https://www.journalofaccountancy.
com/newslette as computers and cellphones but also things like
rs/2017/sep/industry-4-0-change-accounting.html
How Industry 4.0 will change accounting
Here’s what CPAs need to know about the next
industrial revolution.
By Lea Hart
September 25, 2017
September 11, 2017
History class teaches us about the Industrial
Revolution of the late 18th century, when steam
power revolutionized industry.
But some may not realize this wasn't our only
industrial revolution. As this Deloitte video explains,
a second occurred in the 19th century, when
electricity and assembly lines led to mass
production, and a third in the 1960s, when advances
in computing allowed us to program machines and
networks.
Today, we are on the verge of a fourth industrial
revolution, dubbed Industry 4.0.
"Industry 4.0 is the next evolution of automating
processes, making them smarter and better," said
Brian Heckler, CPA, U.S. leader of KPMG's Industrial
Manufacturing Sector.
So just what does that mean? And why should CPAs
care? Heckler and others discuss Industry 4.0, the
financial impact across industries, and why CPAs
need to prepare for those changes.
"The most important thing is just being on top of
this," said C.J. Skender, clinical professor of
accounting at the University of North Carolina's
Kenan-Flagler Business School. "If you're not on top
of it, you're falling behind, and then somebody takes
their business elsewhere."
What is Industry 4.0?
Industry 4.0 began in Germany several years ago as
a strategic initiative to provide advanced
manufacturing solutions, Skender said.
To fully understand Industry 4.0, it's important to
understand the internet of things, said Walter
Merkas, senior manager in WithumSmith+Brown's
cloud solutions and management consulting
practice.
The internet of things includes anything with an on-
off switch that's connected to the internet and/or
other internet-enabled devices, as this
article from Forbes explains. It includes devices such
coffee makers and parts of machinery.
The internet of things and that communication
between devices is part of what's made Industry 4.0
possible, Merkas said.
KPMG's 2016 report The Factory of the
Future describes Industry 4.0 as the full integration
of information and communication technology and
automation technology in the "factory of the
future."
Everything in the factory is on a network that also
includes sales partners, suppliers, equipment
manufacturers, and clients, the report said.
The results will be numerous. Devices will not only
communicate, but also use information and data
analysis to drive future actions, according to
Deloitte.
One such result will be the evolution of the "digital
twin" in manufacturing, which allows new ways to
optimize product design and functionality, Heckler
said. Using artificial intelligence, machine learning,
advanced analytics, and more, companies will be
able to build a product in the digital world that
allows more advanced views and smarter design
than ever before. This allows companies to do more
rapid prototyping than with physical products,
experiment with new designs at a lower cost, and
improve communication with the extended supply
chain.
Deloitte's video also points to decreases in
downtime on the production floor, ensuring
manufacturers never start work that can't be
finished with the materials and labor on hand and
providing an opportunity for manufacturers to grow
new sources of revenue, such as a data business that
can become as large as their product business.
Merkas shared a specific example of how
manufacturers might sell data in addition to
products: A tractor manufacturer builds a tractor
that can transmit data. The tractor tracks a farmer's
seed and fertilizer habits, which the tractor
manufacturer can sell to seed and fertilizer
companies, which can in turn market their products
to individual farmers based on their particular usage
and needs. "It may be that they sell more data than
tractors," Merkas said.
What the future holds
Many argue we're only on the verge of Industry 4.0,
Merkas said.
"The introduction is here in the theoretical arena,"
he said. "Companies will start to experiment more
with the internet of things."
In large part, companies for now are testing the
internet of things in small ways, rather than making
across-the-board changes. As those connections
grow, manufacturers will build a collection of data,
he said. In that same vein, workers are still learning
to convert that data to knowledge useful in decision-
making, Merkas said.
"In five years, I think we'll likely be looking at new
business models," he said. "That will include quicker
speed to market and the ability to respond more
rapidly to customers."
Heckler calls the deployment of Industry 4.0 an
"evolution, not a revolution," in that it will be
difficult to see exactly when it starts and when it
stops. And it may vary from company to company.
"Some companies say, 'We absolutely have to be
connected,'" Heckler said. "But some companies
say, 'We see that, but we're not sure it applies to our
customers or is something we can monetize to
extract value.'"
