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New technology leads to a new era in auditing

As corporate reporting shifts, including the introduction of ESG reporting standards, Emer McGrath, head of audit at KPMG, says investment in emerging technologies can provide better and faster analysis of data to help deliver valuable insights

'Audit is vital to trust in financial information, and it’s this trust that turns the wheels of the capital markets system'

Fri Aug 26 2022 - 04:00

The audit profession adapted at pace to the challenges presented by the pandemic and is now set to play a critically important role in providing independent opinions on companies’ decarbonisation and sustainability claims.

Meanwhile, auditors are also deploying the latest data analytics and automation technologies in their day-to-day activities.

“Our clients are innovating and embracing emerging technologies and there is a growing expectation by them that the auditor should leverage the expanding possibilities that technology brings,” says KPMG head of audit Emer McGrath. “Clients rightly expect the auditor to provide insights that can add value to management and boards.”

The fundamental principles remain constant, however.

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“Audit is vital to trust in financial information, and it’s this trust that turns the wheels of the capital markets system,” she notes. “The value in audit is the independence that auditors bring, the objective scrutiny, and transparency which gives the business community confidence in the numbers. Applying innovative tools to help our professionals transform the process and enhance the quality of our audit work helps to build investor confidence and underpins the functioning of the capital markets.”

Technology is just one part of the equation. “Much of how the audit profession delivers this trust and transparency is down to attitude,” McGrath points out. “A mindset that values curiosity and a healthy scepticism leads to asking the right questions. It also places a value on challenging assumptions. Such an attitude also requires a relentless focus on quality as the bedrock of every successful audit. Auditors have a huge responsibility to build trust and re-inspire confidence at a time of unprecedented informational and regulatory complexity.”

Our main focus is to continually invest in technology so that we can get behind the numbers to get better information

The new tools have been transformational, nevertheless.

“Our main focus is to continually invest in technology so that we can get behind the numbers to get better information because better information can lead to better decisions. Technology is allowing our teams to focus on critical and more interesting work in the most efficient way possible. It allows for richer and faster analysis of systems and data, giving instant insights to help us make audit judgments on very large datasets. It also frees up our professions to focus their time on the analysis and interpretation of the data, which provides both sufficient appropriate audit evidence as well as valuable insights to clients.”

KPMG has developed Clara, its cloud-based auditing platform that embeds digital technologies into the audit and helps leverage the power of emerging technologies such as AI and machine learning. “This helps our audit teams see meaningful patterns across a business at a deeper level whilst at the same time providing a more intuitive and collaborative experience,” McGrath adds.

While the technology allows auditors to quickly spot outliers and unusual transactions, clients are looking for other benefits such as trend tracking and early warning on emerging issues. “For example, using technology tools we can check the numbers in large sets of financial statements in minutes so that our teams can spend their time focused on judgments and estimates and their associated disclosures.

Emer McGrath: 'Some of the value of technology is how it helps us identify risks. Is something a pattern, a trend, and does it signify a threat?'

“Some of the value of technology is how it helps us identify risks.” McGrath says. “Is something a pattern, a trend, and does it signify a threat? Or perhaps it is an outlier or an early warning signal of something more profound. And we are freeing up our teams to use their professional expertise for higher value work.”

Climate change is the overarching challenge of our era. “Organisations across the globe have, or are in the process of developing, environmental, social and governance [ESG] principles and strategies. This is especially the case for decarbonisation and the road to net zero. However, information and reporting need to be accurate and to stand up to robust scrutiny in order to build trust. There is no room for greenwashing.”

This is where the audit profession comes in. “Investors are looking to connect ESG impacts to financial performance and measuring and validating the outcomes,” McGrath explains. “Both physical risk and transition risk have major implications for asset allocation and investment decisions.”

And a whole raft of new ESG reporting standards and regulations is coming down the track. For example, the recently formed International Sustainability Standards Board – a sister organisation to the International Accounting Standards Board – is drafting sustainability disclosure standards. Meanwhile, the EU’s Corporate Sustainability Reporting Directive (CSRD) is potentially the biggest single transformation in corporate reporting in decades.

“The CSRD proposes profound changes to corporate reporting requirements and is central to the EU’s objective of directing capital flows towards sustainable activities,” she notes. “ESG assurance is therefore an area of strong focus for us at KPMG. We are developing and enhancing our methodology around how to apply our smart technology to ESG areas – so we can provide robust opinions on companies’ ESG statements, measurements, and reporting. We see this as a key element of how we work in the public interest.”

The perception may be that the execution of audits moves and changes slowly – nothing could be further from the truth!

McGrath believes agility and adaptability are hallmarks of the audit profession, and this was exemplified during the pandemic. “We continued to deliver audits on time in an entirely remote environment. Few would have believed that was possible just three years ago, yet we adapted to the new situation within weeks. The perception may be that the execution of audits moves and changes slowly – nothing could be further from the truth!”

There is no going back. “The pandemic has transformed how and where we work. It has given us greater flexibility. However, it is important not to lose sight of the value of being in person with other people for specific reasons such as training and collaborative work and that’s why hybrid working will continue to be refined as circumstances evolve.

“The advancement of new technologies also create great opportunities for more meaningful roles based on providing insights from data as opposed to merely crunching the numbers.”

And the pace of change is only likely to accelerate.

“Auditing has changed quite dramatically over the past five years and will continue to change over the next five,” McGrath says. “It is an incredibly exciting time to be starting or progressing a career in audit, as the profession plays an increasingly central role in the climate action and sustainability agendas, at the same time as continuing to perform its traditional role of underpinning the functioning of the capital markets.”

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