Adapting to a Changing Audit Landscape

November 5, 2018

The exact moment the first auditor blinked into existence is a difficult one to pinpoint. It’s intrinsically entwined with the accounting profession which traces its roots back over 7,000 years from the days of early Mesopotamia where lists showing expenditures, and goods received and traded have been found. Even then mankind had an inexplicable desire to collect, count and document “things” from the growth of crops to the management of herds of domestic animals. By counting it was easy to ascertain whether there was a shortage or an excess, and from these numbers, taxation could be calculated and trading activities could be well managed. Accounting and money, and counting and mathematics have their origins in similar melting pots. They both emerged out of the need to regulate goods and the transactions involving these goods.

The first accountant started earning their paycheque in the 4th Millennium BCE by overseeing financial issues for the ruling leaders and high priests in the region now known as Iran. Our diligent and well educated (by the standards of the times) accountant sat in a huge crop storage room placing cylinder shaped tokens on clay tablets to keep track of the substantial harvests and trades and to report these numbers back to the chairman and the board, the Emperor and his faithful priests. 2,000 years later, our trusty accountant got lumped with their first chief financial officer, the “Comptroller of the Scribes”, a strategically important role responsible for all financial reporting. One wonders whether our CFO had trouble getting a long enough audience with the “committee” when it came to reporting on important financial matters of state, or whether that is a new phenomenon.

Roll on another thousand odd years, and on the back of many innovations and improvements in these accounting systems, records show that the ancient Egyptians and Babylonians had reviews in place for the inspection of goods moving in and out of storehouses, including the development of oral audit reports, leading to the first use of the term auditor (from the Latin word audire, meaning to hear). And over in a far from insubstantial place we call China, sophistication started to really creep in with the advent of a three section financial report during the Han dynasty essentially using “in”, “out”, and “balance”. This was developed even further in the second half of the first millennium AD where the T’ang dynasty saw these financial reports upgraded to having four sections, namely “starting balance”, “in”, “out” and “closing balance”. At around the same time as the Han dynasty accounts department were wrapping their heads around their new bookkeeping system a Roman gentleman by the name of Heroninos had a team of administrators on each portion of his estate keep their own accounts of the day-to-day running of the estate from the production and sale of crops, to the remuneration of staff, and these records were then captured on papyrus scrolls and arranged into annual accounting ledgers. Accurate, effective record keeping was born, and the further analysis of these numbers into meaningful information meant that these records could finally be utilized to make better economic decisions and, more relevantly, objective, independent assurance could be provided to add value and improve the organization’s operations (the Institute of Internal Auditors modern definition of Internal Auditing).

Innovations in auditing and accounting continued at a steady rate through the ages that followed. The 13th century saw the advent of double-entry bookkeeping, culminating in the Venetian method of maintaining of a memorial (memorandum), giornale (journal) and quaderno (ledger) enabling merchants to audit their own books, thus avoiding the risk of fraud and theft on the part of their agents and workforce. By the time joint-stock companies were starting to be formed in the early 17th century, the increasing need for accounting and disclosure led to a growing demand for independent auditors who could attest to the accuracy of both internal and external accounts. In 1843, a parliamentary committee on joint stock companies, chaired by William Gladstone, then president of the board of trade of the United Kingdom was incorporated to create the very first piece of company legislation, the Joint Stock Companies Act of 1844. Not much later, in 1854 the Edinburgh Society of Accountants adopted the name “Chartered Accountant” and by 1880, the Institute of Chartered Accountants in England and Wales was established which drew up codes of conduct and examinations for admission, as well as professional designations for its members. The rapidly changing world of global transactions, large scale operations, and limited liability companies had seen a surge in demand for reliable accountants and auditors, launching the profession, and leading to its professionals being an integral part of the worldwide economic and financial system. Lawrence R. Dicksee, in his book “Auditing: A Practical Manual for Auditors” laid out the objectives of an audit as the detection of fraud, the detection of technical errors and the detection of errors of principles. The audit profession was on a steep upward curve, and it was about to become even steeper.

