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July 2019 (Issue 4)
 


AT-A-GLANCE 

 
The rapid advances of technology challenge the accounting profession to shift focus toward services that demonstrate enhanced value. As routine, repetitive tasks are taken over by robots and artificial intelligence, advisory and interpretive skills increase in importance. Though proven technical abilities have become a professional requisite, communication skills are more important than ever, as the first article in this issue points out.

Efforts by accounting institutions in the past five years have helped improve the quality of financial statement audits. Even so, the public still expects more from the audit function of accounting firms to assure detection of fraud and prevent corporate failures. Studies highlighted in this issue’s second article analyze the disparities.


Finally, our Worldwide Update covers news from organizations across the globe.

TECHNOLOGY EFFICIENCIES POINT OUT IMPORTANCE OF PEOPLE SKILLS


More time for advisory services will
drive need for relational abilities


When I was at a computer store with my wife recently to pick up her new computer, I was impressed with the demeanor of the tech person who went over the new features with us. As an accounting professional, I was sure I knew even better than the tech person how things worked (not true). My wife on the other hand, as a writer mainly interested in word processing and email, was more hesitant and unsure, preferring as little change as possible. The tech person, a young woman, deftly moved us through the process patiently and amiably, not bothered at all by the wide divergence of our responses.

That experience exemplified for me the importance of the interpersonal skills that are so easily overlooked in the search for the technical prowess of professionals. Those of us in the accounting profession have been lamenting for years of the deterioration in writing ability among younger staff. Added to the need for coherent written communication, relational ability will continue to grow in importance as the field shifts with technological change.

Some fear that the new technologies, like robotics and artificial intelligence, will eliminate many accounting jobs. However, research firm Gartner, Inc. reports that while artificial intelligence will eliminate 1.8 million jobs of all types by next year, 2.3 million will be created. Others predict that the automation of mundane tasks will expand the role for advisory services, even creating more analytical, thought driven positions. For success as advisors and data interpreters, mastery of the “soft” skills, such as oral and written communication, will be critical, along with digital capabilities.

New studies by Sage, Protiviti, and others, bear out the characteristics of the changes taking place around and among us. The Sage Practice of Now 2019 report acknowledges that technology literacy tops the list for additional skill-sets needed for accountants joining the industry today. However, relationship building and business advisory are right up there next in line on the list, according to the global survey of 3,000 accountants.  

Accountants for years have looked forward to having more time to advise clients, instead of just producing or checking their numbers and balances. But not enough attention has been paid to developing the people skills that are crucial for communicating in a manner that is both knowledgeable, understandable and persuasive. Building relationships also requires the ability to craft words and speech that resonate productively with the variety of personality types.

The Protiviti report surveyed companies worldwide to show the rapid rise of robotic process automation (RPA), and the importance of keeping pace to remain competitive. By incorporating machine learning, artificial intelligence is taking RPA to new levels.

Back in the 1980’s, AI and RPA were considered primarily in the science fiction realm. A major milestone then was the advent of the laser printer at a price that a small accounting firm could afford. When my firm acquired one to print tax returns, a contest was held to give it a name. The winner was HAL, the name of the computer that wrested control from the humans on a spaceship in the movie, 2001: A Space Odyssey. The name, though considered a joke at the time, was used by the firm for years. When checking the status of a tax return, the response was often, “it was sent to HAL,” or “we’re waiting on HAL.”

Then, as now, AI is considered to have limits beyond which only a human can perform, such as capturing the nuances of descriptions or facial expressions. However, the recent rapid advancement of AI has a lot to do with the massive expansion of computing power, and the change in focus to computer “learning” by comparing large quantities of examples. There may come a time when the near boundless processing speed of computers is such that even discernment of those nuances appears real. Hopefully, humanity will develop techniques to stay a step ahead of those future HAL’s.


    Further details can be found at the The Practice of Now 2019 - (https://www.sage.com/en-gb/blog/practice-of-now/) and  Taking RPA to the Next Level - (https://www.protiviti.com/US-en/insights/rpa-survey).
 


IMPROVED AUDITS NOT CLOSING EXPECTATION GAP


Separate surveys show fewer deficiencies, but public still wants better assurance

Indications worldwide are that audit quality is improving, despite difficulties such as reported in our last issue with the United Kingdom’s auditor watchdog, Financial Reporting Council. Nevertheless, public perception internationally has not led to a decrease in the gap between what the public expects from auditors and the actual results. Recent studies by two major accounting profession-related organizations highlight the disparities.

