Earmark Podcast | Earn Free Accounting CPE | Making Audit Matter Again: The Future of Assurance

Audit is at a crossroads. Commoditization and compliance mentalities have diminished its value. Now, auditors face an existential crisis. How can assurance stay relevant? Join Alan Anderson and Blake Oliver as they tackle pressing questions on audit's failure to innovate and chart a new direction focused on value-added assurance. You’ll get a dynamic diagnosis of threats plus practical ideas to transform the profession before external forces make change urgent. Discover what’s at stake if audit no longer matters and how leadership today can write a better tomorrow.

(This episode originally aired on February 28, 2024 on Earmark Webinars+)

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Chapters

(00:00) - EAP 66
(01:57) - The Crossroads of Auditing: Challenges and Innovations
(03:21) - Embracing Technology: The Future of Efficient Auditing
(06:26) - Redefining the Audit Process: Closing the Expectation Gap
(15:24) - Understanding Business Through Audits: The Value of Insight
(27:38) - The Commoditization of Audits: A Call for Change
(31:41) - Exploring the Flexibility in Auditing Standards
(32:19) - The Shift Towards a More Rules-Based Approach
(32:55) - The Impact of Standardized Methodologies on Auditing
(33:48) - Revitalizing Auditing: Injecting Fun and Quality
(36:16) - Addressing the Pipeline Issue: Making Auditing Appealing
(41:04) - The Importance of Planning in Auditing
(46:19) - Challenging the Billable Hours Model
(50:53) - Leveraging Technology to Transform Auditing
(52:38) - Concluding Remarks and Resources

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Connect with Our Guest, Alan Anderson

Website: https://www.accountabilityplus.com/
LinkedIn: https://www.linkedin.com/in/alan-anderson-0ab74227/

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

Alan Anderson

Alan is the author of "Transforming Audit for the Future: The Five Essential Attributes of Audit Leadership." He is the founder and president of ACCOUNTability Plus, LLC, a global accounting and assurance advancement leader based in Burnsville, Minn.

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

Alan Anderson: [00:00:00] But the reality situation is that in spite of our words, our profession has chosen to commoditize the audit. Most people say is the marketplace is commoditized, the audit and I say baloney. We commoditize it ourselves because the first time a client questions the fee, what what happens with the the partner, they say, how can we lower our fee as opposed to saying, well, look at all the value we brought.

Blake Oliver: [00:00:32] 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. Hello and welcome to Earmark. I'm Blake Oliver. I'm excited to have with us today Alan Anderson, a well known audit innovation leader, educator and author. Alan has been named one of Accounting Today's Top 100 Most Influential People since 2017 for very good reason. Over his 30 plus year career, he's served in roles from staff auditor all the way up to senior VP at the AICPA. He saw firsthand the chAlanges and failures facing the audit profession. Now he's on a mission to transform audit into a valuable, valued, viable service at his firm, Accountability Plus. Alan, welcome to the show.

Alan Anderson: [00:01:31] Well, it's a pleasure to be here, Blake. I'm really excited to have a conversation with you today about something that I'm very passionate about, the the future of auditing. So this should be a really fun time.

Blake Oliver: [00:01:42] You have described audit as being at a crossroads. Tell me what you mean by that.

Alan Anderson: [00:01:48] Well, you know, if you actually think about audit and, and and how businesses and economies have changed over time, you have to ask yourself, has our profession on auditing changed anywhere near the pace of change in the businesses, the entities, even the nonprofit organizations that are CPA firms provide attestation services for? And the answer is unfortunately, no. And and the market dynamics are becoming so strong and other disruptors are coming into this space that I do actually believe that we're at a crossroads now. You can argue that nobody can come into the audit space because it is a, uh, for lack of a better word, call it a monopoly, but it is. It's a monopoly for CPA profession. But assurance on financial statement information disruption can take place without that of an audit. So we are clearly at a crossroads. And it's really long overdue that our profession actually has a wake up call and say we need to start evolving our business as all of our clients have had to evolve their business. It's just simply amazing how important it is to our profession.

Blake Oliver: [00:03:06] I was talking with Rob Valdez on a previous episode of my podcast, and he brought up this concept of soc2 audits being commoditized. Soc2 being the information technology assurance service that is, uh, was created by the AICPA. The CPA firms can provide. And Rob described for me how there are all these IT technology companies that have come into this market for soc2 audits and have, as he described it, uberized the audit in the sense that they've created, uh, a more efficient process that streamlines it, that's more efficient and easier for the client than most CPA firms are providing at a fraction of the cost. There are still CPAs involved because they have to be, but they've been kind of put into a box, uh, at the end of a lot of this to sign off. Do you think that sort of thing is coming for the rest of assurance? Like, like is that does that concern you or worry you?

