Technology impacts every aspect of business. It has the ability to increase productivity, do more with fewer resources and deliver meaningful insights. Both internal and external auditors are working to adopt and maximize their use of available technology. However, as recent survey data shows, there is room for improvement.
A recent webinar, sponsored by RR Donnelley and Financial Executive International (FEI), gathered perspectives about the use of analytics solutions from all sides; internal audit, external audit and the solution providers bringing new technologies to market. Michael Cangemi kicked off the discussion by sharing some highlights from a research report he authored for the IIA Research Foundation (August 2015), Staying a Step Ahead: Internal Audit's Use of Technology. This report is part of the 2015 Global Internal Audit Common Body of Knowledge (CBOK) Practitioner Study series currently in development.
One of the issues driving recent research is the cost of compliance, including SOX and PCAOB inspections. Financial executives question the effectiveness of internal control audits while the cost of compliance continues to climb. Another challenge is that auditing standards were written prior to the release of cutting-edge technology. Accounting firms are using new technology to improve the overall audit process.
The use of analytics is great for internal audit, but there is a great opportunity to use analytics to improve controls across the company. Internal audit is well positioned to lead that initiative, but there are staffing challenges that remain unaddressed.
Hank Roberts, Director of Internal Audit with Shaw Industries Group Inc. shared how his organization uses a mix of continuous monitoring and data analytics tools in four key areas of their business:
In all these implementation areas, Hank notes that working with the business units is integral and sometimes painful, but pays off in the end. Internal audit works with the business units to embed technology into their daily business policies and processes, making data more value-add to the organization. Shaw’s use of technology has improved their bottom line, strengthened the overall control environment, and changed the way employees monitor and review transactions. While internal audit still manages the application, the business units have become more involved in reviewing areas of interest. Shaw also uses data analytics tools on an ad hoc basis through individual audits. It is a component of their planning process. Analytics is a critical component of every audit they conduct, and use it show the client something they did not expect.
Like many companies, Shaw uses technology to cover more areas of the business with fewer resources. In addition to the director of internal audit, Shaw has three operational auditors and one IS auditor. This small team uses continuous monitoring to cover business with $4 billion in revenue. The use of technology also helps them move from a “check-the-box internal audit department” to a value-add resource for the company.
Vendors like CaseWare Analytics are hard at work developing new technologies to help companies cover more ground and deliver more meaningful insights. CaseWare’s flagship product IDEA has dominated the external audit market for years and claims more than 73 of the top 100 U.S. CPA firms as clients. Currently, CaseWare’s fastest-growing segment is internal audit. CaseWare Monitor provides a framework for continuous auditing and monitoring, and the company has recently released packaged solutions for AML, P2P, P-Cards, and other business processes.
IDEA was developed around how auditors use data analytics. Its functionality enables auditors to use technology for risk assessments, internal control validation, substantive testing, and advisory, investigative and other special assignments. Bob Cuthbertson, COO at CaseWare acknowledges what the FEI research also found; the audit standards are not updated to reflect the impact of data analytics beyond risk assessments and understanding a business.
Data remains the most difficult area for auditors to overcome. Specifically, how to acquire the right data, what data is needed, and how to take the data you’re given and turn it into something useful. CaseWare is working with the AICPA, the audit data center initiative and other groups to establish audit data standards, and work towards the global adoption of these standards to simplify work for all auditors. Data analytics tools ease some of the data acquisition challenges with built-in features such as the ability to import data in various formats and from different systems while maintaining data integrity. IDEA’s sophisticated equation editor also simplifies analytics and produces useful information.
“We’re trying to work with the researchers to determine just the right factors to help the auditor point in the right direction.”
Bob Cuthbertson, COO, CaseWare
Once auditors overcome the data acquisition hurdle, the ability to analyze 100% of the data population can create another obstacle if an excessive amount of exceptions is produced. CaseWare is working with a team of researchers at Rutgers University on “Exceptional Exceptions” to help companies learn how to use technology to reduce false positives and determine the right factors to pinpoint exceptions. CaseWare is working with Rutgers to build models to pull out the high-value exceptions using risk scoring. They hope to bring new technology by the end of the year to address some of these issues.
