April 2020

How to add more value to your final audit meetings with clients

May 26, 2022April 29, 2020 by Gena Song, CPA, CA

Audit services are traditionally viewed as compliance requirements by regulators or a way to instill confidence with a company’s investors. As a result, the focus of the CFO might shift to minimizing costs and efforts in order to comply with the required audits.

During the limited interactions with the audit committee or the company’s CFO, how can auditors demonstrate their value as a trusted advisor that goes beyond traditional assurance to delivering valuable insights? How do auditors build strong working relationships with respective clients for future audit engagements?

Enhanced Audit Findings Reports or Presentations

Leveraging MindBridge Ai Auditor, the audit team can enhance their Audit Findings Report or Audit Committee Presentations to include visualizations, reports, and trends analysis to better communicate the work performed by the audit team. Reports can be tailored to include areas that are beyond formal requirements to areas that would be of most interest to the audit committee or that the CFO would be most concerned about. This helps create an open and data-driven dialogue with clients regarding their business and financial risk areas with related observations and findings.

As Ai Auditor uses business rules, statistical models, and machine learning to risk score each transaction, it allows the audit team to present the breakdown of high risk, medium risk, and low-risk transactions to clients, by percentage and dollar value. The risk can further be presented by specific accounts that could indicate a higher risk or a time period of higher risks. Stratifying this risk by time, Ai Auditor further breaks down risk by month, weeks, and days to identify unusual periods of activity. The risk graphs can be exported and used in any audit presentations to show clients where high-risk transactions are by account, time period, or any of their interests.

The Trends and Ratios functions help analyze key performance indicators and trends within the client’s business. MindBridge uses a proprietary implementation of an algorithm called SARIMA, developing an expected range based on the historical data of the company and comparing it to actual results to identify any outliers. This information is plotted onto a graph within the “Trending’s” tab that can be downloaded and incorporated in audit presentations. Key ratios such as Liquidity (Current Ratios, Quick Ratios, etc.), Profitability (Return on Assets, GPM, etc.) and Leverage (Asset turnover, Debt to Equity, etc.) can be computed and plotted onto graphics within the tool and then saved to be used as a part of the audit presentation. With multi-year data comparisons, audit teams can show their clients which key ratios are changing year over year or month over month. They can also identify any key ratio deviations and potential causes associated.

Better client discussions

Traditional Audit Closing meetings usually involve a presentation from the audit partner and team on the Audit Strategy, Audit Status, key audit findings, and any areas of interest. Given the limited time that the audit team has in front of the CFO or audit committee, technology such as Ai Auditor can be leveraged to articulate value beyond audit requirements to those of business insights and financial risk observations.

Using the Financial Analysis Template provided by MindBridge, Trends and Ratios can be used to explain key findings and trends related to the account of interest and. For example, Gross Profit Margin can be computed using Ai Auditor’s Trends functionality, incorporating SARIMA and leveraging multi-year data to develop an expected range of Gross Profit Margin within the data set. With multi-year data points showing on the same graph, auditors can identify and show any ratio outliers to clients.

These types of data-driven insights help client conversations to be more targeted. For example: “the gross profit margin for July 2018 is outside the expected range per our AI analysis. We identified the issues to be related to increased material costs during the first quarter of the year impacting the gross profit margin.”

Ai Auditor’s ability to risk assess 100% of the company’s GL data allows the audit team to show their clients the risk breakdown of their transaction data. By illustrating audit work performed to investigate these high-risk or medium-risk transactions, the conversation with the client can be enhanced to: “The audit team identified $100M in high transactions, which represents 27% of the ledger. The high-risk transactions were identified as related party transactions that occurred near year-end. Upon further investigation by the audit team, all related party transactions were reviewed, and no issues were identified.”

In addition, the Ai Auditor risk assessment can also be adjusted to show risk by account. Under the Reporting function, a report can be downloaded and imported into any audit presentation. The risk by account chart breaks down each grouping found within the ledger and risk associated with that grouping. From there, the audit team can show clients key areas of risk as it relates to a specific account.