The seventh annual Survey of Inspection Findings – 2018 was released in May 2019 by the International Forum of Independent Audit Regulators (IFIAR). With 55 members from around the world, and 45 participating in the survey this year, up from 33 in the prior year, the IFIAR’s mission is to “serve the public interest and to enhance investor protection by improving audit quality globally.” Through the sharing of knowledge, promoting collaboration and consistency, and providing a platform for dialogue, the organization seeks to encourage the implementation of uniformly high standards of audit performance quality worldwide.

As the survey report states, the findings point to overall trends in audit quality as opposed to results in specific areas. As such, the survey continues the trend of reported improvement in each of the last five years. The improvement has been measured by the percentage of audits inspected where there was at least one deficiency finding. In the 2018 survey, 37% of inspected public interest entities (PIE) had at least one finding. A PIE is an entity required to have an audit by regulatory or legislative directive. That result is an improvement from the 47% result reported in 2014, the first year measured, and from 40% last year. Even though the deficiencies do not necessarily indicate a misstatement of the financial statements, 37% is still a significant amount, and reflects “a lack of consistency in the execution of high quality audits and the need for a sustained focus on continuing improvement.”

On May 9, 2019, ACCA Global (Association of Chartered Certified Accountants) published the results from a survey of 11,000 members of the public spanning five continents, in a report titled Closing the expectation gap in audit.The report defined the expectation gap as “the difference between what the general public thinks auditors do and what the general public would like auditors to do.” According to the report, 55% of those surveyed believed that existing audit standards, if followed, would prevent company failure. 35% want auditors to always identify and report any fraud. 70% would like audit to evolve to prevent company failures.

The report characterized the gap in three ways. The first was considered a knowledge gap of the public not knowing what an audit was designed to do. The second was an auditor performance gap. The report referenced the IFIAR results above, describing the most common areas of audit shortcomings: accounting estimates including fair value measurement, internal control testing, audit sampling, group audits, and revenue recognition. The third incongruence was considered an evolution gap of how even more of the public want audits to develop further to assure prevention of company failures.

As for closing the knowledge gap, audit firms, regulators and the media are called upon to better communicate and inform the public of current audit requirements and regulatory updates. The performance gap can be further reduced through more rigorous and directed training, continued regulatory oversight, encouragement of new audit innovations, and timely guidance and support from standard-setters. Addressing the evolution gap will require an assessment of whether auditors should shoulder greater responsibility for identifying and reporting fraud and preventing company failures. The survey results were mixed as to whether the public is willing to accept higher fees and more time spent on audits in order to narrow the gap.

The Enhancing Audit Quality (EAQ) initiative launched by the AICPA in 2014 seeks to improve performance by identifying areas of shortcomings and developing resources for auditors. Finding that audit firm peer reviewers were only catching 18% of quality issues in 2014, the AICPA took steps to provide more training, more robust qualification requirements and greater accountability. The EAQ recently released the 2018 highlights and progress report showing that the detection rate had improved to 62% in 2017. Also, toolkits and other resources have helped to reduce risk assessment and documentation issues, while dedicated webpages, blogs and resource centers are focusing auditor attention on audit data analytics, blockchain, and cybersecurity.

The AICPA’s Center for Audit Quality (CAQ) is another organization committed to fostering high-quality performance by public company auditors. Pursuant to that cause, the CAQ in May, 2019, published Emerging Technologies, Risk, and the Auditor’s Focus, a Resource for Auditors, Audit Committees, and Management.Along with laying out general implications calling for attention, the resource specifically highlights the Internet of Things (IoT) and peripheral systems, Artificial Intelligence (AI) used in monitoring business operations, Smart Contracts, and AI’s potential use in developing accounting estimates. While just scratching the surface, the material describes the technologies, while also indicating why a better understanding and/or outside expertise should be employed.  

   Further details can be found at IFIAR releases 2018 Inspection Findings Survey,Closing the expectation gap in audit, and  Emerging Technologies, Risk, and the Auditor’s Focus. (https://www.ifiar.org/latest-news/ifiar-releases-2018-inspection-findings-survey/ (https://www.accaglobal.com/gb/en/news/2019/may/ACCA-research-reveals-55-believe-auditors-prevent-company-failures.html, and (https://www.thecaq.org/emerging-technologies-risk-and-the-auditors-focus-a-resource-for-auditors-audit-committees-and-management/).
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
 
