Earmark Podcast | Earn Free Accounting CPE | How AI is Transforming and Disrupting Audit

Rob Valdez joins Blake to discuss how artificial intelligence and generative chatbots like ChatGPT could automate routine audit tasks. They also explore the potential to train staff more effectively, save significant time on substantive testing, draft higher quality work, and some challenges around adopting these tools, such as security fears, poor system integration, and partners resistant to change.

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Chapters

(00:53) - Rob Valdez Joins the Show to Talk About AI
(02:27) - What Does Rob Do and What Is His Background?
(03:35) - State of Artificial Intelligence in Audit
(05:21) - Exploring the Use of AI Chatbots
(08:55) - Potential of AI in Drafting Financial Statements
(12:16) - The Future of AI with Audit
(23:41) - Implications of AI on Audit Staff Roles
(29:14) - The Power of Automation and Teamwork
(31:00) - Challenges in Adopting AI in Firms
(33:36) - The Inefficiencies of Current Data Management
(35:53) - The Need for Integrated Systems
(39:40) - What Will Motivate Aduit Firms To Adapt?
(49:04) - The Possibility of Private Equity Getting Involved
(53:30) - The Importance of Self-Disruption
(54:59) - Thanks For Listening and How To Reach Rob

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Connect with Our Guest, Rob Valdez

LinkedIn: https://linkedin.com/in/rob-valdez
Twitter: https://twitter.com/robvaldezcpa

Learn more about Novogradac

Website: https://www.novoco.com/

Connect with Blake Oliver, CPA

LinkedIn: https://www.linkedin.com/in/blaketoliver
Twitter: https://twitter.com/blaketoliver/

Creators & Guests

Host

Blake Oliver, CPA

Founder and CEO of Earmark CPE

Guest

Rob Valdez, CPA

Rob is a Florida CPA specialized in helping businesses build value and manage risk with technology. He currently works for the innovation team of a top-40 CPA firm as a product owner and director of business intelligence. A Past President of ISACA South Florida, Rob is a motivated advocate for building trust in technology. He is an adjunct professor with Florida Atlantic University, and he has been featured in the Wall Street Journal, TechRepublic, and the South Florida Business Journal.

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This show is brought to you by Earmark, your source for podcast-based continuing education for accounting and tax professionals. You can earn CPE by listening to the episodes on this podcast and more! Sign up for our mobile app to earn free CPE whenever you want, wherever you go. Learn more at https://earmarkcpe.com.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

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Rob Valdez: [00:00:00] We've been asking ourselves for for years, what is the Uber ification of our profession? Who comes if we're the taxi cab companies? Who is Uber that comes in between us and our client and separates the two of us, creates a bifurcated marketplace and then charges a big fee and kind of like takes all the the profitability and value out of this. They take the profit. Yep. That's exactly right. And this is one potential version of the Uber ification of our profession. This is this is one.

Blake Oliver: [00:00:33] If you'd like to earn CPE credit for listening to this episode, visit earmark Cpcomm, download the app, take a short quiz, and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Hey everyone, and welcome back to the show. I'm Blake Oliver, and I'm joined today by Rob Valdez. Rob, welcome to the show.

Rob Valdez: [00:01:01] Thank you. It's a pleasure to be here. I'm looking forward to it. Big fan of the pod.

Blake Oliver: [00:01:04] We're talking today about artificial intelligence and audit. Audit has been in the news recently. There have been. Well, I don't know if this is recent. It seems to have been a trend that happens just sort of every year we have some big audit failure and that always catches my attention given, you know, that I do a weekly show about accounting. So hey, if there's a $450 million that doesn't exist, that's always very interesting. But, you know, I personally was never in audit. I'm one of those rare CPAs who, uh, I guess maybe not so rare anymore. But, you know, I got licensed in California. I didn't have to do audit hours to get licensed, right? Which is the thing you can do in California. So I've always been in the financial statement side of things, never on the audit side. And so I'm eager to get your perspective as a, as an auditor, uh, as an accountant, you know, on like, where are we with audit and artificial intelligence? We've been hearing a lot about it. Right? We hear a lot about it. But like we do what's actually happening. And I want to say thank you first to Alex Mayer at uplink for introducing us. And before we get started, actually, Rob, like, what's your what's your current role?

Rob Valdez: [00:02:13] Yes. Okay. So what's my current role? Um, I am what's called a product owner and director of business intelligence for a CPA firm. The CPA firm is very specialized in, uh, the real estate industry and in tax credits and the real estate industry. And we do a lot of data analysis and reporting on that industry. And so, you know, we need people to do data science, data engineering, data crunching and the reporting. And so I, I work in a team that does innovation and does a lot of that type of thing. So not super traditional in terms of like, you know, if you're going to pick tax or accounting services or audit or whatever. Although my background did start out, uh, in audit when I went into public. So I got a lot of strong opinions and experience and, and, you know, stripes and heartaches and all that kind of stuff. Uh, when it comes to audit as well.

Blake Oliver: [00:03:04] Well, that's fantastic, because you are you're the perfect person to talk to because you have this tech innovation side of things and you've got the audit side of things. So, you know, uh, you know, what's up. So yeah, let's, let's talk about this like where what is the state of artificial intelligence and audit or is it still just, you know, talk? Is it thought leaders saying like artificial intelligence is going to transform, audit, or are audit firms actually like using artificial intelligence yet? Yes.

