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The Current State and Future of the Audit Profession

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Audited financial statements are intended to be timely and useful in decision making. To remain a valuable and relevant service, auditing must find a way to evolve. This paper summarizes a recent study (“The Future of Audit,” Lombardi, Bloch, and Vasarhelyi [2014]), which conducts an interactive forecasting method to gain expert consensus on the current state of the auditing profession and on how the profession will evolve over the next decade. Expert consensus emerging from the study includes increasing automation of audit procedures, more predictive financial statements, continuous auditing, and maintaining a global outlook on audit transactions. Data Availability: Please contact the corresponding author for data.
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Current Issues in Auditing American Accounting Association
Volume 9, Issue 1 DOI: 10.2308/ciia-50988
2015
Pages P10–P16
PRACTITIONER SUMMARY
The Current State and Future of the Audit
Profession
Danielle R. Lombardi, Rebecca Bloch, and Miklos A. Vasarhelyi
SUMMARY: Audited financial statements are intended to be timely and useful in decision
making. To remain a valuable and relevant service, auditing must find a way to evolve.
This paper summarizes a recent study (‘‘The Future of Audit,’’ Lombardi, Bloch, and
Vasarhelyi [2014]), which conducts an interactive forecasting method to gain expert
consensus on the current state of the auditing profession and on how the profession will
evolve over the next decade. Expert consensus emerging from the study includes
increasing automation of audit procedures, more predictive financial statements,
continuous auditing, and maintaining a global outlook on audit transactions.
Keywords: audit; brainstorming; forecasting; information systems; expert panel.
Data Availability: Please contact the corresponding author for data.
INTRODUCTION
The auditing profession is at a crossroads. Technology is advancing rapidly, and the real-time
economy is changing the way information is received and analyzed. However, audits continue to
be conducted at periodic intervals and express opinions on historical data. Audited financial
statements are intended to meet the information needs of investors and creditors, and are to be
timely and useful in decision making. To remain a valuable and relevant service to the investors,
creditors, and others who use audited financial statements, auditing must find a way to evolve. This
paper summarizes a recent study (‘‘The Future of Audit,’Lombardi, Bloch, and Vasarhelyi [2014]),
which conducts an interactive forecasting study to gain expert consensus on the current state of
the auditing profession and on how the profession will evolve over the next decade.
Danielle R. Lombardi is an Assistant Professor at Villanova University, Rebecca Bloch is an Assistant Professor at
Fairfield University, and Miklos A. Vasarhelyi is a Professor at Rutgers, The State University of New Jersey, Newark.
We thank the expert panels of participants for allowing us to utilize them and their resources and expertise in audit. We
also thank the editors of the journal and the anonymous reviewers for their helpful feedback and comments, as well as
giving us the opportunity to share our research through this journal.
Submitted: September 2014
Accepted: November 2014
Published Online: November 2014
The Financial Accounting Standards Board’s Conceptual Framework states that to meet the
needs of financial statement users, financial statements must be useful for decision making, in that
they are relevant and reliable; in order for financial statements to be relevant, they must be timely.
Before the Internet was widely available and utilized, periodic financial statements were the
primary source of information about a company’s financial condition, so periodic audited financial
statements were considered to be timely. Now, with the Internet and with the widespread use of
technology, corporations have the ability to provide information to the public in real time. Although
companies do not disclose in real time, economic effects are very rapid in the real-time economy
(Vasarhelyi and Greenstein 2003;Vasarhelyi and Alles 2005). New technologies, along with the
evolution of large, interconnected datasets, allow for more rapid analyses of large amounts of data,
providing the potential for forward-looking predictions about those data, which can identify and
prevent potential problems (Vasarhelyi, Alles, and Williams 2010). This technology allows for
potentially ‘‘on-demand’’ analysis and auditing of information that changes frequently or has the
potential to be materially wrong. Closer monitoring of this type of information may ultimately lead to
costs savings for companies and investors by predicting and preventing potential issues.
The accounting literature has documented that the use of Internet searches prior to earnings
announcements partially preempts the information content of the announcement (e.g., Drake, N.
Myers, L. Myers, and Stuart 2014), potentially indicating a declining importance of the audited
financial statements as a primary source of information to investors and creditors, who have
access to other sources of information. Other literature has shown that some information in
financial reports, including earnings, have declined in importance over time (Francis and Schipper
1999;Dontoh, Radhakrishnan, and Ronen 2004). Concerns include that audited financial
statements leave out important information such as knowledge (of particular import in valuing high-
technology firms or service providers), or fair value, or provide information in a format that has
declined in value, and that investors have access to competing information that is timelier than the
audited financial statements.