Similarly, the risk can also be filtered by the users who are entering the accounting transaction. The client might be interested in a specific user, with most of their posted transactions identified as high risk. A high risk by the user could indicate a potential control risk: “We analyzed controls based on the user’s function and identified control issues for the following users: User 123, User XYZ, and User ABC. These users were sharing passwords and recording transactions outside of the scope of their duties. Further, we identified User 456 may lack the appropriate training based on the transactions being entered.”

Other opportunities

Ai Auditor helps auditors to provide their client with more confidence over the organization’s financial information. Auditors can become trusted advisors for their clients by leveraging technology to identify risky transactions, areas of potential control risks, and any downward trends.

Being a trusted advisor creates an open dialogue with clients and can lead to other opportunities for the audit firm, such as risk advisory, accounting policy advisory, tax, forensics and more, all while keeping Auditor Independence in mind. With the power of machine learning and AI analysis, Ai Auditor can provide clients new perspectives of their businesses unlike anything they have ever seen before.

See Ai Auditor in action now by watching this 4-minute demo

How AI restores the public’s trust in the fiscal accountability of governments

May 26, 2022April 29, 2020 by Andrew Popp

Handshake illustration between government and public

The public’s trust of governmental budgeting, fiscal management, and reporting is at an all-time low, especially in the aftermath of the 2008 financial crisis, where only four out of ten people in OECD countries expressed confidence in their government. Cases of fraud, bid-rigging, and pay-to-play are never far from the headlines, and have continued to undermine trust in the public servants and elected officials tasked to oversee the complex work of managing government finances.

A large portion of this mistrust can be attributed to the struggle that government finance managers and auditors are facing in analyzing the increasing amount of financial data. Current financial control and audit techniques, including legislated audit requirements, are not able to scale to keep pace with the massive data explosion coming from their own accounting, payroll, and expense management systems. One government response to this issue, open data, enables a sense of fiscal transparency with the public but it doesn’t replace the rigorous professional analysis required to identify fraud, errors, and omissions in large amounts of data.

Enter artificial intelligence (AI). Leveraging a mix of machine learning and natural language processing (NLP) techniques, AI can help government auditors and finance officials deal with the massive amounts of data they are required to professionally process in a timely fashion to meet their fiduciary responsibilities to their taxpayers, which in turn will help restore the public’s trust in government.

The financial data explosion in government

Imagine you are running a government department that has 150 different operational entities but only have the resources to audit four or five a year. That’s a massive financial blind spot that will make your comptroller or CFO lose sleep at night. It’s not a question of whether fraud or errors are occurring, it’s a question of when the news will break that they have happened.

Equally challenging is the government audit department that must perform 150 audits per year by legislative mandate. With so many audits required, where is the time to dive into different areas of analysis and reveal insights that can help lead to improved service to the public?

PwC estimated that 18 zettabytes of financial information was created globally last year. Visualize a standard pitcher of water as a byte. One zettabyte is all the water on planet earth. PwC also estimates that only 0.5% of that data is analyzed, and it’s in this unreviewed data that the errors, omissions, and frauds that the press reports on is occurring.

Let’s also be clear on what governments are catching in the data they are analyzing. Current financial controls, audit methodologies, and analytics catch about 3% of the total global fraud as estimated by the Association of Certified Fraud Examiners. Tips, on the other hand, uncover 50% of the major corruption cases.

Current government processes and professionals are not catching the errors faster than whistle-blowers are reporting it. So it’s not surprising that governments are perceived as being ineffective in how they deal with the detection of fraud and errors in their financial statements.

Fraud hotlines & open data: First steps

Governments have responded to this issue in a number of ways. One of the first has been the rapid rollout of fraud hotlines, driven by statistics on how fraud has been uncovered to date in the majority of cases.

