Should audit firms investing in tech orbit beyond finance?

There is debate on extending the role of the auditor beyond finance. Data technology can help auditors understand how companies treat their workers or impact the environment—but should they be expected to look?

The audit profession is grappling a hydra of tough regulations, complex laws, rapid technological developments and public misconceptions about its role— people often blame auditors and not bad management when companies go bust. Global accounting firms are investing in technology in search of relevance and growth, but as a result, expectations are rising for auditors to look beyond finance.

“There is a debate now whether the role of the auditor should be extended beyond giving an opinion about a company’s financial position,” says Martin van Roekel, chief executive of BDO Partners, a public accounting, tax advisory and consultancy firm with offices in 158 countries including Sri Lanka. “Expectations are rising for auditors not just to look deeper, but also broader. But this raises important questions. Are accounting firms expected to build expertise beyond finance? And where will it end?” he asks.

Van Roekel and Stephen Darley, BDO’s Asia Pacific head, were recently in Sri Lanka exploring opportunities for business growth. “We’re investing in forensic accounting capabilities in Sri Lanka, because we see opportunities to grow the consultancy business and are keen on outsourcing operations,” Darley says.

Excerpts from the interview are as follows:

What are challenges facing the global audit profession?

Van Roekel: There is a huge challenge around recruiting and retaining sufficient talent. Most mature economies have ageing populations, so everyone is looking for ways to attract people and investing in automation wherever possible. Mobility of people has always been important for our profession, and it’s becoming even more so now. A revolution is taking place. Much of what we do as accountants is being automated. Data analytics, mapping and artificial intelligence (AI) are becoming more important; and while replacing many elements of our work, they present opportunities for growth and continued relevance of the profession. We will have to acquire skills to deploy technology in a sensible way. For example, there’s so much information around, but the challenge is identifying the appropriate data to use and to what end. Once technology processes the data, we will then need skills to analyse the results, establish linkages and form judgments.

Won’t expectations also rise because of this?

Van Roekel: There is a debate going on in some countries whether the role of an auditor should be extended beyond giving an opinion about a company’s financial position. For example, in integrated reporting implemented in several countries, investors are asking whether auditors can give an opinion on how companies impact the environment. Expectations are rising for auditors not just to look deeper, but also broader. This raises important questions. First, will auditors have to build other expertise in areas like the environment? Second, once you start looking beyond taxation and finance, where will it end? Third, where will the audit profession end up?

Similarly, social media is gathering more and more data, but how far should auditors go in using the ‘big’ data available in the public domain? I would think auditors will not access data from social media especially with privacy laws tightening the world over.

However, if that is the expectation and if people want auditors to go deeper into things, they will have to deliver. Having said that, there is a wealth of data in the public domain about companies and industries, and even with the firms we audit. I expect auditors to use that information and do more than just give an opinion on financial statements. They will be able to compare a company’s performance against its competitors and industry. If the company is reporting outlier results compared with the industry, auditors can ask the right questions from management, and through this, dig deeper into a company’s affairs. Auditors can then add value to shareholders by suggesting improvements or highlighting any issues. This is why, going forward, auditing can no longer be standardised, but tailormade to deliver the best possible results for each client.

This much is clear: We have to approach the future with open minds about the possibilities.

What opportunities do you see for BDo in Sri Lanka?

Darley: I’ve lived and worked in eight countries in Asia for 20 years, and what excites me to some extent is the chaos in Asia. Chaos brings opportunity. Mature economies may grow around 1-2%, but emerging economies are growing much faster. I am very excited every time I travel to South Asia because there is so much opportunity here.

We’re encouraged by Sri Lanka’s growth prospects, and there are many opportunities if we avail ourselves. For example, the infrastructure development project pipeline is valued at $66 billion. This is what excites me. We see potential to grow our business by facilitating linkages between our global client network and opportunities here.

BDO can get involved by bringing to the table expertise gathered from our global network of clients from across several areas and industries, like clean energy, natural resources, telecommunication and technology. We also have expertise in public-private partnerships that we can share. BDO has a strong presence in China, which we can leverage, matching investors with opportunities in Sri Lanka.

As a firm, we see opportunity to grow the business in Sri Lanka. We are investing in forensic accounting capabilities here. Another area we are keen about is BPO, offshoring accounting services.

Van Roekel: Sri Lanka has immense growth potential with China’s ‘One belt, One Road’ initiative, and their interest in the country’s investment opportunities will make a significant impact on future growth of the economy. We have a strong presence in China serving state-owned enterprises, listed companies and SMEs. Our partners in both countries could work together to create synergies between the economies, which will help us grow as a network. We have a strong team at BDO Partners (Sri Lanka), who has built strong relationships with public and private companies, and the business is growing. We see new opportunities to grow the consultancy business with foreign investor interest picking up.

What’s BDo’s strategy to differentiate itself from other global accounting firms?

Van Roekel: We deliver exceptional service and quality to each of our clients; this is our differentiator. People expect superior quality and that is something we are committed to wherever we are. BDO has a presence in 158 countries, where 67,000 partners and staff realise $7.6 billion in revenue and deliver services ranging from auditing and accountancy, to advisory, IT and tax consultation. We realise $1.1 billion in revenue in Asia, and have a strong presence in China, where we have 10,000 partners and staff. BDO is ranked number three in China in terms of size, and is growing fast, covering state-owned enterprises and listed companies.

