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Tuesday, 16 July 2019

Finish what you started: AI and auditing

I have long been skeptic about Artificial Intelligence replacing human auditing jobs. It ended after a new devastating FRC report calling the quality of the audit work at Patisserie Valerie "unacceptable" (Guardian). Before, I viewed auditing as a profession, performed by better and lesser skilled auditors, and the lesser skilled auditors were ruining the audit profession.

Since the 1990's, it has been predicted that Artificial Intelligence will cause major job losses, including but not limited to accounting and auditing jobs (eg, 199419972011). On the other hand, AI will create a new kind of jobs which previously did not exist. The danger lies in the speed and mismatch between destroying versus creating jobs.

The audit profession has always been a commercial business, directed towards optimizing the remuneration of its owners, being the audit partners. Its business model is relatively simple: selling audit hours of "cheap" labour at premium rates. Since the 1990's, external audit fee pressure led to a "death" spiral: less audit fees = less audit hours = less quality = less audit fees etc.

American Accounting Association-1999: "In the current competitive and litigious audit environment, auditors must appropriately balance cost control and effectiveness when planning audits. [] Fewer budgeted audit hours in the presence of fee pressure may improve short‐term profitability but may not be in accordance with professional standards and the firm's interest if audit effectiveness is compromised."

Furthermore, the ever-increasing demand for audit staff, following company failures and new legislation, caused a substantial increase in staff salaries since the 1990's. To some extent, audit partners accepted a deterioration in their remuneration as audit fees were capped, and audit hours could not be slashed much further.

Increased industry oversight (eg, FRC) caused further pressure to the auditing business model: higher quality = more audit hours = less partner remuneration (because audit clients often capped their audit fees). The only viable (audit) business solution, to an oversight demand for higher quality, was the use of expert systems. Hence, the introduction of AI in audits is largely self-inflicted.

I think, feel and believe that the (commercial) audit profession will not survive the introduction of Artificial Intelligence. It may disappear all together and be replaced by expert systems run by the government (eg, tax authorities). Some audit-like boutique firms may appear in order to assist companies in optimizing / tweaking the results by these state-run expert systems.

A quote by Fei-Fei Li, chief scientist at Google and Stanford professor: “I often tell my students not to be misled by the name ‘artificial intelligence’ — there is nothing artificial about it. A.I. is made by humans, intended to behave by humans and, ultimately, to impact humans lives and human society.”

Finish What Ya Started (1988) by Van Halen ft. Sammy Hagar


Note: all markings (bolditalicunderlining) by LO unless stated otherwise

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