How robotics is changing the way accountancy firms conduct audits. Policy Pulse June 2018 compendium

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1 How robotics is changing the way accountancy firms conduct audits Policy Pulse June 2018 compendium

2 Eamonn McGrath UK Head of Regulatory & Public Policy Loree M. Gourley UK Director of Regulatory & Public Policy This article forms part of the June 2018 EY Policy Pulse compendium. A collection of six articles that cover key topics which will becomeincreasingly important to UK policy makers and regulators, company boards and investors. Policy Pulse aims to help ensure boards know about these topics and the associated changes, challenges and opportunities that lie ahead. of 6articles Article 1: A bold vision for retirement: pensions in 2030 Article 2: Cryptocurrencies and why policy makers will need to adopt cross-sector thinking Article 3: How robotics is changing the way accountancy firms conduct audits Article 4: The impact of BREXIT on the application of IFRS in the UK Article 5: The future of auditing: where to now with statutory audit? Article 6: Open Banking: the technology revolution sweeping across the banking industry 2 Policy Pulse 2018 How robotics is changing the way accountancy firms conduct audits

3 The age of the Bots The term robotics, or to use the more familiar vernacular Bots, is a hot topic. This is because its potential to reach further into everyone s lives (domestically and professionally) is now all too apparent. However, rather than physical robots, Robotic Process Automation or RPA is simply the use of software to automate certain tasks or procedures. For this reason, it s becoming increasingly popular in the auditing profession. To explain how and why this is happening, we first need to understand the main characteristics of RPA. RPA values and virtues The growing level of interest in RPA reflects the value it can bring to our lives. This stems from its ability to carry out certain tasks consistently and reliably. Its virtue is the removal of human error which might otherwise hamper the quality of certain outputs, particularly when important underlying tasks are routine and time consuming, limiting the capacity of a person to focus on more value-adding tasks. As time progresses and the use of RPA evolves even further, we expect it to become the norm rather than the exception, and like other industries and professions, auditors will be making greater use of it. RPA practicalities Apart from the value and virtue of RPA described above, it has practical advantages too. It can operate 24 /7 without any symptoms of fatigue or distraction. These benefits are certainly not lost on our clients. Some of them are beginning to optimise the benefits of using RPA within their finance functions by applying this approach to the simpler tasks: the ones which are time consuming and repetitive but important nonetheless. For example, RPA is doing the following 1 : Bank reconciliations: extracting the relevant general ledgers (GL), and then cross referencing the balances from bank statements to the GLs. The Bot then prepares the bank reconciliation statements on a predefined format. Sales ordering and invoicing: automating the entry of sales inquiries, updating new customer details, initiating the delivery process and updating inventory records, preparing sales invoices and posting revenue entry in the system. Fixed asset management: acquiring quotations from prescribed vendors, preparing reports on the comparisons between quotations, preparing fixed asset budgets and additions, producing and conducting disposal reports and fixed asset register reconciliations respectively. RPA auditing It s not just companies that are making greater use of automation, as we said in our introduction, accountancy firms are beginning to embrace RPA too (e.g., for cleaning data, populating working paper templates, picking a sample or completing basic administrative tasks). These tasks help to contribute in various ways to the quality of an audit. Take, for example, a second year trainee auditor who would normally be required to undertake important but nevertheless administrative and repetitive tasks (e.g., manually populating a worksheet with information from bank statements, which could take several days to complete). RPA can do this in less time, and without a potential delay from having to make a data entry adjustment. Other benefits from using RPA in auditing that are worth mentioning, but may be more difficult to quantify, include the re-engineering of existing audit processes. For example, when initial steps are taken to map-out an auditing process, so that it can be transposed for RPA purposes, aspects of the underlying process may be identified which can be made more efficient or removed altogether. The term robotics, or to use the more familiar vernacular Bots, is a hot topic. This is because its potential to reach further into everyone s lives (domestically and professionally) is now all too apparent. 1 The dawn of a new partnership. A robotics-led finance function. EY Financial Accounting Advisory Services, 2017 Policy Pulse 2018 How robotics is changing the way accountancy firms conduct audits 3

