What is your perspective on the record fines recently being given to audit firms for historical issues?
At Sigma 3 Digital we think it highlights an entrenched issue in the sector, but also points to the way forward for the shape of the market overall.
Recent high-profile audit failures involving large audit firms are leading to increased scrutiny on the audit profession and have led to questions about whether a broader range of choice for clients would help the sector overall.
The Landscape
The Financial Reporting Council (FRC) sets out that 100% of FTSE 100 firms are audited by one of the big four, there has been an increase of challenger firms auditing FTSE 250 firms, it will be critical to see how to maintain this trend and to make an impact on the FTSE 100. We note that the picture for the S&P 500 US index has the same profile, and may represent a huge opportunity for firms that are well-placed to capitalise.
The above article from the FRC also points out that fees at the big four increased at a faster rate than at smaller firms. At Sigma 3 Digital we think the combination of historical issues, regulatory direction of travel and the availability of technology make this a time of potential growth for small and medium sized audit firms.
Legislation, Regulation and Change
There appears to be slow moving regulatory change, there have been several high profile reviews of this space, following high profile audit failures, however the appetite for swiftly pushing through meaningful change is mixed. In May 2023, the government had “not yet set a date for the publication of a draft Audit Reform Bill”.
If the Bill is introduced, it may bring with it a new regulatory body (“The Audit, Reporting and Governance Authority, ARGA”), and:
“a package of measures intended to increase choice, improve resilience and enhance professional scepticism: notably giving challenger audit firms the opportunity to audit a meaningful proportion of subsidiary audits conducted for FTSE 350 companies”
Opportunity
Smaller and medium-sized audit firms are well-positioned to capitalise on this trend. However, in order to generate enough capacity to take market share, these firms will need to be very efficient.
Automation can help smaller audit firms to improve their efficiency and scale. By automating manual and repetitive tasks, such as data entry and document review, auditors can free up their time to focus on more value-added activities, such as risk assessment and analysis.
In addition to improving efficiency, automation can also help smaller audit firms to improve the quality of their audits and the perception of their clients. By using automation to perform tasks that are prone to human error, auditors can reduce the risk of errors in their audits. Communications with clients can also make use of technology to ensure your client isn’t chasing you for updates.
As a result, automation can help smaller audit firms to provide high-quality audit services at a competitive price. This can make them more attractive to clients who are looking for alternative audit providers.
Regulatory compliance and automation
In addition to improving efficiency and quality, automation can also help smaller audit firms to improve their regulatory compliance. By automating the collection, analysis, and reporting of compliance data, auditors can reduce the risk of non-compliance. Additionally, automation can help auditors to stay up-to-date on changes in regulatory requirements.
Automation in action
One specific example of how automation can be used to make data clean and more usable is through the use of natural language processing (NLP). NLP can be used to identify and correct errors in data, such as misspellings and inconsistencies. Additionally, NLP can be used to extract information from unstructured data, such as emails and contracts. This can make it easier for auditors to find the information they need to conduct their audits.
By using automation, smaller audit firms can improve their efficiency, quality, and competitiveness. This can help them to capture a significant portion of the audit market.
In addition to the benefits listed above, automation can also help smaller audit firms to:
Improve their understanding of the client's business by providing them with access to a wider range of data.
Identify potential risks more quickly and effectively.
Communicate more effectively with clients and other stakeholders.
Automation is a valuable tool that can help smaller audit firms to improve their efficiency, quality, and competitiveness. By implementing automation, smaller audit firms can position themselves to capture a significant portion of the audit market.
We’re passionate about improving audit standards using technology, we have a lot of experience in supporting auditors who operate in complex environments, and we understand the challenges you face. Contact us today to start the conversation about how you can use technology to your advantage.