Technology creates promise, but can firms keep up?

By:
Chris Gaetano
Published Date:
Aug 15, 2017

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Editor's note: This is the third and final installment of a three-part series on how technology is affecting the accounting profession. Part 1 is available here, and Part 2 is available here.

The accounting profession is undergoing a period of major change, with technology serving as one of the main drivers, both in terms of what clients demand and what CPA firms can deliver. But while innovations like cognitive computing and blockchain technology promise a world of new opportunities, they also raise questions about how firms will adjust to a landscape where common business practices are becoming obsolete.

For example, billable hours—a staple of accounting firms everywhere—may not make as much sense in a world where the routine tasks that used to take up the bulk of an engagement are largely automated. In this world, practitioners will spend less time collecting data and more time analyzing what it means so that they can develop better insights for clients. Charles Weinstein, the CEO of EisnerAmper LLP, thinks that this automation will result in billing practices being driven by the quality of these insights, as opposed to the amount of time spent developing them. While this is hardly a new idea—Weinstein said people have been talking about the end of billable hours for years—he believes technological change will soon force the issue, creating a rapid shift, where practitioners will focus more on adding value than filling hours.

“Charging by the hour is going to go away,” Weinstein said. “So, how efficiently we gather data and analyze data, that will determine the pricing, [and] more importantly, the value you add by interpreting it and providing solutions.”

This change is driven, at least partially, by the sheer amount of measurable data that business clients have started to produce, and their increasing desire to be able to harness that data in innovative ways, according to Marc T. Macaulay, KPMG LLP’s cognitive technology audit leader. He noted that most everything today generates data, from social media to search engines to smart appliances, in a quantity never before seen in all of human history. Successful firms and businesses will be the ones that learn to leverage this data in order to optimize their performance.

“The business[es] of the future, to be successful themselves … will need to determine from that explosion of data what’s relevant for their most important business, financial and operational insights so they can make a  difference to their various constituencies, be it their customers, their investors or their team members,” he said.

This focus on data analytics, in turn, has already started to affect what kind of skills firms look for in their new hires—something that will accelerate as technological change infiltrates further within the industry. William T.  Brennan, the managing partner for assurance transformation at PricewaterhouseCoopers (PwC), said that his firm has been making it a point to hire people educated in fields such as data analytics and security, reflecting the changing nature of engagements. Already, he said, people from technical backgrounds outside the traditional five-year accounting education make up about 12 percent of staff at his firm, and that number is set to grow.

“The more we rely on technology, the more we rely on automation, the more we rely on data analysis, our people will need to change the way they audit, from sampling and vouching and comparing and ticking and tying [to] analyzing—reviewing things earlier in their careers than they ever had before,” he said.

Beyond being able to offer services like data analytics, these changes in hiring patterns are also a response to the need for CPAs to simply better understand their clients. Salvatore A. Collemi, the partner-in-charge of the Professional Standards Group at Marks Paneth LLP, noted that the business world is increasingly enmeshed in the information technology arena. If firms don’t develop their own technological
proficiencies, they will be hobbled by their own lack of understanding, quality will suffer and clients will move on.

“There is a huge need for auditors to learn [information technology], because they’re really putting themselves at risk [if] they’re not familiar with the environment—they need to catch up and learn, either having an IT specialist at the firm or someone they know externally to assist and give them a crash course on how the current environment works,” he said.

Regulatory concerns

The complexity of the current regulatory environment is another major factor driving the profession’s increased integration with information technology. The new revenue recognition standard issued by the Financial  Accounting Standards Board replaces the myriad industry-specific guidance with a single framework based around identifying and fulfilling performance obligations in customer contracts. Robert H. Colson, a distinguished lecturer at Baruch College, said that this standard alone will require new software that can effectively track these performance obligations.

“With the way accounting standards are changing, especially on revenue recognition, [firms] have to deploy technology in ways they have never employed it before, in terms of being able to search for keywords and contracts and things like that,” he explained.