The other approach has been to broadly publish budget, financial, and audit reports to the public. This approach has been tied to the open data/open government movement and has been seen by many as a more citizen-inclusive approach to solving this problem. The idea is, by releasing all the data to the public, concerned citizens can dig into finances and find errors and mistakes to help share the burden of analysis.

This refreshing approach to transparency in government has its benefits, including seeing governments become better stewards of their own data, and being more open to feedback. However, the open data movement hasn’t been able to put an end to the public’s mistrust as first promised. Missteps in areas such as the standardization of data formats and APIs, the frequency of updates to the released data sets and the scope of the data released has limited analysis by external parties.

In addition, as larger data sets are released, individuals are no longer able to perform a full analysis of the data in a single pass. Microsoft Excel, the world’s most widely available financial analysis tool, has a million-row limit for data processing, and other available data science and accounting tools and resources are out of reach for the majority of citizens. The data might be readily available, but the professional tools and skills are not.

Artificial intelligence: Creating government efficiencies

Artificial intelligence is part of what is being dubbed the Fourth Industrial Revolution and has the ability to dramatically improve the efficiency of organizations. In the financial and audit worlds, AI offers an approach that includes:

Continuously ingesting large amounts of financial data from different sources
Risk assessing 100% of all transactions against all current and past data
Indexing all transactions in a way that can be interrogated with common language questions, such as “Show me all transactions with high risk at the end of 2018”
Producing reports that allow auditors and financial officers to extract insights into how their government is operating, and take corrective or reinforcing actions accordingly

In this way, AI builds on what the open data movement has started, as it offers a means of democratizing the application of complex analytics to governmental financial review. Governments can now load and analyze all their financial data, applying the open government standard of transparency to both the data and the algorithms they are using, and then releasing the results for the public to review when completed.

AI solves the problem of the department with 150 potential audits and having the resources to run 4-5 audits only. AI can run continuously on every department and help to direct the limited resources to the departments that exhibit high risk instead of burning resources using round-robin audit approaches and random sampling of transactions to review. For the departments not chosen for an audit, financial managers can be sent risk reports in each department allowing them to take corrective measures in advance of a future audit.

And for the organization facing 150 mandatory audits, AI can drive cost efficiencies as standard procedures can be automatically performed, freeing up auditor time for deeper interrogations of the data.

AI can also make fraud hotline tip review more efficient, namely the requirement that anonymous tipsters have to be convinced to give up their anonymity to prove the claim being made is true. Upon receiving a tip, an AI tool can be directed to review the data claimed at risk. This allows the financial data to speak for itself, relieving the tipster of having to reveal their identity early on in the risk assessment of the tip.

Artificial intelligence: Finding financial anomalies

So how does AI find anomalies in financial data and allow auditors and financial officers to search the data quickly? These capabilities are found in the application of machine learning and NLP.

Machine learning is a sub-field of artificial intelligence that focuses on the application of algorithms to large amounts of data to enable further insights. MindBridge Ai uses both supervised and unsupervised algorithms to risk rank all the financial transactions loaded into platform. Supervised algorithms are based on training data, and we developed an algorithm based on known patterns of fraud that was provided to us by forensic accountants.

Unsupervised algorithms are special, because they are developed to allow the data to speak for itself, meaning that transactions are clustered into neighborhoods of numbers that are interesting to accountants, such as rare connections between two accounts. These algorithms can also identify transactions that fall outside neighborhoods of numbers, called outliers.

These algorithms, run in concert with standard accounting rules and statistical techniques, such as Benford’s Law, allow us to risk score every transaction in a financial ledger. While this is done, the data is also indexed for rapid search capabilities, which brings us to the application of NLP.

NLP is another sub-field of AI and, in the accounting context, allows auditors and financial officers to ask questions of the data that has been risk ranked using machine learning, returning a list of risky transactions that fit the criteria.

Together, machine learning and NLP have been empirically tested to show that we can conservatively detect financial anomalies 10-30x better than current audit and financial analysis methodologies.