Alan Anderson: [00:04:15] You know, uh, actually it it is going to happen. I mean, there's no doubt about it. I mean, I'm a big believer in soc2. I just the AICPA with all those services were developed. And I think it's a wonderful service. And I think that was, you know, groundbreaking strategy to help move our profession forward, to realize that it's not the. Auditing the end of the line because basically all auditing is, is validating history, right? It's historical financial statement and all it all it does is validate history at a point in time. Why can't we validate history on a more real time basis, like almost after the transaction takes place? Well, what technology and and and bots that can be placed on systems, there can be real time monitoring of transactional flow through technology that can identify and flag what could be an outlier. Right. And so what it does is it actually elevates the skill set needs of the auditor to be much more of an interpreter, an analyst, and understand what's going on in the business. To be able to say, well, that flagged item is a problem or it is not a problem, and technology can can do all that work in the background and, and the auditor will provide the higher value add with the interpretations and understanding of what was flagged and whether, excuse me, whether it was a problem or not. So I actually think that technology such as that will. Lack of a better word, force some of our practitioners to sort of realize that things need to change. They need to be better at what they do in understanding and interpreting, then ticking and tying.

Blake Oliver: [00:06:11] I want to talk about how things need to change, and this concept of the expectation gap that you've outlined in your writing. But first, I want to welcome our live stream viewers. Welcome, Liz. If any of you have questions for Alan or comments, feel free to put those into the comments box. Press enter. We'll be happy to, uh, hear you and or see your comments and respond to those. So let's talk, Alan, about how we can close this expectation gap. You know, what is the expectation gap in your mind in audit?

Alan Anderson: [00:06:46] Well, the the there are actually several things. I mean, what what our profession tends to do is they say, okay, we're using technology in the audit to help, help, help us carry out our work. Right. Well, really what auditors did is threw technology at a problem that they didn't even well define what the problem was. And so what they really did is replicate what they were doing in a paper world. And they didn't even really rethink how to do their work. The expectation problem is, is we audits start at the end after the financial after the year end has closed, and they start with those ending numbers and they look backwards into those, those amounts, those aggregated amounts on the balance sheet or income statement. And then they test some of those items. And if some of those items are in fact correct, they make they draw the conclusion that that sample supports the that the entire balance is fairly stated. All right. The the real gap is auditors don't understand how the transaction even got into the general ledger. And so to be much more. On time, real time with their audit process. They need to understand transaction flow from inception and how it how it navigates its how that amount navigates its way through the system and ultimately results in a sale or a purchase of a of a commodity, whether it be inventory or supplies or something like that, and validate those things on the real time basis.

Alan Anderson: [00:08:28] And so we need to think about turning our audit upside down. And rather than starting at the top, at the balance and working down into the items, we need to start from the bottom up. And when we start from the bottom up, we can be much more timely. We can be much more understanding of what's happening to business. To also provide what is sorely being missed in the audit process is providing value to your client in with respect to the understandings, because when you start with a balance, you're not going to learn a lot about the business. When you start with transaction flow, you understand the business. And so there's a huge expectation gap in even how to approach the audit. And then when you approach the audit from the bottom up, you'll use your technology differently. You'll actually use it as an asset as opposed to in today's world, it's just it's a digitized piece of paper.

Speaker3: [00:09:28] Um.

Blake Oliver: [00:09:30] So you're saying we need to start with the source transactions and build up to the balance. So we understand how that balance, how that amount ended up on the balance sheet or in that account.

Speaker3: [00:09:41] Yep.

Blake Oliver: [00:09:41] I interesting I always thought that was just part and parcel of understanding the internal controls of the organization, which is part of the audit, is it not.

Alan Anderson: [00:09:51] Well, you know, it's a it's it really does vary. I mean controls are important. All right. It controls everybody forgets what the importance of internal control is. Internal control is just a process to help management achieve their business objectives. All right. And then we also need to recognize that internal control the cost of internal control should never exceed its benefit. Lots of organizations internal controls are are burdensome, time consuming and are not cost effective. But what happens is as a company grows, they keep adding on controls and don't realize that the bureaucracy that they're that they're adding an organization and an auditor will take basically get some information, they'll fill out a checklist, ask them, get a bunch of yes no answers and say, okay, that's a control. That's what I'm gonna test. They know how to ask the questions. They don't understand the business. You can't you can't understand control at a client until you first understand the business and what needs to be controlled. So you're sure you're supposed to capture internal controls, but that doesn't tell you. Okay, got they got the scroll control in place, but that doesn't tell you whether it's meaningful, whether it's necessary or really actually helps the business achieve their objectives.

Blake Oliver: [00:11:12] So understanding the internal controls I mean, you can do that without understanding how the business really operates and how these transactions get into the accounting system into these balances.

Alan Anderson: [00:11:23] Absolutely. I mean, and we don't and most firms don't do a really good job training their staff about the business that they're auditing. Right. And then they don't do a real good job training their staff about internal control, because the audit, even partners don't sometimes oftentimes don't see the benefit of the time spent doing that to ultimately get to an opinion on the financial statement, because they're so balance sheet focused right into the into the line focus versus that the starting point focused.

Speaker3: [00:11:57] Right.

