What The Break-Up Of The Big Four Audit Function Could Mean For The Future Of Accounting

    the uk financial reporting council (frc), the accounting industry’s regulatory watchdog, has set a June 2024 deadline for the big four accounting firms to separate auditing practices from the rest of its other operations to avoid potential conflicts of interest. . the firms are due to outline their plans to implement that break by the end of next month.

    stephen haddrill, director general of the fair markets group, uk department of trade and industry, has had three discussions with the competition and markets authority about opening an investigation into the uk audit market (photo from dustin shum/south china morning post via getty images)

    Reading: Breaking down the big four

    How will this change affect the future of accounting? For starters, expect increased scrutiny of audits and increased reliance on AI-powered audit tools in the tax planning and compliance process.

    The decision to force large accounting firms to separate their audit functions from the rest of their operations has been in the works for several years, but has gained significant momentum in the UK in recent months as a series of audits of High profile. the failures made headlines around the world. The problem was fear among British regulators that the rapid growth of the Big Four’s consulting business was creating a recipe for conflicts of interest that would negatively affect the impartiality of their audit business. Between 2012 and 2018, the Big Four’s combined consulting and advisory revenue grew 44%, compared with just 3% growth in their audit businesses.

    For their part, the accounting firms themselves supported the decision, but suggested that further action is needed to improve the quality of auditing in the UK. Jon Holt, head of KPMG’s UK audit business, told the Wall Street Journal that “introducing a UK version of the Sarbanes-Oxley Act should be seriously considered. the big four companies agreed that regulators and the government should undertake more comprehensive reforms in the market.

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    practical considerations for tax and audit functions

    In making its decision, the FRC issued a 22-point plan outlining requirements for separating audit functions from the rest of the Big Four’s operations. While firms will not need to completely separate their audit business into separate, independent legal entities, an idea that was initially considered by regulators, they do need to protect their audit practices, ensuring that audit partners spend the majority of your time to audits. and that auditing practices publish their own profit and loss statements, separate from the consolidated financial statement.

    This will not be an easy transition. Large accounting firms have spent the last decade or more building synergies between their audit and consulting businesses, creating shared technology platforms, forming cross-functional workgroups to collaborate on complex problems, and leveraging data from across the enterprise to inform the development of product and customer strategy.

    Under this new regime, partners working on the consulting and advisory side of the business will need to rely on their own technology platforms to analyze trends, forecasts and analytics. Similarly, auditors will operate in their own vacuum, without the benefit of perspective from the consulting side of the business.

    That will create a need on both sides for data and analytics capabilities that will help clients forecast future exposures, test the impact of stress events, and create strategies that recognize the full spectrum of potential tax and business implications. increasingly, that information will come from technology.

    leveraging artificial intelligence to fill the gaps between strategy and audit

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    That’s where the AI ​​will come in. Historically, the audit function has been at the forefront of the AI ​​development and adoption curve. This makes sense, of course, because auditing contains a lot of iteration, with auditors spending their days chasing customer data, matching that data to transaction records, and entering the results into an auditing software system. These kinds of tasks read like a playbook for AI automation, and in many cases, companies have managed to streamline the process with AI.

    What has happened in recent years as these technologies have been integrated into the audit workflow is that auditors have been able to focus more time and energy on the higher risk parts of the audit, exposing them to a much higher liability risk and takes a much longer time to investigate, whereas much of the basic information gathering and review has been done with AI.

    that evolution is key to understanding the future of accounting in a world where auditing and consulting/advisory functions are forced to operate in silos. that same technology that is being used to streamline the audit process will need to be fine-tuned and leveraged by the advisory side of the business to better understand clients’ risk exposures and develop more predictive forecasting capabilities. On the audit side, these analyzes will become more sophisticated and refined in order to serve as a backup to test the accuracy of audits and reduce the likelihood of error or misrepresentation.

    long road ahead

    the frc’s decision was far from the last word on this issue. High-profile audit failures have continued to make headlines following the separation announcement and the FRC has indicated that it plans to introduce more aspects of the reform package over time. there is also the lingering specter of similar legislation in other parts of the world. And, of course, auditors will face the ever-present challenge of managing increasingly ambitious client initiatives, as we saw this week in Deloitte’s decision to abruptly resign as auditor of, say, group citing concerns about the governance of the uk service station company and internal controls.

    As it all unfolds over time, expect great scrutiny of the audit process and a tidal wave of new technology development focused on improving that process and filling the gaps left by the separation between advisory and audit practices.

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