Artificial intelligence: Restoring public trust

The inability of government audit and financial departments to analyze 100% of the data in the government’s trust has been a major factor in its inability to spot financial anomalies. While fraud hotlines and open data techniques have been a step in the right direction, AI offers an opportunity for the government to actively pursue the detection of financial anomalies before whistle-blowers think to act on ethical and moral grounds.

Private sector audit firms are already turning to platforms such as MindBridge Ai Auditor, and over 40% of the top 100 audit firms in North America are currently engaged with us. In the public sector world, the auditors and financial officers in the Canadian and UK federal governments have already tested the MindBridge platform and measured the advantages of using AI against current techniques.

Students in accounting programs at over 60 universities in Canada, the UK, US, and Australia have also engaged in using Ai Auditor in their accounting courses. As AI-ready individuals move to becoming workers and taxpayers, they will demand that AI be employed by all levels of government to help in the detection of fraud, errors, and omissions in financial data. Citizens are already becoming aware of the capabilities of AI, as they hear about it every day in its application to autonomous vehicles and other government services, such as automated government decision making.

The Fourth Industrial Revolution is upon us, and there are significant benefits for governments in the early application of AI to detect financial anomalies to turn the tide on fraudsters and bad actors. Beating whistle-blowers to detect and mitigate fraud is an achievable goal through AI and will make major leaps towards restoring the public’s faith in a government’s ability to manage the public’s finances.

To learn more about our government solutions, including real use cases, visit our government finance page.

Giveaway: Win a digital assistance package for your firm

December 18, 2020April 15, 2020 by Roy Sarkar

The world is changing and we’re all looking for ways to navigate the current crisis landscape together. That’s why we’ve partnered with Future Firm, Xero, Practice Ignition, Karbon, Float, and Ron Baker to offer you a chance to win a Digital Firm Assistance Package!

Valued at over CDN $13K, the Digital Firm Assistance Package provides the support, tools, and advice that allows your firm to try new technologies, learn from the experts, and plan your evolution to a stronger digital model.

This package includes:

A one-hour consulting call with one of our resident CPAs to answer questions on how to adopt AI for advisory services, mapping to firm methodology, and how to pitch AI to clients
2 one-hour coaching calls from Future Firm to answer any questions you have about navigating a cloud-based accounting firm model
A premium white-glove Xero Kickoff Call with their Regional Director, Partner Consultant & Account Manager to understand your firm’s online accounting needs & objectives plus 2 meetings with their Partner Consultant to create a tailored Implementation Plan that includes recommendations to help you achieve those objectives
A free Xero partner account + special offers (which cannot be advertised) on Xero licenses based around the Implementation Plan
A free Float Gold Plan (which includes up to 50 licenses!) for 1 year, so that you can provide your clients with automated cloud-based cash flow forecasting services when they need it most
Karbon‘s premium, white-glove Full Service Onboarding service to get you trained and migrated to their cloud-based workflow management software in less than 30 days
25% off your first year’s Practice Ignition annual subscription to help you engage and onboard clients remotely
A digital copy of Ron Baker & Ed Kless’ The Soul of Enterprise book

Every single entry receives some cool freebies, so check out the details on the contest entry page.

The Digital Firm Assistance Package will be awarded randomly to one firm by entering the draw below. Contest closes on April 21, 2020.

Enter now

Quality audit vs. efficiency: How technology bridges the gap

May 26, 2022April 6, 2020 by Shaye Thyer, CA

As someone who has worked in big-firm transformational change for quite a while, I’ve often reflected on the perils of success and its ability to stand in the way of innovation and agility. We work really hard in transformation teams to articulate URGENCY, and NECESSITY, and ABSOLUTE DIRE NEED to transform. But no matter how creative we are, without a great deal of immediate pain, it is incredibly difficult to steer a new course for big ships that have been historically successful.

Undeniably, COVID-19 is a catalyst for urgent and mission-critical pivoting across most areas of professional services, and indeed business in general.