Rob Valdez: [00:03:31] So there is still a lot of talk for sure. Uh, there's also some action. And then there's also, like all this ambiguity around what we consider to be artificial intelligence. And so when are we actually using AI versus when are we just using like honestly just great tech and great procedures and that kind of stuff. And that's totally fair game as well. But in terms of like let's say large language models, LM if that's kind of what we're very, very interested at this moment in time, how much are those getting used in some form or fashion in audit like right now, today it's it's still pretty limited in terms of what people are doing at this exact moment in time. There's been a couple of, uh, really kind of inspiring announcements that are coming out from different firms, you know, uh, Markham presented Ask Markham AI, BDO presented personas, and these are all like these kind of virtual assistant types of, uh, implementations of large language models that you can now ask stuff. And if you happen to know people who work for these firms, and I do, and I won't say any names, of course, I would never do that. Uh, then some of them are kind of like exploring these technologies, and some of them still are kind of like so busy and doing their day jobs that they haven't quite gotten there to, to using them yet. So let's say we're taking baby steps, although the potential is absolutely there. So we can we can talk about what those baby steps look like, if that makes sense.

Blake Oliver: [00:05:01] Yeah. Well, I'm intrigued to understand more about the use of these generative AI chatbots because that's the latest big thing, right? Chatgpt Claude and I just did this this morning with ChatGPT. I created a custom GPT, and I uploaded some PDFs to it, and I gave it instructions to help me basically query those PDFs. It has to do with CPE course creation. There's a lot of, you know, compliance around that. And now I can give that GPT to our course writers, to our CPE manager and say, hey, if you have a question, don't come to me first. Query the Naspa CPE bot and it will tell you, you know how to structure this course so that it meets the requirements. Is that what we're talking about when it comes to these chatbots with audit?

Rob Valdez: [00:05:48] Yeah, absolutely. It's an equivalent of that. Right. They're not using OpenAI's make your own GPT. And there's really specific reasons why they're not doing that right. They want to have like all this geofencing and proprietary IP protection and all this kind of stuff. So but many of them are using like for example, Azure has this kind of sort of simulated environment at the exact same thing because because the partnership with OpenAI. And so these firms are using those types of environments to use the make your own GPT technology, upload their own kind of documents and upload authoritative guidance, and then provide staff and others the ability to query that. So I actually saw a lot of firms, you know, PwC did a presentation with Microsoft a little while ago, and it was it was great. I watched it and and many of them kind of went on a similar type of journey. In doing this right. They they practiced setting up these environments. They started off with uploading, just like you uploaded a bunch of PDFs. They uploaded what they consider to be like non super sensitive types of information first, like employee handbooks or just like IRC, right? Just tax code or whatever. And they're like, let's start out there. Let's see how that goes. And then let's see how much employees are querying it and using it and getting meaningful responses. And just like you can get great responses to Nasba related questions, staff, if they ask great questions, can also get like honestly, really great responses from these things. These this tech works really well. Now, that doesn't always mean we know exactly the right moments to go when to ask it questions. Right? Because that is kind of the the rub, right? Like when do I go ask a virtual intelligence? Where do I go? Ask an assistant how to ask a question. And you.

Blake Oliver: [00:07:39] Have to know what question to ask.

Rob Valdez: [00:07:40] And what question should I ask and what should I expect. And like there's this thing, the fact that these are kind of like probabilistic, uh, kind of responses. Right? Like there's going to be like, let's say 50 different versions of this response. And you're almost like shaking up a magic eight ball of response and you're going to get one. And what are the types of questions that you can ask that that's okay. That there's like 50 different versions of that response versus sometimes there's just like there's one right answer. You only want one right answer, and you don't want a lot of hemming and hawing around that right answer. You just want one clear, articulated, non hallucinated right answer. And so like, uh, the more creative and insightful and like, uh, thoughtful and curious of these staff can go right now to these, these virtual assistants like those couple of firms and like the, the big ones and like many others, uh, that are, that are building these and they can ask questions like, hey, we're drafting a footnotes to a financial statement for a client who's about to implement this standard for the first time, right? Like, like, uh, expected losses on on current assets, that kind of thing. Right. There's new revenue recognition standards and new, uh, reporting standards around these. And they can say, we're about to write a footnote for the first time. We're going to implement it. It's this kind of client, this kind of business, this kind of risk. Here's my prompt. What's an example of a draft of that footnote. And right now you would actually get if the if the authoritative guidance had been uploaded, you would get an excellent response to that question. Really well drafted footnote. And that's today available at many firms. And even even if it's not necessarily at your firm, there are ways you could go about asking that type of question, not using any type of client information whatsoever. Right. And like still get a good response in a way that your firm would probably be very comfortable with as long as, you know they had thought through this.

Blake Oliver: [00:09:41] I feel like drafting notes, the financial statements is like almost the perfect use case for these chatbots because it's good. They're templated in many cases anyway, and these chatbots have gone and surfed the whole internet, ingested them into the LMS. And that includes, like every K one that's ever been published on the SEC website. So in that example you use the expected losses. Uh, footnote how many versions of that are in the model? It can probably produce the perfect footnote. And you don't have to give it client information or proprietary client information because you're just giving it, say here's our here's our number that's in on the balance sheet. Right. And here's the information that we need to communicate. Now create the footnote. Draft the the narrative.

Rob Valdez: [00:10:31] Absolutely. And let's pretend that you're like, you know what? I don't want to put any number in there whatsoever. You could say in place of the numbers, put x x x right. And it'll totally do that. Right. And that way you're like, you can tell yourself and your firm and your clients and the greater public like. There is zero sensitive data in this conversation that I'm having with this. You know, I right now. And yet we can still draft a very nice footnote, uh, kind of work through something and, and even ask, like, follow up questions like, okay, but what if this was a type of scenario? Or what if I'm really concerned about that or I don't like that sentence, can we rewrite that? And if you think about it like that's probably, uh, a good several hours worth of work by your like, not your staff. Right. Your senior senior slash manager type of person that is going to go, I don't know, maybe look up stuff in the Edgar database, read examples of other footnotes, read some authoritative guidance, draft the you know, the first lousy copy that you got to get out of the way anyways and then start reworking that thing and you could do all that in like it's not an exaggeration to say 15 minutes, right? You could kind of get that first version hammered out. Absolutely. Part are still going to read it. The senior manager is still going to read it, a manager is going to read it and we're still going to read it. But like you've got a nice rolling the ball forward at that point.

