Deloitte: when audit turns digital
Can a 2000+ year old industry reinvent itself at once ?
The field of accounting was first developed in ancient Mesopotamia, alongside other major breakthroughs such as writing and counting. What we know now as “auditing” dates all the way back to the Roman Empire. The term, coined from Latin “Audre” (to hear) meant that the government’s treasury had access to detailed financial information throughout the empire. Bright and ambitious young men appointed directly by the Emperor, were sent to the corners of the earth to ensure that local provinces handled treasury assets and expenditures correctly. This was deemed critical as imperial taxation was underpinned by this system, and with it the very livelihood of the Empire.
Fast forward a few thousand years, and auditing would earn its modern stripes with the rise of the industrial revolution; as for the very first time private individual investors became part of the business process. The premise this time round, was to verify that information provided by management was accurate and that the individual’s hard-earned money was spent wisely and with transparency.
So there we have it: the business of auditing, at its core, is all about introducing trust in an exploded system with many different stakeholders. Someone trustworthy, has to do the reporting to investors, on financial information prepared by management. While this system sustained itself for this long, it is now under siege, fighting for its very survival. Enter: digital transformation.
Description of the current challenges and opportunities the company is facing due to digital transformation:
The development of computers in the seventies enabled business to grow at a pace never experienced before. Auditing firms then had to adapt both their organizations and methods to better serve their clients. From old Rome to the late nineties, auditing merely required teams made of individuals with technical accounting expertise to manually sift through reams of financial reporting[2]. Much has changed since. Nowadays, the ever-increasing complexity of business and the explosion of data, has brought about a new paradigm. The McKinsey Global Institute estimates that, compared with the Industrial Revolution […], disruption of society is happening ten times faster and at 300 times the scale. This means roughly 3000 times the impact. [1]
In a nutshell, technological improvements are not merely changing financial reporting and the way the auditing industry is set up; they are completely disrupting them.
From basic transactional accounting to regulatory filings, from business process outsourcing to fiscal risk mitigation; all auditing functions were being impacted. Clerical accounting is no more, and automation has taken over the bulk of routine bookkeeping tasks. [3]
Firms such as Deloitte have therefore no choice but to evolve. However, while embracing the digital transformation seemed like the natural path for self-preservation, the change required will undoubtedly be a tortuous journey, and will most likely take some time.
Recommended changes the company needs to make to address these challenges or take advantages of these opportunities:
More often than not, the basic instinct firms demonstrate when faced with the digital revolution, is to be on the defensive by protecting business as usual. It is my contention that Deloitte stands to gain tremendous competitive advantage if it charges ahead before its competitors do, and manages to disrupt itself in the process. In a nutshell, it should take the offensive stance, experiment, adapt, and eventually write the new book of auditing.
This challenge will demand heavy investments and a significant shift on two separate fronts: technology and people.
On the technological front:
In order for Deloitte to rise above, it needs to reinvent itself beyond accounting. It must supplement the accounting expertise with technological capabilities. It is imperative that Deloitte revisit its legacy processes and put in place advanced software technological suites, based on automation and artificial intelligence. As a result of doing this, Deloitte would be better placed to uncover insights allowing the audit to be productive and pertinent. This would also help individual investors and managers make more informed decisions. Tools based on artificial intelligence, could scour vast quantities of data faster and more accurately. This would allow auditors to determine whether processes or practices are compliant. Building on this, human auditors would then judge how operations should be improved. With time, this developed technological suite will refine its capabilities and build on this consolidated “experience”, making the audits ever more impactful.
On the talent front:
Firms like Deloitte have built their whole business model around talent. Their true asset lies not in PP&E or in cash positions, but in having within their ranks scores of talented individuals with deep technical expertise able to rise to the ever-shifting challenges their clients face.
As the very tenets of auditing have already started changing, Deloitte ought to invest heavily in maintaining its workforce up to the task. Then and only then, would Deloitte be able to dig deeper, leverage technological-enhanced insights and uncover more about business and financial risks for its clients. Because the current education system is not agile enough to train the next generation of audit professionals, the responsibility falls on firms such as Deloitte to reinvent themselves and train future business professionals accordingly. Ultimately, the people (and not the technology itself) will define and drive audit quality. Auditors should learn to use technology as a tool of providing them with insights on a number of financial and operational matters, and to leverage those same tools to automate the time-consuming routine tasks.
In conclusion, is Deloitte headed towards a world where machines take over the function of auditing? My personal inclination is towards a firm “not at all”. Even with all the convenience and insight offered by artificial intelligence, the human auditor still remains the ultimate participant to offer key analysis and make important decisions. However, only the audit firms that will embrace change are likely to reap the benefits hereby described. After all, while the job of auditing itself has not changed much, history books are full of examples of defunct audit firms.
[1]: http://xbrlsite.azurewebsites.net/2017/Library/AccountingAndAuditingInTheDigitalAge.pdf
[2]: https://www.forbes.com/sites/kpmg/2016/11/23/how-technology-is-transforming-the-audit/#21a11308716c
[3]: https://allenvisioninc.com/digital-revolution/
Great post. Only thing I would say is that as Deloitte contemplates reinventing itself on the technological front, it will need to also determine whether it will also help with the implementation of any new technologies it has or if it will try to stay afar like it has within the audit space. If it wants to move into the tech space it will have to compete with firms like Accenture that have a workforce of 100,000. That’s a different business model, so not sure if they want to go there.
Thanks for your post YZ. I really liked it. The big 4 auditing firms need to embrace technology, and turn into an opportunity before they are disrupted by a challenger. Auditing is largely still done in a manual format – from the reading above, it seems you believe that a reason for that is that first: the type of talent they have does not allow them to do so, second: they haven’t invested in the technology and third: even if they do so, the human auditor would still be needed for key analysis and decision making. Although I agree that machines will not fully replace human auditors because of the reasons above, I believe that one of the main reasons it was historically immune and that may not longer be the case now or in the future is that auditing is shifting from being a relationships business to a transaction one. With certain countries adopting mandatory audit rotations (a limit of certain years with a certain firm), the nature of the audit business is changing. The key analysis and decision-making in auditing is still needed, but I wonder what percentage of the business consists of analyzing, making decisions and exercising judgement on those findings that sit on grey areas and may not be performed reliably by machines? My guess is that a lot of jobs are at risk in the gathering of data and the basic auditing functions, as machines are taking over; but I would love to hear what you think on that point?
I therefore think that there should be more urgency for Deloitte to adopt technology and to shift their business model accordingly – and I do agree that those firms that do not lead that change will suffer the consequences.