To explore the current state of the auditing profession, and evaluate where the profession is
heading over the next decade, the study enlisted a panel of experts with extensive backgrounds in
the fields of accounting and auditing. The expert participants included academics, consultants,
CPA firm partners and directors, and executives and presidents of national professional
accounting organizations. Participants first participated in a brainstorming session to gain
consensus on the current state of the auditing profession, and then participated in an interactive
forecasting exercise to gain consensus on the future of the auditing profession. The interactive
forecasting exercise (described below in more detail) consisted of two rounds with a discussion in
between, and the experts responded to the same questionnaire before and after discussion. The
questionnaire was developed with input from a team of researchers with varied backgrounds in
accounting and auditing.
Overall results indicated expert consensus about the current state of the auditing profession
and the forecast of the profession a decade out. Experts agreed that although the auditing
profession is beginning to evolve to incorporate new advances in technology and become more
sensitive to changes in the global economy, it will further incorporate technology over the next
decade to allow auditors to produce continuously audited financial statements, have more
guidance in making important judgments, and shift their focus to evaluate risks rather than
focusing on transactional data.
The published study has important implications for the auditing profession as a whole.
Whereas a large body of prior literature has studied the declining importance of financial statement
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information (see, for example, Ramesh and Thiagarajan 1995;Chiang and Venkatesh 1988;Lev
and Zarowin 1999;Francis and Schipper 1999;Brown, Lo, and Lys 1999;Dontoh et al. 2004) there
is little research that either provides empirical evidence about the current state of the auditing
process, or expert consensus about specific ways that the profession will have to evolve to remain
relevant. This research is needed to adequately address the declining importance of financial
statements and make important changes. It will be useful to regulators, researchers, and
practitioners who can use the results to guide them in making necessary modifications to auditing
standards, auditing practices, and research related to these modifications. It also is an important
contribution to the debate about maintaining the usefulness of traditional audited accounting
information as we proceed further into this digital era.
The remainder of this article is organized as follows: the research method used in the study,
then the results, and finally the conclusion.
RESEARCH METHOD
The study employs two separate research sessions (performed six months apart) and
compiles predictions from each session. At each session both a brainstorming and interactive
forecasting method were employed. The brainstorming exercise involved experts responding to
open-ended questions regarding the current state of the auditing profession. In the first session,
participants were in small breakout groups and each group responded collectively to a set of open-
ended questions about hot topics in the auditing profession. Topics included nonaudit
opportunities, e-audit, audit automation, and the audit process. In the second session, participants
individually responded to open-ended questions covering technologies, audit fees, the relationship
between internal and external audit, audit education (higher education), litigation, and services
provided by CPA firms.
The interactive forecasting methodology (Delphi Method) was first used by the RAND
Corporation and involves providing experts in a field with at least two rounds of a questionnaire,
with structured feedback in between, in order to ultimately obtain their consensus (Bell 1967). The
interactive forecasting method has been shown to provide value to research and to accurately
forecast future occurrences and predict the direction of specific industries (Bell 1967;Holstrum,
Mock, and West 1986;Baldwin-Morgan 1993;Rowe and Wright 1999;Cegielski 2008;Worrell, Di
Gangi, and Bush 2013). The topics covered in the discussion were automation, roles of internal
and external audit, sampling and analytical procedures, audit judgment, XBRL, auditor
compensation, continuous assurance and audit, and frequency of financial reporting.
All questions and topics were developed by a team of researchers. Responses from the
brainstorming exercises were in line with the questions asked during the interactive forecasting
method; further validating that the questions targeted significant areas impacting the future of
audit. Both research sessions were recorded and participant discussions were transcribed for
analysis.
Each session had eight expert participants with extensive experience and knowledge in
auditing (Figure 1). The participants were a combination of academics, consultants, CPA firm
partners and directors, and executives and presidents of national professional accounting
organizations. Each expert participant had over ten years of experience in the field of auditing.
RESULTS
During the brainstorming session, participants indicated that the profession as a whole has
moved to a paperless environment, highlighting three major areas that have progressed from the
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traditional historical audit function: the audit model, technology and automation, and education.
