On the current effects and implications of digitalization on auditing, the future in the age of artificial intelligence and the true disruptor – the Blockchain.

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f you look at it closely, digitalization in the area of auditing is not a new phenomenon. This is as data has always been the basis for the final audit. Digitalization is nothing more than a piece of technology, i.e. a tool with which this data can be analyzed and evaluated. Computer Assisted Auditing Techniques (CAAT) have long been spoken of, meaning that audits were performed electronically. When we talk about Big Data, Data Analytics and AI today, we are only talking about a transition similar to the transition from CD player to iPod.

From experiences such as these, however, we know that such transitions can have great effects. Which of the new tools will make the auditor’s life easier? Which will improve the quality of the audit and which will change the audit as a whole? The future holds two exciting answers here. Firstly, we are experiencing a possible paradigm shift within auditing. Secondly, the reinvention of auditing, because its core area is being fundamentally changed by technologies such as AI or Blockchain.

“Auditing is in the midst of a transformation. But are we experiencing a paradigm shift or the beginning of the end of the #audit?“

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Current Fields of Development in Audit

The digitalization of audit is currently taking place and will continue into the coming years as a result of developments in various fields. Six technologies and trends can be identified that are or will be particularly relevant in this regard.

  • Big Data: Large, complex, fast-moving and weakly structured data.
  • Data Analytics: Analysis and exploitation of big data with complex procedures.
  • Process Mining: Analysis of processes by means of visualization of data flows.
  • Robotics and process automation: Software that can take over routine tasks.
  • Artificial intelligence: Software that learns and makes decisions independently.
  • Blockchain: Decentralized database for accounting with cryptographic procedures.

Currently, we are using or are significantly expanding data analytics, process mining and robotics. When it comes to artificial intelligence, we are in the beta phase, but we are on the verge of a breakthrough or have already achieved some initial successes. Before new technologies can be applied in practice, however, these tools must be extensively tested and validated. Only when a tool receives the rating “testable” is it actually used to generate test certificates. Of all the development areas, as I will explain in a moment, the most promising at the moment, however, is artificial intelligence.

The Advantages That New Technologies Must Bring

Technology must not be used for its own sake. Take, for example, a tool that we use in the area of “leasing” to check a large number of license agreements. If we were to check these manually, it would take about ten weeks today. If this tool were approved, we could complete the same process in less than a week. The time saving alone is not enough as an argument in itself. This must always be accompanied by an increase in the quality of the audit results. This is exactly what this tool does. In addition to the significant reduction in processing time, the results of the tool are characterized by a lower fault tolerance compared to human testing.

The challenge now is to design this tool in such a way that it delivers reliable audit evidence and can be certified as an audit tool. This is all on the condition that the results are recognized as audit evidence by both the German and international supervisory authorities. If this proves to be the case, then we will continue to make significant investments in this area. With regard to increasing the effectiveness of an audit the following equation always holds true: Efficiency + Quality = Effectiveness.

“An effective tool, which is used in the context of the #FinancialStatementAudit, does not simply have to be faster. It must also deliver better quality results!“

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The New Role of the Auditor

However, digitalization does not simply make processes more efficient. Rather, a paradigm shift is currently taking place with regard to the role of the auditor. The profession must reinvent itself to a certain extent through digitalization. This becomes particularly clear when one looks at auditing from the point of view of companies. So far, auditors have come into the company with a view to the past.

This is changing along with digitalization. Analyzing data no longer only allows for a close look at the past, rather it also delivers findings that are relevant for the future. The patterns, interrelationships and causalities that lie within the data also allow us to peer into the future. This presents a whole range of completely new possibilities for both the auditor and clients alike. This is as scarcely anyone has these extensive opportunities to really get to grips with the company, its strategy, industry and its future prospects in such a way. In this regard, in recent times it has primarily been technologies from the area of AI such as Machine Learning that have shaped this.

Artificial Intelligence – The Most Thrilling Technology of our Time

For me, artificial intelligence is quite simply: “The most thrilling technology of our time”. I see the exciting thing about this technology in the fact that it is an evolutionary system. Similar to the process of human learning, the intelligent algorithms become better and evolve by gathering experience. Let’s come back to the tool for analyzing leasing contracts. If I feed in ten leasing contracts into the tool, it is still relatively stupid despite artificial intelligence. However, if I give the tool one million leasing contracts, then the large comparative value it can now fall back on makes it much smarter. It recognizes patterns, connections and irregularities, making it ideal for risk assessment and also for recognizing fraud, for example.

The Blockchain: The True Disruptor

With technologies and tools such as Big Data, Process Mining and Text Mining, we are moving in the present, as already mentioned above. Here we have already reached a high degree of maturity. If we take a step further into the future, we will come across Artificial Intelligence. Clients and auditors will benefit equally from this in the coming years. The exciting question is what happens if we go one step further into the future. This is as on the horizon; Blockchain has long since emerged that has the potential to turn everything upside down.

Blockchain is a system that makes the function of auditors as intermediaries virtually superfluous. In simple terms, trust between two business partners who know nothing about each other is suspended by the Blockchain. All of the information required to process a transaction is stored in the Blockchain in a fraud-proof manner. The trustworthiness is thus virtually built into the system. For the parties to the transaction, there is maximum transparency and thus automatically maximum trust. Today, in many cases the auditor defines himself/herself as the stakeholder’s confidant. When we talk about real disruption, for me Blockchain is the top technology that poses the most substantial threat to the basic understanding of this profession.

Is the End of the Audit in Sight?

So, the legitimate question is whether and what future auditing still has in light of these developments. First of all, it should be noted that we are currently in a phase in which there are major differences in development. On the one hand, revolutionary developments such as AI or Blockchain are already emerging. On the other hand, many companies are still at an early stage of digitalization. This is accompanied by cultural change, generational change and massive investments that are necessary. Data availability, data protection, data quality and cyber security pose immense challenges for all companies in the coming decades.

Last but not least, a look back shows how difficult it is to predict the future. Technologies that were the subject of hype just a few years ago no longer play a role today. Therefore, questions as to what valuable information the audit can be provided for the client through the digitalization of the audit should guide the redefinition and reinvention of auditing. This means that an end to auditing is not in sight. The elaboration and interpretation of the knowledge gained from new technology can only be showcased today and in the future through the competence of the auditors.

Do you have any questions or suggestions?