Blake Oliver: [00:11:58] It is a requirement as part of an audit, that the auditor obtain an understanding of the business and its environment and all of that. But I suppose the staff aren't the ones usually doing that. That might be the partner, the director manager level folks. The staff are just assigned all of these checklist items. I have to I have to sample this account and I have to prove it and, you know, do the work papers. And so.

Speaker3: [00:12:30] That's right.

Blake Oliver: [00:12:31] So the question is you're saying that firms need to basically approach audits in a completely opposite way. They're doing. Now flip the script. Start from the bottom, not from the top. But does anyone do this? Like is there any business reason for them to do this? I feel like it would be like more time consuming for them to do that than, you know, what they're doing is easy, right? It's go look at the amount on the balance sheet and now sample the transactions and prove it.

Alan Anderson: [00:13:02] Well, there's. There's there's lots of reasons why starting at the beginning makes good sense. You know, we we work and there aren't many firms that are doing it. And you could argue that some of the largest firms in the country, when they're doing their Sarbanes-Oxley work and things of that nature, they're testing controls throughout the year and all this stuff. And so but what we do with accountability, plus we call it a data driven audit. In other words, let's make these audits data driven. Start with the data and and make sure that we know how that data gets into the system, that it's a valid piece of data. It is that it is a it is a transaction that's real and needs to be processed. All right. And so we we do these data driven audits with these firms to start at the bottom and work their selves, work their way up into this whole process. And what happens is because you can do it on a much more real time basis, you can basically plan your work throughout the year so you have more touch points with your client. And what you do is you take that, you reduce that huge bubble of time. That's called busy season. You know, you got those calendar year ends, you know, from January 15th to April or whatever. Uh, you're, you know, you're working 85 hours a week or things of that nature trying to get all that historical financial statement done. It levels the work flow. It basically allows you to have more touch points with your client. It allows you to provide more value to your client. And and if all you believe an audit is, is purely compliance. Then all you're going to do is go through the motions that'll get you there in the shortest possible amount of steps to issue your other report. But then basically, you've commoditized what you've done, you've provided no value. And more importantly, you basically have burnt out a bunch of staff and they're all leaving.

Blake Oliver: [00:15:09] So I want to make sure I understand this philosophy because it it's revolutionary. It really is totally different than how a lot of firms are approaching audits. So instead of approaching after the fact where I get the balance sheet and then I design my audit backwards from the financial statements, you're saying work with the client throughout the year to understand how the transactions get in to the accounting system and how they build up to the financial statements. And if you do that and you develop that understanding, then you can provide assurance on the financials because you know, the inputs are good.

Speaker3: [00:15:49] That's great.

Alan Anderson: [00:15:50] And you have to you have to realize that, you know, our profession or for the last ten years have been talking a lot about data analytics and using data analytics in the audit.

Speaker3: [00:16:01] Right, right.

Alan Anderson: [00:16:03] The uptake on the use of data analytics in the audit has been. Poor, to say the least.

Blake Oliver: [00:16:12] Yeah. We haven't seen much in the way of technology to, to support that. So yeah, I would, I would feel like if there aren't tools to do it then it's probably not being done. Right.

Alan Anderson: [00:16:20] Well you know and the you have to remember there are tools, but there are there's no knowledge base on what the data analytic needs to be because you don't understand what would be an outlier and what would be a properly recorded transaction. So when we do these data driven audits, you understand the data, you test it a little bit manual in the first year or two, but then that allows you to start building the analytic, to then put on what we basically call put an audit bot. We'll put an audit bot on the system. We'll get a data scientist to write the analytic analytic, because data analytics needs a person to write the algorithm. And auditors can't write the algorithm. But auditors can could basically, if they understand their client can write, can tell them what would be an outlier, right? So if you're if you think about data analytics needs an understanding of what would be acceptable versus what's not acceptable. And the the bottom line is that when it they don't know what's not acceptable. So they can't program the outlier because they don't know what would be an outlier. So to build the data analytic you got to understand the data.

Alan Anderson: [00:17:44] And that's why there's no there's no off the shelf data analytic tool because every organization is different. And what would be an outlier in company A would not be an outlier in company B. So it's a chAlange. But ultimately industry segments will figure it out. And so the disruption will come from the pharmaceutical industry. Some will create analytics for the pharmaceutical industry, and they'll start measuring against those and and then and that and then they can still build the bot around it. And so then this disruption will be is someone else will start monitoring all of this. Because the whole concept of continuous assurance and continuous audit that's been talked about for 25 years. I mean, one of my good friends and really a pathfinder in all of this, Doctor Nicholas Pastorelli from Rutgers University, he's been on top of this for 20 years. And and but it's hard to get people to move from what they're familiar with. And and what it will take is somebody saying there's got to be a better way. They're going to leave public accounting and they'll create their own better way. Yeah. And then they'll they'll be the successor.

Blake Oliver: [00:19:04] I love this concept of continuous assurance. Melissa in the live stream had a very insightful comment. Melissa said, if you work this way, you correct issues during the year and have less weaknesses at year end that would need to be reported.