That second group of companies tends to believe
they have cemented a competitive advantage by
doing business in a certain way, he said. However,
those companies may face problems if a competitor
finds a way to provide the same product with
increased value or better customer retention.
"You see that happen in other business models,"
Heckler said. "Look at the retail sector being
disintermediated by Amazon."
How CPAs can help
Changes brought forth by Industry 4.0 will impact
the financial side of these businesses.
An investment analysis will need to take place,
Heckler said, as industries look at the cost of change
and weigh that against potential future profits.
"How well is finance really able to predict the
profitability impact and the return-on-investment
analysis?" Heckler said. "If we buy this new
equipment, if we invest in new technology, can we
predict and quantify its impact with a similar degree
of comfort as we can with traditional investments?"
CPAs can help companies with pricing analysis when
a product improves in functionality, helping to
determine whether the company can charge more
for filling a customer's need, he said. Or they might
examine cost savings. If production is more effective
and efficient, what will the company save in costs?
With this new connectivity among machines also
comes new risk, Heckler said.
CPAs can help their clients analyze the risks that will
arise, he said, including liability for product misuse
or unintended use, as well as risks related to being
more connected within a factory or outside the
enterprise. As recent ransomware attacks have
shown, connected devices have a level of
vulnerability, Heckler pointed out.
"The enterprise risk-management process has not
really caught up to assessing the unique new risks
that might arise due to this connectivity," Heckler
said.
Contract management, terms and conditions, and
responsibilities and boundaries will all see changes,
and CPAs can help, he said. Companies will need to
address frontiers such as ownership of data and
standards for transmission, according to Heckler.
Finally, CPAs will be crucial in helping companies
understand new value streams and new business
streams coming from the transmission of all that
data, Merkas said.
"If you specialize in manufacturing, information is
going to come from a sensor—how are we going to
use the data to make better decisions?"
Lea Hart is a freelance writer based in Durham, N.C.
To comment on this article, contact Chris Baysden,
senior manager of newsletters at the AICPA.
https://www.accountingweb.com/community/blog
s/garyeastwood/how-accountants-can-survive-
industry-40
How Accountants Can Survive Industry 4.0
garyeastwood
Loess Hills AccountingSep 28th 201
Some analysts call it Industry 4.0, claiming that this
is the fourth Industrial Revolution and will change
every aspect of society. Others worry about the
potential downsides such as security or how
workers will be impacted by new changes.
But no matter the name, the last few years has
witnessed an explosion of new technology. The
Internet of Things (IoT), Big Data, and automation
will affect how businesses work, and how CPAs do
their jobs. It is consequently critical that
accountants look at these technological trends,
understand the resulting changes, and figure out
what role they can play in the new economy which
will be created.
The Power of the Internet of Things
People have been talking of the Internet of Things
for years, and ZDNet reported in June that IoT
spending will reach over $800 billion in 2017 and
$1.4 trillion by 2021. Furthermore, ZDNet also states
that “manufacturing, freight monitoring and
production asset management will attract the
largest investments.”
On a basic level, the Internet of Things revolves
around different devices, devices which never
before have been connected to the Internet,
communicating with one another. Manufacturing
equipment can be connected and transmit data,
which allows businesses to respond faster to
developing situations.
For example, a piece of industrial machinery can
now transmit a warning of when it is about to fail or
is nearing the end of its lifespan. Before, a factory
would either have to spend hundreds of man hours
checking machinery, including your signal booster,
to make sure everything is in order, waste space and
money storing spares in case a piece happened to
fail, or even shut down should that piece suddenly
fail without warning. Now, a factory can order parts
only when they need it, eliminating downtime,
saving money, and making machine failures far less
frequent.
A key thing to note in the above example is the role
which data plays. The Internet of Things and Big
Data are linked together, as devices connected to
the Internet will be constantly transmitting data to
interested parties. More businesses with more data
means more analysis and prediction. A 2016 survey
of industrial participants reported
by Forbes showed that “83% expect data to have a
significant impact on their decision-making in five
years” while only half are using data now.
Manufacturers could even sell data received from
customers using their products to other customers,
establishing a data market and a new revenue
stream.
