Resulting from Revisions to the IESBA Code that Require a Firm to Publicly Disclose When a Firm Has Applied the Independence Requirements for Public Interest Entities
These proposed narrow scope amendments to International Standard on Auditing 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and ISA 260 (Revised), Communication with Those Charged with Governance, will help operationalize recently approved changes to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence S
The fourth industrial revolution is reshaping the world we live and work in. This revolution presents significant opportunities for audit and assurance. The ever-growing availability of data combined with emerging technologies offer new ways for assurance professionals to enhance trust and confidence in their work.
For the audit and broader assurance profession, the emergence of new digital tools represents a real opportunity to attract a new generation of professionals to this noble profession.
In some ways, the accounting and auditing world is catching up to the digital transformation that many industries have already experienced. Retail, hospitality, transport, entertainment, energy and many, many more have undergone disruption via new entrants and completely improved customer experience. In fact, it’s harder to think of an industry that hasn’t been disrupted by technology than one that has. If an industry hasn’t been disrupted yet, it’s only a matter of time.
At the International Auditing and Assurance Standards Board (IAASB), we are determined to ensure that our standard-setting keeps pace and is prepared to adapt to disruptive technologies. We do so without losing our focus on setting high quality standards that strengthen public confidence in audits and assurance.
Technology is one of IAASB’s most relevant strategic drivers influencing our standards and future activities. Our technology initiative has three objectives:
Build processes and structures to support the IAASB’s disruption initiative;
Maintain and improve the IAASB’s knowledge about disruption trends and their implications for standard-setting and the public interest; and
Share knowledge and agenda with stakeholders in the reporting community to improve audit and assurance quality and thereby improve reporting quality.
Staying close to new technological developments is key to understanding what’s coming and in 2020 we carried out a research study with support from Founders Intelligence, a leading technology consultancy, to identify the leading disruptive technologies that could impact audit and assurance.
This research included investigating over 100 technology innovator companies and interviewing over 20 organizations across the industry including audit and assurance practitioners, national standard setters, regulators, and professional accounting organizations as well as founders and management of technology startups. We sought to categorize the various technologies we identified into those impacting the way information is accessed, verified, and protected as well as those that impact procedures related to assessing internal controls. We obtained insights into the expected timing of widescale adoption of these technologies within audit and assurance as well as gaining an understanding of their potential impact on the profession.
Based on the research undertaken, we identified four common themes about how technology is, and will continue to, disrupt the audit and assurance profession:
Audits and assurance procedures performed on a more continuous and real time basis.
An audit or assurance engagement that is increasingly analytics based, including making use of artificial intelligence and machine learning in performing analytics.
An audit and assurance engagement that is increasingly performed remotely.
Audit and assurance becoming a more technology-enabled profession, where more professionals can understand, use, and leverage advancements in technology in their day-to-day work.
The IAASB discussed these findings from this research in January 2021. We held two roundtables, in November 2020 and February 2022, where the innovators behind selected technologies were invited to share more about the technology and to answer questions about it from participants representing the global audit and assurance ecosystem.
Our focus did not stop there. We continue to commit dedicated resources to carry on this research and maintain the horizon watch for disruptive technologies that might impact audit and assurance.
We are upskilling IAASB members and staff to ensure we obtain a good understanding of the technologies that have the potential to disrupt audit and assurance and can factor these considerations into our current and future workplan activities.
Our bi-monthly Market Scan publication focuses on a different technology and presents a high-level understanding as well as technology trends, industry and startup driven innovation in audit and assurance and what it might mean for the IAASB.
We are committed to building processes and structures to stay informed about technology and potential disruptions. To this end we have set up a Digital Advisory Group made up of a small number of innovators and business leaders to help influence the IAASB’s thinking about the technology environment, different technologies and how those technologies may require standard setters, including the IAASB, to act.
This group, comprised mostly of experts from outside the audit and assurance profession, will be asked to comment on technology and innovation topics related to assurance and to bring valuable points of view that may differ from the IAASB’s usual stakeholder outreach. The intelligence obtained from this group will be used to update the IAASB’s research to date and focus other information gathering activities.
Over the coming years, we will translate these lessons into real standard-setting inputs. In our ongoing work on audit evidence, fraud, and going concern, the IAASB will account for the impact of new technologies. Going forward, we will need to think about whether the use of the technology becomes the norm in fulfilling audit and assurance requirements and how that will impact our thinking on the scalability of our standards.