Speaker3: [00:19:19] Absolutely.

Blake Oliver: [00:19:20] And that means less workload compression during busy season, which we know is the number one problem that drives staff out of the accounting profession is too many hours.

Alan Anderson: [00:19:34] Two too many hours. And honestly, um, you know, we we don't make the work all that exciting. I mean, let's, let's let's face it, these the everybody's got to get 150 hours right now to get their accounting degree and get their CPA, right. So then they go to 150 hours like like like a masters. And then what do they do for the next two years? They trace amounts from an invoice to an Excel spreadsheet. Yeah. And you and you scratch your head and say, did I need 150 hours to basically do a comparison from an amount on one piece of paper to another piece of paper? Come on. It's ridiculous.

Blake Oliver: [00:20:12] And, uh, I did this for a client. I never worked as an auditor because I was licensed in California, where I didn't have to get my audit hours. And I've always been on the financial statements side, so I've been making financials. So for me, it's funny to think that auditors don't understand how the transactions get in there, because my entire career has been automating getting transactions into accounting systems, essentially, and building financial statements in an automated way with technology. And I have great comfort that the financials that I am building are accurate, because I know how all the rules that I programed to get the transactions in there, right? So I can very confidently send a PNL over to a tax preparer and say this is accurate, right? And put my stamp on it.

Speaker3: [00:20:59] You know.

Alan Anderson: [00:20:59] And I think that the young auditors would want to know that, but they're they're really not given the time. They are so jammed with, with doing all of this detail work that they're not given the time to step back and say, what is all this mean? And how do I, how, how can I how did it even get there? Because honestly, when you take a I'll just take a real simple example. You got accounts receivable on the balance sheet. All right. That totals $1 million. You got a detailed listing of accounts receivable and the totals $1 million and say, oh, okay. The subsidiary agrees to the general ledger. You send ten confirmations and and the and the confirmations say. Yeah. The I owe that to this company. Then the auditors. Done. We, didn't they? They sent a confirmation. They agreed the balance. And they'll do some other stuff, of course, but but there's they didn't need to know how that receivable, how that sale even got recorded.

Speaker3: [00:22:00] Right.

Alan Anderson: [00:22:00] Because the customer said they owed it.

Blake Oliver: [00:22:03] So there's a lack of just fundamental understanding as to how that are got on the balance sheet.

Alan Anderson: [00:22:10] Yeah. And the question in the in the standards say you need you said you need to understand the entity and the environment as you say. But but the reality situation, it is the extent of that understanding is really left up to the judgment of the auditor. Right, right. And and that's why there's a lot more pressure in our profession to have partners, me be more actively involved in the planning of the process, because if they've been a client of that partner for a number of years, that partner probably understands that business a lot better than that first year staff account. Well, not probably they do. But the reality situation is they're not transferring that knowledge all that well. And so the staff person is trying to figure it out on their own and what they're supposed to do. And then you're three years into your career now you're a senior accountant, you're planning these jobs and and you still really haven't taken had the chance to really understand the depth of the business that you're auditing because you are so busy going from client to client to client. And so the whole model does not provide the time needed to really get gain that understanding.

Speaker3: [00:23:26] You're just.

Blake Oliver: [00:23:28] You're evaluated. Well, let's put it this way. When I look at PCAOB inspection reports and audit failures, a lot of times the firms get beat up for their work papers for not following the procedures. They don't get beat up for not understanding properly the business. Right. There's no there's no financial penalty for skipping on that. The penalty is on the work after the fact.

Alan Anderson: [00:23:57] Well, and that's true, but because the problem is the PCAOB, when they do their inspections, they're doing these inspections based on the work that's in the file. Right. And and you're not going to really know how little or how little the auditor knows about their client's business and how things operate until something goes wrong. Because when something goes wrong, they'll say, you know, it's like I was I was working with a firm and we were doing a data driven audit on it. And it was quite interesting is, is that they didn't realize until we started getting in there that 100% of the transaction activity that was getting into the general ledger was based off of a barcode on a container, on how the containers move around an organization, the the, the shop floor and the organization. And so they are tracing all of this information from this report to that report and that report. But it was all it was basically one barcode that tracked all that movement. And they didn't even test it. The system was working for the barcodes. They just traced a bunch of paper around. They didn't take the time to understand how information was. Flow was actually getting captured in the organization.

Blake Oliver: [00:25:18] I feel like. With with audit. So much of it is about creating the work papers, doing the work to support and audit opinion. Right. We have this. We have this objective in an audit of like we got to get to the opinion. That's what the client is paying for ultimately, right? That's what they want. They want an unqualified opinion. So the question is how do we get there as quickly as possible? And that when that is the business model, when that is the objective, then all this other stuff, understanding the business, like it becomes like it's it's it's not part of the model. It's nice to have it. Right. But how do you how do you get auditors to do this to to step back and understand what is happening, how the business works, how the transactions get in there when there's like no financial incentive to do that. The incentive is to do the minimum required to get to the audit opinion, to support it, and to ensure that the firm does enough work so they don't get hit with a fine or sued.

