Risk & Compliance

Regulators Fear Big Data Threatens Audit Quality

Does audit firms’ emphasis on data analytics mean that audits themselves are suffering?
David KatzApril 15, 2014
Regulators Fear Big Data Threatens Audit Quality

Regulators around the world are worried that a rise in audit firms’ consulting business and a corresponding slowdown in the growth of revenues from traditional audits will hurt the quality of those audits, a member of the Public Company Accounting Oversight Board says.

“The evidence is very clear that the audit practices of the big [accounting] networks are growing much more slowly than other practices, particularly the advisory practices,” said PCAOB member Lewis H. Ferguson, who chairs the International Forum of Independent Audit Regulators.

Speaking at a press conference last week reporting on the results of  IFIAR’s 2013 survey of regulators’ inspections of audit firms, Ferguson said that the changing business models of the top six global accounting firms (BDO, Deloitte Touche Tohmatsu, Ernst & Young, Grant Thornton, KPMG and PricewaterhouseCoopers) are “a source of great concern to regulators around the world.”

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The issue that auditors, driven by the lure of profits, may be paying less attention to auditing their clients and more attention to providing them with non-audit services — and thus falling down in their essential role of confirming the accuracy of financial statements — is by no means new. The fall of Arthur Andersen in the wake of the Enron scandal in the early years of this century was widely attributed to Andersen’s lust for consulting-related revenue. In turn, that partly led to Title II of the Sarbanes-Oxley Act of 2002, which set limits on audit firms’ ability to provide such services to audit clients.

Today’s concern is more about the business models of entire firms rather than about the mix of services an audit firm might offer any individual client. And the issue is complex, said Ferguson.

As data analytics becomes a more significant part of the business of big accounting firms, auditors themselves need to acquire new skills that “are not in the natural skill set of the auditor,” he said. The accounting firms make “a cogent argument” that to attract analysts with data skills, they must boost the services sides of their businesses, according to the regulator.

The point of view of those new people, many of whom are skilled in the analysis of Big Data, differs sharply from that of traditional accountants. “Instead of doing testing by sampling, you look at the entire general ledger, at every transaction a company has done, and analyze those by exceptions and by outliers,” Ferguson observed.

On the other hand, the influx of such expertise “raises serious questions about differential levels of profitability in these businesses, differential rates of growth, where the economic incentives are and to what extent audit quality suffers as a result” of such trends, he said.

Top Audit Deficiencies

Another official, Janine van Diggelen, the vice chair of IFIAR and the top audit regulator in the Netherlands, voiced another concern at the press conference: that the most serious audit deficiencies unearthed by inspections of accounting firms are “not specific country issues. They are sector-wide issues. And we need to approach them on a global level.”

For the survey, 30 independent audit regulators (those with no connection to their countries’ audit industries) reported findings from inspections of 989 audits of listed public companies at 113 audit firms.

The most common kinds of audit deficiencies reported in the 2013 survey are similar to those cited in IFIAR’s 2012 survey. In particular, the three kinds of defects composing more than 10 percent of total reported findings in 2013 — problems with fair value measurement, internal control testing and adequacy of financial statements and disclosures — appeared with similar frequency in 2012. The first two problems had the highest number of deficiencies in both the 2013 and 2012 surveys.

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