Blake Oliver: [00:11:58] So like I mentioned, I've never done an audit myself or I've never participated on an engagement team. I did do an agreed upon procedures engagement once for a client, and that kind of like dissuaded me from ever doing that again. Uh, it was it was very hard to do just one, you know, one person. I guess if I'd had staff where I could have them do all the testing, that would have been great. But for me, like doing it myself, I was like, sitting at the computer for hours saying like, why did I agree to do this? I'm testing, you know, 500 transactions here manually. Yep. Um, but, you know, maybe maybe I will change that. Right? Like we're a solo CPA. Could actually do the testing with AI. Um, and that is one of those things that we have been hearing about for a while. Yes. With artificial intelligence, even before generative AI came along, there have been companies that have come out. I know there's a few around. Um, maybe you could talk about some of those applications where, as I understand it, you take a general ledger and you feed it into that system, and then it can do stuff like pull transactions, right? Figure out the samples, uh, you know, come up with the risk profiles, like. And I may not be saying it. Right. Sure. Yeah. But like, is that is that basically the the idea.

Rob Valdez: [00:13:10] Absolutely. Yeah. That's where we're headed. There are early versions of that already out now. And we expect a lot more of that in the very near future. Right. And, and uh, you know, I because of some work that I do in this innovation team, I had the chance to meet with, uh, some of the, the companies that are producing like document document management systems and stuff. And everybody's heard of these companies, you know, caseware and, and, and these kinds of companies, uh, that, that are absolutely all integrating right now, LMS into their platforms. And, and we expect a lot more of this type of stuff to come in the very near future. Now, the faster and smaller companies have already kind of done it, and they already have clients using it and seeing it and getting results and getting feedback, and they're improving it and that kind of stuff. You mentioned that Alex is the one who introduced us at uplink. Right? And so they have basically like this document request portal. And you can go ahead and say, you know, write write these document requests. Give me the PPA roll forward, give me 50 examples of, you know, this type of uh, document for uh, onboarding a new staff. Right. And then you can even write in this, uh, platform, you can say, here's the tests that I'm going to perform, like, here's the things that I'm going to look for in the artifacts in each one of these.

Rob Valdez: [00:14:35] Um, you know, I'm going to look for onboarding date. I'm going to look for, uh, whether or not there's a checklist that says, like, you know, that we we signed the code of ethics and this kind of stuff. Right. And the AI will make a first pass. A large language model will like, let's say they upload 50 PDFs, it'll ingest the 50 PDFs, make a first pass and say like, yes, here's all the things that were identified and not sure about this one. And go check that one further. And I've I've watched several demos of this, uh, with, with Alex and the uplink team and it's like it's very, very, very impressive. And now you're getting to this state where you could have like yourself one sort of, you know, manager slash partner level type of person that's like, okay, I'm just going to design an audit. Yes, AI is going to do a first pass at the audit. And sure, it's not going to be perfect, but like even if it's 50% of the substantive testing of detail is done, like right at that first pass. Oh my gosh. That's that's very, very nice. Right. And that's actually available in certain platforms right now and many more in the near future.

Blake Oliver: [00:15:45] So I'm just thinking applying that to my experience where I was doing order to cash testing because the the owners of the business were concerned that maybe an employee was siphoning cash somehow. Right. That was their their main worry. So that's why they had hired me to do it. You know, I had to take all of these, um, orders and then match them up to all of these deposits. And, you know, it was it was a lot. I had to do a lot of testing. And so you're saying basically I could take all these documents, upload them into the portal, or have my client do that, and then it could go and check for all of the, you know, the date and the sign offs or like all the different details that I'm checking for in each document. It can do that reliably.

Rob Valdez: [00:16:28] Yes, yes. And even produce a first draft rough draft version of a work paper. Right. Like, here's all the, you know, uh, artifacts. Here's all your your your selections from your sample. Right. You know, you chose 50 items that are invoices and invoice dates and all this kind of stuff. And it kind of like, can pre-populate like a very first draft of a table. Uh, here's what a test might look like. And of course, you're going to have your own way. You write your own procedures, you need your own, uh. Tick mark toolbar and all this kind of stuff that you want to see on your work paper and that your firm insists must have on its own work paper. So it's not going to do any of that. And, you know, maybe in the near future they will, but we're nowhere close to that. But yeah, you can have a first sort of draft of a testing table kind of even being produced by these things, which is honestly that's that's a great step forward. And that's where you start to get a little bit more excited about some of the things that that we think are in the pipeline.

Blake Oliver: [00:17:27] To me, that feels very much like when we started to get bank feeds in.

Rob Valdez: [00:17:33] Yeah, yeah, cloud accounting.

Blake Oliver: [00:17:35] And exactly, I could import all the transactions into the accounting system and then set up rules to categorize them automatically. Yep. That compared to what I was doing before, was like an 80% save time savings. I was previously entering transactions from PDFs, PDFs, bank statements as a bookkeeper. That's how I got started. And then and then we connected the data. We set up rules and now it's 80% less work. I would just was reviewing exceptions. So are we talking about that kind of time savings in terms of, you know, audit like staff work testing.

Rob Valdez: [00:18:13] That is absolutely the goal to get that type of time savings. I think what is lacking right now is that, like, first of all, those are not evenly distributed, like all those sort of LM integrations are being done right now. So the the startups, the quick thinkers, the, the SaaS, uh, solutions, they're kind of doing it already. But like the big pieces of enterprise audit tech stack have not yet done it. Right. So we're not there yet on those. And then the second piece is like the auditors ourselves, we don't yet know how to use this and that. It's available and exactly the right things that we should be asking it to do versus things that we shouldn't be asking it to do. And so, like, let's say this busy season, like you're not going to get that that night and day QuickBooks uh, rules ingest experience. Uh, but you could start to do it on a couple of engagements if you're a leaner firm that is actually working with newer technology. Uh, you could probably even make a couple of passes at this now and absolutely already be telling yourself, okay, we're not doing this again. We're, you know, our our summer jobs, our fall jobs, we're doing this other way and kind of even start to think in that redesigning, re-engineering, uh, phase in your mind and certainly be getting those types of, um, uh, benefits in terms of time expense, I mean, you know, mental burden and boredom and fatigue and just the horribleness of taking and tying like PDFs, which is just the worst part of the work. Right?