We know from our outreach activities that many national standard setters, regulators, audit firms and professional accounting organizations are similarly committing resources and effort into determining what the impact of technology will mean for auditing standards and for our profession. This is encouraging and crucial. All players in the industry have a responsibility to upskill themselves, engage in the conversations about technology disruption and share their experiences as well as the challenges they are encountering. It is only through our collective commitment to digital transformation that we will be able to move forward as a profession and continue to fulfil the valuable societal role that is our guiding purpose as well as creating an exciting future for our professionals.
This article was originally published in The Chartered Accounant, published by the Instittue of Chartered Accountants of India.
Welcome to the fourth market scan from the IAASB's Disruptive Technology team. Building on our previous work, we will issue a Market Scan on topics from the report approximately every two to three months. Market Scans will consist of exciting trends, including new developments, corporate and start-up innovation, noteworthy investments and what it all might mean for the IAASB.
In this Market Scan, we explore natural language processing (NLP), a technology that has applications within Accessing Information & Data (NLP and Computer Vision for Digitizing Documents) and within Assessing Internal Controls (Optical Character Recognition, NLP and Machine Learning for Intelligent Document and Voice Analysis). This technology has the potential to impact many areas of the audit—enhancing the way auditors work and providing opportunities for greater insight.
We cover:
What is natural language processing and why is it important?
The latest developments
What this might mean for the IAASB
What is Natural Language Processing? Why Is It Important?
Natural language processing (NLP) is a branch of artificial intelligence that is concerned with giving computers the ability to understand, interpret and manipulate human language, both written text and spoken words.
Artificial Intelligence Technologies with Natural Language Processing highlighted
NLP uses a combination of technologies, including computational linguistics (rule-based modeling of human language), statistical modelling and machine learning. NLP involves both natural language understanding (NLU) and natural language generation (NLG). See the video from Simplilearn below for an explanation of how the technologies fit together.
What Is NLP And How Does It Work? | Simplilearn, five-minute watch
There are many benefits of having technology that can fully understand human speech and text (including tone and meaning), determine the right response and provide that response in a human-like format. These include:
Enabling better decision support through analysis of large quantities of unstructured data (e.g., emails, documents, social media) to understand sentiment, identify text similarity or discover specific themes.
Supporting improved communication through effective translation applications (e.g., Google Translate)
Providing around-the-clock support to customers, clients, users and other help-seekers through chatbots, voice assistants and applications that use semantic search functionality
Assisting with efficient documentation through generative language applications that can automatically create text content, such as high-level insights or summaries.
In an audit and assurance context, NLP-based technologies can be utilized to support and enhance auditor activities. For example:
Providing auditor assistance by delivering relevant guidance to the auditor, when and where they need it, through voice assistants and help bots.
Enriching risk identification and assessment activities by providing valuable insights about the entity and its environment, from analysis of unstructured data from a variety of sources such as regulatory notices, social media, and news articles.
Supporting understanding the entity's internal controls by extracting and summarizing what has been written down in process documents, emails, articles, and from employee inquiries.
Augmenting documentation activities through automatic text generation, for example, by providing commentary from data analysis results. See the below video from Wordsmith for an example of technology that can do this.
Wordsmith: Extend the Power of Tableau, Automated Insights, two-minute watch
These technologies offer opportunities, such as those described above, to the auditor or the audited entity, which could reduce manual, time-intensive activities; enhance the effectiveness of certain procedures, tasks, or actions; and augment decision making. However, they are not without their risks and adoption needs to go hand in hand with a recognition that imperfections in outputs could arise.
Recent Noteworthy Developments in Natural Language Processing
These recent developments may signal future disruption in this area; this is not a complete list of all activities in the natural language processing. For a reminder of Key Venture Capital and Investment terms please refer to the first Market Scan.
1. Transformers—boosting NLP development
Transformers are deep learning models used in natural language processing for translation and text summarization. Recent developments have seen these technologies trained with large language datasets, leading to a growth in pre-trained systems like Generative Pre-trained Transformer (GPT) and Bidirectional Encoder Representations from Transformers (BERT). Some notable developments include:
GPT-3 from OpenAI is a hugely popular model that can generate large amounts of text based on a small amount of text input. It is used in many copywriting and content generation applications available today. However, the solution has gained notoriety for the machine learning bias it picked up from the human bias in the internet text it learned from. The Gender Bias Inside GPT-3 | Made by McKinney, five-minute read
What is GPT-3 (Generative Pre-Trained Transformer 3) – Tech Target, three-minute watch
Google’s BERT is the underlying model for the Google search engine—and due to be replaced by MUM, a Multitask Unified Model, during 2022 and described as 1,000 times more powerful than BERT.