The transition to manufacturers wholeheartedly
embracing the Internet of Things will take time, as
manufacturers slowly upgrade their equipment and
learn how to use data to make smart decisions. But
whether it comes slowly or quickly, Industry 4.0 is
coming.
The Role of the CPA
The Internet of Things, Big Data, and Industry 4.0 will
have major effects for CPAs both directly and
indirectly.
Directly, accountants will now have to prepare to
face an incoming stream of real-time financial data
instead of periodically checking in with a
bookkeeper. Auditing in particular will become
much easier. Accountants can catch financial fraud
faster, minimizing the damage, and can also notice
financial trends and offer more real time advice.
But only CPAs who learn how to manage these large
real time data flows will be able to take advantage.
They will thus have to learn the language of IT and
IoT concepts in order to construct new accounting
and reporting structures. Once that is complete,
accountants can then help their clients as well,
providing advice on how to build a business
structure which takes full advantage of the IoT.
Providing advice will be the main way through which
Industry 4.0 will indirectly change the accounting
profession. Automation and artificial intelligence
are already changing the industry so that as Firm of
the Future states, the accountant’s role will evolve
from reporting and compliance work to becoming
“forward-thinking small business advisors.”
Industry 4.0 will amplify that trend, especially
because many businesses are unsure of how exactly
to embrace the IoT. The IoT does have potential
risks, such as hackers using less protected devices to
commit data breaches or other criminal activities.
Accountants will need to help their clients analyze
the upsides and risks of using the IoT with any
particular device, get the maximum value out of
data they collect, and play a crucial advisory role.
The first Industrial Revolution was all about size in
who could build the biggest factories, have the most
machinery, and get the most workers into a single
space. Industry 4.0 will be about speed. Who can get
data the fastest and use it to reach good decisions?
As financial advisors with knowledge of technology,
CPAs have a crucial role to play in helping businesses
and must ensure that their own firms are not
swallowed in the new technological storm. There is
 still time to prepare for the IoT, but it will not be for
much longer.
https://www.accountancyage.com/2018/02/26/fo
urth-industrial-revolution-impacting-accountancy/
How the fourth industrial revolution is impacting
accountancy
What we learned from the Accountancy Age Fourth
Industrial Revolution webinar
Author
Lucy Skoulding
ReporterDate publishedFebruary 26,
2018Categories
Our recent webinar was all about the fourth
industrial revolution – the way technology is
transforming the accounting industry and the
resultant changing role of the accountant.
Speakers discussed how accountants can leverage
technology to drive business success, how to
maximise the benefits of cloud systems, and how
best to approach technology investment decisions.
With opportunity often comes risk, so overcoming
challenges associated with technology was also
discussed. Finally, our panel talked about what the
future of accounting might look like, bringing in AI
and machine learning, and predicting what the
industry will look like in 15-20 years.
Emma Smith, Managing Editor of Accountancy Age,
drew upon the expert knowledge of the panel. The
speakers were:
 Tim Wakeford, Vice President, Financials Product
Strategy, EMEA at Workday
 Mark Farrar, Chief Executive, AAT
 Chetan Mistry, Director, Smith & Williamson
 Noel Tagoe, Executive Vice President, Academics,
The Association
Listen to the webinar on demand here.
1. The role of the of the accountant is changing
A key benefit of technological developments is the
removal of the need for slow, manual processes,
enabling accountants to spend more time on adding
value to the business. Also, cloud technology has
lowered the infrastructure support costs for
organisations. New technology allows a greater
analysis of business drivers, using insight and
actionable analytics to achieve a competitive
advantage.
Accountants are therefore moving away from
bookkeeping and stewardship to become strategic
business partners. Routine and process-driven roles
will decrease while roles which require thinking
outside the box will be in demand. Accountants
have grasped this “inexorable tide” of technology
overall, but the challenge lies in completing day jobs
in time to deliver the change of the future. Many
people’s daily routines are so hectic, that even
thinking about different ways of working is
impossible.
Most accountants have come round to the idea that
change needs to happen, but the delivery of change
is still in its infancy. Some customers also still need
persuading that technology is the way forwards.
They need to remember that their competitors are
using technology to drive growth, so they must too.
