Verifying a company’s assets exist. Confirming the ownership and accuracy of balances held on a balance sheet. The fundamentals in any field can be hard. They are often the critical foundations upon which a higher skillset is built. In financial auditing, however, we’ve witnessed a skillset evolve around processes that do not create a base layer for future value. Co-ordinating paper and e-mail trails, or chasing a bank clerk on support calls should not be the fundamentals that help a student of the profession progress at their craft.

The future of money will enable the future of proof

Establishing valuable foundations is especially important now as the future of finance is shifting. The changing nature of money and payments will likely see cash payments in the UK decline below 10% of transaction volume in the next five years. Cash is a key mechanism by which Central Banks can achieve financial stability in any economy, and, as a result of the sharp decline in its use, Central Banks are planning to issue their own digital currencies in order to keep pace with Fintech firms who are creating new forms of money and digital assets.

Truly programmable money — that’s intrinsically connected to the internet — will be transformative for society. We will see the ownership of financial assets, as well as physical property, tied to digital corporate identities and stored within digital wallets. From simple payroll payments to large property purchases with “smart contracts”, transactions will be executed with no friction and near-zero counter party risk. The scale of change will span every type of business in the economy, with many new business models created.

For auditors, what is crucial here is that trust and transparency can be built in, with each party validated digitally on a network. The ability for transactions to be verified in real-time allows for increased audit quality and coverage across the whole business — rather than testing a small sample. All of this brings forward the point of focus for the audit team, meaning that the skill and judgement of next-generation auditors can create real value for the businesses they audit, and their stakeholders.

Significant challenges — capturing the holy grail

When it comes to auditing a business, independent evidence from a validated source is the holy grail. For over a century, every auditor has had to go on the same paper-laden quest to verify the assets and liabilities held on a company’s balance sheet. Notoriously difficult to obtain, the “confirmation request letter” — sent to a Bank to confirm the cash balance held on a customer account — is absolutely critical audit evidence, and yet it continues to break the hearts of the most senior audit partners when finalising an audit report.

Auditors aren’t the only ones who feel the pain when it comes to chasing down confirmation letters as evidence — Banks with dedicated processing teams, Solicitors confirming title or liabilities, Brokers, Custodians, Transfer Agents, Debtors, Creditors, Pension Providers, and Tax Authorities are among those affected too. Currently, a manual check is done on every single corporate account and a response letter is prepared to confirm that the historical balance exists and is accurate. There is very little tracking, with limited or no audit trail between organisations that have not been validated.

As the world of finance evolves, financial systems are becoming more connected, and Fintech adoption is driving innovation among the traditional banks. However, all of this is creating an even broader and more complex mix of the sources of evidence that an auditor must check and verify against in order to confirm the financial position of a company.

Building the future of the audit profession

As auditors, the world as we know it is being rebuilt. The profession is collectively embracing the challenge of re-imagining its vision for the future of audit. Meanwhile, the core tenets of the audit profession remain — those of benefitting society, creating value for the businesses being audited, and giving transparency to their investors.

During this time of re-imagining, developing the already skilled professionals in the right areas is more critical than ever. Training firms will need to recalibrate their offerings to meet the needs of the auditors of the future. Right now, too many high potential professionals spend almost all of their time looking backwards, to verify historical transactions.

Time is needed for a talented audit workforce to hone their skills in assessing forward-looking statements and identifying future business risks. If we can achieve this, a greater service would be provided to the public markets, as well as the auditors working in the profession.

At Circit, we are working to help solve these challenges and help shape that vision of the future of audit. By creating a global-asset verification platform, auditors can now have one view across all potential sources of evidence, and be able to verify assets and transactions in real-time. We are continuously growing the global network of traditional banks and Fintech providers, digitising and automating the process for all parties.

Please stay in touch to hear more about how we are helping firms to tackle these challenges.

Thanks,

David