I’ve been checking in with many of my clients and industry colleagues over the last couple of weeks, seeing how I can help them, seeing if they’re ok. This has helped me learn a lot about how many audit firms across Australia and New Zealand are coping.

	CLOSING	DECLINING	PROVIDING	THRIVING
CURRENT STATE	Hibernating or liquidating	Open (just), panic over decline in recurring revenue	Open and BAU (as far as the market is aware)	Open & thriving
REVENUE MIX	None	Traditional recurring engagements only	Mostly traditional recurring engagements	Maintained traditional recurring engagements, adding parallel services and /or opportunistic blue-sky work
CLIENT APPROACH	In the wind	Overwhelmed by client emotional burden	Reactive client emotional support	Proactive, deliberate and direct client management
WORKFLOW FOCUS	Nil	All client work reducing	Laser focus on core client deliverables	BAU on core + new (relevant) service offerings
STRATEGIC FOCUS	Nil	Holding breath, can’t see past next week	Wishing for the dust to settle	Planning for acceleration when the dust settles

Regardless of which state you and your firm fall into, no one will argue that ‘business as usual’ is no longer a thing. All those posters we’ve all seen about needing to embrace change seem to have come rushing at us all with force.

The push-pull between audit quality and efficiency

How are firms around the country reconciling the absolute mission-critical need to be agile, to adapt, to change rapidly while protecting their sole reason for existing: Audit quality?

Materiality

Many firms are considering their materiality levels. Are those that have always been used still appropriate in the current climate? If lowering them is most appropriate to capture risk properly, how will firms deal with the significant uptick in sampling effort required as a result?

Focus on fraud

Pressure – Employees within our client’s businesses will be under enormous stress, thinking about potential job loss, financial strain, and social distancing.

Opportunity – Management review may not be as vigilant due to distractions by the crisis and other management responsibilities, and internal controls may be circumvented in times of crisis for the reason of expediency to keep business processes operating.

So firms are considering how they can appropriately resource, looking more closely in areas that are ripe for fraud in these economic conditions – areas like payroll, termination payments, shrinkage of inventory, revenue recognition…anywhere where there’s not great segregation of duties, management override of controls, etc.

Big picture mindset

Following a normal process, one designed for ‘business as usual times,’ is just not sufficient in the current state of COVID-19, so firms need their auditors to step back and look at more of the big picture. Considering the broader context of what they’re doing, evaluating the effects of COVID-19 and surrounding behaviours on their risk assessments is critical for effective audits. This requires perhaps more space and ‘thinking time’ than the normal production line of audit engagements so again, firms are contemplating the effect of this change on resources and profitability of current engagements.

Carrying on as normal is unacceptable. What was identified as the top risk when you did your audit planning and risk assessment —what you are auditing as you read this —is almost certainly not the top risk today.

Normal Marks, author of Auditing That Matters

Each of these considerations means a diversion from very structured and process-driven methodologies and practices that have been refined over the recent years to deal, in many cases, with the downwards fee pressure on audit engagements. And pivoting away from ingrained processes risks the need for more WIP and more resources.

As Tim Kendall, BDO National Leader for A&A shared with the AFR recently: These things coupled with any rigidity in ASIC’s views around current financial reporting time deadlines pose a significant risk to audit quality as firms are forced to squeeze engagements into a very tight delivery timeframe. (full AFR article HERE)

The key difference between those firms who are Closing, Declining, or Providing and those firms who are Thriving is simple – either an ongoing commitment to best-of-breed tech to support the most efficient and effective high quality audit engagement delivery OR an immediate prioritising of adoption of such. Or both.

Thriving firms already have, or are seeking to have, tech that provides ways to be more efficient AT THE SAME TIME as expanding the lens to have a broader contextual view of risk.

How auditors use AI-driven ratios to understand risk

Effective audit execution in remote work environments

Getting ready for AI-powered audit in 2020