2. Technology is disrupting the accounting sector
Key developments have led to better processing
power and the ability to store more data.
Accountants can work faster but also look at more,
which is massively impacting the way they work.
Specific developments include cloud technology and
big data, both of which are affecting all businesses,
not just accountants. Clients are more empowered
by data and technology too.
There is no underestimating the power of
technology. It will change the unit costs of the
finance function and the pricing models of the
future.
3. With change, comes opportunity
Technology has enabled finance teams to do three
key things at pace: produce and create value, shape
how it is done, and tell the story of how it is
achieved. In the past, finance was focused only on
cost, whereas now it can contribute value creation
and value preservation.
In particular, accountants can make use of software-
as-a-service (SAAS) technology, which allows access
to individual applications and is hosted on the cloud.
As well as lowering infrastructure costs, set-up costs
are cheaper and the speed of implementation is
greatly improved.
Cloud technology is also secure and allows seamless
updates to be performed. The level of insight which
can be obtained from it far surpasses anything that
is possible on an On Premise system and any
changes, such as adding new companies, can be
almost instantaneous.
4. Accountants should take time when investing in
technology
Before making an investment in technology,
accountants must understand how it ties in
strategically with their business. They should look at
the value proposition and apply this to both their
staff and clients. Cost does not bear as much weight
as it once did, but it is still a consideration.
Resources and time needed for implementation
should also come into the mix.
To ensure successful technology
implementation, accounting firms should have
plans in place and the right kind of partnerships to
help with this. The technical side is often well
looked-after, but people can be more of a barrier.
The necessary question to ask is are people using
the technological platforms in the way they are
expected to use them and therefore getting
optimum output?
Seamless implementation can only be achieved with
a project team who understands what needs to be
achieved conceptually and then technical teams and
solutions providers working together to make this
happen.
5. Cloud technology is a game-changer for
accountants
One tangible benefit of cloud technology specifically
is mobile working. People can access their data
anytime, anywhere, which has fundamentally
changed the way businesses operate.
The ability to perform real-time reporting has also
transformed organisations. More information can
be pushed directly into the hands of business
leaders in the format they want it.
Traditional technology tells you the who and the
what, but not the why. Cloud ERP technology works
in a totally different way, for example recording
people’s names against revenue transactions. The
linking of non-financial information into general
ledgers means accountants can offer richer services
now.
6. There are challenges with cloud technology to
overcome
Security is a major issue. We need to protect
software, hardware, and data. With GDPR coming in
May, there is also the consideration of permission to
access data. There has been carnage with big
corporations such as Carillion going bust recently
which has led businesses to worry about what will
happen if their suppliers go into liquidation. It is
important that accountants are aware and prepared
for this.
Training is another challenge. People have a key part
to play in technology and they must be taught how
to make the most out of it. Time is vital. Not
everyone will grasp using new technology overnight
and businesses must allow for this. They should
empower staff to try it out and eliminate any fears
of failure.
Trust is also a barrier. People often lack confidence
in new systems, but they will change their minds the
more they use it. Getting staff involved in User
Acceptance Testing is a good way to tackle this as
people are then involved in the technology journey,
learning about it while testing it.
7. The future of accounting is varied and bright
Drivers such as Blockchain, Making Tax Digital, and
Open Banking are changing work for accountants,
and they need to get ahead of the game and ensure
they are not left behind.
AI and machine learning do form part of the future
for accountancy, and this is a good thing. There is no
need to worry about accuracy. There will always be
qualified accountants checking any figures
produced by automation and verifying that they are
correct.
Accountants should stand back and think very
carefully about their objectives around technology.
Move quickly, get with this change, and stay agile.
This revolution cannot be ignored.
https://businessmirror.com.ph/2019/01/07/the-
fourth-industrial-revolution-accounting-faces-new-
challenges/
The Fourth Industrial Revolution: Accounting faces
new challenges
By BusinessMirror January 7, 2019

F we stay silent about change, we might as well
resist it. For change has come once again. But to
what extent are we responsible to ourselves and to
the accounting profession in terms of victory or
defeat?
The 13th Washington SyCip Lecture Series, dubbed
“Industry 4.0: Lights and Shadows,” was organized
by the University of Santo Tomas-Alfredo M. Velayo
College of Accountancy on November 7, 2018.
