At KPMG Ignition Tokyo (KIT), which consists of a group of specialists not only in advanced technologies such as the cloud, AI, blockchain and IoT, but also in digital areas including data science, data visualization, cloud architecture and system security, we are always envisioning and fantasizing how we can integrate the expertise and the latest digital technologies which KPMG Japan has acquired over the years.

As the “Pilot” of Digital Management, Masayuki Chatani and Tim Denley of KIT discussed the outlook for the auditing service with Kentaro Maruta of KPMG AZSA.

Possibility that ESG/SDG Initiatives May Be Included in Targets of Auditing...?

Tim, Maruta, Chatani

(Masayuki Chatani, Representative Director & CEO of KPMG Ignition Tokyo and CDO of KPMG Japan (right); Kentaro Maruta, Manager of Digital Innovation, KPMG AZSA (center); Tim Denley, Board Member & Partner of KPMG Ignition Tokyo (left)) *Professional affiliation and official position in the article are at the time of publication.

Chatani:       We discussed this a little bit in “Global Movement, Management Changes and Behavior of Business Persons Will Change in This Way in the Post-COVID-19 Era” but how do you think digitalization will change in the auditing area going forward?

Denley:         When I was talking with Bill Thomas, Chairman of KPMG International, he declared that “auditing will change.” He also said that it will eventually become an ESG agenda.

The essence of auditing, I think, is to have a third party confirm the target, which is believed to be difficult to understand, from the standpoint of a specialist, and declare that “it is correct if we as the third party are trusted” accordingly.

Accounting has a history of 150 years but if accounting audits began from suspicion—“the company is saying that it has this much money and made this much profit, but is it really true?”—I think that ESG and SDGs, which are considered to have social importance, will become the targets of auditing in the future.

For instance, companies have recently started to announce that they are “reducing CO2 emissions by this much” but they are not being examined accurately by third parties. There is a possibility that the task of examining whether the details of the integrated report regarding CO2 emissions and other ESG targets of each company are really true will be incorporated in the auditing service.

Chatani:       I guess this means that when the accounting service began, it only checked profits and revenues, in other words, the “body temperature of a company” but that from now on, the health of a company will be checked more in details with various parameters.

Denley:        With the emergence of the environmental agenda, a method to explain it pan-scientifically will be necessary, which is similar to the way the need for auditing increased with the launch of accounting and the advance of capitalism. I believe that KPMG Japan, which has gained trust based on its experience and performance in auditing, has sufficient ability to respond to these needs.

Chatani:       However, I feel that skills that are different from those needed for the current auditing service may become necessary.

Denley:         Nonetheless, I think the way of thinking is similar. It should not be that different with respect to the concept of assurance. But as the targets of auditing are not limited to numbers, necessary skills that must be acquired will probably change. If we need to look at just numbers, AI, not humans, will be able to do it. As this is a reality which we cannot avoid, the people who are involved in this industry will have to change.

Chatani:       Now, let’s go more in-depth into this with Kentaro Maruta, Manager of KPMG AZSA, who is actually conducting audit work.

How Has the World of Auditing Changed with the COVID-19 Crisis?


Maruta:        This does not apply to just auditing but there is a tendency to compare the impact of COVID-19 with those of the bankruptcy of Lehman Brothers and the Great East Japan Earthquake. However, in the past two events, the impact was local, such as on the financial industry rather than on business itself. Compared to these events, COVID-19 is impacting all industries all over the world. It can be said that we are facing a more fundamental issue.

Chatani:       You’re right. Its impact is immense and is affecting almost everyone such as through curfews, the temporary closure of schools and teleworking.

Maruta:        I think the impact of the Great East Japan Earthquake was rather concentrated on infrastructure and the communication environment. Looking back, as the technology we had at the time was limited, the impact was also limited in terms of “not being able to connect via mobile phones,” for example.

Denley:          I experienced the bankruptcy of Lehman Brothers, the Great East Japan Earthquake and COVID-19 in the Otemachi neighborhood and I think that this COVID-19 has the power to change a more fundamental part of our lives. For example, physical meetings on a global basis have not resumed yet and online meetings are expected to continue for some time. This is only one example but it will be necessary to make further changes in the way we do our business going forward.

Maruta:         As for the change in my way of working, there were many restrictions such as “avoiding business trips” until the first half of March and I even asked myself, “can we really do business and auditing under such circumstances?” But now, I can’t remember how it was before the COVID-19 crisis.