The 1900’s witnessed a shift in the focus of an auditor from a detailed verification of every transaction to the use of sampling techniques on gathered evidence and the assessment of internal controls. Auditors were no longer merely the brainy calculator behind the cylindrical tokens sliding across a clay tablet in some random warehouse in Mesopotamia. They were becoming analysts, making sense of data derived from multiple internal and external sources, with a view to adding value through a risk and control based approach. The adoption of technology enabled the auditor to focus on areas most likely to contain errors, meaning a far wider audit scope, at a lower cost, and with less manual process work. It also meant that auditors were able to lend credibility to both financial and non-financial information, taking another giant leap towards adding greater value and enhancing the success of the organization’s operations.

So, in the space of 7,000 years, our auditor had progressed at a fairly steady rate from being a recorder of livestock, crops and basic goods to becoming a highly skilled, extremely qualified individual who, according to “inspects and verifies the accuracy of a company’s operational and/or financial records”. When I say steady rate, that’s probably an overstatement. By contemporary standards it was a crawl, not a sprint. The dawn of the age of computers in the 1950’s and 1960’s saw some dramatic leaps forward in the way products were manufactured and the way companies were run, and the often unrecognized improvements in the way information was stored and recorded had a remarkable impact on modern civilization and our access to data. Now there was no longer just a paper based audit trail, but data was being stored in an electronic format with a growing number of organizations setting up extensive data processing centres. But for the auditor it was still a case of parallel processing, comparing a system’s input with its output and reporting anomalies and errors, just as they had done with ledger books a hundred years earlier.

Nonetheless this snail’s pace was about to change rapidly. The final 20 years of this 7,000 year journey, a tiny blip on the timeline, has seen the most extraordinary transformation within the audit landscape, and the smart auditors amongst us are in a rush to expand their areas of expertise to include a far broader set of skills than was ever imagined necessary. Auditors were now no longer limited to auditing around computer systems, but began to harness the power of information technology, using the computer as a vital part of their toolset. The introduction of internal audit software and various Computer Assisted Audit Techniques (CAATs) such as electronic working papers, data analytics tools, business intelligence tools and Enterprise Resource Planning (ERP) platforms has enabled the tech savvy auditor to add tremendous value through constant monitoring, integrated audits and a risk based approach to assurance, advisory, and anticipatory roles supplemented by the use of technology as an enabler. This opens up the audit function to playing a key role in conveying a vision, backing that vision up with solid data, and assisting in the achievement of that vision through the anticipation of issues and challenges before they materialise. In this way an auditor can help reduce the level of uncertainty facing the organization whilst providing the type of assurance that enables better decision-making. This is assurance at the right time, in the right place, with the right level and manner of communication to the right stakeholder. The auditor is now positioned in the role of key strategic adviser with a far more forward-looking focus.

These enhancements to the functions of the internal auditor have necessitated a change in the competencies required. The modern auditor is both the conventional, reflective analyser of past data, as well as the futurist with one eye on the unknown. Audit reports have become multifaceted narratives, and not just reams of findings and recommended actions. The modern auditor has to be a storyteller, weaving this narrative into the everyday cognition and behaviours of their auditees, which requires a high level of communication skills, and thorough knowledge of the entire organization. And no longer is this a reactive process based on audit procedures followed, but has switched to a proactive one in order to effectively steer the ship through risky and complex seas.

When one considers the remarkable upgrades that auditing has undergone in the past 20 years, what do the next 20 years hold in store for us? What role will artificial intelligence play and will systems fully supplant the human auditor? Or will it finally free the auditor up to be more than just a glorified data capturer and analyst? How will continued globalisation and regulatory changes transform the arena? Will audit budgets keep track with the increased technology demands? Are agile methods being followed in order to promote an almost instantaneous response to emerging issues? Whatever it is that this future holds, there is no doubt that it will no longer be business as usual. A transformation is required, with very little time in which to do so.

What are you doing in order to not just remain relevant in this changing landscape, but also to add value to the exponential growth, and provide direction to the revolution?“Just when the caterpillar thought the world was over, it became a butterfly”
Chuang Tzu – Tao philosopher
Author – Paul van der Struys

Wikipedia – “History of Accounting”
Lawrence R Dicksee – “Auditing – A practical manual for auditors”