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Blake Oliver: [00:19:49] To me. Looking at what the staff experience is now on an audit engagement like staff one. Right. You just join. To me, it's like bookkeeping. It's it's not requiring a lot of like, thought. It's here's a bunch of stuff I got to do. Go pull the docs. It's just I'm following a checklist and I can't imagine that's very exciting. Um, for those young accountants. And I wonder if that's, you know, is that part of the reason we're struggling to get people in?

Rob Valdez: [00:20:16] I fear that it is, um, because, you know, there's so much context that professionals lack when they first enter the workforce because they've done good work in school. And it's it's it's true that there are some great courses and great professors and all that kind of stuff. And, and they've done some good work and they've, they've challenged themselves in a certain ways and they've trained themselves certain ways, but they still don't know any of the terminology. They don't know how to read an audit program. They don't understand what's being said in an audit program. They've never seen all the different. Horrible, chaotic versions of a work paper that your client actually gives you, right? You look in your class and you get an AR aging, and it's very straightforward and it's simple, and you can read it and you can understand it and your, you know, you say to your client, I want the AR aging. And they produce you some document, some table of table of tables. And you're like, what is this? This is an in buckets. It's not grouped. Right I don't understand do I have to run this through idea just to get it in the right format? I don't I don't understand why this is so complicated. Like, you got to learn all that and know when to kind of push back on the client, when to go ask your senior when to, you know, burn time on the budget, when to not. And there's so many like professional environment and just auditor CPA life things that you're trying to learn that. Yeah. Unfortunately um you don't come in prepared for all that stuff and it takes that's why it takes a little while to get to senior and takes a little while to start having judgment and, and and learn when to push something back to the client and say, hey, this didn't tie to the goal. How can you give me this? This is working versus when to. Oh, okay. We just got to kind of make it work in this other way. Right. All that lacks at the beginning. Yeah.

Blake Oliver: [00:21:55] So I guess if if we're freeing up the staff so that they're not doing all this ticking and tying and the audit program or the technology is, is doing a lot of it, you know, then it raises the question, like, do we have room on our engagement teams for these staff? Like, what are they going to do and how are they going to get the experience to then be the seniors and the managers, if they're if they're not doing what they currently do?

Rob Valdez: [00:22:21] Yeah. So you know, it it's probably the like the million dollar question. Right. So like if we do take away some of the boring aspect of the work that was useful because it trained them on the job, what do they do now? And if you look at some other professions and how they kind of handle these, like these junior sort of positions, there's some really interesting ideas that we could we could adopt or think about or take parts from if we wanted to like software engineers, they have this thing that's called pair programing, right? And it used to be really popular. And then it went away and it's kind of coming back. And the idea is that you literally sit, you know, when we worked in physical spaces, it was side by side and like did programing together and like, you know, you would do some programing for a little while and the staff would watch and then you take your hands off the keyboard, push the keyboard over to them. Maybe the next hour they do programing for a little while and you're watching and you guys are talking the whole time. This isn't silence. This isn't like observing. It's not judgment. This is like we're thinking together as one, right? And maybe now that we don't sit in the same physical office, maybe you join a slack huddle or you join a teams call or whatever it is.

Rob Valdez: [00:23:34] Right? And now, like, you work on a work paper together, like, okay, what's the first step we do? Why are we doing it? What's the second step? Why are we doing it? Third step why are we doing it? And like I in my team, in my work that I do right now, I'm doing a lot of this because like right now. So we do a ton of data engineering and stuff, right? So you get you get a bunch of files, they're they're Json or XML or Csvs or whatever they are. And you got to manipulate all this stuff, transform, turn it into tables, join tables, merge tables, do all this kind of thing, and like a brand new data scientist or a brand new data analyst or data engineer, they don't know how to do all that stuff. They did some projects in school. They get conceptually what you're supposed to do. But like all the judgment, all the things you can get wrong, all the times you tripped yourself, they don't know any of it. Right? So we share a screen, talk to a project, talk to a task step by step. Here's what we're going to do.

Rob Valdez: [00:24:26] First. Here's what I'm going to do next okay. You know and it's okay. Like if the person spends a couple of minutes kind of fumbling around trying to figure out how to do it, like you don't have to breathe down their neck, you kind of let them figure it out. You talk them through it. Okay, let's do this. Let's do that. This is on this screen. You click that button, maybe, you know, write this formula, write this script, whatever. And maybe there's opportunity for a lot more of that. Right now we're testing the search for unrecorded liabilities. Right. So we have this, you know, uh disbursements journal. We're going to go through these items. We we made selections. We picked a sample of this size for this reason. Here's an individually significant items. Here's, you know, non-material items. Here's things that we think are worth testing. Here's what we're looking for on each artifact. Why are we looking for that? What do we want to put in the work paper. Why do we want to document that? What needs to be on our work paper, like talking through all that together, um, is a great opportunity for for training our people. If we'll take the opportunity and spend the time to train our people. Right.

