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The accounting industry is at a crossroads. Ernst & Young, to pick one recent example, gave WeWork a clean bill of health, shortly before investors ripped into the office-space-sharing company’s finances and business model. The accounting firm is far from alone—nearly a third of Big Four audits inspected by the industry’s US regulator have deficiencies, as Michael Rapoport reports this week in our field guide for Quartz members.
Consulting and advisory makes a bunch of money for the major accounting companies. The industry says this makes them “multidisciplinary,” especially when it comes to upgrading their technology know-how, and the Big Four are pouring billions of dollars into artificial intelligence and whizzy machine learning technologies. Automation could strip out the most dreary, tedious work of auditors, freeing them to work on more challenging and creative problems.
Tech could also make their audits more efficient and precise. A pilot project using AI and natural language processing to analyze documents cut processing time as much as 90%, and it boosted accuracy by some 25%. Machines could make their reviews vastly more comprehensive, rendering the spot audit a thing of the past. As Rapoport writes:
Audits are typically performed by checking just a sampling of a company’s transactions; a big company might have billions of transactions, so auditors couldn’t possibly review them all. But a computer can, and so it has the capability to unearth errors or other problems in transactions that otherwise no reviewer might have looked at.
The problem is that tech won’t resolve a fundamental conflict of interest between their accounting and consulting practices. “At the big accounting firms, consulting is the tail that wags the dog,” Rapoport reports in the field guide.
Consulting spins off more money, is less regulated, and is a less mature field. About 44% of the Big Four’s 2019 revenue came from consulting and other non-tax advisory services, compared with some 33% from auditing.
But the obvious concern is that auditors will go easy on their clients to win consulting fees. We’ve been here before—Arthur Andersen, Enron’s auditor, made more in fees from non-audit services for the collapsed energy company than it did from auditing. Most big firms spun off their consulting businesses around the turn of the century, but they’ve since been rebuilt.
Changes are coming from regulators, politicians, executives, and technologists. The UK, after several bungled audits, is considering splitting up the auditing and consulting businesses to reduce conflicts. The EU put in place restrictions for non-audit services starting in 2016.
There’s much more in the field guide. As Rapoport writes, “In the end, both technology and institutional reforms may have to play a part to fix the audit.”
Let’s talk
Also for members: Today I’m having a call with Viktor Nebehaj, co-founder of London-based digital brokerage Freetrade. The ex-Googler and I will discuss entrepreneurship, the digital brokerage scene, and making the leap from Big Tech to fintech. That call is at 11am ET (4 pm GMT). Want to tee up a question in advance? Shoot me an email at jd@qz.com.
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