4 Launching and embedding RPA is not easy Developing RPA can be relatively straightforward. There are plenty of software providers who can build one quickly. However, the process from initial idea through to launch on a full-scale can be challenging and can take longer than expected. There is a world of difference between automating something on one machine, and building something suitable for an entire audit practice to use at scale. This is because the development and use of RPA requires a wide range of tasks, from designing, building, testing and implementing the right IT infrastructure, to launching and providing the right enablers to ensure success. This requires input from auditors, developers, IT specialists, information security experts, audit quality leaders, system testers, communications experts and trainers. Unsurprisingly, aligning and managing all of these groups effectively is not straightforward. What does automation in audit mean for the regulator? The indications are clear: regulators with a clear line of sight to sustaining audit quality and meeting the expectations of stakeholders welcome the use of new technologies in audits. This is because there is a greater understanding of the beneficial impact of these technologies which includes analytics, automation and artificial intelligence. For example, the FRC has made a number of references to how it sees the future use of new technologies driving up audit quality, and how they are engaging with firms to identify the opportunities and challenges, including how compliance with auditing standards can be preserved. 2 However, whilst the benefits of increased audit quality are clear, there are risks to consider when implementing the wider use of RPA. A robust and transparent testing process with clear quality controls is critical for any new technology, including RPA. This is evident in the work undertaken by the FCA when it launched its sandbox in It offers a testing ground or safe haven for anyone developing new technologies, innovations and services for the marketplace. 3 The PCAOB cautions that: The use of these technological tools and methods raise certain challenges. For example, it is important that the data being used is reliable, complete and accurate. That is true for general ledger data, other financial and operating data, and data from outside the company. Data security and quality control over these tools, whether developed in-house or by vendors, are also factors for firms to consider. And ensuring consistency of approaches across group audits may become difficult if such tools are not readily available to, or used by, affiliate offices. 4 2 Developments in audit, FRC, Financial Conduct Authority s (FCAs) regulatory sandbox opens to applications, Technology and the Audit of Today and Tomorrow PCAOB, Policy Pulse 2018 How robotics is changing the way accountancy firms conduct audits

5 What does this mean for auditors as individuals? There is a lot of hyperbole in the media that RPA is taking away jobs, both in the accounting sector and more broadly. This viewpoint is likely to be misplaced. Rather than the removal of jobs, it s the nature of the job that is changing. As auditors, we recognise that the use of technology is already helping our people (experienced and inexperienced alike) to optimise their time for the more value-adding tasks (e.g., thinking more sceptically and evaluating and communicating the meaning behind data-driven results). So we view RPA in a positive light, because we regard it as another tool. Conclusion What s next for RPA in audit? Whilst we are focused on using RPA to automate specific parts of our audit process, this is leading the way for the next wave of opportunities. This might involve getting audit RPA to work with third-party systems, and/or interact with clients own RPA arrangements to help streamline auditor-client interactions. As the PCAOB noted in 2017, We are clearly in the midst of a transformational era in auditing The potential opportunities are endless. Rather than the removal of jobs, it s the nature of the job that is changing. As auditors, we recognise that the use of technology is already helping our people (experienced and inexperienced alike) to optimise their time for the more value-adding tasks. Policy Pulse 2018 How robotics is changing the way accountancy firms conduct audits 5

6 Questions the board should be asking itself How does the company make use of RPA in its processes and procedures? To what extent do company stakeholders engage with, and understand, the value RPA can bring to business? What steps has the board taken to understand the value of using RPA in audits, from an audit quality perspective? 6 Policy Pulse 2018 How robotics is changing the way accountancy firms conduct audits

7 Subject matter expert For further information on any of the issues raised here, please contact the author or your usual EY adviser: Mike Rudberg Partner, Assurance UK Regulatory & Public Policy Team Eamonn McGrath Partner Loree M. Gourley Director John Jarrett Director David Parrish Associate Director Jane Hayward Green Associate Director Nina Emordi Regulatory Manager James King Regulatory Affairs Specialist

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