Accounting experts from various sectors discussed
their insights and judgment with regard to Industry
4.0 in business and accounting education. The
experts include: Mr. Michael Gallego of
Punongbayan & Araullo, Dr. Arnel Onesimo Uy of
the Commission on Higher Education, Prof. Florenz
Tugas, Prof. Kenji Asano, Mr. Fermin Antonio Yabut
and Ms. Kristine Abegail D. Asug.
Being told for numerous times, there is only one
thing in this world that is constant: Change. Today,
Industry 4.0 has been establishing itself on our
current business setting. This is of great importance
not only to the general population but also to the
whole work force. The implications of technology
exempt no one, as seen on how it influences
individual behaviors and overall culture. With this,
corporate regulations and business transactions
have also been evolving. As these changes occur
naturally in our economic and business system, as
individuals, one option is and will always be
existence; sometimes our last resort is acceptance
of change.
While Industry 4.0 is a call for both celebration of
potential and preparation for risk, it likewise
challenges our educational system to take
responsibility in creating a new norm on educating
the future generations, as educational institutions
are one of the starting points where we can reap the
benefits of Industry 4.0.
Generally, seeing the shift in how education is put
into operation, the focus of academics at some point
becomes the technicalities of the field, rather than
discussing the very essence of principles and
concepts. Sometimes, educational systems focus
more on the functionalities of the system itself,
leaving the principal mission of education
overlooked.
Observed in most academic discourses, it tends to
focus on answering the what of things, rather than
the why and how. Not to mention that
the why and/or how can be taught in lectures with
its what inherently included. It is, still,
understandable that this is immensely challenging
on the part of those belonging in academe.
However, the field of accounting, at this point in
time, is crucial to the technologies that are currently
surfacing. We are, somehow, in competition with
artificial intelligence in terms of the application of
accounting rules and standards. Though accounting
may be an overwhelming field, if we bring into the
system how accounting, such as tackling essence as
foundation rather than facts, may not only allow us
to attain the highest level of appreciation for
accounting but also an opportunity to instill a
lifelong zeal in students, the rewards of which may
be unseen in the present, but are potentially
realizable in the future.
Accounting is a very competitive practice, involving
complex skills such as analysis, communication and
decision-making. The human mind is essentially
created with the capability to operationalize these
processes but not to recreate these into machine
form. This is, in all honesty, a misinterpreted
opportunity. We usually underestimate human
talent when robotics becomes a frontliner. But a
human heart we do possess, and that is a passion
present within the accounting equation that can
never be replaced.
In relation to this, Dr. Uy mentioned that human
beings can offer one resource to our clients that
robotics can’t, and that is trust. Our nature as
human beings will keep accounting alive, and
accounting, in return, will keep the business sector
functional not only for the economy as a whole but
also for its individual constituents.
There are certain weapons that can be designed to
supplement the current scope we implement in our
accounting education. For this accounting world
will, one day, be far from the kind of accounting we
have today, and we are preparing for a change we
shall embrace.
Camila V. Amistoso is a senior student from the
University of Santo Tomas, pursuing a Bachelor of
science in accountancy. She is a member of UST
Junior Philippine Institute of Accountants and a
contributor to UST-JPIA’s official publication, The
Ledger.
This column accepts contributions from
accountants, especially articles that are of interest
to the accountancy profession, in particular, and to
the business community, in general. These can be e-
mailed to boa.secretariat.@gmail.com.
http://www.mondaq.com/Nigeria/x/774828/Audit
/Industry+40+Audit+professionals+of+the+future
Nigeria: Industry 4.0: Audit Professionals Of The
Future
Last Updated: 24 January 2019
Article by Deloitte Nigeria
Deloitte Nigeria
My early days in the profession witnessed going to
the field with loads of prior year audit files stacked
in several volumes sometimes up to ten volumes
depending on the size and complexity of the
engagement. As a year one Audit Associate then,
one of my tasks on any engagement was to obtain
and move to the field long and short analysis
spreadsheets with which we are to document audit
work to be performed plus the prior year audit files.
Today, audit professionals go to a client with their
laptop, equipped with audit software to deliver
seamless quality audit service to clients.