The audit model has become increasingly risk based and continuous, a progression from the
traditional, periodic historical audit. Auditors’ tools used during fieldwork have also progressed. For
example, paper and pencil checklists have been replaced by automated decision aids and
interactive checklists, which are completed electronically. Other examples include software that
customizes audit plans based on the characteristics of the individual client, analytical software
programs, and the use of XBRL (eXtensible Business Reporting Language) as an enhancement to
auditor fieldwork. Higher education is believed to have progressed to include more current issues
in auditing. There has been an increased emphasis on fraud concerns, the development of risk
analyses, and the differences between IFRS and U.S. GAAP, as well as between the International
Auditing and Assurance Standards and U.S. Statements on Auditing Standards. There has also
been an increasing emphasis on technology and applying analytical procedures. There was also
consensus that the increasing use of technology will require additional training for veteran staff that
may be less up to date with current technology than newer staff.
As for the future of the audit profession, expert participants came to an overall consensus of
forecasts related to the following topical areas: automation of judgment and audit procedures,
reliance on the internal audit function, frequency of external audit opinions and audited financial
statement presentation, and the utilization of XBRL/GL (XBRL Global Ledger Taxonomy
Framework). Topical areas where consensus was reached are discussed below in more detail
and areas of dissent are also highlighted. For a summary of predictions from the experts refer to
Figure 2.
Participants predicted that although automation will continue to increase and become more
enhanced, auditor judgment and decision making cannot be completely automated. More refined
decision aids will be used to assist auditors in developing overall judgments; however, these
FIGURE 1
The Experts Used in This Study
This figure was obtained from Lombardi et al. (2014).
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judgments will not be completely superseded with technology, as judgment becomes even more
important when using automation. Automation will be used for more repetitive, transactional tasks,
allowing auditors more time to apply their expert judgments to riskier, more pressing areas. To
keep up with changing technology, frequent auditor training will be needed, bringing costs and the
need for staff availability for training. Automation in the future will also vary with company type and
size.
The increased use and continual advancement of technology will bring about new safeguards
to retain companies’, as well as individuals’, privacy (e.g., Health Insurance Portability and
Accountability Act). These safeguards and policies will evolve to stay relevant to the technologies
and data.
Experts agree that external auditors will rely more on the work of internal auditors. Internal
auditors perform similar procedures and assessments as external auditors on a more continual
basis and they are commonly viewed as qualified, objective, and somewhat independent from the
corporate accounting side of the business. Reliance by external auditors on the procedures
performed by internal auditors will allow them to dedicate more time to the riskier issues/areas of a
company. This shift could lead to a reduction in audit time and, consequently, audit costs. There
was some initial dissent in this area among participants who felt that most companies do not have
the resources to invest in training internal audit personnel and expanding internal audit
departments to enable them to take over some of the responsibilities of external auditors.
However, after extensive discussion, participants reached an overall consensus.
Finally, some of the experts forecasted that audits will be performed more frequently, and
even continuously through the use of advanced technology. Other experts forecasted that there
would be little change in the current format of the external audit, because it would not be possible
to perform audits more frequently. For those who forecasted more frequent audits, the consensus
was that instead of quarterly reviews and an annual audit, audits will be cycled throughout the year
and not just at year-end. As a result, financial statements will be produced throughout the year,
rather than just quarterly and annually, with companies having the ability to develop a set of
FIGURE 2
Highlights and Recommendations Provided by Experts
This figure was obtained from Lombardi et al. (2014).
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financial statements at any time with technologies and software such as XBRL, XBRL/GL, and
Enterprise Resource Planning (ERP) systems. Using this technology, the format of the financial
statements will also evolve to become more forward-looking and transparent, as opposed to
traditional historical statements.
Those who forecasted little change in the format of the external audit indicated that although
information will be released more frequently, there will not be an increase in demand for more frequent
opinions. Additionally, although XBRL is mandated for public companies and foreign private issuers,
and most companies may be capable of taking advantage of technology such as XBRL/GL, little
change in the use of these technologies will occur over the next decade. Dissenters indicated that a
common data model
1
needs to be created across all ERP systems to use these new technologies,
and companies and educational institutions must improve learning and training in this area.
CONCLUSION
Our study set out to provide a formal methodology for understanding the current state of the
auditing profession and forecasting the profession a decade in the future. This is an important
contribution to developing understanding of how the auditing profession and audited financial
statements can continue to compete and remain a valuable source of information in a digital world
where information is readily available from many sources. The experts agreed that the profession
has been changing to incorporate new technology, such as XBRL and automated decision aids, to
conduct more effective and efficient fieldwork. In addition, auditors are using technology to better
analyze risks and detect fraud. Audit higher education is also beginning to focus more on
technology, including the use of technology in auditing and auditing through sophisticated
accounting and ERP systems.
