Audit is here to stay, but needs to evolve, says Tarryn Pedlar

Partner at Moore Durban says big data analytics and value-add are the future of audit.

This Future of Audit Series interview is proudly brought to you by ACCA.

“We need to change the way we audit,” says Tarryn Pedlar, Partner at Moore Durban. “We can’t keep going with this tick-box approach. We need more integrated audit teams with access to specialist skills and we need to offer value-add, while still maintaining independence.”

Tarryn says that it’s important for auditors and regulators to remember that every business is different. There will be different risks that auditors need to assess, for say a call centre versus a manufacturing business. A large, listed multinational requires a different level of scrutiny to a small and uncomplicated local entity.

This is why she believes that while technology will assist in automating parts of the audit process, there is still a need for human interpretation and judgement.

Evolving assurance
“The way we audit has already changed substantially. We barely set foot on some client premises these days, unless it’s to do stock counts. We always used to ask for ‘original source documents’ and those don’t really exist anymore. How many people still get their invoices sent to them in the post? Almost everything is done remotely or over email. The regulations are also always evolving. But what won’t change is the need for audit, or for some form of assurance,” she says.

She does believe, however, that as regulation continues to increase, there needs to be more of an assessment of which types of organisations should be audited. For example, in the case of some smaller entities, an independent review would suffice in many cases.

“If we’re following what’s happening overseas, not all companies really need to be audited,” she says. “For many, an independent review would make more sense, and then if they want certain audit-type procedures, for example auditing their debtors, we could do agreed-upon procedures. That drops the fee, and yet they still get a level of assurance that they need.”

Tarryn adds that there is also more room to provide value outside of a compulsory audit, as long as there’s no conflict with section 90(2) of the Companies Act (which prohibits an auditor from providing audit and certain specified services to the same client).

However, she says, many small companies that wouldn’t otherwise need to be audited have not changed their Memoranda of Incorporation (MOI). “Because they are still sitting under the old Articles of Association from before the 2008 Companies Act came into place, they are subject to compulsory audit, whereas under a new MOI, private companies can elect not to have their financial statements audited,” she says.

Increasingly integrated
“I don’t see audit being how it is now, where it’s done by a bunch of people who are accountants or training to be accountants,” Tarryn says. “I foresee far more integrated teams, consisting not just of accountants, but also of lawyers, data analysts, industry specialists and possibly actuaries.”

Tarryn notes that while the Big Four firms are likely to be able to afford specialist skills in-house, mid-tier and smaller firms need to develop partnerships, or access skills through centralised networks, as Moore does.

Firms will need to prepare employees to work with new technologies, although Tarryn says that many of the skills that will become valuable in relation to things like data analytics and blockchain, such as coding, are already being taught at school level.

Again, the reality of rolling out new technologies will differ for larger and smaller firms. The biggest firms have the resources available to build their own technology platforms and service enterprise clients who are already using or investigating emerging technologies in their own businesses. For firms largely servicing smaller organisations, the rate of adoption is slower.

However, Tarryn says there is still room to add value through data analytics. “In our management report letter, we might build in things like ratio analysis, which is often incredibly valuable for smaller clients who don’t have the ability to do that themselves,” she says. “For a manufacturing client, we might include the calculation of their break-even point, or their actual cost per unit. Normally a manufacturing business will use a standard stock-costing system, and we can show them the difference and where they need to update their bill of materials. Often they are shocked.”

She says another example is cybersecurity, where there is room to point out what might be missing in terms of cybersecurity insurance or training that needs to be done.

Understanding the mid-tier market
Tarryn believes that the success of mid-tier audit firms is built on relationships. While auditor independence remains crucial for quality assurance, increasing regulation means that often competitors end up having to collaborate in some way. For example, one firm might be managing audit and the other tax. It’s in the best interest of the client and both firms to collaborate and build good working relationships.

“While you need to retain your professional scepticism and independence with your clients, they need to know that you’re there when they need you,” she says. “Relationships are also key in accessing skills, whether within your network or in terms of retaining people.”

She says that Moore has recognised that while it may not be able to compete with certain other firms in terms of the salaries it offers trainees, as a mid-tier firm, it can offer them the chance to develop valuable managerial experience once qualified that they would not get within a larger firm.

Moore is also looking at ways to leverage its own assets. For example, the Durban office is considering remotely seconding trainees from other countries for audits when it is short-staffed. These trainees benefit from global exposure, skills development and exposure to well-developed methodology.

Thinking beyond reform
Tarryn says that in the wake of corporate failures, the audit profession needed to introspect and interrogate what went wrong, but there’s also a need now to look outwards and to think about what’s possible and how to grow the profession for the future.

“We need to stop just looking at ourselves and thinking about what’s wrong – we also need to look at what other industries are doing, and what we can learn from them to grow past this,” she says. “We should ask what lawyers are doing, what banks are doing, and what we can learn. For example, there’s a move to using blockchain to speed up the transfer of properties. What is that going to mean for us? If other industries start using blockchain, we can start using the same technologies to audit them.”

Tarryn says audit firms need to find ways to be the change they want to see, rather than waiting to see what the rest of the world does. “We need to think about how we get ahead of the curve. What do we need to do to prepare? If our clients are harnessing big data, how can we use that data not only to improve audit, but to add value for them? Big data and analytics are very exciting for me, and I definitely think that’s where our future is headed,” she concludes.