It's Not Your Grandfather's Accounting Profession Anymore
Guest Post By D. Scott Showalter
The accounting discipline has been slower than most to adopt to embrace innovation. But that looks to be changing: More and more accounting firms are employing data analytics to better serve their clients. In this excerpt from the May-June issue of the Innovation Management Report, Professor D. Scott Showalter, CPA, of N.C. State’s Poole College of Management, shares insights he’s gleaned as the leader of the accounting department’s undergraduate business analytics program and an advisor to companies on the impact of business analytics on accounting.
While I was at a recent workshop on the business use of data analytics (which I prefer calling “business analytics”), a senior partner from one of the Big 4 accounting firms remarked that the impact of data analytics on the accounting profession will be the most significant change to the profession since the passage of the Securities Acts 1933 and 1934. So how did the accounting profession arrive at this place, and what changes is it making to respond to the opportunity?
The marketplace, not regulation, created this significant opportunity. Enabled by the reduction in the cost of data storage and computing power plus the introduction of easier-to-use business analytics tools, many organizations have moved to using business analytics to enhance the way they currently provide services/products and to open up new business opportunities. As organizations begin to realize the significant impact of analytics on their businesses, they are asking other organizations with whom they do business how they are using business analytics to improve and reduce the cost of what they deliver—interpreted as value.
The accounting profession has not been immune to these inquiries. As one partner told me, the conversation has gone from “tell me what you know about data analytics” to “tell me how you are using data analytics to perform the audit” to “show me how you use data analytics to perform an audit” to “here is some of our data; show us what you can do with it.”
This all occurred between roughly 2012 and 2014. These inquiries served as a wakeup call for the accounting profession. Recognizing the benefits of using business analytics to perform the financial statement audit, the profession would have arrived there on its own; however, the speed of implementation definitely accelerated thanks to these nudges.
Which raises the question: How will your business respond to a similar change? To answer this question, let’s explore how the accounting profession is changing before our eyes.
Leveraging Business Analytics
Rather than using business analytics to perform an audit the way it has been traditionally conducted (what I like to call “paving the cow path”), accountants are beginning to leverage the capabilities of business analytics to change the way audits are conducted.
Based on the magnitude of the investments being made by the accounting firms, there is clearly a cost reduction element in play, but I seriously doubt audit firms would undertake an investment of this size just for the cost savings. Rather, these firms are betting this new capability will enhance the effectiveness of the audit they perform and provide insights that current audit processes simply don’t provide.
When looking at their audit model, firms realize business analytics can be deployed in all aspects of their operations—including client acceptance, gaining understanding of the client’s needs, risk assessment, performance of audit procedures, and communicating results in a meaningful way. In the short run, they have focused on how to enhance the actual audit procedure. That’s something that basically has not changed for a long time.
Two Areas of Emphasis
The principal areas of emphasis include 100 percent examination of transactions and the use of predictive analytics. By using the power of business analytics to examine all transactions in a given population in order to identify transactions that are outside the expected (i.e., more likely to be an error or fraud), the focus of the audit effort moves from spending most of the time examining correct transactions to focusing the same or less effort examining those transactions that are more likely to be in error. This represents a complete reversal of the traditional audit focus.
Predictive analytics provides a similar opportunity to identify relationships between financial vs. non-financial information and internal vs. external information that were neither possible nor evident in the past.
Additionally, accounting firms can now use predictive analytics and other tools to analyze information in a format and structure no longer dictated by the way the audit client is organized and/or reports information. While such data is primarily structured today, the real opportunity lies in the future as audit firms learn how to harness unstructured data such as the unstructured text appearing on the Internet every day.
To take advantage of the power of business analytics, accounting firms have also reexamined the skills needed and how the audit itself is delivered. They are hiring more data scientists and information technology professionals to perform the tasks described above. They have also centralized procedures that have traditionally been performed by the local engagement team.
And this is just the beginning of the transformation. As accounting firms look forward, they see new capabilities enabled by business analytics:
Continuous Auditing: A promise long time coming, business analytics facilitates a capability that will allow information to be audited in real-time. This can significantly increase the timeliness and relevance of the financial statement audit.
Predictive Analytics: Predictive analytics will allow accountants to advance from using analytics to inform them about the numbers reported to predicting what those numbers should actually be. Achieving this capability depends heavily on the ability to analyze externally produced unstructured data.
New Service Opportunities: The greater capabilities and confidence in those capabilities will open up areas far beyond traditional financial statements to many other types of information. These will include different types of non-financial information like corporate responsibility that businesses are beginning to present. This is an opportunity many inside and outside the profession have espoused for many years. Additionally, instead of numbers, think visualizations.
Workflow: Audit procedures have traditionally revolved around the year-end of the organization being audited. By examining 100 percent of transactions or using predictive analytics, more audit procedures can be performed throughout the year.
These opportunities are limited by our experiences to date. No doubt, they will increase as the capabilities of business analytics are better understood and developed.
Questions To Be Answered
This trend has not gone unnoticed among organizations that oversee the profession. For example, preliminary discussions have raised the following questions that will need to be answered:
How does the application of business analytics meet the standards for audit evidence?When 100 percent of the transactions in a large population are examined, how do you resolve the inevitable differences?How can business analytics be used to perform inspections (peer reviews) of audits?How can business analytics be used in enforcement situations?
Radical change does not come to mind when one thinks about the accounting profession, and yet here we have it. The profession is at the beginning of a business analytics journey whose end no one can foresee. And for those who think this is a passing fad, the genie is out of the bottle.