MIPA Conference - 6th Edition Of The Forum Of Accountants

MIPA Board Members, FRC Board Members, Fellow  Accountants 

All protocols observed, Good Morning 

I am very honoured to be here this morning sharing my  thoughts on a very interesting topic: The Future of Audit. But it  also pains me to be attending a MIPA event without the  presence of my good friend Kamal Sadien whose untimely  demise has left us in shock. We have known each other since  college days and have maintained a very close friendship. My  thoughts are with his family and his wife Prema. 

As a Board Member of FRC, I Am here replacing Mr Thorobul  CEO of FRC who unfortunately could not make it and he sends  his apology. I wish to stress that the views expressed this  morning are mine and should not be construed to be those of  FRC.

 Before we look to the Future lets take stock of where the audit  profession is Today.  

When you think about it, the requirement to do an audit is simply  one line in the Companies Act. The whole industry hangs on this  one line, certainly a heavy weight one liner. Audit is the pillar to  independent, transparent and timely financial reporting globally. It  has evolved over the years by adapting to changes in market  conditions.  

It used to be a service but unfortunately it is turning out to be more  of a commodity where price is an important criteria in choosing an  auditor as value addition is now hard to prove more so with the  emphasis on Corporate Governance which puts more  responsibility on the Audit & Risk Committee and Internal Audit.  The client of the auditor has shifted from shareholders at the AGM  to the Audit & Risk Committee.  

In addition, the industry has been dominated since 2003 by the Big  Four which has its advantages of a global service provider to  Multinationals but this also stifled growth of other industry players  to emerge. It is also common to see many agreements, legally or  illegally, right or wrong ,refer that the audit must be performed by  a Big Four auditor. 

The other challenge currently face by Audit Firms is that the  quest for a quality audit has become a very sore point. The  bigger the firm the bigger the shortfall. Globally we have  witnessed that the big names being fined for delivering sub standard audits.  

The regulators globally have upped their game and I am  proud to say that the FRC in Mauritius is one such regulator,  and audit firms are playing catch up.  

Reconciling quality audit work with commercial  considerations is a tough balancing act without adding the  downward pressure that fees come under, and talent needs  to be rewarded handsomely to avoid attrition let alone the  ability to attract new talent.  

Pretty Bleak scenario but the future is brighter and there is  an optimistic note to be more than just hopeful.

The future of audit will be influenced by how we respond to  those challenges. In my view, there are eight issues that will shape the profession: 

Let’s start looking at each one of them: 

1. MINDSET 

We have traditionally been focusing on historical events and  reporting. Auditors have been looking at the rear view mirror.  We must wake up to the reality that the windscreen is much  bigger than the rear view mirror and we need a forward  looking mindset to better appreciate the current state of  affairs. E.g all tech start ups are loss making in the initial  years. Are they all going to be qualified on Going Concern?  Amazon was more than 10 years loss making and today is  an integral part of the global supply chain.  

We need to have the confidence to sign off on the going  concern and this requires the ability and skill to be forward  looking.

2. IFRS 

There lies the challenge. IFRS is geared for developed economies  and pose certain threats to emerging economies. Countries like  India and China are not yet fully compliant. This is creating certain  competitive disadvantages. Rules are rules but frankly I have no  solution.  

I am sure you will agree when you go through an Annual Report  today the two items which have more pages, more explanatory  notes: RBO and Deferred Tax. Neither is a critical business risk.  Surely, we are focusing on the trees and missing out on the forest.  Three pages of notes on Turnover would have been more relevant  and meaningful.  

We have all witnessed the challenge of embracing IFRS 17 in  Insurance Industry. It has certainly put many audit firms at a  disadvantage. How do you rotate audit firms when only few players  can audit Insurance companies? How many firms can justify their  own in-house actuary? This leads me to the next challenge.

3. AI & AUTOMATION 

With technology occupying such a strategic importance in the new  businesses, the auditors must be at the forefront of technological  innovation and development. Most accountants have a finance  degree currently. Going forward, does this make them relevant?  We shall need accountants with a strong IT background. This is  the resourcing aspect.  

Then, the audit firm will need massive investment in technology in  order to be able to serve their clients. It is not just technology to be  able to be more efficient but if you do not have the right technology  how will you audit a bank or a payment provider which operates  only an IT platform? Which client will come to you if you cannot  demonstrate that you are keeping abreast of technological  developments? 