Speaker3: [00:26:27] Well, you know.

Alan Anderson: [00:26:28] It's an interesting comment because when you when you think of our profession, you know, and kind of how it's evolved is firms don't need. 200 clients. Firms need 20 clients that are really good, that they're actually providing value. And and so, you know, I encourage anybody to go to any firm's website across the country. In somewhere on that website. They're going to say that their audits are different. They're more than the numbers. They provide insight. They provide business value, they provide all this stuff. And guess what? The clients don't believe it because they're not getting it. Now, there are firms out there that are good at that, and they're the ones that have no turnover because the staff enjoy what they're doing and all this other stuff. But the reality situation is that in spite of our words, our profession has chosen to commoditize the audit, most people say is the marketplace is commoditized, the audit. And I say baloney. We commoditize it ourselves because the first time a client questions the fee, what what happens with the the partner? They say, how can we lower our fee? As opposed to saying, well, look at all the value we brought. Yeah, to, to this audit because they know they don't. And then every, every firm that goes out for a proposal, you get eight replies. And those replies on those RFPs all still say we provide value. We do more than the numbers and all this other stuff and they don't believe it. So they just go to the last page and say, what's the fee, you know? Right. And uh.

Blake Oliver: [00:28:13] Because that's what the client ultimately needs is I'm thinking, as a business owner, right. I'm going to have to get audited. I'm an Earmark. We'll have to get audited someday. And what do I care about? You know, I don't I don't need somebody to come in and tell me how to run my business or to give me insights. I got that already, right? I just want the opinion so I can get the loan from the bank, or I can raise money or something like that. Right. So it's nice to have all that. But like, in the end, the client, if the client doesn't care, you can't charge for it.

Alan Anderson: [00:28:42] And actually I actually think that that if if you actually did have somebody that was providing insights, the owner and the CFO would care. In other words, because you probably haven't personally experienced insights of the nature that you're seeing value. So you're already saying, well, okay, that person didn't say, because a lot of these individuals, you know, that's why firms that do data driven audits start from the bottom and are focused in an industry segment will become the the survivors because they're better advisors. They understand their client. They can provide suggestions to help the business because they know what other companies are doing. In that same industry segment, when you try to be, you know, the pure generalist, doing any type of client of any type of industry, you're just going to be a commodity provider. And but I do believe that, you know, we can provide relevance in what we do if we set our mind to it and our clients will see value.

Blake Oliver: [00:29:47] If I see the comments coming in on the live stream, please keep them coming. I spoke to those, um. But I want to continue on this thread for a moment. I want to pull at this thread with you, al. So if. Is the problem with the commoditization of audits also related to like how rule based audits are? I mean, there's not a lot of room for auditors to do things differently, is there, based on the rules that we've created as a profession?

Alan Anderson: [00:30:15] Well, you know, there is judgment involved. There's no doubt about it. I mean, it's like I mean, the Auditing Standards Board will say that their standards are principles based, not rules based. Financial accounting standards are much more rules based and principles based. What the procedures an auditor follows to basically get to a conclusion that an amount, a balance or a financial statement is fairly stated in all material respects is based on principles. Now, I will say the Auditing Standards Board has moved a little bit in some areas to be more a little bit more rules based. But when you actually do read the standards, you know, there is no rule that says you must test ten items, right? It says you must test whatever number of items or things that you feel are necessary to get yourself to a conclusion, uh, that the number is fairly stated. So there's a lot of professional judgment involved. And so and the problem is, is that the, the rules sort of evolve because most firms are using a standardized off the shelf methodology that the methodology says. These are the 12 steps you do to do an audit. All right. And uh, and so they'll do those 12 steps and then they'll think they're all required by the standards. But if you actually look at the standards, it's very possible that many of those steps weren't required based on that client. But when you have a generic audit program, you're going to have a generic set of steps that are far more inclusive than might be needed based on the risks that the client.

Blake Oliver: [00:32:00] So in other words, it's easy to just follow a template for every audit. And so firms do that. And so that's that's how we've commoditized the audit as a profession. We don't have to do it all the same way.

Alan Anderson: [00:32:13] Yeah. No we don't. And it's like but the the fun thing is when you start changing this with firms and start putting thinking back into auditing and thinking about how to do stuff, that's when staff love it. Yeah, that's when they start enjoying what they're doing. And I had one firm I worked with that that was experiencing turnover at levels equal to that of every firm in the country. They worked with us for a year and their turnover went to zero, and three people that left wanted to come back.

Speaker3: [00:32:42] That's incredible.

Alan Anderson: [00:32:43] Those staff were having fun. They were enjoying what they're doing. And guess what? Their quality went up. When you understand your client. Your quality gets better because you know where risks are, because you know exactly what you're looking at, because you know your client. It's such a win win. It's just it's amazing. But again, I work with firms all across the country and they'll say, yeah, these are all good ideas and I'll get to them just as soon as I have time, right.

Speaker3: [00:33:10] And nobody.

