A new era in audit

A new era in audit is emerging as ESG and reporting regulations challenge business leaders like never before. Audit quality continues to be vital in underpinning trust in the capital markets. All the while, the audit profession is evolving in keeping up with these challenges. Emer McGrath, Head of Audit at KPMG, says that the key change is how we collaborate – in teams, with colleagues and with clients.

Audit is vital to trust in financial information and it's this trust that turns the wheels of the capital markets system. The audit profession adapted at pace to the challenges presented by the pandemic and is now set to play a critically important role in providing independent opinions on companies' decarbonisation and sustainability claims.  

Emer states, "The value in audit is the independence that auditors bring, the objective scrutiny, and transparency which gives the business community confidence in the numbers. Applying innovative tools to help our professionals transform the process and enhance the quality of our audit work helps to build investor confidence and underpins the functioning of the capital markets."

Meanwhile, auditors are also deploying the latest data analytics and automation technologies in their day-to-day activities. "Our clients are innovating and embracing emerging technologies and there is a growing expectation by them that the auditor should leverage the expanding possibilities that technology brings," says Emer.

"Clients rightly expect auditors to be using technology, analysing vast populations of data and distilling it down into something meaningful to help them in their decision-making process so they can spot trends and emerging opportunities - or threats - in their business, adding value to management and boards."

The new tools have been transformational. "Our focus is to continually invest in technology so that we can get behind the numbers to get better information because better information can lead to better decisions. Technology is allowing our teams to focus on critical and more interesting work in the most efficient way possible. It allows for richer and faster analysis of systems and data, giving instant insights to help us make audit judgments on very large datasets. It also frees up our professionals to focus their time on the analysis and interpretation of the data, which provides both sufficient appropriate audit evidence as well as valuable insights to clients."

KPMG has developed Clara, its cloud-based auditing platform that embeds digital technologies into the audit and helps leverage the power of emerging technologies such as AI and machine learning. "This helps our audit teams see meaningful patterns across a business at a deeper level whilst at the same time providing a more intuitive and collaborative experience," Emer adds.

While the technology allows auditors to quickly spot outliers and unusual transactions, clients are looking for other benefits such as trend tracking and early warning on emerging issues. "For example, using technology tools we can check the numbers in large sets of financial statements in minutes so that our teams can spend their time focused on judgments and estimates and their associated disclosures.”

“Some of the value of technology is how it helps us identify risks." Emer says. 'Is something a pattern, a trend, and does it signify a threat? Or perhaps it is an outlier or an early warning signal of something more profound. And we are freeing up our teams to use their professional expertise for higher value work." 

While technology matters and the rate of change can at times be exponential, the audit process still depends on factors beyond tech.

"Much of how the audit profession delivers this trust and transparency is down to attitude," Emer points out. ''A mindset that values curiosity and a healthy scepticism leads to asking the right questions. It also places a value on challenging assumptions. Really, it's about the people and it's about having an enquiring mind, asking the right questions and challenging the assumptions that underpin those financial statements so that stakeholders and the wider investor community can have confidence in those financial statements that really support the functioning of the capital markets.”

“Such an attitude also requires a relentless focus on quality as the bedrock of every successful audit. Auditors have a huge responsibility to build trust and re-inspire confidence at a time of unprecedented informational and regulatory complexity."

For those thinking about a career in audit, there are several factors to consider, not least that it's a fast moving and dynamic environment with the opportunity to bring real insights to clients.

Emer believes agility and adaptability are hallmarks of the audit profession, and this was exemplified during the pandemic. ''We continued to deliver audits on time in an entirely remote environment. Few would have believed that was possible just three years ago, yet we adapted to the new situation within weeks. The perception may be that the execution of audits moves and changes slowly - nothing could be further from the truth!"

Climate change is the overarching challenge of our era. "Organisations across the globe have or are in the process of developing, environmental, social and governance [ESG] principles and strategies. This is especially the case for decarbonisation and the road to net zero. However, information and reporting need to be accurate and stand up to robust scrutiny in order to build trust. There is no room for greenwashing."

This is where the audit profession comes in. “When it comes to ESG and sustainability reporting, this is a business imperative now because that sustainability information will have equal prominence with the financial statements in the annual report.”, Emer explains.

 "Investors are looking to connect ESG impacts to financial performance and measuring and validating the outcomes. Both physical risk and transition risk have major implications for asset allocation and investment decisions."

A whole raft of new ESG reporting standards and regulations is coming down the track. For example, the recently formed International Sustainability Standards Board - a sister organisation to the International Accounting Standards Board - is drafting sustainability disclosure standards. Meanwhile, the EU's Corporate Sustainability Reporting Directive (CSRD) is potentially the biggest single transformation in corporate reporting in decades.

"The CSRD proposes profound changes to corporate reporting requirements and is central to the EU's objective of directing capital flows towards sustainable activities," she notes. "ESG assurance is, therefore, an area of strong focus for us at KPMG. We are developing and enhancing our methodology around how to apply our smart technology to ESG areas - so we can provide robust opinions on companies’ ESG statements, measurements, and reporting. We see this as a key element of how we work in the public interest."

There is no going back. "The pandemic has transformed how and where we work. It has given us greater flexibility. However, it is important not to lose sight of the value of being in-person with other people for specific reasons such as training and collaborative work and that's why hybrid working will continue to be refined as circumstances evolve."

"The advancement of new technologies also create great opportunities for more meaningful roles based on providing insights from data as opposed to merely crunching the numbers."

And the pace of change is only likely to accelerate.

"Auditing has changed quite dramatically over the past five years and will continue to change over the next five," Emer says. "It’s an incredibly exciting time to be starting or progressing a career in audit, as the profession plays an increasingly central role in the climate action and sustainability agendas, at the same time as continuing to perform its traditional role of underpinning the functioning of the capital markets."