It is often said (and impossible to corroborate) that 80% of the world’s data has been created in the past two years. The proliferation of data has transformed our lives, not least in the way we act as consumers. The era of big data also continues to reshape how businesses operate, giving them far greater insights than before into their customers, suppliers and business partners as well as their own operations. 

We have probably only skimmed the surface of the benefits that big data can bring to business, as technology and analytics software boost our ability to exploit information. It is not unlike discovering an engine far more powerful than anything ever seen – the rest of the vehicle may need adapting but the potential for speed is electrifying. The question for our particular profession is, what does auditing look like in a big data world?

The answer is that it looks very different indeed. The quantity of data produced by and available to companies, the replacement of paper trails with IT records, cloud storage, integrated reporting and growing stakeholder expectations for immediate information – any one of these alone would affect the auditing process, but big data is bringing them all, and more, at the same time. 

The profession has historically struggled to stay ahead of the data curve. In the first few years of electronic communication, auditors were playing catch-up as the volume of data produced by clients increased far faster than the technology to monitor it properly could be developed. But big data has handed the audit profession an opportunity to mine this deluge of information to maximum effect.

That is why Winfried Bischoff, chairman of the Financial Reporting Council, told delegates at the PwC/IASB Meet the Experts conference at the end of last year that big data and technology would have a bigger impact on auditing than anything else.

Others agree. In the summer of 2014 the Fédération des Experts Comptables Européens (FEE) published a discussion paper, The future of audit and assurance, arguing that big data technologies will be ‘revolutionary for the audit profession’. In their responses to the paper, various firms describe how technology and big data in particular are changing the nature of the audit. 

‘Technology innovation for audit is a key area on which the profession should focus, to consider how technology can be used to perform better audits,’ Deloitte says in its response to the paper. It adds that ‘technology innovation is making it possible to automate highly repetitive work, which is fast becoming commoditised in the audit process’, and also eliminating traditional records, which puts greater reliance on IT records to support transactions and which in turn necessitates a change in the way companies are audited.

‘Technology innovation has also made use of analytics in audits more accessible,’ it goes on. ‘More financial and non-financial data is available to assist with risk assessment and analysis. The use of electronic audit techniques also allows the use of unstructured data as part of the audit. And we are seeing companies making greater use of cloud-based technologies, which will likely impact how financial data is managed, stored and controlled, and in turn also impact how we audit.’

It is clear that the fundamental nature of audit is changing. Technology is allowing the monitoring of very large or complete sets of data, rather than samples, on a more frequent and perhaps eventually continuous timescale. In theory the result is a more thorough, better quality and more efficient audit.

But already auditors are going further. Hywel Ball, EY’s head of assurance in the UK and Ireland, explains that new technology and techniques have brought a far greater ability to mine data and look for anomalies and red flags as part of the audit. He explains: ‘Take unstructured data, which usually means things like email traffic. If we were looking for a rogue trader at a bank, for example, we could correlate between that unstructured data and the structured data – the official records that traders produce – to look for anomalies and add greater insight. These are techniques that were developed by our forensic accounting practice but increasingly we’re using them in auditing.’ 

But, he adds, why stop there? In a big data world, there is an almost limitless supply of information, which may be equally relevant to an auditor. ‘There might be a case, for example, where a flurry of outraged comments on Twitter could alert you to an environmental issue affecting a company,’ he says. ‘At the moment, as auditors, we focus on the information within the client company’s business and systems, but the advent of social media and internet-enabled devices means that there’s an awful lot of data that sits outside the organisation that could be equally relevant. That’s the next wave of big data understanding.’

Tech link-ups

For the Big Four in particular, this is an ideal opportunity to take back some of the lost ground on audit and assurance, which has increasingly been commoditised in recent years. ‘One of the consequences of an increase in audit tendering activity has been that firms are using technology as a key differentiator,’ says Ball. ‘All of the firms are moving to internet-based auditing software. Tendering is driving innovation.’

It also helps to explain the huge investment the largest firms are making in data analytics. KPMG, for example, is halfway through a $1bn, five-year global investment plan in data and analytics solutions, which has seen it form a strategic alliance to apply McLaren Applied Technologies’ predictive analytics and technology to its audit and advisory services, and take an equity stake in Bottlenose, a real-time trend intelligence company.