Megatron-Turing NLG is the latest model from Microsoft and Nvidia and described as the largest and most powerful generative language model with 530 billion parameters.
Enterpret, a start-up founded by brothers Varun and Arnav Sharma, is developing natural language models to improve insights from customer feedback. This technology, which is focused on enabling more informed product development, could have widespread application across all industries with digital presence.
Cohere builds large language models and makes them available through an Application Programming Interface (API). In November 2021 Google Cloud announced a multiyear partnership with Cohere to provide infrastructure for development of their platform.
This popular Y-Combinator backed startup has built an AI copywriting assistant to write original, creative content including blog articles and social media.
OpenAI, which developed GPT-3 for generating text, has leveraged this technology to develop a tool called Copilot to help generate code. It is part of a growing trend in developing technology that enables everyone to become a code creator.
What this might mean for the IAASB
The IAASB is interested in maintaining its collective knowledge base on digital technologies, including on specific sub-topics such as NLP, promoting digital readiness and enablement through its engagement with stakeholders, and encouraging action by others to supplement and support standard-setting activities.
The IAASB is also keen to explore how technologies, such as NLP, could be used to enhance interaction with auditing standards. Subject to the IAASB’s work plan decisions, possible use cases of digital technologies, such as NLP for audited entities and audit engagements, might provide input for further modernizing the IAASB’s standards to be adaptable to and reflect the current business and audit environment (while recognizing that the standards would address digital technologies in a principles-based manner).
NLP-based technologies present exciting opportunities for auditors to enhance the effectiveness of procedures, tasks, or actions. Widespread adoption is also likely to be more straightforward than for other technologies as it can often be introduced with limited training requirements. From the perspective of both an auditor performing an audit engagement and a firm’s quality management around the technology resources used by engagement teams, the opportunities as well as the potential challenges should be considered.
Technologies that make suggestions to the auditor, for example, about risks they may not have considered (using data extraction) or on appropriate next steps in the audit process (using a chatbot or voice assistant) offer just-in-time guidance but may give rise to automation bias. That is, the tendency to over-rely on automated aids or, more broadly, the outputs from technology solutions. In addition, challenges are likely to exist around the availability of suitable data sets for training these support technologies in order to provide appropriate recommendations given that facts and circumstances will differ from audit to audit.
Technologies that help auditors create documentation, for example, those that summarize documents or those that provide commentary on data analysis, warrant consideration about how they may blur the lines of responsibility. With these technologies often acting so seamlessly with humans, reviewers of documentation prepared by a combination of computers and humans may find it difficult to determine who did what and therefore decide on the appropriate level of scrutiny required. A principles-based approach continues to recognize that the responsibility for documentation remains that of the auditor, including that the documentation provides a sufficient and appropriate record of the work performed and conclusions reached.
Deepmind, the Google-owned AI company behind the AlphaGo program that was the first to beat a professional Go player, has now developed a new tool called Ithaca. Ithaca is a machine learning model that guesses what the missing words might be in incomplete ancient Greek texts potentially shedding light on the meaning of inscriptions that are thousands of years old.
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Functional and information silos within organizations are barriers to delivering high-quality sustainability-related information, which is necessary for decision making and trustworthy corporate reporting. Boards and CEOs are turning to CFOs and finance functions to break down these silos and to drive connectivity between sustainability and financial information and processes, thereby creating a critically important “integrated mindset.”
At its core, an integrated mindset is about improving the quality of sustainability information and processes and connecting these to financial reporting and the value of the business. This leads to better decision making and communication with stakeholders, and consequently to reduced risk and cost of capital, as well as growth opportunities.
The CFO and finance function are essential facilitators of an integrated mindset given their expertise in connecting and prioritizing information—both financial and sustainability-related—into a more integrated corporate reporting process that provides an accurate picture of performance and value creation to the organization, its investors, and other stakeholders.
Business held its position as the most trusted institution in the 2022 Edelman Trust Barometer, which indicated an enormous need for business to continue delivering tangible action and results on society’s most critical issues. IFAC believes that trustworthy, comprehensive corporate reporting is critical to delivering on this need and driving long term value creation and trust.
“Sustainable value creation will not result from siloed thinking and information,” said Kevin Dancey, IFAC CEO. “Enabling management and boards to make informed decisions and deliver decision-useful disclosure for investors requires breaking down functional silos and connecting information on sustainability, value creation, and financial performance. Professional accountants are poised to deliver this integrated mindset, and we're calling on all businesses to take action.”
The International Federation of Accountants (IFAC) is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. Comprised of 180 members and associates in more than 130 countries and jurisdictions, IFAC represents more than 3 million accountants in public practice, education, government service, industry and commerce.
