Financial Statements Now Audited by Big Data
Investors around the world rely on financial statements to determine whether they should buy or sell equities. But how can they know if those statements are accurate? Now auditing firms like KPMG are using the power of big data analytics to get a clearer picture of a firm’s financial health, and to identify potential fraud.
In the past, auditors would analyze just a sample of the documents related to a client’s finances and financial health. That’s because the volume of data contained in those statements were just too great to perform an exhaustive review.
But thanks to big data technology, auditors are now able to analyze much more of a firm’s document trove, which will ensure a higher degree of accuracy in the audit, and reduce the chance of overlooking some aspect of the finances that would signal possible problems.
Roger O’Donnell, a KPMG partner and the U.S. and global leader of the data and analytics team in the auditing division, recently talked with Datanami about the state of advanced analytics in the field of auditing, and how it’s quickly changing the time-tested procedures that auditors have relied upon for decades.
As O’Donnell says, traditional audit methods typically would involve selecting transactions from a random sample, and then analyzing them to make sure they’re up to speed. “Those would give you a snapshot relative to the specific transaction, and give you a statistically valid basis to form a conclusion, which is great. There’s nothing wrong with that. It’s consistent with all the audit standards.”
Over the past three to four years, KPMG has begun using advanced analytic tools and techniques to analyze more of its clients’ financial data. The analytics, which are powered by a collection of off-the-shelf and proprietary technology, aren’t being used in all client engagements yet. Differences among the core ERP systems that house a company’s financials is a technical hurdle that must be overcome.
But the trend is definitely toward using more big data analytics during the audits. “Our goal, and where we think this technology allows us to get to, is to analyze 100 percent of a client’s transactions in those ERP systems,” O’Donnell says.
KPMG’s analytic filters generate insights that inform the standard audit procedures, he says. They also alert auditors to anomalies and outliers that could indicate potential problems or the existence of fraud. That tells the auditor what they should examine more closely.
“We need the analytics to provide us with more information to help us do risk assessments and to help us better determine where we should be focusing our procedures, so that we can use the best information we have to determine if there’s an anomaly or outliers from a performance standpoint to suggest if there’s more work to be done or more investigations through other parts of the audit that we would want to pursue,” he says.
For example if the analytic tools show there are deviations in the patterns of payments, that could indicate a potential cash-flow issue that is perhaps not evident using traditional auditing mechanisms. The fine-grained audit may even alert the client to problems they didn’t know about, O’Donnell says. “We may be able to detect things that clients may not be looking at, or perhaps may not have that level of detail in their analytics fine-tuned,” he says.
However, the decision on whether to alert the client to the potential issue is not one that the auditor should take lightly. “While we may share our insights with our clients and give them some of our perspective as a result of our work, it’s not for us to then step in and make a decision or help them make a decision, because it would impair our independence,” O’Donnell says.
KPMG’s focus with the analytic investment is ensuring that client’s financial statements are as accurate as they can be. “It’s to provide reasonable assurances,” O’Donnell says. “We’re never going to get to 100% accuracy. We’re not going through and evaluating every piece of information…It’s to provide reasonable assurance and in our opinion it provides us with more levels of precision that we can get to by using the information and the analytics around it.”
Few auditors possess the skills needed to effectively wield analytics. Out of the 150 credit hours that are required to take the certified public account (CPA) exam, few schools were teaching the analytic skills that KPMG and other major accounting firms are increasingly using.
So to help ensure that the next generation of auditors are familiar with the new analytic capabilities and procedures, KPMG is partnering with Villanova University and Ohio State University in the creation of new auditing analytic programs.
“We want the professionals that are going through these programs to have an understanding of the technology we’re using, so we’re working with the schools to allow them to have access to our technology so they can use it in a classroom setting,” O’Donnell says. “Having that education and training for the next generation of students we think helps them get a leg up on what it takes to be able to carry out an audit in the data age.”
There are currently 50 students going through the one-year programs at the two schools, with all costs paid by KPMG. So far, the classes are going very well, O’Donnell says.