Blake Oliver: [00:25:28] I love that as a training method, because it also overcomes this problem with remote work, which is that our young people feel isolated and alone and lost, and they're reluctant to go ask questions, because when you're in person, you can kind of get that feel for whether or not. Your senior or your manager is truly available. But when you're on Microsoft Teams, all you see is their name on a chat and you feel like you're bugging them constantly and so they don't ask for help. But if you're doing these regular working sessions where you're always with somebody else, then you get that that in-office feeling with the ability to work remotely. Um, and I'd heard about that, that, that idea that, I mean, this is very common in programing, right? Where you have two programmers work together, it's proven to be effective. So that could be something that we adopt in accounting that would help our firms work remotely. I think I'm going to have to have to try that in my own business, because we're fully remote and we we struggle with the same thing. Um, and I find that actually, when I'm, I do a lot of workflow design because we're a remote company, we have to have really well documented processes. And when I do that, I prefer actually to be on with my business partner David, and we work through it together, building it in the app. It's like the same thing you're talking about there.

Rob Valdez: [00:26:51] Yeah it is. And we actually, you know, have daily meetings like, you know, we call them daily stand ups or whatever, but it usually ends up going into a session and we'll spend time, we'll say, okay, what are we going to do today? You know, what are you doing? What am I doing? And let's let's take some task. Let's work through it. Right. And and sometimes it'll be 20 minutes. Sometimes it can be two hours. Right. And so like, uh, you sit there and you work through it together and you've got it blocked out and you know that you're going to do that, and you're, you're kind of thinking through this and you're really investing time in a person. And I and they're learning and they're getting a lot of that experience. And then and then you're talking through a bunch of stuff of course, related to the task, but then also like, you know, talking to each other, just building that relationship, which is so important. So you you absolutely can do this, but it's a real investment, right. Like you could only do this for a certain number of people. And like, maybe they could turn around and only do it for a certain number of people as well. So it, it definitely like it scales in a certain way and doesn't scale in another way and.

Blake Oliver: [00:27:59] Well, but think let's think about it this way. If you automate, let's say 50% of the work that staff were doing before, you could look at it as, oh, now I only need 50% of the staff. Or you could say, I'm going to keep 100% of the staff, and I'm going to have them work together. Yeah. And so we'll have two people working together on the same thing, and we'll get higher quality as a result.

Rob Valdez: [00:28:25] Yeah. And better trained people.

Blake Oliver: [00:28:28] Better trained people. We're not just throwing them into the fire.

Rob Valdez: [00:28:31] Exactly. Which is like the real scaling leverage of our profession. Right. Since our profession is so much about like relationships and trust and deliverables and transformations, now we're focused a lot on transformations of our clients actual business goals as opposed to just here's your report, see you next year or whatever. Right. So that like investment in people and then turning around and investing times in our clients as well. I mean that that's really the sort of the, the, the big lever that we hope to be able to pull and deliver a lot of value, enjoyment and fulfillment to ourselves and value to our clients and value to our teams and our firms and our organizations and hopefully our communities and our profession as well.

Blake Oliver: [00:29:15] So we've been talking a lot about the ideal state using AI to to, you know, make our firms better, make audit better. But let's talk about the blockers. Yeah. What is holding back, in your opinion? What is holding back firms from adopting AI and and getting to this ideal state.

Rob Valdez: [00:29:33] Yeah. So a lot of things uh, some very well thought through and some like legacy things that we still continue to carry. Right. So, uh, first of all, I kind of mentioned that like some of these firms that are doing good work, they're like working with, well, trusted organizations like, like Azure and Microsoft, uh, to build out these environments because they're so concerned with intellectual property and confidentiality and privacy and all the things that they actually, absolutely should be. Right. So, uh, there's that big information security consideration that is causing people to tread with caution. And then there's also like quality and, uh, professional, you know, acumen and that sort of thing that is, is like people are leery of, let's not just have someone suddenly trust every single thing that is provided to them by a virtual assistant or a chatbot without thinking through it. Right, and turn around and hand that to a client, because that's definitely not a good idea. And these things absolutely do hallucinate. And they do say things that don't make sense, and they do write code that is buggy, and they do all that kind of stuff that a human would do. Go figure. Right. And so that's kind of holding us back on the one end.

Rob Valdez: [00:30:47] But then. The other things that are holding us back as well include some like kind of still very clunky legacy sort of aspects of our organizations, and that's like the silo ization of our software and the silo ization of our data and the lack of structure and standardization of our work. Paper. Right. So like we download something from one area, put it over somewhere else and then upload it there and then change it into a format, and then somebody else reworks it and all that kind of stuff. Still moving around the data from one place to the to the next. And if your eye that you're working with is only in like one of those components or the very last component, then you still get that kind of like brain in a jar sort of scenario where I don't get to use it until I've perfected everything for it and then hand it off to it, and then finally I get to use it. And by that point, I might as well have done it myself. Like, that's still going to hold firms back from from moving as quickly as we would want them to.

Blake Oliver: [00:31:45] So. Well, like, give me an example of that.

Rob Valdez: [00:31:49] Yeah. Okay, so let's pretend that you're an auditor and you, your firm uses some type of, uh, document request management system. Right. So, like, let's just pretend you use, I don't know, Citrix Sharefile or whatever, you know, that's a good one. They're super. Yeah. Very well known. Right. Very well known. And so, like, let's say you went in there and you built a request list and maybe you didn't use all the tooling that's available in citrus Sharefile where you can, like, build out one item at a time, maybe you, like, did something silly, like just uploaded an Excel document there and the client's like reading that. And so now they're kind of just dropping a bunch of random, like PDFs and Excel workbooks and artifacts, and they're and maybe they didn't title them right, and that you didn't organize your requests super well and they didn't organize their responses super well. So now somebody's got to, like, read each one of those things and figure out what it's responding to and map the artifacts to the requests. So right right there, you're kind of losing like the benefit of data structure and like having all that organized. Um, and then if you kind of bring those down, some staff brings them down into their local laptop and then like, renames them, okay, this is the PPA roll forward.