Blake Oliver: [00:33:11] Ever has time to get.

Speaker3: [00:33:12] To it. You know.

Alan Anderson: [00:33:13] Somebody used the phrase, we're busy, being busy. You need to be busy being smart, not being busy, being busy.

Blake Oliver: [00:33:20] So one of the criticisms of audit from the general public, public from laypeople is that we never find fraud. Rarely 4% of frauds are detected by the external auditors. And Melissa had a comment here. Melissa said if there is fraud, you have the chance to find it during the year and save the client money. Because if you understand how these transactions are getting in, you can probably detect some of that in a better way. You know much, you're much more likely to spot issues than if you were just doing it all after the fact. And you don't understand where these transactions come from in the first place.

Alan Anderson: [00:33:53] That's exactly right. I mean, when you when you get when you get your audit data driven and you get and then you start building analytics around that data. Yeah. And you put an audit bot on the system that follows that transaction flow through those analytics and kicks out an outlier. You will find errors or fraud because that's when something's wrong. It's either an error it's a fraud. Right. Because there's only two choices. They they made an honest mistake or they made a mistake on purpose. Right. So so it's either error or fraud. So long the short of it is um, the the algorithm won't tell you whether it's an error or fraud, but it'll tell you there's something's not normal here. And then the auditor will do the interpretation to help conclude as to whether, in fact, it was error fraud.

Blake Oliver: [00:34:42] Regarding the pipeline issue, Liz says we can't fix the pipeline of new auditors or doing such boring work that they quit instead of staying in the profession.

Alan Anderson: [00:34:53] Well, I'd say that's a true statement. I mean, it's like, um, you know, and I work with firms all across the country, and I get, you know, I tell these, you know, senior accountants and staff all the time. I said, you know. You guys. Auditing is fun. And they looked at me and said, oh my God, you're nuts. You know, you're just nuts. And I go, no, the way you do auditing is not fun. But auditing can and should be fun because, I mean, I have always had such an appetite to learn about business and understand business, and if I couldn't understand my client's business, how could I say that those numbers make sense? And so when we start making, putting thinking back into auditing again, then we make smarter decisions. We have more fun, we understand where the problems are and and we move them, and then they enjoy what it is they're doing. It's kind of like what I said earlier. It's like when I started in public accounting, they always used to say that, you know, three years in public accounting is comparable to 6 or 8 years in industry. Right? I say right now, when you have five years in public accounting today, you don't have five years like I had five years. You basically had one year repeated five times, because all you did is do the same ticking and tying for five years in a row.

Alan Anderson: [00:36:15] No wonder they lose. And and so we need to basically go into this with our eyes wide open and really start saying, how can we do this differently? And, uh, and, and so, you know, I talk a lot about the, the essential attributes of Ana leadership. And one thing without question, that's a huge an attribute to attributes that I think are go hand and glove is innovation and empowerment of the of the five. The other three are relevance business mindedness and quality. Never throw out quality because quality is important, right? But if I've got in an innovative spirit and the innovative esprit de corps in my staff room and I'm empowering them to try things, then all of a sudden they say, well, what about this? What about that? Let's try this. All right. You know, and we need to create a culture that it's okay to be wrong, right? I made a mistake and we'll fix it and we'll get it right. We're not going to issue a bad opinion. But I'd rather have an environment that's okay to be wrong and they do something wrong and we fix it. Then it's not okay to be wrong. And you just do. You basically do. Sally. Same as last year, over and over again. And as long as I did every work paper that I did last year, it must be right.

Speaker3: [00:37:33] Right.

Blake Oliver: [00:37:34] And that's the root of all evil in the audit profession, if you ask me, is doing the same thing over and over again, simply because we did it last year without understanding why we did it in the first place. And that's how errors get compounded. If we did something wrong one year, now we're going to do it wrong or in a way that doesn't create value every year after that. And there's no point, right? It doesn't help. It doesn't help the audit. It doesn't help the client doesn't help protect the firm, substantiate the opinion.

Speaker3: [00:38:08] There's one good.

Alan Anderson: [00:38:09] One. One thing you are, you know, I encourage our our audience to do is just if you're questioning why you're doing it a particular work paper. Ask yourself, what is this work paper intended to accomplish? What? You know, we talk about audit assertions in our world. So what assertion is this covering? Oftentimes we do the A test because we repeated it for five years, but we don't even know what why we're doing it or what assertion it's covering. You know, next thing next thing you know, you realize it's a test not necessary because somebody put it in there for one specific situation 25 years ago and it just got carried over. But just don't be afraid to ask why. Yeah. And and it's it's not okay to say, well, I don't want to do it because it takes too much time. That's not a good answer, but I don't want to do it or we don't need to do it because it's not giving covering the risk in this area. And it's and we already have this assertion covered on this other work paper. So you need to know what it is you're doing. And that's why innovation and empowerment are so important in this whole process is to get people thinking about it in, in, in just being okay to try stuff. Here's what I want to try. And but we we're so busy. It's like, you know, the most important part of the audit is planning.

