In a world of growing uncertainty, effective and reliable audits enhanced by artificial intelligence (AI) can be the bedrock on which societies flourish.
However, reports such as the Audit Quality Inspection and Supervision by the FRC, published in December 2024, mention that tier 2 and tier 3 companies “[…] are falling short in delivering consistent levels of audit quality”, highlighting a discrepancy between what audit firms outline and report on as quality, and what is perceived as quality by regulators.
The value of truth
On the tail-end of some high-profile scandals such as Wirecard and Patisserie Valerie, the auditor’s role in verifying financial statements is now clearer and more pertinent than ever.
In a world of uncertainty, at least financial markets can offer some positivity. The S&P 500, Nasdaq Composite and Dow Jones Industrial Average rose to almost record levels in 2024, with investors buoyed by factors such as the AI revolution, excitement over stock splits in leading businesses, and stronger-than-expected corporate profits in the US. But the long march to restore faith in financial markets shattered by the 2007-08 financial crisis looks to be undermined by increasing challenges in verifying financial statements.
In December 2024 it was revealed that the number of US companies forced to withdraw financial statements because of accounting errors has surged to a nine-year high. In the first 10 months of this year, 140 public companies told investors that previous financial statements were unreliable and had to reissue them with corrected figures, according to data from Ideagen Audit Analytics.
The re-issuance of financial statements covers the most serious accounting errors, reflecting on the size of the mistake or because an issue is of particular concern to investors. Errors of this type were up from 122 in the same period last year and more than double the figure four years ago. How can this be addressed?
The tech challenge
The audit profession is undergoing swift developments in audit technology and seemingly lightning-fast developments regarding AI.
Artificial intelligence can be a double-edged sword: AI systems can be biased, they require large amounts of data to operate (which can be a risk to data security) and their outputs can lack transparency. Ultimately, AI can’t make subjective judgments, so there may be errors or omissions that require human inspection – this is why auditors remain firmly in position as the fact-checkers and truth-finders.
These challenges aside, AI can be a valuable tool in auditing, helping to identify anomalies and potential threats. AI can analyze large amounts of data, identify patterns, and generate visuals to help professionals gain insights into clients’ financial health, which may have prevented some recent corporate catastrophes. Though still in its infancy, this is generally the direction that some voices in the industry anticipate AI will take.
Before we get there, one of the core challenges of AI is that it needs vast amount of data to function correctly. The output of an AI system is only as good as the quality of the input – independently obtained, verified data is at the core of setting these processes up to be compliant, reliable and truly an added value to the auditor and their clients.
A survey by KPMG in May which polled 1,800 companies across 10 major markets, found almost three-quarters (72%) of organisations are already embracing AI in their financial reporting processes, and this figure is poised to reach 99% by 2027. Critically, over three-quarters (82%) of respondents believe that their auditors are either ahead or on par with them in the adoption of AI for financial analysis.
Moreover, a significant majority (77%) consider AI, automation, and data analytics to be moderately to very important for their external auditors to utilise. Data security, privacy, and ethical concerns emerge as the top priorities, with 56% of respondents citing these as the biggest barriers to successful AI implementation.
In the rapidly evolving field of corporate audit, the adoption of cutting-edge tools powered by AI technologies, such as generative AI, is seen as both a beacon of potential opportunity and a challenge to be surmounted.
This is perhaps most apparent in the disparity in the adoption rates among professionals in the countries surveyed. Firms in North America are ahead in integrating these technologies compared to their counterparts in Europe and Asia, where the pace of adoption is slower, potentially due to regulatory environments or levels of investment in technology.
The human (auditor) touch
Despite differences in adoption rates, the advent of AI is undeniable. The October Audit Innovation survey by BDO detailed a growing expectation among companies for audit firms to utilise advanced technologies such as AI to improve the audit process.
But it also referenced the importance attached to the irreplaceable value of human expertise in the field, vital for maintaining trust in the audit process. It said more than 60% of leaders believe that the use of advanced tools by auditors somewhat or significantly enhances trust among key stakeholders and 84% anticipate an improvement in audit quality with greater technology integration.
BDO national managing principal of assurance operations, Demetrios Frangiskatos, said in the report: “What we learned underscored the demand for auditors who can skilfully leverage these tools to maintain and enhance audit quality. By understanding these needs and expectations, we can help ensure that audit quality and trust remain at the forefront as the profession evolves.”
The use of effective AI tools, combined with human oversight and the right data at the core, can deliver the best outcomes when it comes to measuring corporate performance. Sound corporate audits are key to thriving financial markets that in turn ensure economies can be managed effectively. That is vital for societies to thrive and to see through misinformation and confusion.
AI can be a powerful development for auditors. It just needs a human hand firmly on the tiller.