Rob Valdez: [00:32:58] This is the, you know, revenue schedule. This is whatever. This is the accrual work paper for this. Right. And then you start uploading that into your document management system. Right. Let's say you use Pro system for engagement or you use Caseware or you use whatever right now you upload it there. So now you're in the like the third storage location that you've moved from one place to the next, and you're still kind of just moving around files as a staff, manually spending time manually rewriting stuff, manually kind of cleaning up things, and then they're going to put it in the right folder and then make sure it's indexed according to the work paper index like sort of rationality. And then like maybe they do a separate testing work paper and in a separate Excel file. And like they kind of put references and all that stuff and like, so the fact that all this data is disjointed and not just one home that just flows along a workflow, it it burns a ton of time, a ton of effort. It's very low value. The client doesn't care about any of this stuff that we're doing, right. This is our problem. And and nobody enjoys that work. Right. So that that will hold us back if we continue to let it.

Blake Oliver: [00:34:07] So that is the mission of the tech companies out there. Startup founders, please, if you're listening, it's crazy that our document storage systems and our work papers, organization systems are not connected to these portals that we are using with clients. That just seems like nutso, but it's not odd. It's not the only department with this problem. Tax has the same problem, same problem where tax software is not connected to the systems for requesting documentation. Even if you've moved from that PDF organizer or that printed out and mailed tax organizer, and you've got an online one often that doesn't integrate with your tax software. So now you're downloading and having to re-upload and and manually find the missing docs. And it's funny because, you know, I come from the outsourced accounting world and in many ways we have solved this.

Rob Valdez: [00:35:03] Yes.

Blake Oliver: [00:35:04] And and you know, it's kind of like I look back at the more traditional areas of accounting, and I feel sorry for everybody that's stuck in that world. You know, why can't these why can't these software vendors get with the program?

Rob Valdez: [00:35:19] To me, it's slightly shocking that accounting services or CAS or whatever anybody is going to decide to call it, has done such excellent and extraordinary work in kind of moving this ball forward. Whereas like our tax and our audit services, the big giants in our in our profession of driven by compliance, 90%.

Blake Oliver: [00:35:44] Of the profession is auditing tax or.

Rob Valdez: [00:35:46] Something. Absolutely right. And maybe that's like if we flip it on its head, maybe that's why like they're so big and so legacy and so, uh, sometimes profitable and established and, you know, uh, political interests or whatever we want to say about that, um, that change management and an adaptation might be slower in those areas because of that reason. Whereas you have these, like, you know, fractional CFOs or bookkeepers or accounting service firms that are just cranking it out, maybe integrated with their clients, maybe all on one platform, commenting and exchanging information and, you know, with, with like Bill.com and these amazing things that you kind of like your flow is integrated with your client. Your client knows exactly what it's doing. The policies are kind of built into this, of course, like when you are integrated behind the firewall of your client's sort of boundary, it perhaps that's easier to do. Um, you know, you've decided to work in one platform. You're not going to necessarily work in one platform for tax services in an intuitive way. And certainly with audit independence, there's going to be ways that people want to protect themselves in different ways about that. But still, we can we can definitely solve this problem. We can definitely work around this. That's that's not insurmountable.

Blake Oliver: [00:37:05] So that's what we got to do. We got to connect the apps, automate the flow of the data, and then we can really get the benefit of the AI.

Rob Valdez: [00:37:13] Yeah, yeah. It says uninspiring and unexciting as middleware. Right. Like that's literally what we're talking about. Middleware. Yeah. Making sure the stuff connects. And if it does then now all of a sudden we get the extraordinary benefits of LMS plus good data engineering, plus good analytics, plus good storage, plus efficiencies, plus more automated reporting and dashboarding and real time communications and all these stuff that we really want and have been talking about forever in these professions and still continue to make progress on. It's like we're making none, but we're not making it as fast as we want. That's pretty clear. And and this is kind of one of the big impediments for it.

Blake Oliver: [00:37:54] Well, and you implied this or mentioned it briefly, but I think it's worth pointing out, you know, audit firms are profitable and yes, and so it's hard to push for change when the system is working for the partners. It's working, you know, or they feel that it's working. Yeah. Um, and so maybe it'll have to break before it gets fixed. Really. Right. Like, um, and I feel like the crisis that's leading us to that point is the talent shortage. There just simply aren't enough young accountants coming out of school to staff these engagements. And we've seen a number of municipalities recently. They seem to be the ones that are feeling the pain first in rural areas, saying we couldn't get our audit done because there's only two firms in the state of Wyoming that do government audits, and the one that we use is understaffed. So it's delayed, right? Yep.

Rob Valdez: [00:38:54] Yeah, the talent shortage for sure is a, uh, potential driver for for change. Right. And then also, we, uh, look inward at our profession a lot as well. And maybe some of the more opportune kinds of entrepreneurs spot that about us and realize that they can shake us up from the outside sometimes, too. Right. And I think we see both things coming at us in real ways and fast ways, and they might cause us to get motivated to change a little faster or to break some of this profitability or or not even not just the profitability. It's the success, the comfort with our own ways. Uh, they might encourage us to explore a little more. Right. You you do see, like in SoC two audits, right? We saw this sort of explosion of platforms that kind of reached to our market, didn't even reach to the CPAs us. Right. They reached to our clients, the clients getting the audits. And they said, we can automate your audit, you know, and they kind of, for better or for worse, I have a lot of, uh, criticisms of that messaging, but that that is what they told our marketplace.

Rob Valdez: [00:40:12] We saw Venta, Andrada and Tugboat and these other solutions, these these startups, tech startups, SaaS platforms go to the clients and say, we can automate your Soc2 we know that your soc2 is very painful. We know it takes a long time. We know you don't like it. It's expensive. Guess what? We automated it. That's what they went and effectively told the marketplace. And suddenly firms that did a lot of that type of work found themselves in the position of like, wait a minute, I'm getting middlemen out of this relationship that I have with my client. My, my client just got told by some software platform that a soc2 audit, which the market rate rightfully for, takes the level of effort to be for for this imaginary company, maybe between 30 and $40,000 to effectively perform this with quality. Well, they just got told by this SaaS startup that if you pay the startup, you know, x 10,000 bucks or whatever, that now the audit should be able to be done in a Y type of fee. And they may have said some crazy number like 5000 or $8000.