IDEA 10 includes a Discover feature that allows users to click through a few steps and identify trends, outliers, patterns, statistics, etc. then present the results graphically with the new Visualize feature. Productivity tools, such as history and pre-written tests further simplify the auditors’ work.
Continuous Auditing takes analytics a step further by improving the existing process of data, discovery, analysis, insight, and action (reporting) to get better results and better insights. It becomes a continuous improvement cycle by refining the analytics and gaining deeper, more meaningful insights.
Roshan Ramlukan, Principal, Global Assurance Ernst & Young LLP stated the use of technology is not fundamentally new. For some time now, external auditors are thinking of ways to integrate technology to achieve efficiency and effectiveness. What has become more pervasive over the past five years is the new range of technology solutions to help auditors achieve their objectives.
Extracting data from client systems remains a challenge, but solutions are being developed to streamline the extraction process and identify variations from system to system. Beyond data and analytics, if auditors want to transform the way they do audits, they must rethink the audit methodology and approach. Standards don’t prevent the use of analytics, but there is work to be done.
The focus is the use of analytics at every phase of the audit, from understanding the business and flow of data, testing and concluding of the audit. While there is a lot of emphasis on control and substantive testing, the use of analytics and large volumes of data allows auditors to produce better quality while supporting business insights. The goal is to produce better quality audits and make them more relevant to stakeholders, particularly the CFO.
Regarding sampling vs. analyzing the entire data population, Roshan commented that it’s more about intelligent targeting about which areas to test. For example, analytics gives auditors the ability to analyze the entire population, and based on the categorization of the transaction clauses, focus in on those transactions that exhibit higher risk to focus on areas of concern. While you still may get a high level of exceptions, auditors can sample out of the exception population to get a better idea of where risks reside.
External auditors’ primary objectives are to deliver the highest quality audit, deliver value and drive efficiency. According to Roshan the use of analytics is not really increasing or decreasing the cost of audits. By using technology to focus on higher risk exceptions, it is causing auditors to look at areas that may not have been looked at in the past and spend more time reviewing those areas. Over time, as the audit process stabilizes and technology becomes more integrated, there may be a reduction in the cost. External auditors spend a significant amount of time getting data from their clients. If companies could focus in on how they provide data or facilitate access to the data, cost savings could be more readily achieved.
FEI’s research revealed a number of issues related to staffing for automated audits including hiring people who:
Shaw is focused on hiring auditors with the above-listed skills, and enriching the staff they have, particularly in the areas of daily communication and report writing. CaseWare has seen companies reduce training due to lack of resources. Even though technology is becoming easier to use, it still requires training and companies must reinforce its use. EY is dealing with it at a grassroots level to integrate the right kind of learning materials into colleges and universities to better prepare students before they enter the profession. They also enhance their learning and development programs through sharing global knowledge internally. Finding professionals who have an audit background, can write code, understand the business process, and know-how to extract and analyze data is difficult. EY is working to develop those who have an “analytical mindset,” to encourage the use of analytics.
Cangemi added that software is getting easier to use than ever before, and recent graduates are getting better at using it. He calls for more of a “creative bend” in using technology, encouraging companies to allow staff the room and encouragement they need to try it and use it. While there may be some trial and error, management must be more tolerant knowing they may fail, but know they are working towards a better process.
From artificial intelligence to robotics, exciting technological movements are on the horizon. Routine, manual work is quickly becoming extinct, and the ability to analyze huge data populations is changing how insights are derived. Although continuous auditing technology has been available for years, the widespread adoption of it could significantly impact the profession. While many companies own software, they are only using a fraction of its capabilities. Owning the software and using it sparingly is not enough – auditors need to delve into its capabilities to increase its potential to positively impact the business.
The digitization of audit is a top priority across the profession. PCAOB and other regulators are already driving this forward. It is important for companies to understand how other business functions are using technology and how to leverage those gains. For example, using analytics is much like a mechanic plugging a car into a diagnostic computer to find out where the problems are rather than spending time manually prodding around looking for the cause. It’s about spending less time, and spending it in better places.