However, current technology being used by audit
practitioners has its limitations and no longer meets
the ever growing needs of practitioners today's
complex global economy. Since modern-day audit
professionals have been exposed to how applying
cutting edge technology can be a key differentiator
with clients and talents. Also as the industry moves
forward, organisations will require carefully crafted
business strategies that anticipate the ultimate
effects of regulatory reform, technology changes,
competitive dynamics and market movements,
hence audit firms must continue the tradition of
excellence and innovation in audit technology by
embarking on initiatives and invest in new
technology and skills to shape the future, remain
competitive and remain relevant in the future.
There is wide debate around the impact that
advances in technology in this disruptive era will
have on the scope and relevance of the audit of the
future. If we do not engage with these
developments the outlook could be bleak: at best
the profession as we know it will become less
relevant and at worst we might not remain in
business at all. But if we harness the opportunities
that technology disruption offers us then we have a
very exciting and integral role to play.
Over the past 10 to 20 years there has already been
a significant change in how we all use technology –
both in business and socially. However, the rate of
technology change that is around the corner is likely
to be significantly greater than any we have
experienced to date. As an example, market
research company Forrester reported that by 2021
robots will have eliminated 6% of all jobs in the
United States – just a few years away.
And set against this backdrop we have a profession
steeped in tradition and operating within rigid
regulatory frameworks. Do these disruptive
technologies present an opportunity or a threat to
the auditing profession?
While this pace of change will be perceived as a
significant threat by many in the profession, this is a
time of great opportunity for the profession if we
embrace it. The biggest risk for auditors lies in doing
nothing in response.
Some routine roles/tasks will undoubtedly be
eliminated. However, there will always be a need for
skilled, human auditors who can apply sound
judgment and arguably this is even more important
in an increasingly technology-enabled world. After
all, who will decide what information should be fed
into technology-enabled tools? Who will interpret
and communicate the results? And who will ensure
that end users can rely on the output from these
tools and have a robust understanding as to how
risks such as cyber threats have been mitigated?
The current technology landscape
Technology is already changing the face of the audit
profession. Machines are helping us today to do
audits faster, efficiently and with a reduced risk of
error.
Analytics
Analytics has been a buzzword within the audit
landscape for a number of years now and it remains
a pivotal part of the move towards the audit of the
future. Improvements in analytics capabilities are
enabling auditors to concentrate their efforts
towards outliers in a population and allow 24/7
analysis of huge data sets. Suddenly testing
complete data sets rather than a sample-based
approach is achievable and the concept of
continuous audit within reach, allowing auditors to
test audit evidence in real time, with timely
identification of issues and insights and allowing
focus on anomalies in a population.
Audit Analytics has an important role in raising the
audit quality bar, in particular, enabling
stratification of data and focused testing of large or
complex data sets. As with many of the technology
solutions which are going to become part of the
auditor's future toolkit there is a critical dependency
on the standardisation of data as a pre-requisite to
being able to overlay these advanced tools.
Going forward, there is a shift towards predictive
analytics – using analytics capabilities to predict
events, explain when and why they might occur
using simulation and modelling and also prescribe
the most effective path to maximise opportunities.
Such developments will allow audits to be
increasingly precise in targeting risk and increase
their relevance.
Artificial Intelligence (AI)
AI is simply the task of getting computers and
machines to do tasks that require intelligence when
done by humans. Most current AI is narrow in that
it is created to deliver a specific task within certain
programmed parameters. This means the AI is
reliant on humans providing initial instructions and
algorithms.
Cognitive computing uses artificial intelligence and
machine learning algorithms to go beyond analytic
capabilities and to learn and make autonomous
decisions. AI is considered a fundamental advance in
driving efficiency and quality of output.
The concept of AI is not new and is being actively
explored and rolled out in a broad range of areas –
from the healthcare sector to the automotive
industry, from online advertising to credit agencies.
Unsurprisingly, the audit profession is also exploring
the opportunities and potential for harnessing AI
within an audit approach.
Emerging technologies like AI present the audit
profession with many opportunities to improve the
way we work, to provide better services delivered in
a more efficient way and bring enhanced insight into
the audit process.