One of the most significant trends that will shape the future of  auditing is the increased use of artificial intelligence (AI) and  automation. The key is the treatment of data. This will allow  auditors to process larger volumes of data more efficiently and  accurately, while also identifying potential risks and opportunities  more quickly. 

4. STRUCTURE 

As firms require massive investments in Technology, the  partnership structure has past its sell-by date. Where will the  capital to fund the technological transformation of firms  come from? You will need third party investors. This is  happening in USA with some leading international firms and  in UK Private Equity is targeting the mid-size firms. Apart  from providing much needed funds for investments, it will  also be bringing a new wave of Governance with  Independent Directors. This is a new development and will  need to be embraced. However, their equity capital should  not be used to exit partners as this will kill the essence of  outside capital which is being invested in the future with a  clear path to return.

5. SPECIALISED SERVICES 

The market is moving more and more towards specialised services  e.g Tax and Corporate Finance. This will result in Audit firms being  just audit with ancillary services. This will preserve independence  and also avoid confusion e.g Tax is tax. Tax planning is not about  audit and compliance with tax rules has nothing to do with IFRS.  Some auditors still think of making tax computation an IFRS affair.  I feel sorry for their clients.  

However, we must consider Non Financial Audit like ESG audit,  Environmental, social and governance (ESG) issues are becoming  increasingly important to businesses and their stakeholders. As a  result, companies are under pressure to report on their ESG  performance, and auditors will play a key role in ensuring the  accuracy and reliability of these disclosures. Auditors will need to  have a deep understanding of ESG issues and be able to assess  their impact on a company’s financial performance and risks. 

6. CONTINOUS AUDIT 

With the implosion of technology in many businesses, specially in  Financial Services, auditing historical figures seem to be  something of the past. Ideally, with technology, it is more relevant  to embark on continuous audit by ensuring that the system at the  client is fooll proof in generating timely, relevant and reliable data.  The audit should become easier and faster; in theory! How many  of you think that within five years a financial institution with a 30th June year end will be in a position to publish audited accounts by  1st July? 

Once the market demands continuous audit, then the question is  should the auditor be a traditional auditing firm or the likes of  Microsoft & IBM entering the market? If you think about a Hi Tech  Bank like Revolut, it is so High Tech and there is very little  subjectivity that comes into play; may be adequacy of provisioning  why then can’t we complete the audit within 24 hours of year end?  

Are we then giving an opinion or a statement of fact? That’s the big  change that can disrupt the industry.

7. ETHICS & PROFESSIONAL STANDARDS 

Ethics and professional standards are becoming  increasingly important to stakeholders in the auditing  profession, particularly considering recent audit failures and  scandals. Auditors will need to demonstrate that they are  upholding the highest standards of professional conduct.  This will require a focus on ethical decision-making and a  commitment to ongoing professional development and  training. 

8. TALENT MANAGEMENT 

Attracting, Motivating and Retaining Talent will be a key  competitive advantage going forward. We have to rethink the  people management to clearly reflect the current trend. We have  to compete with sexy start up, innovating businesses like those in  sustainable energy and environment.  

Financial services is also evolving but the Audit Profession is seen  as a line of defence but youngsters like to be in the front line and  love interactions. Being stuck behind a lap top all day is  challenging when it comes to continuous learning and on the job  training. The hierarchical structure needs to be flattened. Gen Z  wants to feel wanted, nurtured and inspired. 

Work From Home is a No Go but flexible hours a must. We cannot  train them the way we were trained. It’s a different era. Our talent  is our stock, our asset and its management cannot be left to HR.  The reward also must change and it must be participatory  otherwise the best will not join the profession and if we are not  careful, we shall attract average talent resulting in an average  profession generating average revenue.

Conclusion 

The future of auditing is an evolving landscape that is being  shaped by a range of trends and challenges. Auditors will  need to stay ahead of the curve by embracing new  technologies and approach to audit quality and  transparency, and by being adaptable to changing business  models and regulatory requirements. By doing so, they will  better be able to meet their clients needs and maintain their  stakeholders trust and confidence.  

I have shared my thoughts on the future of audit in an  optimistic manner with few pointers on addressing the  challenges. It remains an exciting profession but lets ensure  the current industry leaders do the right thing to ensure the  legacy they leave behind is one which will be much more  exciting and much profitable. The regulator will leave no  stone unturned in ensuring the quality of the audit continues  to be enhanced for the benefit of all stakeholders. All I can  say to end, there is no future in the past! 

Thank You  

Afsar Ebrahim, FCA CF