Denley:         We may have been a little naïve before and were unable to imagine what human beings can do.

Maruta:         That’s true. I felt a strong resistance toward the restrictions on business trips and curfews at the time but now, this has become natural and I have begun to think “what can we do?” based on the restrictions. However, in the “situation where necessary technology is not available” or the “situation where online meetings cannot be used such as due to large-scale disasters,” our responses will be totally different.

Denley:         It may be that we had already been preparing to respond to the current situation. We often hear that the “digital shift such as the introduction of the online meeting system was accelerated by three years.” It can therefore be said that what we had been preparing over the years was implemented at once due to the COVID-19 crisis.

Chatani:       The fact that what had been originally estimated to take three years was achieved in less than three weeks may indicate that there were people that were resisting its introduction in the past.

Denley:        I have talked about “digital disruption” in many places in the past. I have been emphasizing to business owners that “digital disruption will be triggered in your business by digital natives.” However, when looking at the social changes caused by COVID-19, I came to understand that this was completely wrong.

Disruption can occur from anywhere and the recent disruption did not originate from digital technology.

Maruta:        Indeed, no one probably thinks that disruption is necessary to promote digital technology now. On the contrary, I feel that the awareness to incorporate anything if it improves this environment has increased.

Denley:        Those that can ride the digital wave at this point of time, I think, are likely to be the ones to survive. And I think it is beginning to show that those that miss the wave will gradually shrink.

Chatani:       As digital technology is after all a tool, those that can skillfully utilize it become the winners and how to disseminate it in a natural way is important. Also, if people go back to the previous normal while advocating carrying out the new normal, that is not what it’s supposed to be.

Can Auditing Be Digitalized? Will There Be Training Opportunities to Develop People’s Judgements?

Chatani:       Talking about the new normal, have there been any changes in auditing because of COVID-19?

Maruta:        There was some discussion about relationships of trust with clients at the beginning of this conversation, but this is very important. In auditing, we must exercise professional skepticism that “the client may not be telling the truth,” carefully monitor things and try to detect whether there is really no fraud.

For the period ending March 2020, we were in a situation where we had to carry out auditing services without delay even though we were unable to travel to the clients’ places of business due to COVID-19. This year, we were able to overcome this difficulty thanks to the trustworthy relationships we had with our clients, but communication issues may occur from next fiscal year onward such as not being able to detect misconduct and problems or misunderstanding each other.


Chatani:       I guess we are now “eating up the assets of trust which we have built in the past and have to build new trust from now on.”

Maruta:       I think that both we and our clients are thinking the same thing. In the case of auditing, there has been an increase in cases that we determine based on information and data but there are times when we make mistakes unless we really learn how to understand the context and data. This is why I think it will take a little more time to shift to fully digital work and fully remote operation.

What Kinds of Abilities Can Be Digitalized and What Kinds of Abilities Must be Enhanced?


Denley:                 With auditing being digitalized, will there be fewer opportunities to develop the judgement of auditors?

Maruta:                 It may be that such opportunities will be reduced. As the volume of data processing will increase significantly with digitalization, I think we must enhance our judgement so that we can focus on what is really necessary from among a huge volume of data and explore it further.

Denley:                 This was actively discussed when RPA (Robotic Process Automation) became popular. It has been said that skills including the ability to make judgements can be acquired by repeating steady tasks and I think the issue of “what kind of education must be provided when these tasks disappear?” will eventually emerge.

Maruta:                 This is a very difficult issue. In our case, these skills were gradually acquired by repeating steady tasks, beginning with going to the actual warehouse for taking inventory or counting cash.

Chatani:       For instance, in the world of shogi or go, players are now practicing by playing against computers. It may be possible to also introduce simulation games in business and enhance the skills of employees by having them learn steadily through roleplaying.

If there is a roleplaying game for taking inventory, it may be possible to carry out training sessions that could only be conducted once a year many times and thereby exponentially increase skills.

Denley:        That sounds like the Apollo Program! Creating a pseudo environment so that simulations can be carried out to refine judgements that will be required onsite, without actually going to the moon.

Evolution of Technology May Lead to “Evolution of Fraud”

Denley:        Talking about judgement, we must talk about the problem of fraud in the auditing sector. While deepfakes have been attracting attention recently, I think that this may become a new breeding ground for fraud.

