Technology-enabled data analytics: Friend or Foe?
By Jackie McLaughlin, CPA
With the increased availability of useful data, analytical review procedures are becoming more important during the audit process. The processes provide a number of benefits to help CPAs reduce risk and increase audit efficiency. Additionally they provide opportunities for CPAs to become even better at what they do. For example, greater emphasis on analytics encourages and almost demands that the auditor improve the quality of their professional judgment and skepticism.
Accountants sometimes take judgment and skepticism for granted because they are inherent in our profession. However, a study by the Global Public Policy Committee called, “Enhancing Auditor Professional Skepticism” disagrees. It found that judgment tendencies, common to auditors, could weaken skepticism and lead to bias.
CAUSES OF BIAS IN THE AUDIT PROCESS
According to the study, judgment tendencies that cause bias in the audit process include:
– Overconfidence (overestimation of the auditor’s own abilities)
– Confirmation (placing more weight on evidence that confirms management position rather than on evidence that refutes it)
– Anchoring (always using a starting point, and being overly influenced by initial numbers recorded by the entity)
– Availability (the tendency to rely on information that is more readily available instead of looking for information that could be more relevant for a particular judgment)
Bias happens for a number of reasons. Sometimes this is just human nature. Sometimes it’s because of increased familiarity with the client. Either way, with financial statement fraud on the rise, we need to strengthen our skepticism…not weaken it. In fact a report by Cornerstone Research entitled, “Accounting Class Action Filings and Settlements –2014 Review and Analysis“, shows allegations that accounting fraud surged 47 percent in securities class-action lawsuits over 2013.
A WAY TO OVERCOME BIAS IN THE AUDIT PROCESS
Technology enabled analytics can help overcome auditor bias and increase skepticism while also performing computations more quickly and accurately. Additionally, if set up correctly, they can highlight, without bias, those areas that appear to be unusual and may need more audit testwork.
Often they may give rise to artificial intelligence and this can be frightening. We may silently worry that it will replace us. But as we have learned, there can never be a substitute or a replacement for auditor judgment. It is the foundation upon which an audit and its resulting opinion is built.
On the other hand, technology enabled data analytics can enhance our judgment because they frequently involve the use of broader and deeper ranges of disaggregated information. And the more disaggregated the information is the more meaningful it becomes.
Consequently, we should view data analytics and particularly technology enabled analytics as our friend, not as our foe. In the end, technology can make the work of a CPA more interesting. Instead of spending time on mundane tasks, technology can allow CPAs to focus their resources on analyzing data, challenging our thinking and making themselves more valuable to our clients.
- eBook: Audit & Review Best Practices and Pain Points
- Article: How better audit planning produces better audits
- Infographic: Why Industry Data is Important
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About the Author
Jackie McLaughlin, CPA, started her career in a Big 4 public accounting firm. Since leaving public accounting, she has been an internal auditor, a tax preparer and a Controller. She’s also done forensic accounting and she’s written various articles for Intuit. Currently, in addition to being the Controller for a small private college, she instructs all 4 parts of the Becker CPA exam review and she’s a course reviewer for National Association of State Boards of Accountancy.