Audit Dead in a Decade? (Post from Accounting Today article)

Below is a post from an article in Accounting Today. My comments are below.

Article

Following are some highlights from an article titled “Audit dead in a decade?” in Accounting Today putting the accounting sector on notice of pending changes over the next decade. Accounting professor David Yermack thinks the audit profession may be dead in 10 years.

At a roundtable discussion held at New York University this past Tuesday (Oct. 30, 2018), Yermack, who is a legal, economics and finance expert and the Albert Fingerhut Professor of Finance and Business Transformation at NYU’s Stern School of Business, based his observation on the role that artificial intelligence and blockchain are taking in audit.

“The distributed ledger reduces the need for audit by 97 percent,” he said. “Auditors in the future will be competing on the basis of productivity, which will essentially mean who has the fastest hardware and software. And fraud, in the classical sense, will be all but impossible.”
The concept of the immutability of a set of data has been fundamental to the development of distributed ledger technology (DLT), according to Abhishek Biswas, corporate vice president and director at New York Life, who was also on the panel. And that is why fraud the way we know it today will effectively disappear with the rise of the distributed ledger.

But while DLT is extremely secure by design, there are other opportunities for fraud that will develop alongside the technology, as they have alongside every technology we have seen. For instance, socially engineered hacks, like phishing, in which cybercriminals target people (rather than computers of software) with emails and personal messages, may still be an effective way to gain access to private information even as blockchain becomes more widespread.
Yermack is not alone in his gloomy view of the future of the audit profession, although he may be one of the few to state the sentiment so boldly. The American Institute of CPAs is very aware of how AI is changing the sampling process drastically already, and recently launched an iniiative to build what it’s calling a “Dynamic Audit Solution” that it hopes will drastically change the methodology of audits. At its recent user conference, Sage Intacct shared a similar plan: The company wants to build software that shifts audit from “after the fact” to “real time and continuous.”

Ryan Lazanis, a CPA and CA who was also at the NYU discussion, didn’t quite share Yermack’s view that audit will die, but does think the role of the auditor will change – perhaps drastically — but that it will remain an important part of accounting services.

“An auditor’s job has two parts,” said Lazanis, who is the founder of a paperless firm, Xen Accounting. “First, to provide independent verification of third-party data, but also to apply accounting standards, and use judgment to verify that the record is valid and accurate. The audit role will shift more to the second part than the first.”
He went on to say that blockchain, as it develops, will be an “interesting tool” for auditors, as it provides the ultimate audit trail.” Expertise in blockchain will be highly sought after by firms in the future, he added.

But when will this shift occur? First, more data needs to flow through blockchains, Lazanis said; big players, like the Big Four, major corporations, big banks and governments need to adopt the technology; and regulations need to become clearer. But Lazanis thinks we could be as near as five years away from this shift taking place.

Comments:

As a CPA, I am concerned that in my remaining lifetime (hopefully longer than 10 years) there could no longer be an audit profession. The audit is dying BUT it can be reinvented as a highly specialized field IF radical changes are made to US GAAP. In addition, comments like this may dissuade people from pursuing the profession when it is need of people.

As a CFE, the statements about fraud “effectively” disappearing as we know it today and be “all but impossible” because of this technology seem very unrealistic. Fraud has been around for a long time and as the article eludes to it will adapt. I believe it will help limit certain types of fraud but that is it. Some may argue that technology has allowed fraud to grow exponentially and this may be no exception.

I also have comment about the author, stating Lazanis “didn’t quite share Yermack’s view” is misleading. Yermack and Lazanis are not even on the same planet. How is auditing dead in ten years (Yermack) but continue to be an important part of accounting services (Lazanis). Yet I agree with both and disagree with both. I agree with Professor Yermack that the audit is dying and technology is accelerating its death but technology is not the reason the audit has been dying or will eventually die. I agree with Mr. Lazanis that auditing will change drastically in the next 5 years but it is not an important part of accounting services and has not been for quite some time. It is why the audit has turned into a commodity.

I see the use of Block Chain and AI operationally and for transactional items. No one has shown or explained to me yet that AI and Blockchain will be able to prepare a full set of financial statements with disclosures in accordance with US GAAP. Thus, the technology is limited to transaction oriented improvements. It is not able to apply interpretive guidance and application of an accounting standard, not yet at least. This is one of the main reasons the audit is dying. If the immutable system can’t produce it, what confidence will investors have in it. Investors what 3 things: timely, accurate and relevant financial information to make decisions from. US GAAP provides none of those three. If it did, there would be no need for publicly held companies to provide any non-GAAP financial information when we know there is a ton of it. This article is clear. Imagine AI and Blockchain providing immutable, specified, relevant financial information directly to investors in a real time setting. Once the investors realize this what would you need an auditor for? I know and I know how to make the auditor a highly specialized sought after professional.

What amazes me is the accounting profession continues to focus on improving the audit including using AI and Block Chain as tools when the underlying problem is US GAAP. The accounting profession’s solution is if we “improve” the audit and make the auditors better, the problem will be solved. I have analyzed almost every issue I can think of related to an audit and every time the same result appears as the cause of the problem, US GAAP. The audit will die if the profession continues to believe US GAAP is immutable and the problem lies with the auditors.

9 thoughts on “Audit Dead in a Decade? (Post from Accounting Today article)”

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