Blake Oliver: [00:41:18] I've heard it's a lot lower.

Rob Valdez: [00:41:19] It's night and day. This is this is the innovator's dilemma, disruptive innovation, Christiansen type of stuff that we're seeing flying at us. And I don't even think our profession has on a broad scale kind of recognizes yet because we're like, oh, soc2, those are SaaS startups. And and those are all tiny companies and those aren't IPO yet. And, and you know, that's like the the innovator's dilemma, right. That like it starts out at the bottom and then we say, oh, we don't need to worry about it. And then suddenly they come after the mainstream and then we get worried about it. I see where.

Blake Oliver: [00:41:51] You're going with this, or I think I know where you're going with this, which is that why couldn't a startup come after financial statement audits the same way they've come after Soc2 audits? Yes. And maybe they start small. Uh, but all you have to do, right? As with Soc2, these these are. And by the way, for our listeners who aren't familiar with Soc2, this is it audits, right? Is that if, you know, like ensuring that your systems are secure and protecting client data and all this stuff. Right. And this is something that was created by the AICPA, designed for CPA firms to do and correct me if I'm wrong, but these startups have come along as I understand it and have created platforms to do the Soc2 audit. And then there is a CPA who signs off, um, but that's like, you know, they've they've automated everything except for that.

Rob Valdez: [00:42:40] We're observing some very, very, very interesting trends in this area. Right. So the platform comes along, kind of standardizes the request list to some large degree. Uh, integrate a lot of those things into the client's cloud services or whatever, and then effectively automatically automates a bunch of the artifact gathering, the evidence gathering. And then because of that, they kind of like, turn around. They tell the CPA, hey, this is basically automated. It's going to take you a very short amount of time. And CPA firms were like, well, we don't know that your thing is right. We don't know that your requests are right. We don't know that that you're going to do this right. And they found a whole spectrum of CPA firms, some that are like, we're going to do this quality, uh, the way our quality management management system tells us how to do it. And we're going to do it exactly the way we believe ethically we should do it. And then they've also found some more adventurous CPA firms that are like, hey, we definitely want to try your technology and see how much efficiency it can gain us.

Rob Valdez: [00:43:37] And yeah, we're willing to kind of like meet the market wherever that is in terms of changing our price. And then of course, in any free marketplace, there's some other far end of the spectrum as well of some firms that are like, hey, okay, if you can give us all the evidence and we can close our eyes and sign like maybe. Will do that. And yeah, I've read some of those reports and I'm not going to name any names, but some of those reports are not the type of quality that I'm used to seeing. And we're seeing a disruption of that type of attestation work. If they can come after attestation work, you know, the most sacred and protected of all the CPAs types of work, then of course they can come after the other types of attestation. Eventually they can come after tax work, they can come after, uh, the other types of services and attempt to like disintermediate and tell the client at least that they're going to automate the CPA out of the picture and reduce fees by doing that.

Blake Oliver: [00:44:33] Well, they've carved out a lot of that work for this tech company, and now the CPA is just doing the at the very end, looking at the work papers that have been prepared and signing off. And so the CPA share of the value of that engagement is smaller.

Rob Valdez: [00:44:51] Exactly and.

Blake Oliver: [00:44:52] Exactly. That's the risk we run as a profession. If we don't modernize and do this ourselves, a tech company is going to come along. And like you said, disintermediate us from the client.

Rob Valdez: [00:45:02] We've been asking ourselves for for years what is the Uber ification of our profession? Who comes if we're the taxi cab companies? Who is Uber that comes in between us and our client and separates the two of us, creates a bifurcated marketplace and then charges a big fee and kind of like takes all the the profitability and value out of this. They take the profit. Yep. That's exactly right. And this is one potential version of the Uber ification of our profession. This is this is one.

Blake Oliver: [00:45:35] And I never thought about soc2 as being the. The vanguard of that. That's that's the first. I mean, are there any other areas in attestation that are being disintermediated, like.

Rob Valdez: [00:45:47] I'm not seeing other areas being disintermediated to this degree? And it's funny you say, why in the world Soc2 I mean, it's like it's kind of a arcane, like smaller segment of the marketplace. Why would this be the area where something gets disrupted? And it's funny because the client and the entrepreneur are the same person, right? So this, you know, some of these firms.

Blake Oliver: [00:46:11] They've had to go through it themselves.

Rob Valdez: [00:46:12] They went through it themselves. They hated the audit themselves. They came out of Y Combinator and they were like, hey, in order to get big enterprise accounts, we got to get this thing called Soc2. We don't know what it is. We don't care what we got to do it. They went and did it. It was awful, you know, much to our chagrin. Right? And expensive and expensive and time consuming. And they never understood it. They never really felt like they received value from it. And they said, okay, I guess I just found my new niche paying customer. I want to go after this thing now. And they did. And you know, to their credit, they are doing it now. I think there's some ways they're cutting a lot of corners that I'm not a fan on. Right. And that I do not think are good for the marketplace or the profession, or even for their own long terme sustainability and longevity. I don't think they're serving themselves when they cut corners. Right. So. Of course, it's a broad marketplace of disruption, and some people will go after it in different ways. And there's great, great versions of this and less quality versions of this. And we're going to see that whole thing happening, and maybe it's going to come after other markets. Now they realize how vulnerable we are now that P like has gained a huge taste for buying up firms, and they've seen how easy it is to do and how profitable they can do it now. Yeah, maybe we'll see more of this as well. Right.

Blake Oliver: [00:47:30] Well that is that raises an interesting specter, which is a private equity firm with this mentality, buying a big accounting firm and then saying, you know, 40% of audits are deficient, according to the PCAOB financial statement. Audits. Right. So. What can we do to automate this and create a system where we can deliver audits? And all they have to do is pass inspection, which, you know, when 40% of audits are deficient. That indicates to me that quality is a big problem in our profession right now, right, due to the staffing shortages. So there's an opportunity. Maybe that's what we will see coming out of these p acquisitions. Somebody's going to somebody's going to start doing financial statement audits like these soc2 audits.