The theory is that analytics will provide a better quality audit that adds extra insights of value to the client. Costs can be controlled to some extent if the process-driven grunt work can be handled by shared service centres, while the power of data analytics adds more value than ever to the service provided. In practice, though, there is still some way to go before clients see audits as a genuinely valuable exercise, and audit fees have not increased significantly as the new technology has been introduced. ‘At the moment we are putting more cost on without taking anything out,’ is how Ball puts it. 

In spite of the rate of audit innovation, not everyone is convinced that the profession is adapting quickly enough to the world of big data and all its challenges. 

A recent white paper, Reimagining auditing in a wired world, produced by the Emerging Assurance Technologies Task Force of the American Institute of CPAs (AICPA), points out that if auditing were to be invented today, the processes would be designed to make best use of the available technology so that auditors could provide the most effective and efficient services possible. Instead, says the paper, ‘for the most part auditors use legacy processes that are not much different from 50 years ago, except that they have been computerised’.

The white paper argues that the profession needs to take ‘a quantum leap’ and redesign audit processes using today’s technology. ‘Although auditors embrace and make extensive use of IT, little has been done to consider how auditing might be transformed by it,’ it says. ‘For the most part, IT has been used to computerise and improve the efficiency of established processes rather than transform or replace them. Consequently, improvements have been incremental rather than transformative.’ 

The paper argues that while technology could be used to achieve the same level of assurance more efficiently and at a lower cost than current systems can provide, it would be an even greater benefit if it was used to deliver a higher level of assurance at a similar cost. This would result in better audit quality for clients and investors, and reduce risk and liability for the auditor.

Some auditors argue, though, that auditing standards are holding back true innovation. At the moment, there is no definitive guidance on, for example, what data should be made available to auditors (the AICPA published an audit data standard in 2013, which discusses which data should routinely be made available to auditors and in what format, but the standard is voluntary). An added difficulty is that current auditing standards have their roots firmly in the traditional audit process, where samples of transactions are examined rather than an entire body of data. 

Standards must adapt

‘It’s right that we’ve been doing audit in more or less the same way for 50 years,’ says Ball, ‘but that has been driven by our auditing standards. We now have all these new systems available for workflow management and managing and interrogating data, and we’re working out how best to use them, but we also need auditing standards to allow us to use them efficiently. The standards are prescriptive about points we need to hit and what we need to do, and you can be so worried about missing them that you end up doing it the old way.

‘Auditing standards set the boundaries of what we can do. We can only move so far ahead – we need the standard-setters to move.’

One of the recommendations of the AICPA’s white paper is that auditing standards need to be modified to incorporate the concepts of big data and continuous auditing. It is a call that the standard-setters are preparing to meet.

In December, the International Auditing and Assurance Standards Board (IAASB) published its work programme for 2015/16, which included a number of projects classified as information-gathering activities to inform future work. The IAASB has said it will form a working group to monitor ‘the various applications of data analytics and the relationship to the audit, such as the effect on risk assessments, testing approaches, analytical procedures and other audit evidence’. An initial IAASB discussion is planned for June 2015, including a review of international auditing standards that might be affected by changes in IT, followed by the development of a discussion paper.

A further priority for the auditing profession is to ensure that it trains auditors in the skills needed to meet the demands of a big data world. FEE’s paper points out: ‘It will be essential for auditors to evolve and maintain professional knowledge and skillsets at the level required to respond to and keep up with the changes. To this end, the appropriateness of the current education and training models, which are based on a number of historic disciplines, are increasingly being questioned as to whether they continue to build and develop the right competencies for the future.’

Deloitte agrees with this point in its response to the paper: ‘Automation of many lower-level and possibly even some knowledge-based tasks will have a direct impact on the talent model of accounting firms.’ 

There is no suggestion, though, that computers will eventually replace auditors altogether. The firms argue that automation of many parts of the audit is in fact a good thing because it frees up audit professionals to concentrate on the most value-adding (and exciting) areas. ‘However good the software,’ says Ball, ‘it’s never going to be of much use unless you have people to ask the right questions.’