The experts also agreed that the profession will significantly evolve over the next decade to
remain relevant and competitive. Technology will allow audits to be performed more frequently,
even allowing audited financial statements to be continuously produced. Increased reliance on
internal auditor work will enable some of this evolution. As a result, technological safeguards will
be put in place to ensure corporate safety and privacy. Although audit judgment will always be an
important component of an effective audit, electronic decision aids will allow auditors to make more
consistent and effective judgments.
To continue a viable and relevant field, the auditing profession, as any profession, cannot
resist advances that may further the efficiency or effectiveness of the process, or it will find itself no
longer viable. Audited financial statements are widely accepted as a gold standard of reliable
financial information. However, the importance of annual financial statements is decreasing. A
decade ago, if a person were told that bookstores would no longer be a viable model, then it would
too have been an unlikely scenario. However, with the increasing use of tablets and smart devices,
there is less and less in actual print, and major retail chains, such as Borders, have gone out of
business, in part because they were not able to predict or make necessary modifications to keep
up with the changing market. The auditing profession does not want to find itself in the same
predicament. This study provides guidance through a panel of experts on where the field is now
and where it will be in a decade. Now it is time to get ready for the future.
Preparing for the future includes keeping up with technology and providing training on a more
frequent basis with how to best use this technology. Automation through the use of advanced
1
The AICPA’s audit data standard (available at: http://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/
DownloadableDocuments/FINAL%20Audit%20Data%20Standards%20ED.pdf)maybeastepinthisdirection.
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technology provides auditors a means to complete mundane tasks in an efficient and timely
manner, while allowing more time to be spent in complex, judgmental areas. Together,
researchers could develop a meta-information exchange to increase comparability among
companies, industries, and transactions. Also, with internal audit taking on more responsibilities,
the AICPA should provide current guidance regarding external audit placing reliance on the work of
internal audit and how to sufficiently examine the work. Finally, there has been a lag between the
profession and education that should be shortened in order to properly educate and prepare
students for the audit profession. Researchers could examine current audit and accounting
programs and offer suggestions of how to integrate the new and changing environment and
practices into the classroom. Traditionally taught classes might not continue to be a plausible
option in order to stay current with the profession in the classroom.
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The ongoing transformation of supreme audit institutions (SAIs) external environment is changing the demands and expectations of its stakeholders. The changing environment triggered by technological advancements, increased demand for accountability, and transparency means a change in the way auditing is done. The literature provides evidence of an ongoing technological innovation within the private sector audit. Private sector auditing research has focused mainly on technology adoption and use failing to address the umbrella concept of digital transformation (DT), some even consider processes of DT such as technology adoption and use to be DT. The public sector auditing literature is still yet to commence DT‐related research. This study seeks to fill in this gap and after presenting what DT entails, we applied an exploratory approach through semistructured interview responses, together with other documents from SAIs, to understand how SAIs currently perceive DT and what are their current reactions or actions to transform. The paper analyzes and discusses how SAIs perceive and define the DT phenomenon. The results show that most SAIs still do not master the concept of DT, as they often refer to technology adoption or automation of auditing processes to be DT, notwithstanding a great majority acknowledges the need for DT but lacks the right strategy and resources in place. We saw a few proactive SAIs who are futuristic on the contrary a majority are reacting to change when the need arises, especially during the audit process. The paper provides one of the first empirical investigations into the current DT of public audits. It also proposes a general framework suitable for analyzing the factors involved in the DT in SAIs.
Chapter
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______________________________________________________________________________________________ Manuscript first received/Recebido em 10/12/2013 Manuscript accepted/Aprovado em: ABSTRACT The purpose of this study is to discuss the current state and future of auditing. Expert consensus is used as a basis to examine the current state of auditing and generate modifications both needed and likely to occur in the audit profession. This study contributes to the literature by using the Delphi method to develop predictions as to the direction of the audit industry and discuss the implications associated with these predictions. If auditors can better understand where the profession stands and where it is headed, then they can better prepare for the future. Some predictions emerging from this study relative to future audit practices include increasing automation of audit procedures, more predictive financial statements, continuous auditing of financial statements and transactions, and an increasingly global perspective regarding audit activities.
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