Speaker3: [00:39:35] All right.

Alan Anderson: [00:39:36] The the amount of time that's spent truly planning. Now, we spent a bunch of time filling out forms. All right. I'm sorry. That's not planning. That's filling out forms. Right. You know, but if we actually spend time planning the payback on the end of the audit will be in multiples of 3 or 4 times the savings if you actually took the time to plan it.

Blake Oliver: [00:40:01] The saying is measure twice, cut once.

Speaker3: [00:40:05] Right. How much?

Blake Oliver: [00:40:07] How much time in a, let's say, a typical, uh, audit that is being done in the, you know, traditional way for a firm you come into to consult with, like how much planning is being done as a percentage of the total audit hours.

Alan Anderson: [00:40:25] You know, I've got these benchmarks and I always say really real planning ought to be about 20% of the time. The doing all the work, the detail work and everything ought to be 70%. And then wrapping it up, getting out the door ought to be no more than 10%. Now, I can tell you, I've got firms that have been charging 20% of their time to plan. Right. But that 20% of the time is not meaningful planning. They're filling out forms, doing stuff that's unnecessary. And so you have to be careful.

Speaker3: [00:40:59] Real planning.

Alan Anderson: [00:41:00] Yeah. And so if you're doing meaningful planning, talking to the client, understanding the business, it ought to be about 20%. Right. And and because I had one firm that basically hit the numbers right on, they were 20 you know, 20% was planning time. Right. So I looked at their planning codes. When I when I actually looked at when they charged the time for planning. Of the 20% of the time that they charge to plan right, 80 attached percent at 20%. Was charged to planning codes after they left the fieldwork. In other words, so they were filling out forms to get it through review after they did all their ticking and time. Okay, so they hit 20%. They just did it.

Blake Oliver: [00:41:54] It's a total waste of time.

Speaker3: [00:41:56] Waste of time. Yeah, it's.

Blake Oliver: [00:41:57] A complete waste of time. You're you're you're pretending.

Speaker3: [00:42:01] Like it's nuts.

Blake Oliver: [00:42:02] Yeah. You know, it's funny. Um. When I was a musician, one of the hardest things for me was learning how to practice. Properly and my to the best teacher I ever had taught me how to practice this. And, uh, I would say it's about the same if you have a one year window to practice, you really only have about 50 minutes because there's about ten minutes of like getting in and getting out of form. So yeah, it's like a CPE webinar, right. You got 50 minutes. And then of that 50 minutes you should spend at least ten minutes. Either at the beginning or throughout planning what you are going to practice in that session. So then you have about 40 minutes of practice, right? And you've got the planning that happens to to actually think about what am I going to do? Because if you just go in there and you start practicing, you're not going to accomplish what you set out to do because you didn't set any goals. You didn't you didn't think about what you were going to do. And I actually witnessed personally the effectiveness of that, the students who learned how to do this properly and planned their sessions, their practice sessions were, you know, two, three, 4 or 5 times faster at learning a new concerto, a new piece of music.

Speaker3: [00:43:22] I mean.

Alan Anderson: [00:43:23] That makes all the sense in the world. And because it's like, you know, you know, as you were. Citing that example, I was thinking of how a staff person approaches their section. Basically what they do is they get whatever the workpapers are from the client, and then they put them in the same order as last year's workpapers, and then they just start going at each work paper and taking and tying and doing all this stuff. And I've, I've had situations where staff have done work on the Workpapers did all the sticking, tying, and then they went to the bottom line, the total and that then, then and only then did they realize that that it didn't agree the trial balance. So. Prepping Dolph on how you're going to execute your procedures on the audit. Because that ten minute of pre-planning plan, would your approach, like you talked about for practice, is is exactly what are they going to do? Set your take the time to get yourself set up right, so that I'm organized to know exactly how I'm going to carry out my work.

Blake Oliver: [00:44:30] It's it's hard because you have to go slower to go for sure. Yep. And that doesn't feel right. It's not intuitive or right. But if you do it, you're going to can work less and get way more work, do you that? The problem is that we don't have these billable hours targets. Because I look at those for of taking this sheets and I think well really for incentivized to bill a lot of hours. But these are not like looming every hour is equal right. So planning is hard. That was the reason that it took me the same. To get good at instrument is because if it was easy just to jam through a piece, work through it over and over again with all the mistakes, well, but the hard I don't know is actually sitting down and planning out which measures and portions I was going to practice and how I was going to do it, which took mental and we. Mhm. Yeah. To just uh, getting which is the we use in music and in audit. So like hit confirms change the ag incentive used for effect staff to actually get them to want to do this work as.

