Earmark Podcast

The audit profession faces significant challenges, including evolving business models, high staff turnover, and a growing “expectation gap” between auditors and clients. The expectation gap refers to the difference between what clients believe auditors should be delivering versus the limited insights they often receive from traditional audit approaches.

In a recent episode of the Earmark Podcast, Alan Anderson, a renowned audit innovation leader, discussed the pressing need for a paradigm shift in the audit profession to address these issues.

Alan’s message is straightforward: In order to bridge the expectation gap and continue playing its crucial role, the audit profession needs to move away from its conventional compliance-focused approach. Instead, auditors should adopt a more proactive, insights-driven methodology that prioritizes comprehending clients’ businesses and offering timely, actionable recommendations.

The Expectation Gap: A Chasm Between Auditors and Clients

The current audit approach often fails to meet clients’ expectations. Auditors tend to focus on validating ending balances rather than understanding the entire transaction flow. For example, Alan described a client where 100% of transactions were based on container barcodes, but the auditors didn’t test the barcode system. They just traced numbers between reports without understanding the business.

Alan points out, “The expectation problem is that audits start at the end after the year-end has closed, and they start with those ending numbers, those aggregated amounts on the balance sheet or income statement. And then they test some of those items. The real gap is auditors don’t understand how the transaction even got into the general ledger.”

The expectation problem is that audits start at the end after the year-end has closed, and they start with those ending numbers, those aggregated amounts on the balance sheet or income statement. And then they test some of those items. The real gap is auditors don’t understand how the transaction even got into the general ledger.

Alan Anderson

To narrow the expectation gap, auditors must shift their focus to understanding transaction flows from inception through the system, providing more timely insights and value to clients. Addressing this gap is crucial for the audit profession to maintain its relevance.

Turning the Audit Upside Down: The Bottom-Up Approach

Auditors must adopt a bottom-up approach to understanding transaction flows to provide more value and timely insights. Alan emphasizes, “We need to think about turning our audit upside down. Rather than starting at the top, at the balance, and working down into the items, we need to start from the bottom up. When we start from the bottom up, we can be much more timely. We can be much more understanding of what’s happening to business.”

We need to think about turning our audit upside down. Rather than starting at the top, at the balance, and working down into the items, we need to start from the bottom up. When we start from the bottom up, we can be much more timely. We can be much more understanding of what’s happening to business.

Alan Anderson

This contrasts with the traditional “top-down” approach of starting with account balances and working backward. The bottom-up approach involves:

This bottom-up approach involves:

• Starting with understanding transaction flows from the beginning
• Working up to the financial statements
• Providing real-time insights and understanding of the business
• Offering greater value to clients

By adopting this approach, auditors can level out their workload, reduce the intensity of busy season, and deliver more meaningful insights to their clients.

The Power of Industry Specialization

Audit firms must specialize in specific industry segments to avoid commoditization and provide unique value to clients. As Alan notes, “When you try to be the pure generalist, doing any type of client of any type of industry, you’re just going to be a commodity provider. But I do believe that we can provide relevance in what we do if we set our mind to it, and our clients will see value.” 

When you try to be the pure generalist, doing any type of client of any type of industry, you’re just going to be a commodity provider. But I do believe that we can provide relevance in what we do if we set our mind to it, and our clients will see value.

Alan Anderson

Firms that specialize in specific industry segments and perform data-driven audits are more likely to:

• Survive in a competitive market
• Provide valuable insights to clients
• Understand their clients’ businesses better
• Offer more relevant advice

Generalist firms risk becoming commodity providers, unable to differentiate themselves or deliver unique value. Industry specialization is key to the paradigm shift needed in the audit profession.

Leveraging Technology and AI

Emerging technologies such as AI and blockchain have immense potential to enable the transformative, bottom-up audit approach Alan advocates. These tools can automate routine tasks, flag unusual transactions for auditor review, and continuously monitor systems.

For example, Alan describes putting an “audit bot” on a client’s system to analyze transaction flows and remove outliers. The auditor then interprets if flagged items are errors or fraud. This frees auditors to focus on understanding the business and providing valuable insights.

However, firms must approach technology purposefully. As Alan cautions, many firms have thrown technology at audits without rethinking their underlying processes. Technology should enable a fundamentally transformed audit methodology, not just a way to digitize existing checklists.

Potential Challenges and the Path Forward

Shifting to a bottom-up, data-driven audit approach is not without challenges. It requires significant investments in training, technology, and developing industry specializations. Staff may initially resist moving beyond familiar checklists. Firms will need to overhaul long-standing practices and fee structures.

However, the benefits are clear. Auditors will provide more value, gain deeper business understanding, and enjoy more engaging work. Clients will receive timely insights to improve their operations. The profession can reverse high turnover by making audits exciting again. 

 Alan shares, “I worked with a firm experiencing turnover at levels equal to that of every firm in the country. They worked with us for a year, and their turnover went to zero. Three people left and wanted to come back. Those staff were having fun. They were enjoying what they were doing. And guess what? Their quality went up.”

I worked with a firm experiencing turnover at levels equal to that of every firm in the country. They worked with us for a year, and their turnover went to zero. Three people left and wanted to come back. Those staff were having fun. They were enjoying what they were doing. And guess what? Their quality went up.

Alan Anderson

Transforming Audit: An Imperative for the Profession’s Future

The audit profession stands at a crossroads. Maintaining the status quo is not an option in a rapidly changing business world. Forward-thinking firms will abandon a narrow compliance focus and transform their approach to deliver valuable insights and thrive in the future.

Auditors have a clear choice: cling to an outdated model and slowly becoming irrelevant, or seize this opportunity to reimagine their role and secure their position as indispensable business advisors. The future of audit is exciting – for those bold enough to create it.

To learn more about the need for a paradigm shift in the audit profession and how auditors can adapt to provide more value to their clients, listen to the full episode of the Earmark Podcast featuring Alan Anderson. 

To learn more about transforming your audit practice, read Alan Anderson’s book Transforming Audit for the Future from CPA Trendlines.