Audit firms must re-look their business model, says Ascendis Health CFO

CJ Kujenga says audit needs to add business value and to grapple differently with complexity.

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Audit firms have to really rethink their historical model if they want to be future fit, or even “current fit”, says CJ Kujenga, CFO at Ascendis Health. The traditional business model of hiring in recruits with accounting degrees straight out of university and putting them through a three-year programme to churn out CAs does not take into account the complexity of business or the need for lateral thinking.

CJ has experienced audit from both sides of the boardroom table. Before she took up her first CFO role (at Adcorp in 2017), she had served as an audit partner and the strategic growth markets leader for Africa at EY.

“My concern is that we bring in really bright students and almost ‘dumb them down’ immediately because we make them focus solely on this tick-box approach to an audit,” she says. “Yes, there are regulatory requirements, but unless we allow people the room to think – to really understand a business, its strategy, its business model – we’re creating a group of people who can’t grapple with the complexity of modern business.

“Auditors need to think beyond the signing of an audit report. They have to start thinking in a more sustainable fashion about the business in five or 10 years’ time. Otherwise, we’ll continue to have the ‘surprises’ like Steinhoff and the other corporate failures we’ve seen in recent years.”

CJ believes that a major part of the problem is that the auditing business model is very risk averse and designed to view the world in black and white. “It’s a very rigid model coming up against a rapidly evolving and increasingly complex commercial world,” she says. “You can’t respond effectively to complexity by assuming there is a structure to do so. This approach might work 80 percent of the time, but the problem is that the remaining 20 percent often has more of a significant impact on the fundamentals related to the business sustainability perspective than the audit was able to absorb from a complexity perspective.”

While there’s been much talk in the industry of the audit product needing to evolve, CJ says this cannot happen until the business model changes. “We need to move past the idea of bringing in a bunch of people who have all done a similar undergraduate degree, who all see the world in the same way, and who are given a black-and-white checklist and told that’s all they need to think about,” she says.

“The way audit firms recruit, train and incentivise needs to evolve. We need to bring in people who think differently. It doesn’t all have to be accountants. And there has to be a more solid focus on understanding how business works.”

New skills for a changing world
While CJ says the exact skills required will differ per industry, audit teams should include people who are not only focused on the numbers, but who have real business insight or experience. “We need more diverse teams – people who are lateral thinkers who can ask different questions; people who have more experience in certain aspects. Even allowing your trainees to come in and be curious about organisations will mean they will ask different questions.”

The fee model is a big part of the problem, CJ says. The hours-based approach encompasses only the regulatory and compliance measures and steps and doesn’t allow space and time for looking deeper into how the business functions and what the business sustainability risks are.

“Probably 75 to 80 percent of the audit procedures can be regulated or automated, but the reality is that there's an additional 20 percent that actually is more of an art,” she says. “There, you've got to make sure that you’re tapping into proper understanding of the business and asking questions beyond just the finance teams. Spending enough time really immersed in an industry and in a business is where you get to understand the risks, which might come from the culture and how decisions are being made. It’s a different way of thinking about an audit.”

Starting the shift
CJ says that for this shift in auditing to take place, the regulator has to allow audit firms more flexibility in their approach and in the skills they source. “There’s been this great call for separation of external audit from advisory parts of the business in audit firms. I’ve got a very different view,” she says. “I actually think that if you had more advisory-type thinking and partners in audit, you’d get more value and start to see what the proper issues are in businesses. The challenge is that the way that the firms are set up – their pricing models, etc. – makes that very difficult.”

She says audit pricing should take a leaf from consulting firms, which tend to offer a value- or solution-based pricing model rather than an hourly fee model. “They can then have the flexibility to bring in the right skills, the right expertise. When auditors go in to do an audit, they should be thinking of the problem statement being, ‘Is this business sustainable in the medium to long term?’ not just, ‘Is the historical data that we need there?’ but ‘Is this business being operated in a way that is going to be sustainable?’”

CJ believes that as ERP systems continue to evolve towards continuous auditing, external auditors will need to focus less on financial and historical data and more on making management aware of business risks and problems in the business.

“I’ve been involved in businesses where I’ve come in and found all these issues, and I’ve asked where management and the board were, but also the auditors, because the auditors would probably be able to show me a clean audit file, with all the relevant supporting documentation. But when decisions were being made to spend money that the business could not sustainably have had, when delays were being made around repayment of certain debts, why were they not flagging the risks?

“I’m not expecting the auditors to be the primary owners. In this ecosystem, the board has a role to play; management has a role to play. But I do think that I would find a lot more value in audit if I felt like the things that kept me up at night were the same things that keep the auditors up at night. But that’s not always the case.”

New ways of thinking
CJ believes that if audit firms are to survive, they need to adapt to changing user needs and embrace new ways of thinking. “I feel very strongly that a lot of people see the world in black and white: they say, this is problem X and you can solve it by applying best practice Y. However, the reality is most problems are not like that. Many problems have a lot of grey in them.”

She says that undergraduate degrees need to teach a different method of problem solving for when the answers are not known. “We need to teach how you take steps forward and how to get comfortable navigating in a world where you don’t have all the answers, but you’ve got to make solid decisions,” she says. “A lot of that comes with experience, and that’s fine. But as we’re looking at what’s happening with business today, with innovation and change, it’s important to start bringing some of that disruptive way of thinking into our accountants’ minds.

“We need to arrive at a new automated high-value business model for audit, which leverages technology to automate routine processes in the audit, thus allowing the people to have more time to understand the companies and more opportunities to provide increased value to them.”