Alan Anderson: [00:45:39] Well I think, I mean I think it's building a culture of empowerment but importantly you. Who I could talk for hours on how ridiculous the concept of billable hours is in our profession. I mean, it's I mean, first, everything is pretty much a fixed fee. And and the problem is, is that I get my hours in, but did I get anything done? I'm a huge believer on deliverables based accountability, not hours based accountability. Here's the things I need you to get done this week. And if you get them done this week and it's Thursday afternoon and you got everything done and it's all and I've reviewed it, it's all correct. Have Friday off. You did what I wanted you to do. I delivered everything I needed. But we we the only thing we hold lots of times we only thing we hold people accountable for is hours and not even delivering on those hours. They just charge all those hours. Next thing you know. Well, how did Joe or Mary get so much time in these audits and and but they hit their hours budget and but they didn't get what they were supposed to have gotten done in that time frame taken care of. So it's it's just rethinking the whole model of how we got there. In other words, we know the hours. We are not an hours based, we are an hours based profession. But it's a cost accounting system, not a revenue system. I need to know how many people I have to deliver this work, but I know in order to deliver this work, I need to know what I deliver this. You know what you know, cash section, fixed assets and all these other things. But at the end of the day, um, the best metric is a deliverables based accountability. Mhm.

Blake Oliver: [00:47:28] We got some more comments here. Liz said I hated audit because no one ever taught me how what I was doing had anything to do with the objectives of the audit.

Speaker3: [00:47:38] Yeah, well, um.

Alan Anderson: [00:47:39] There is a there's truth in that statement. There's no doubt about it. Um, I mean, it's like, um, we tend to take for granted and it's like, you know, it's like when we start an audit section, the senior accountant ought to be able should sit down with that staff person and say, here's this section, here's where the risks are. Here's what I want you to watch out for. And here's what we're trying to accomplish. Right. Mhm. Right. And and everybody says oh that went away when Covid went away I would argue that that went away way before Covid. Staff were just saying here's your section get it done. And then when the staff person says what did what did, what do you want me to do here? The senior will say, I didn't have time to plan it. So what? Let's go look and see what we did last year. Right. So so I do believe that that that taking the time to talk to your staff, talk to people, building that culture of reminding them because that's what it's really all about. It's really getting them to understand because, um, they need to understand what they're doing is relevant. I mean, of the five attributes, relevance is the key thing and it's relevance to what I'm doing as an auditor, but also relevant to the client. And so those are all important things. And if they don't know where they fit in the big picture and how this all comes together, I think we do a, I think we could benefit big time by getting our staff to understand the business of public accounting, how this all works. You know, we all, all we tell them is charge time, but we don't really get into talking about the business of accounting.

Speaker4: [00:49:14] Do you know?

Blake Oliver: [00:49:15] So we mentioned it briefly, but let's address it head on. Technology. We've got generative AI available to the public for over a year now. We're starting to see some companies in accounting, tax and audit build applications on top of AI. With these new capabilities. Blockchain's been around for a while. People have been talking about how that's going to revolutionize audit with triple entry accounting and whatnot. I want to ask you, al, broadly, how do you see technology either enabling this vision you have or hindering it?

Alan Anderson: [00:49:54] Without question. It enables it, there's no doubt about it, because what this technology will do will basically help sort out the routine, the mundane and the ticking and tying and and elevate the need of the auditor to be much more of an interpreter, an analyst, and understanding what's happening to the client. And so just that alone will make the profession more exciting, uh, more, uh, valuable to our clients. But I, I'm a huge fan of technology. When we understand what we want technology to do for us, because innovation is broader than technology, technology. Technology is an enabler. And the all of these tools will enable it. Because even if some generative AI says this is how a footnote will look. Someone still has to read it to still see if it makes sense. I mean, I've, I've played around with generative AI, and I've gotten footnotes prepared by generative AI that were just flat. Flat wrong. Yeah. So so you still got to be the interpreter.

Blake Oliver: [00:51:04] Al, I want to thank you for your time today, your insightful, um, your insights about audit in the future and how we can improve it. I learned something I hope our listeners did too, and I want to wrap it up because I can hear your voice going and you very generously did this, uh, even though you're under the weather. So thank you. Um.

Speaker3: [00:51:27] My pleasure.

Blake Oliver: [00:51:27] I want to make sure that our listeners know about your book. The book is called Transforming Audit for the future, and you can order it on CPA trendlines Transforming Audit for the future. Uh, anything in that book that we didn't get hit on today? I mean, like what? Tell tell us, uh, who's this book for? Who should read it? Audit partners, audit staff, everybody.

Alan Anderson: [00:51:51] I think I think there's parts in this book that's valuable to anybody. From a staff all the way up to a partner. I actually do believe, you know, I don't want listeners to believe that. That I'm talking gloom and doom. I actually do believe there is strong, strong future for our profession. And, uh, and we need to be, but we need to change. And our book, my book really gets down to the point of how you can actually move forward from your current state to the future state, because there is there is a lot of potential. And I believe we can't ignore the art of what's possible because I think there are professions. Future is bright. If we start looking towards transforming the way, way toward the future.

Blake Oliver: [00:52:38] Thanks everyone who joined us. Uh, we'll see you around. Be sure to download the Earmark app and head to Earmark Cpcomm. Join our mailing list so you'll get notified of future webinars. Thanks, everyone!