The future of internal audit: looking towards an innovative change in the profession
The audit profession is on the cusp of change, with a lot of debate and discussion about the future of internal audit. This need is driven by a lack of trust in the quality of audits as a result of publicised cases where audit results have not been up to standard, including all of the biggest auditing firms in the UK. The Financial Reporting Council set a target to be met by 2019 that 90% of FTSE 350 audits should have a ‘good’ score or result in minor recommendations for change; however, this target fell short with only 75% of these audits reaching a satisfactory score.
The covid-19 pandemic having dominated most of 2020 as the primary concern meant that businesses had to quickly adapt and find new ways to conduct audits, and has fast tracked the need for change. This means that the question of the future of auditing needs to be addressed now, rather than later, to restore public confidence in the value of the profession and safeguard the future of audit in an increasingly digital, connected and changing world.
The problems with internal audit- where are improvements needed?
With even big names in audit falling short of expected standards, this begs the question- why is this happening? PwC set out to answer this question, inviting a range of public discussion to form the basis of their report on the future of audit. Among all the discussion about the issues with internal audit- what underpins this is essentially the lack of innovation and change over the years. Auditors continue to do things the way they always have, yet business practices, mindsets and compliance is changing all the time. Internal audit needs to adapt in order to provide valuable results in today’s world.
The key findings from the PwC report include:
- Stakeholders want an up-to-date view on what’s going on; looking towards the future rather than summarising the past
- There needs to be a greater focus on risk
- Information should be accessible and tailored to meet the needs of various stakeholders
- Flexibility is needed in the way auditors approach small vs large organisations
The respondents indicated that they would like to see a greater deal of accountability against company directors and more transparency in business activities. It was also highlighted that auditors should take the time to establish who all the relevant stakeholders are and what their needs might be. The question of whether or not internal audit could definitively be classed as ‘broken’ resulted in divided answers. What was clear from this is that a more distinct, measurable definition and set of objectives need be to put in place to establish just what constitutes a quality audit.
Key areas to focus on in order to instigate positive change
The findings from the above report gives clear feedback from businesses, institutions and individuals about what they want from auditors, and what their expectations are about the future of audit. In order to achieve the quality that is expected, there needs to be a renewed focus on the following areas:
- More investment and focus on training, continuing professional development and technology tools
- Ensuring the audit practice is aligned with the needs of the business- improve the overall communication between auditor and auditee
- Have a defined culture and process for quality control
While these are all areas that the overall auditing profession can work towards, the question of improving the quality of internal audit should not be seen in isolation. PwC summarise the matter as: “for the audit to move forward, the entire corporate reporting system needs to evolve.” This brings us to the matter of technology and its place in the world of audit.
Technology was another major point of discussion in the report. While there are clear benefits to adapting to new technologies, respondents also communicated their reservations and the possible limitations of it. With various different audit automation software solutions on the market, this raises the concern for some traditional auditors that their jobs are being replaced with technology, the key point being that technology cannot replace human judgement.
What is clear here is that there is a misunderstanding about what these technology solutions actually do, and what their purpose is. Audit software is not designed to replace the auditor themselves, it is a tool to allow the auditor to do their best work and reduce the time it takes to collect, access and analyse information. Along with the audit professional, these solutions can help to facilitate change and provide the calibre of quality audits that are expected from organisations, governing bodies and the general public.
Why now is the time for change
Many of these discussions about the future of audit were happening prior to 2020 and the covid-19 crisis but the pandemic has accelerated these changes and forced companies to adapt very quickly in order to maintain business continuity and compliance.
However, as we enter a new year into another lockdown, it is clear that many of the covid restrictions will remain in place for the foreseeable future. In addition, a lot of discussion has taken place about the future of work and how things are unlikely to revert back to the way they were. What is clear though, is that we cannot see into the future to know for sure what the world of work will look like in the years to come, meaning that it is critical for auditors to adapt a flexible mindset to allow them to embrace change and make the most of the technology at their disposal. As Erik Asgeirsson, leader at CPA.com, states: “this is no time for a wait-and-see posture… take stock of your team’s strengths and weaknesses. It all starts with changing your firm’s mindset and evolving your strategy, and the time to do that is right now — not down the road when you’re ready to make a technology choice.”
Embrace the future of internal audit and join in with our discussion on agile auditing to support a more flexible and modern approach to your auditing practice.