 
INTERNATIONAL
 
IASB
International Accounting Standards Board (www.ifrs.org)
  1. Exposure Draft - Reference to the Conceptual Framework, issued May 30, 2019, would amend IFRS 3 to refer to the latest version of the Conceptual Framework to determine what constitutes an asset or liability in relation to the acquisition of a business.The comment period ends on September 27, 2019
  2. Exposure Draft - Annual Improvements 2018–2020, issued May 21, 2019, would impact IFRS 1, 9, 16 and 41, covering the subjects of a subsidiary as a first-time adopter of IFRS, financial instrument fees included in the ‘10 per cent’ test for derecognition of financial liabilities,  illustrative examples of lease incentives, and taxation in fair value measurements in agriculture.The comment period ends on August 20, 2019.
  3. Exposure Draft - Interest Rate Benchmark Reform, issued May 3, 2019, as proposed amendments to IFRS 9 and IAS 39, would “modify specific hedge accounting requirements so that entities would apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based is not altered as a result of interest rate benchmark reform.” The comment period ends on June 17, 2019.

IFAC
International Federation of Accountants (www.ifac.org)
  1. International Auditing and Assurance Standards Board (IAASB) – Audits of Less Complex Entities-Exploring Possible Options to Address the Challenges in Applying the ISAs,Discussion Paper issued April 29, 2019, seeking further understanding and views on this subject. The comment period ends September 12, 2019.
  2. International Public Sector Accounting Standards Board (IPSASB) - Measurement, Consultation Paper issued April 30, 2019, as the “first step in establishing a comprehensive measurement framework for the public sector. The Consultation Paper focuses on better aligning the IPSAS measurement requirements with those established in the Conceptual Framework.” The comment period ends September 30, 2019.

ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)
  1. Cyber and the CFO, report issued May 30, 2019 in conjunction with CA ANZ, Macquarie University and Optus, surveyed 1500 members, finding that a majority rank cyber security as a top business risk, but that “cyber security is not managed as a risk to businesses and is too often left to IT specialists to handle.”
  2. Insights into integrated reporting 3.0: The drive for authenticity, research report published on May 23, 2019, “examines the reporting practices of organizations in the International Integrated Reporting Council’s Business Network. It highlights the progress made towards integrated reporting over the past year, discusses the challenges that preparers face, and gives practical recommendations to guide more organizations on the path to integrated reporting.”
  3. Closing the expectation gap in audit, research report published on May 10, 2019, “uses a survey of 11,000 members of the public to better understand the audit expectation gap. It explores a new approach for understanding the expectation gap, in terms of a knowledge gap, a performance gap and an evolution gap. It proposes a multi-stakeholder approach to closing the expectation gap, by reference to these three gaps.”

CIMA
Chartered Institute of Management Accountants (www.cimaglobal.com)
  1. Purpose and Profit - Value of Value: The new long-term horizon for business leaders, brief published on May 16, 2019, by Black Sun and the International Reporting Council (IIRC) in collaboration with the Association of International Certified Professional Accountants “seeks to analyze trends and challenges in measuring, disclosing and understanding the value that companies create. It is a brief update of the current business environment and links its findings to previous editions in the Value of Value reporting series to illustrate change in thinking over time.”

WORLD ECONOMIC FORUM
(www.weforum.org)
  1. AI Governance: A Holistic Approach to Implement Ethics into AI, white paper issued May 3, 2019, “aims to enrich the ongoing debate about implementing ethical considerations into artificial intelligence (AI) by looking at possible means and mechanisms to apply ethical values and principles in AI-driven technology` and machines in order to contribute to building a human-centric AI-society.”


ADDITIONAL
A&A NEWS



Back to the country: rise of the regional accounting firm in Australia
(https://www.intheblack.com/articles/2019/05/01/the-rise-of-the-regional-accounting-firm)

How we successfully implemented AI in audit
(https://www.journalofaccountancy.com/issues/2019/jun/artificial-intelligence-in-audit.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=19Jun2019)

FASB looking at delaying standards for private companies and nonprofits for 2 years (https://bit.ly/2Xoukek) from Accounting Today

Why diving into tech won’t control accounting sector disruption (https://bit.ly/2YsKSyj) from Accountancy Age

Audit Firms’ Problems Are Also Cultural
(https://www.cfo.com/auditing/2019/06/audit-firms-problems-are-also-cultural/)

Help us re-imagine the profession: AICPA President and Chairman
(https://bit.ly/2Xkrh1S) from Accounting Today
 Audit & Accounting Alert is a publication of Integra International intended to highlight emerging issues in the profession.  The goal is to give Integra members an awareness of developments impacting the practice of Audit & Accounting enabling them to stay on the forefront of industry trends.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice.  Please refer to your advisors forspecific advice.


Editor Gerald E. Herter ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA
email:  [email protected]
     
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