Maruta:         I think that COVID-19 and fraud will become the topics going forward. As there was an urgent lockdown during January and March this year, there was no time to commit fraud and I don’t think it was possible to plan any fraud. However, as there is still some time until the end of this term, we are keeping close tabs on fraud and data falsification of subsidiaries.

Chatani:       While fraud on the Internet leaves logs, it may be easier to carry out real fraud.

Denley:        What triggers fraud is when there is an economic recession and there is a need to cover losses. I am concerned that it will be difficult for companies in tough management situations to continue their business unless they can raise funds and that this situation may raise their “motivation” to carry out fraud.

Tim, Maruta, Chatani

On the other hand, we often hear that “it has become difficult to identify fraud patterns” in every aspect in recent years. It will be important to seek ways to track down new cases of frauds.

“Auditing firms should not stand on the viewpoint that human nature is fundamentally good” and it is important to have a mind like a veteran detective who asks himself, “what would I do if I were the criminal?” We also need to think what kind of fraud can be carried out in the digital world.

Maruta:       In the old times, everything was on paper. The introduction of the accounting system has made it easier for auditors to work. We have therefore decided to also audit the access rights to the system as well as internal control. And now that it is possible to obtain data more broadly, we are trying to address fraud, which directly rewrites data, by auditing the storage system and governance of data. In this respect, I think the level of fraud has increased from the past to now.

Denley:       Someone that can look at the flow of data and judge that “there is no way such data can come out from this route” will be necessary going forward for instance, someone that has the knowledge to judge that “it’s not possible!” when told that “this is all the data with regard to the POS data.”

Chatani:       If fraud is detected, the other party can send ransomware and hold the data as a hostage.

Denley:        This is not only in the case of fraud but there seems to be many ways to escape or disappear after the fraud is detected.

Chatani:       Fraudulent data can also be created easily.

Denley:        You’re right. We also create a lot of false data to test a system.

Chatani:       This is the same as making counterfeit money. People that have the knowledge and skill to make the real thing can make counterfeits that look just like real money even if they only have restricted tools.

Maruta:         KPMG AZSA is researching and studying ways to take measures against fraud with technology but it may be necessary for the industry to establish a taskforce. Regarding Germany’s online payment service “Wirecard”, which went bankrupt in June, there were illegal accounting activities such as camouflaging cash and issuing certificates.

Chatani:       In other words, the evidence itself was fake. It seems that even amateurs can create elements for fakes nowadays. Cases of fraud that are detected are only the tip of the iceberg. We may be able to raise the capture rate with data but cannot detect everything. I feel that the definition of fraud itself is very vague.

Maruta:       The definition of fraud may also change. As there is accounting fraud that is combined with timing such as posting revenue in advance, there are cases that are automatically “cured.” There is also the issue of the “level of importance” and we are not required to detect all cases of fraud of minor importance. However, if we can capture them, we will be able to better visualize such fraud.

Denley:        Is there any characteristic in cases of fraud specific to industries and regions?

Maruta:        Yes, there is. In the software and distribution industries, there are fictitious transactions. There are also cases of fraud involving cash, deposits and points. The commercial practices of the trade may have some effects. However, if the auditing program of the previous year is correctly passed on to the next year, the same type of fraud can be mostly trapped except for fraud that involves circular transactions. Even in such cases, we are careful as there may be combinations of unforeseen frauds.

Denley:         We sometimes carry out optimization analyses but interesting results may come out if we carry out an optimization analysis of fraud.

Maruta:         In the case of deposits and withdrawals, frauds that cannot be found with one-way data—deposits or withdrawals—may be detected with two-way data. As it will then become an issue of calculation volume, it may be possible to utilize quantum computers for this.。

It Is More Important to Define Problems than to Provide Answers


Maruta:        Now, I would like to ask you two a question. In our work, we can train ourselves by undergoing simulations such as “what to do when something occurs,” but do you think it will be possible to digitalize the premise itself or the changing of the framework?

Chatani:       Current AI is focused more on providing answers and I think the ability to define problems will be the next step. Many social issues can be resolved by everyone if we can define the issues. Given this, I think that defining problems is more important than providing answers.

Maruta:        I guess sensitive matters such as acknowledging and defining problems are still difficult for AI.