Rob Valdez: [00:48:25] We might we might. It's it's it's certainly not an obvious guarantee that this is exactly what will happen. But that is one of the scenarios that we could see out of this, right? We've seen P come in and I think P just bought Baker Tilly. Right. But maybe the largest PE acquisition um, of of a public accounting firm that we're seeing coming out now. And so like we're seeing way up the food chain, these types of transactions taking place. And we're seeing that they could come in with their existing mentality. Uh, what is private. What do private equity firms do. Right. They buy a bunch of little versions of a thing dry cleaner, CPA firm, whatever it is. And they put them all on the same platform and they tell them, hey, you're all going to do the same way now. And they kind of centralize some in the back office and some of the shared services, and then they they make it more profitable because of that. Then they start cut, cut, cut cut cut. And then next thing you know, we've reduced a bunch and hopefully created a leaner system and maybe made a lot of, uh, ownership and shareholder value in the process. That's the sort of classic model of what they think they do and what many times they can do and what they potentially could try and do. Uh, for us, you know, for better or for worse.

Blake Oliver: [00:49:39] And I just looked this up on ChatGPT using the web search feature Baker Tilly in was indeed, uh, one of the largest transactions to date. Their net revenue in fiscal year 23 was $1.6 billion. Incredible. And they're now private equity owned. Hellman and Friedman and Valorous Capital Partners. It's going to close in June 2024. Okay. It's the largest investment, largest private equity investment in a US CPA firm so far for sure.

Rob Valdez: [00:50:09] Yeah. And even though that's the biggest and it's a it's a huge headline and extremely important right down the food chain all along the way. There's been a ton of transaction activity that we've been seeing over the past couple of years as well. Right.

Blake Oliver: [00:50:22] We've seen uh let's see. It's it's telling me. Citrin Cooperman. Yep. Um, Cbiz is the success story that it's pointed to a lot in this private equity world because they are corporate, right? They're not a partnership. Fascinating. Yeah, well. Yeah. I mean, as a CPA, there's a part of me that hopes that we don't get Uber fied. Yeah. Of course. Because like, you know. I don't know if that would be great for the profession as it is, but also I feel like our profession needs to be disrupted. So I welcome this competition, um, because otherwise there's no impetus to change, right? If you don't have competition. And we've seen taxi companies actually do some really great things. Like now my taxi driver doesn't get pissed off when I want to pay with a credit card. Right? So imagine that I've started taking the taxi at the airport. When I get to the airport, I don't go get an Uber. Most of the time I just jump in a taxi because it's easier. Yeah, maybe I'll take an Uber back to the airport, right? Sure. Yeah. Um, and I find the taxis actually a better experience. Ten years. How long they've been around now? Yeah, I feel like ten, 20 years. Yeah, about a decade.

Rob Valdez: [00:51:34] Yeah. Yeah, yeah. That's right. So maybe they'll raise the bar and maybe that is, uh, a bright side of this, uh, conversation. And let's certainly hope that it is. I would prefer and I would encourage us to also disrupt ourselves as outsiders are looking at us and looking at how extraordinary of a profession and opportunity it is that we have and that we have the the opportunity to work in. And we do, uh, we should also say, well, if they appreciate it so much and recognize all this opportunity, we, of course, can also do that, right? We can recognize there's opportunity to innovate. There's opportunity to start firms with entirely different value propositions. There's opportunity to not say, I'm just going to do the exact same thing that everybody else has done. I mean, you know, I see a lot of interesting conversations on on what's still interestingly called, uh, tax Twitter. Right. You know, there's still a lot of interesting threads about things that people are doing in their practices with fees or with markets that they're serving or ways that they're changing or technology they're adopting. So I love it, and I would love to see even more of it. And so that's why I think these kinds of conversations are so great, because as long as we keep challenging ourselves to think outside our own routines, then, you know, we can also be part of that competition that the outsiders are certainly going to try and join. But of course, we have the advantage of knowing all of the context and all of the value and all the, uh, important quality that we have to maintain in the process.

Blake Oliver: [00:53:13] Rob, it has been so great talking to you. Uh, we've been hearing from Rob Valdez. Rob, where do you like to connect with people online? You mentioned Twitter. Is that your favorite social platform? Like where can people continue the conversation with you?

Rob Valdez: [00:53:26] So LinkedIn is great, right? I'm Rob Valdez on on LinkedIn. And you can look me up. I write a blog at vision CPA. And, you know, you could certainly, uh, check that out and like, connect with me there. It's very easy to like, uh, connect with me on socials or submit a, you know, little, little comment there or something like that. And I'd be thrilled to hear from anybody. And you hear the type of stuff that I like, right? So I don't get sick of talking about this. So if anybody wants to talk about this, then I welcome the discussion.

Blake Oliver: [00:53:57] I have just subscribed to your blog at vision CPA. Thank you. I recommend everyone else do that. That's a great way to stay in touch with folks. Uh, and by the way, you can subscribe to my blog @BlakeTOliver. Com head over there, join my newsletter. You'll get notified of new posts and interviews and whatnot. And don't forget, you can earn free CPE for listening today with the earmark app. If you made it to the end of this episode, you can get an hour of CPE that is Nasba approved. Go to earmark Cpcomm, download the app and find the course with this episode title on the earmark podcast channel, and take a quick five question quiz and get your CPE. And that, Rob, is how we are helping to automate CPE and continuing education compliance for CPAs. I love it.

Rob Valdez: [00:54:44] Let's keep doing it.

Blake Oliver: [00:54:46] Thanks, Rob. Great chatting with you.

Rob Valdez: [00:54:48] Likewise.