Sir Donald Brydon has published his eagerly anticipated review into audit quality and effectiveness and has included submissions from Validis on how to implement technology changes that will fundamentally improve the quality of audit and help identify fraud.
The Report makes 64 recommendations on how to deliver a more robust and transparent audit framework in the UK, with the firm purpose of increasing confidence in business and reducing the chances of unnecessary corporate failure.
Review recommendations include: redefinition of audit and its purpose, the establishment of a new audit profession, measures in relation to fraud, new opportunities for companies to demonstrate their approach to resilience and assurance; an enhanced role for shareholders and other stakeholders in audit, increased use of technology, and much greater transparency and communication within the audit process and report.
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Harnessing data through technology
It is fair to say the accountancy industry lags behind other industries when it comes to harnessing data. Retail and Financial Services, for example, have long identified data as a key differentiator and competitive advantage creator. Tailoring products, services and offers specifically for individual clients. Accountants have a far more transactional relationship with data.
The report highlights the potential of data to support better audit outcomes, helping to identify risk and provide assurance. And makes recommendations around implementing technology to “use data from the companies they audit in order to promote better quality audits.” (24.1.8) Just as other industries have concluded, accountants need a sound data strategy in order to provide a strong basis for the audit engagement.
Technology can play a crucial role in accessing, standardising and interpreting client data ahead of the audit engagement. The downstream benefits of which are multiple.
Digital extraction is now well established. Our technology, for example, saves our clients weeks and months of data preparation headaches. Accessing transaction level financials directly at source (in this case the client’s accountancy package) is not only real time but also provides the granular financial detail required during an audit engagement.
Standardising data during the extraction process is crucial. It ensures the data is fit for purpose for the activity it is intended for. Be that transaction analysis, analytics etc. Digitally collecting unformatted financials is of little more use than collecting data from PDFs or excel and manually keying it into your practice software or analytics platform.
During an audit engagement time is the greatest barrier to success. Instant insights, available upon extraction, help guide auditors towards certain areas of the accounts that need particular attention. Given some of the wider reaching recommendations in the Review, identifying and interpreting areas of concern will become far more important.
New regulations; New responsibilities
The Review supported the need for a new regulatory body (ARGA) and recommended new responsibilities for the audit profession.
A key recommended change is that “it is the obligation of an auditor to endeavour to detect material fraud in all reasonable ways.” (14.1.5) And, “directors should report on the actions they have taken to fulfil their obligations to prevent and detect material fraud.” (14.2.2) By increasing their responsibility to detect fraud auditors will once again need to turn to technology for support.
One area identified in the Review that directly supports the ability to detect fraud is that of transaction sampling (24.1.11).
Technology exists today that can automate the analysis of 100% of P&L transactions against 3rd party data, such as bank statements. Crucially, this provides a step-change in audit quality because it offers an immediate view on transactions which don’t reconcile between the General Ledger and the client’s bank statements. The auditor can then use this intelligence to guide them throughout the audit engagement and utilise their time as efficiently as possible
Fundamentally the role of the auditor will change with regards to fraud detection. Audit teams must do much more to detect fraud and hold Directors to account over their activities to prevent financial fraud. It’s also refreshing to see audit training in forensic accounting and fraud detection come much more to the fore.
Who is Validis and how do we help drive better quality audits?
We are Open Accounting technology experts. This means we specialise in extracting, standardising, interpreting and verifying client accounting data for accounting firms that provide audit services. We enable massive process efficiencies while ensuring auditors have fit for purpose data at every stage of the audit.
Specifically, our smart audit technology can be utilised to:
- Gain rapid access to a client’s accounting data, by connecting and extracting data directly from the client’s accounting software, supporting wider digital transformation goals
- Standardise a client’s accounting data to make it fit for purpose during the audit process
- Reduce the amount of data a client needs to manually provide to the auditor
- Provide instant insights regarding the quality of a client’s bookkeeping
- Verify up to 100% of P&L transactions against third party evidence, such as bank statement data in order to support fraud detection and reduce sampling
- Automate the production of working papers used in the audit process
- Retain and recruit talented members of staff who are looking to work for technologically enabled practices
James Foster, Head of Audit Technology at Validis, commented, “It’s encouraging to see Validis recognised as a marketplace solution in Sir Donald Brydon’s audit quality review. Given the far-reaching nature of the recommendations outlined it’s clear it will have a positive and lasting impact on the audit process. At Validis we are more focused than ever on helping deliver a step-change in audit quality through the use of technology. We very much look forward to supporting our clients implementing the review’s technology recommendations throughout 2020 and beyond.”
Sir Donald Brydon’s review will have far-reaching implications, not least around how technology is reviewed, purchased and rolled out. Validis is poised to help your firm meet those technology challenges and continue to provide your clients with the highest level of service during an audit.
FOOTNOTE: Recommendations from the Brydon Review:
Section 24 – Technology
- 24.1.8 – That BEIS and ARGA work with auditors to create the necessary protections and policies for audit to be able to use data from the companies they audit in order to promote better quality audits.
- 24.1.11 – That, in the audit report, auditors should explain the reasons for the necessity and basis of any sampling techniques used in conducting the audit.
Section 14 – Fraud
- 14.1.5 – That ARGA amends ISA (UK) 240 to make clear that it is the obligation of an auditor to endeavour to detect material fraud in all reasonable ways.
- 14.2.2 – That directors should report on the actions they have taken to fulfil their obligations to prevent and detect material fraud against the background of their fraud risk assessment.
- 14.3.3 – That training in both forensic accounting and fraud awareness be part of the formal qualification and continuous learning process to practise as a financial statements auditor. In developing qualifications for auditors of other areas of activity, parallel training should be established.
- 14.3.5 – That the auditor’s report state explicitly the work performed to conclude whether the directors’ statement regarding the actions they have taken to prevent and detect material fraud is appropriate. Furthermore, the auditors should state what steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.
- 14.4.3 – That ARGA maintains an open access case study register detailing corporate frauds that have occurred in order that auditors can learn in real time from these frauds.
- 14.5.4 – That ARGA establish an independent Auditor Fraud Panel to which it would refer the results of any investigations into auditor failure to detect material frauds and that such a Panel should be equipped with the ability to levy sanctions on auditors as appropriate.