Just take one example of natural language
processing: using advanced machine learning
techniques, auditors are now able to quickly
process, highlight, and extract key information from
electronic documents. These cognitive capabilities
enable the auditor to assess a far broader
population set in its entirety and focus effort on key
items of interest and insight while the repetitive or
low judgement area of extraction is automated.
Although automation, analytics and cognitive
technologies in themselves have the power to
disrupt how audits are delivered – and indeed the
business models and structure of audit firms – the
real transformation of the audit profession will
occur as these exponentials converge and combine
with new technological disruptors, such as
distributed ledgers – often referred to as the
blockchain.
Technology horizon scanning
Blockchain
Distributed ledgers are becoming an increasingly
hot topic. The concept of a secure, distributed
ledger of information which provides a platform for
representing and exchanging things of value could
disrupt the way in which transactions are conducted
and recorded in the future. Many organisations are
starting to recognise the potential of blockchain
technology and some are investing heavily in
experimenting in this area.
Over the last five years, blockchain has evolved from
a cryptocurrency or payment system to a broad
ecosystem of digital automation opportunities.
The blockchain provides an immutable record of a
transaction established in code. Some have
suggested the future possibility of triple entry
accounting where every accounting transaction
recorded by an entity also has a corresponding
posting onto a public blockchain. All the transactions
on a public distributed ledger are available to all the
users in the network, making the system
transparent by design.
In reality, this feels a little far off and is dependent
on collaboration within a complex ecosystem of
companies, regulators, standard setters and
government. The more likely route over the short to
medium term is that some core building blocks of
the blockchain concept will be incorporated into the
way in which private groups of companies transact.
One such example is the way in which blockchain
can be used to record smart contracts between
entities. Such contracts could dramatically disrupt
the way people do business. It is easy to see the
advantages of users being able to interact with
smart contracts to invoke an automatic execution of
defined rules and as a way of securely holding and
transferring legal title of the asset. Details of how to
account for the contract could also be included
within the smart contract. This would enforce
congruence between the recognition of costs in one
entity and the recognition of revenue in the other.
Such transactions are self-verifying meaning that
someone auditing the recognition of revenue from
the contract would know that the other party to the
contract has agreed the costs incurred, either
themselves or through a trusted source of
verification.
And what is the long term view? Put the concepts of
smart contracts and triple entry accounting together
and the world of auditing looks very different. With
all transactions verified by an independent source
(or the other party to the smart contract) and a
complete history of all transactions on the
blockchain, the focus can move from the audit of
transactions in a year to auditing the terms of the
smart contract itself.
Rather than waiting until year-end to see the impact
of an entity's transactions on their financial
statements, auditing could occur as smart contracts
are created, before the transactions even take
place. Misstatements, either due to fraud or error
could be stopped before they occur. Auditing
becomes real time – not an annual event looking
back at the past year, hence bringing a new lens to
transparency and corporate reporting.
Most development efforts using distributed ledgers
remain highly experimental, and practical
applications and large-scale commercial solutions
have yet to emerge. And of course it is not without
its negative press; the instability of Bitcoin is a
seasoned discussion point. More recently, the
negative press associated with the "hacking" of
ledgers due to potential flaws in the code has made
people realise that the blockchain may not be as
impenetrable as thought.
Blockchain is still a relatively early stage technology.
However, despite the very obvious current
challenges and its unpredictable journey to
maturity, the disruptive potential of distributed
ledgers remains significant.
What does this all mean for the profession?
As a profession that is steeped in tradition and
surrounded by frameworks and concern for
regulatory challenge it is going to take a concerted
effort to embrace and proactively respond to the
opportunities and challenges that the digital and
technological revolution will bring. Some of the
biggest hurdles will be around responding in an agile
way and having a forward-looking mindset.
Technology disruption is not a distant future state –
it is here and now. If the profession is going to
remain relevant it needs to embrace these changes.
And the pace of change remains one of the biggest
threats to the profession. If we are not proactive in
our response to these technological advancements
then the traditional audit services and audit firms
are wide open to challenge from the more agile
startup community.
The response required is complex and requires
interactions from multiple stakeholders. Each of
these stakeholders is critical in ensuring the ability
of the profession to move forward.