Over four decades, IFAC has represented the global profession and supported the development, adoption, and implementation of international standards that underpin the contributions of today’s global accountancy profession. IFAC has maintained a long-term approach to building and strengthening a global accountancy profession that supports transparent, accountable, and sustainable organizations, financial markets, and economies.
New IFAC initiative highlights the critical role of CFOs and finance functions in enabling an integrated mindset
To deliver useful information for internal decision-making, as well as for comprehensive, trustworthy corporate reporting, businesses can break down functional and information silos with an integrated mindset, bringing together information from corporate functions and external sources about sustainability impacts and related opportunities and risks that are relevant to the value creation process.
With global assets in sustainability and ESG-related investment vehicles due to surpass $53 trillion by 2025, the need for reliable, neutral, and comprehensive frameworks for reporting sustainability information is evident. And policymakers and regulatory bodies have taken note. The European Union (EU) continues to negotiate terms for its Corporate Sustainability Reporting Directive. This past March, the U.S. Securities and Exchange Commission proposed new rules regarding disclosure of climate-related risks. The newly formed International Sustainability Standards Board (ISSB), which has support of the G20 and others, issued their exposure drafts for sustainability reporting for public comment. The International Organization of Securities Commissions and Financial Stability Board weighed in on climate-related disclosures as well.
As a result, we face a critical moment: the growing desire globally to develop reliable, high-quality sustainability reporting as a key element of corporate reporting is leading to new requirements and heightened expectations. This will be a journey, and some level of patience is needed. The data capture, information systems, and processes within many organizations needed to report reliably on sustainability are, understandably, in the process of maturing.
Like in the world of financial reporting, external assurance has a key role in contributing to reporting reliability. Supporting investors and regulators’ trust in the sustainability information reported is the goal. Robust assurance standards that offer a consistent approach across borders for opining on organizations’ sustainability reports should facilitate that goal.
We at the International Audit Assurance and Standards Board (IAASB) hear the need for a global assurance standards solution. The IAASB already has well-established principles-based and subject-specific standards and guidance that are being effectively applied. But we know there is further work to be done in bringing the existing standards and guidance together and supplementing them to address assurance of sustainability reporting specifically.
We’ve recently taken a big step forward; our March 2022 meeting providedourfirst opportunity to discuss the IAASB’s actions in responding to the urgent need for an international assurance framework for sustainability reporting. In the discussion, the IAASB heard directly from investors that the reliability of sustainability reporting is crucial for decision making. The need for urgent and effective action, which balances global consistency and flexibility to accommodate regional variations, was clear.
The IAASB is committed to leading this effort to create new “sustainability bespoke” assurance standards. We are now in the process of identifying the specific approach to building these standards that will have the greatest impact on establishing high-quality assurance to support reliable sustainability reporting. We have determined that the new sustainability assurance standards will need to be framework-agnostic and principles-based—they will need to work with all sustainability/ESG reporting frameworks. We also expect that the sustainability assurance standards will need to be developed in a phased approach. Initial actions shall focus on an overarching standard that addresses all areas of the engagement in principle, with specificity provided on key areas. Specificity across non-key areas of the assurance engagement will develop over a longer time horizon, factoring in the maturity and evolution of sustainability reporting and assurance.
We will be discussing the approach to standard-setting on sustainability assurance at our IAASB meeting next week. The IAASB is hoping to have the proposed new sustainability assurance standards ready for public comment during the second half of 2023. Moving at this speed is possible in part because the current International Standards on Assurance Engagements (ISAEs), together with the non-authoritative sustainability assurance guidance, provide a robust starting point. We also plan to leverage the principles embedded in our International Standards on Auditing (ISAs), which are already used in 130 countries, are well known throughout the marketplace, and are trusted by investors and regulators.
Building a mature reporting and assurance ecosystem for sustainability will not happen overnight. The evolution of the ISAs, for example, has been an iterative affair since the 1970s. The process will—and should—take time. Nevertheless, to make progress, we cannot let perfect be the enemy of the good. Over time, as preparers, auditors, regulators, and investors gain experience, we can expect reporting frameworks and assurance standards to become increasingly refined, just as financial standards have evolved.
To continue to make progress, all stakeholders will need to remain in close collaboration. This will enable us to move quickly and boldly where and when we can. We expect a rapid transformation to occur in this space over the next decade. From there, global sustainability standards, like global financial audit standards, will be a stable platform, and our focus will on almost certainly be on continuous improvement.
The IAASB is taking the next steps for new standards for ESG assurance.