It’s important for us to have a credible presence in emerging markets, so we’re growing our network there too. Our business across South Asia is growing, in India, Pakistan and Bangladesh. As a global network, we need to adopt new technology, train staff and communicate our offerings to clients in a timely manner to avoid missing opportunities.

The way we do business, work and communicate with clients will be heavily impacted by technology, but I believe we will reap the benefits of our ongoing investments in IT, enabling us to remain relevant and deliver the best possible outcomes. Five years from now, we want to be the network of choice among entrepreneurial companies. We expect this to translate to revenues exceeding $10 billion. BDO’s global network won’t require major expansion because we’re already in line with the ‘Big Four’.

Darley: There is something called the three R’s that define and differentiate us as a network: relationships, resources and responsiveness. We have established strong credentials around the network, which can be sourced to fill a need anywhere in the world – be it in India, the UK or Germany – and in any industry or sector, finding opportunities in tough regulations and chaotic markets.

We conduct programmes with several schools, providing internships at BDO offices, which helps us retain the best talent. We’re doing this really well and I feel this is another differentiator.

As a global network, BDo is exposed to multiple regulatory environments at different stages of evolution. How can these experiences be used to navigate regulatory challenges in Sri Lanka?

Van Roekel: BDO International is one of six networks working closely with the International Federation of Audit Regulators, where frequent dialogue and debate focus on regulations across many countries and improving auditing standards.

When regulations change, it’s important to look at what audit reforms really mean. We tend to focus on what will be forbidden or what new obligations will be imposed on auditors. However, if you understand the rules, you will also see the opportunities that are bound to be there.

For example, if there is going to be a new audit rotation rule, you can either spend time worrying about the clients you will lose or you can take the time to understand the new rule and use the opportunity to acquire new clients and expand non-audit related accounting services.

As a network, we make it a priority to really know what rules mean for different jurisdictions, then we look for opportunities and share them with our partners. So, wherever it may be, it’s always wise to take a step back when confronted with change, so we get a clearer view of the opportunities. It’s wise to learn how countries implement certain financial market reforms, but we must also remember that rules are often made for a particular challenge or a specific country issue, so we shouldn’t copy anything blindly.

Sri Lanka’s audit profession is struggling to deal with a widening expectations gap. The government is talking tough about audit reforms and the SEC is proposing new rules, including removing an ex-officio seat on its board reserved for CA Sri Lanka, the accounting body here. How should the audit profession on the verge of a possible rebuff respond?

Van Roekel: Where there is chaos, take a step back and the opportunities become visible. Intense scrutiny of the audit profession is nothing new.

What’s happening in Sri Lanka is part of a worldwide trend that began 10 years ago with the global financial crisis. Many countries around the world tightened regulations and introduced new rules, forcing improvements to audit quality. As a result, there have been significant improvements in the work of auditors. More importantly, there is better dialogue between regulators and auditors. They’re stimulating each other, working together to improve and enhancing auditors’ reports in financial statements. It’s an ongoing process.

Auditors need to be constantly aware of the expectations, so they can deliver effectively. This is why dialogue is critical between regulators, auditors and users of financial statements. The dialogue must be encouraged and expanded to include a company’s suppliers, employees and the general public.

Having a seat on the regulator’s board is not critical. In most countries, accounting bodies are not represented on regulator boards. What’s more important is the profession’s ability to deliver input. Accounting bodies can often add value and contribute to the policy debate, and there are different ways in which this can be done, whereas a board seat is not necessarily important.

The profession can learn from challenges elsewhere and become meaningful catalysts of change here. For example, many countries introduced long-form audit reports to financial statements.

Previously, auditors gave an opinion on the financial position of company. With long-form audit reports, they do much more than that. Auditors now detail their scope of work and present opinions on both the financial position and operating performance of companies, conduct evaluations, make recommendations, and highlight issues. The experience has been very encouraging. Investors and other stakeholders say these reports add more value and give them better insights about companies. These reports also give people a better understanding of what auditors actually do, because auditors can now disclose much more information about their work and issues they’ve uncovered when auditing a company.

Can the profession play a role in introducing best practices here? Yes, they can and should. I’m encouraged that Sri Lanka will soon be introducing longform audit reporting.

Darley: Governance and structure is everything. Audit quality is determined by the governance and structure of audit firms and the profession as a whole. If there are any regulatory changes, they had better move towards improving governance and structures of audit firms and of companies that require audits.

Van Roekel: Absolutely. Many people conveniently believe that only auditors are accountable for the quality of financial statements. This view is flawed. The responsibility of preparing good quality financial statements begins with the management of a company—even non-executive directors, supervisory boards and board committees have significant roles to play, along with the accountants, and internal and external auditors.

All of them are entrusted with preparing reliable and trustworthy financial statements. One of them failing to do their job will risk financial statements not meeting shareholder and financial market expectations. This is why we advocate for strong corporate governance codes and transparency across companies, audit firms and governments.

Tagged as: