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Brace yourself for the next wave of audit technology

By David Smith
September 26 2016
4 minute read
Brace yourself for the next wave of audit technology
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Technologies that will change the nature and effectiveness of SMSF audits are on approach, and a shake-up of auditors’ day-to-day role will naturally follow. What can you expect? Smithink’s founder David Smith discusses the issues with SMSF Adviser.

What technologies can SMSF auditors expect in mid to long term?

A lot of these technologies apply to regular audits as well as SMSF audits. Technologies which enable you to essentially audit every transaction are emerging. So you’re able to look at every transaction to see whether or not it has an issue. I think with the connections and the integration to the bigger SMSF software providers, that would be eminently possible. This raises the issue of what’s an audit for. There’s always been this challenge of being either a watchdog or a bloodhound. A watchdog being, ‘I’m going to look for the higher level and see if there are any issues’ and the bloodhound gets into the detail. And this technology will allow you to do both, which is one big change.

Another change is around algorithms that could start to try and assess risk. So they would look at the fund and determine where potential risk areas are and determine the audit tests that need to be done to validate those riskier areas. In other words, essentially the algorithm will allow you to customise the audit based on the perceived risk of a bundle or parts of the fund, so that you could concentrate in some areas where the algorithm says the risk is. Then perhaps you can do less work where the algorithm says it’s OK. That would allow you to streamline the audit and be more efficient in how you do it.

The other area which always interests me is using the technology in turn to hone in on your team’s performance. So that because everybody is lumped in when they are doing their audits on these audit systems, the systems can watch what they’re doing and determine how efficient individual team members are, and also make suggestions about how they could be even more efficient. Using the technology to drill into the actual practices of the auditors could be another area of growth, and some of the technologies are playing around with this idea. I’m not sure how the team members will go when they know that big brother is watching. But I think there is an opportunity there to really hone in on how they are doing things.

The next area would be around continuous auditing. Rather than just auditing once a year, because of the connections again to the major admin and software platforms, you could see auditors potentially building products that sit outside of those systems and are potentially looking at the transaction when it entered in to the system, running their audit tests on the fly and continuously.

To take it to a different level is the idea, because most SMSFs are slowly but surely ending up on these admin and software platforms, there is a concept of saying, ‘Well if I actually audited Class or audited BGL and satisfied myself about Class and BGL, do I need to do the same amount of work on the individual fund? Because I’ve validated that Class and BGL are processing these things correctly, therefore I don’t need to do as much work on each individual fund.’ That might be an extreme breakthrough in terms of efficiency.

You’ve noted some significant changes there, what kind of market pressures do you think will follow?

Fundamentally, nobody likes paying for an audit. It’s a bit like going to the dentist. It’s something that you have to do, but you don’t really want to do it. There’s always going to be cost pressures on auditors. SMSF Adviser actually had an article on this, with the ATO and ASIC querying low-cost auditors. They are getting concerned that auditors are using this technology and as a way to try and streamline to get their costs down, and maybe they’re going too far and creating an over-reliance on the technology. That’s the other side of the coin. So cost pressures are one.

I think the second issue is the value add that potentially can be created with an audit. As I said before, if the auditor is doing more than just validating the financial statements, if it’s actually looking into the details of the transactions and could be used as a fraud detection tool potentially, well that ties another level of confidence to trustees and could be perceived as a value add. Or, there may be analytics that the auditor can do related to the performance of the fund, which again could give trustees a greater value add. I think there are opportunities for auditors to not just compete on price, but to compete on providing extra information.

Other areas too where auditors have to get their act together, is how can we do the audit in a matter of hours rather than days and weeks? Everyone wants to finish the accounts and get the tax return done and stuff, and quite often the thing that holds them back is the auditor. Turnaround is another area of competition where this technology could allow rapid turnaround time, which for instance has been achieved with actuarial certificates.

While we’re on automation, the ATO is also concerned about an over-reliance on automation to form an opinion on an SMSF. Do you think we’ll reach a point where fully automated audit is viable?

It’s an interesting debate. Ultimately, an audit can do the grinding, ticking and bashing that used to be done by the junior in the accounting firm and you can probably automate most of that. But at the end of the day, an audit is also about judgement. It’s about looking at the numbers and thinking, ‘Are they presented fairly and accurately in the financial statements?’

While I think we can automate that to a point, I do think, for the moment and the foreseeable future, the accounting standards are so complex that there will always be a need towards the end for human intervention.