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The six largest UK accounting companies have not formally monitored how automated tools and artificial intelligence affect audit quality.
The Financial Reporting Council on Thursday published its first AI guide along with a review of how businesses use automated tools and technologies. This is “doesn’t quantify the impact on audit quality because there is no formal monitoring carried out by the company.”
Watchdog has found that the audit team of big four companies (Deloitte, EY, KPMG, PWC) and BDO and Forvis Mazar use this technology to perform risk assessments and obtain evidence.
However, companies said they understood the number of teams they use for audits “usually for licensing purposes” rather than primarily monitoring the tools to assess the impact on audit quality.
Tools included tools that used artificial intelligence, such as machine learning. Regulators said some companies are also deploying generative AI technologies such as chatbots, but these have fallen outside the scope of the review.
FRC also lacked a critical performance indicator for the tools used by all companies. This work was spurred by the regulatory audit quality review team.
AI is rapidly transforming the audit sector, with companies including Big Four investing heavily in AI-powered tools increasing efficiency across multiple stages of the auditing process. However, the FRC said that AI can also present “risks and challenges” in audits that include possible biases in ethical issues and tool output.
Scrutiny over the use of AI technology comes after the FRC criticized BDO and Forvis Mazars for their shortcomings in their fourth consecutive audit last year, threatening “more powerful actions.”
Meanwhile, EY said it would invest around $2 billion from 2021 to improve the quality of its audits following a scandal that included the collapse of German payment group Wirecard with a prominent scam.
“AI tools move beyond experiments and become reality in specific audit scenarios,” says Mark Babington, FRC executive director of regulatory standards.
KPMG UK has begun using AI tools for sophisticated auditing techniques, including AI transaction scoring. This scans millions of data transactions to identify most of the notes to auditors, and says that traditional technology is not possible, according to Emily Jefferis, director of audit quality.
Meanwhile, Deloitte’s audit team uses AI to summarise board minutes, extract information from complex contracts, and streamline other manual processes.
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For rapid adoption, FRC encourages businesses to define metrics to assess the impact of AI tools on audit quality. “The use of (automated tools) has great potential to improve the quality of audits, but this relies on (tools) that consistently produce reliable output and are used regularly in the way they are intended,” the report states.
Since the review began, regulators said companies have begun modernizing surveillance in this sector.
However, Jefferis of KPMG UK said that quantifying the impact of such tools is a “subjective problem.” She said: “We aim to carefully monitor the adoption of all tools using a variety of KPIs and put AI in the hands of all auditors for use in all engagement. We are now approaching that goal.”
The FRC findings come as a big four race to devise a new kind of audit to assess the effectiveness of clients’ own AI tools. Audits can open revenue streams to auditors, as well as the demand for assurance on corporate environmental, social and governance metrics.