What Cannot be Surpassed by AI, which Can Exceed the Standard

Denley:        We thought that something would change after the bankruptcy of Lehman Brothers and the Great East Japan Earthquake but nothing much has changed. So, what will change with the COVID-19 crisis? Some people say that “nothing has changed in terms of laws.” They mean that even if a device is attached temporarily, nothing will change fundamentally due to this. This is the key point. What is being questioned is will this really serve as an opportunity for change?

Maruta:        I guess it means that some things will change but customary aspects that do not change will serve as a major driver for companies to survive in the post-COVID-19 world.

Denley:        It will be quite different whether they are protecting legacy systems or creating legacy systems.

Chatani:       Bringing out the example of shogi and go again, standard tactics have been overthrown already. Better moves have been found by making calculations with computers. Calculating the combination of moves, which computers are strong at, has exceeded human intelligence and human beings are no longer able to surpass computers in this area.


Denley:        The moves of AI are not restricted by human common knowledge. They can think in a rational way that we cannot think of.

Chatani:       Auditing, in a way, is a field with many standard tactics. I think it is a trove of treasures. As the task of narrowing things down with professional skepticism cannot be captured with numerical values, it is very interesting to know how data-driven evaluations will look.

It may be similar to treating a disease. As we know about symptomatic treatments such as “this medicine will lower the fever”, the standard tactic is to prescribe this medicine. However, there may be different approaches if each person is examined based on their DNA.

Common knowledge may change in auditing as well; for instance, what was thought to be standard tactics to minimize risks may become different.

Maruta:         As we look at numbers and data for auditing, there may have been oversights of data before. As the volume of data is immense in the first place, it may be possible to visualize and raise the accuracy level by utilizing business intelligence tools. However, the judgement and sense of top professional go or shogi players as well as auditors cannot be realized with tools.

I think that it will take a little more time to digitalize areas such as the sense of auditors that can find risks and detect fraud and mistakes from transactions. If we try to digitalize this now, it will probably produce an enormous amount of errors and will end up taking more time to verify them.

Chatani:       That’s because it is just data without any information or insight.

Maruta:        Yes, but each of these “data and numbers” has meanings and when we dig deep down into them, we can find that “something is wrong.”

Denley:         It probably means that we can find a cause-and-effect relationship by connecting the dots. If we look at numbers from three dimensions of VR, we may be able to see that “something is wrong!” as we can see numbers from a different angle. I think it is important to find ways to maximize creativity that can express these data.

What Happens after AI Deprives People of Work?


Denley:        Assuming that digital technology has advanced to some level, I am interested in whether the same volume of work will be carried out with the same number of people five years from now. What do you think?

Chatani:       If “defining a problem is work and anything other than that is a task,” 80% may be done digitally. If so, excess resources will be used to get new business.

Maruta:        I also want to focus on doing value-added work. I think this is why Japanese labor productivity is said to be low.

Denley:         I also think that we must focus more on added value that should be created by people rather than talk about downsizing, which is, in a sense, a means to improve profitability. We must therefore resolutely carry out investment and achieve a better cycle.

Maruta:         Otherwise, economic growth will not be possible. Japan has been growing at a low level and productivity has not increased for many years but the COVID-19 crisis may be our chance to recover our loss.

How Will Technology Be Incorporated in the World of Auditing?

Chatani:       In order to improve productivity, it is quite important to relinquish physical restrictions. There is no need for the person in charge to necessarily carry out auditing reporting tasks. So, if the client agrees, an avatar can read out the report while others can do other work.

Maruta:         Yes, this may be possible for external IR announcements and general shareholders meetings.

Chatani:       Furthermore, it will promote deeper understanding, for instance, if a glossary can be displayed via chat when a technical term is read out, or if company information is shown when the name of a client is mentioned.

While there are still insufficiencies in the voice recognition system, it should be possible to perform an online search of relevant keywords mentioned by the digitalized voice and display them by brushing up the technology.

Tim, Maruta, Chatani

Maruta:            This is not limited to IR announcements and general shareholders meetings, but if it becomes possible to acknowledge and display what the other party is saying and bring out relevant data, cases that have had to be “brought back to the company, checked and asked again” until now can be resolved on site. Then, productivity will probably become very high.

Denley:            In this respect, functions with added value will probably increase in three to five years. This type of evolution tends to come out first in the world of games. As it is already possible to have conversations while enjoying a game, this method will probably be introduced in business including auditing. If so, the world will probably seem much closer to us.


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