Auditors
While there are many important stakeholders, in
discussing the future of the audit profession it is
auditors themselves who should be seeking to drive
the agenda. There is a responsibility on audit firms,
particularly the largest firms, to continue to invest in
developing increasingly technologically enabled
audits. This needs to involve some experimentation
and an active ongoing dialogue with regulators as
new techniques emerge.
The increasing use of technology will result in new
challenges for businesses and new risks in the audit
process. Auditors will need to validate the design
and controls around the platforms which host the
new software in addition to interpreting the
complex data sets that arise.
All firms – regardless of size – have the potential to
be disrupted by technological advancement. While
smaller and medium practices may not be able to
invest in experimentation on a scale that larger
practices are able to, building awareness and
engaging in the debate, as well as developing an
agile strategy, is key to successfully adapting to
these new challenges and opportunities.
Regulators and standard setters
Recent and future technological advancements
demand a rethink of the regulatory environment. In
the short term, as auditors increasingly use
algorithms to identify outliers for testing there is an
urgent need for regulators to reassess the relevance
of the regulatory environment and adapt their
focus. This means that regulators need to work
closely with audit firms to understand the
experiments in progress and to make some
wholesale changes to regulatory requirements
which in turn will shape individual firm methodology
and approaches.
Longer term disruptors – such as distributed ledgers
– will require a completely new regulatory
environment and accounting standards to ensure
consistency of approach around verification of
ledgers, validation and recording of transactions and
the role that oracles play verses auditors.
If we want something that is going to support
technological developments and be a meaningful
and appropriate regulatory environment, we must
ensure that we do not simply try and shoehorn the
new technology/approach into an existing
framework. There needs to be a transparent process
and mechanism for developing these new
frameworks with input from all key stakeholders.
The audit profession can be a big ship to turn and a
concerted and proactive effort is needed on the part
of regulators, standard setters and audit firms to
make this change happen. There is a risk that
existing laws and regulations will act as a barrier to
the pace of change and therefore action is needed
now to start the cogs of change.
Companies
Technological change and its impact on internal and
external audits will also bring challenge and
opportunity for companies. For example, boards
and audit committees can demonstrate an interest
in how technology-enabled their external audit is
through supporting technology investment in
internal audit.
From a governance perspective, boards and audit
committees will need to be appropriately resourced
and sufficiently trained in order to understand the
impact of technology on companies' own financial
reporting processes, as well as being able to
understand and challenge the work executed by
auditors.
And, from a practical standpoint, if companies want
to benefit from a more effective and efficient audit,
they will need to be open to moving towards a more
standardised format of financial data to enable
analytics capability and cognitive software to be
used without the prohibitive barriers of complex
data manipulation which is often the case at
present.
Investors
The investor community also has an important role
to play. The clearer this community can be on what
information they need, when it is needed and what
level of assurance is required, the greater the
chance of success.
Investor needs can be met through more innovative,
timely and relevant financial reporting, enabled by
the types of technological developments
highlighted above, but engagement and clarity of
needs is key.
What does this mean for the auditor of the future?
Significant change is coming and offers a huge
opportunity for the profession to be more relevant
and trusted than ever. This prize will require us to
embrace change and to train and to develop people
with a different range of skills and abilities.
While the broad business training that qualification
for the ACA provides is still considered a valuable
asset by graduates, there is a risk that the profession
is still perceived by the majority to be very narrow in
its graduate selection and required skillset.
For the future, the mix of skillsets is critical. The
profession will need people who have accounting
skills but who are also extremely IT literate.
Analytical capability is coming to the fore – and also
the ability to code and work with a range of new
technologies. To meet this opportunity there are
already some examples of audit firms recruiting in a
broader way than they have done in the past and
this trend looks set to continue.
Added to this is the potential to use the crowd to
deliver audit tasks – a future that will be enabled by
technology platforms and which will bring a whole
new dimension to the flexible and agile audit
workforce.
Future audits will be of a higher quality enabled by
technology, but this is only part of the equation.
Highly skilled humans will always be needed to
interpret the big data, report and to interact with
other humans on key judgement areas and provide
assurance around the new technologies which are
generating the data.
Technology is not a silver bullet – it is only as good
as the data underneath. While the day-to-day
responsibility of the auditor may change, the
opportunities for our profession are greater than
ever.