Even as some standards and regulations grow increasingly complex, however, it is not clear whether existing standards will account for the growing technological sophistication of accounting practices. Some regulations may need to be updated in order to address the way technology has automated work that was once done by humans, since they were written in the predigital era. For instance, the Public Company Accounting Oversight Board (PCAOB) defines “audit evidence” as “all the information, whether obtained from audit procedures or other sources, that is used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.”  The PCAOB’s auditing standards say that the reliability of evidence depends on the nature and source of the evidence, as well as the circumstances under which it is obtained. What happens, then, when that source is a computer program?

Bruce H. Nearon, the director of IT security audits at CohnReznick LLP, noted that, in the past, externally generated audit evidence was considered better because it came from a third party. However, this assumption may not hold in an age of big data, he said, pointing out that there is far more data available because of sources such as Twitter feeds, but much of it is unstructured, with few to no controls.

“You’re going to get billions and billions of terabytes of data, and then that is sliced and diced … and becomes distributed over many different servers, and then eventually winds up in the audit file. How do you know it hasn’t been changed? You don’t, because there’s no control over it. You don’t know the provenance of it,” he said.

But at the same time, he said, this data can be extremely relevant. Still, the lack of controls means that, under current standards, none of this data is acceptable as audit evidence. Since audit procedures are driven by the prevailing standards, this might indicate that the procedures themselves may lag behind the technology available to auditors. Standards setters will need to keep up, Nearon said, but he is not confident this will be done quickly.

“The standards have to change, and this change in the audit standards is like turning an aircraft carrier around in the ocean. It takes a very long time,” he said.

A significant investment

Underlying all these discussions about how artificial intelligence or blockchain will change the industry is the fact that these sorts of technologies represent a significant investment by the firms that use them. Brennan noted that PwC, like the other Big Four firms, is spending hundreds of millions of dollars to buy and develop new technology.

This presents the risk-averse CPA firm with a dilemma: Do you spend a significant sum of money to reap the rewards of this new landscape, or do you cede the field to other firms, while concentrating on more traditional areas? This is a choice that more firms will be facing as the industry changes, according to Kenny Li, chief technology officer at Citrin Cooperman, the 4th largest accounting firm in the Mid-Atlantic Region by revenue, according to Accounting Today. To illustrate, he brought up the concept of continuous monitoring—the automated collection of audit evidence and indicators on a real-time basis.

“This is a huge investment. Do you accept that [to get a client], or do you defer to the Big Four—they’ve invested the money and can afford it and can certainly cater to that type of client,” he said. “For us, we will make the shift to it, and it will be a significant investment to our clients and to the future of our firm.”

Larger firms will have a significant first-mover advantage because they’re the only ones that will be able to afford these types of technologies, Collemi pointed out.

“At the moment, only certain firms can probably afford it, based on the price point.  But the other ones … can’t touch this stuff before it becomes really affordable,” he said.

Jonathan W. Raphael, the chief innovation officer at Deloitte & Touche LLP, acknowledged that while the largest firms will enjoy an advantage for some time, as time goes on, more people will gain access to the same technologies.

“I agree, we’re early adopters and implementers, and so usually when at that phase of the curve, it tends to be more expensive and experimental, and we spend a lot of time on experiments and pilots and seeing what works,” he said. “I do see, over time, things like optical character recognition, natural language processing, those becoming open-source technologies, so over time I believe it will benefit everyone. It will take some time—it’s an investment up front—but over time, it will be spread throughout the profession.”

Nearon agreed that smaller firms will not be completely and utterly shut out. He said that large firms tend to service large clients that make millions of transactions across the globe, and they are the ones that currently demand these kinds of services.

“Who can do that? GE can do that. Boeing can do that. LG can do that. Big companies do that. The kind of clients that the middle tier has and small CPAs have? No,” he said. But, he noted, “The competitive advantage of first movers will dissipate.”

Amanda Wilkie, the chief information officer at WithumSmith+Brown, noted that it might take a while longer for this technology to filter down from the big firms, but eventually, there will come a time when smaller clients will actually need services like this, and when that happens, the tools to provide them will likely be available.

“If Bob’s Bowling Alley is using a supply chain that is leveraging the technology of blockchain, then it’s going to be just as relevant to a small firm that works with Bob as it would be for the Big Four. … I think doing business in the next 10 years, firms of all sizes and clients of all sizes will be impacted by these sorts of things,” she said.

 

 

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