Auditors Use Algos to Scan Books Minutely

Industry experts expect wider adoption of algorithms from April 2016 when new rules come into effect

Algorithms, the software programs that are increasingly replacing humans in many complex jobs where precision and speed decide the winner, are becoming an essential tool for auditors as well.

Algorithms, or algos, help auditors identify unusual patterns in the books of account for further analysis.While algorithm-based auditing isn't new globally, audit firms have just started introducing these software systems to India, at a time when local regulations are becoming increasingly stringent. Starting April 2016, failing to raise red flags or mentioning the exact problems they found during auditing of companies could even land the auditors in jail.

Auditors rely on technology mostly in risk-based auditing. These algorithms could pinpoint the problem ar eas. The Big Four auditors -Deloitte, PricewaterhouseCoopers, EY and KPMG -which have invested millions of dollars to build in-house technologies globally, are also the main players in India in using algoaudit. Industry experts expect wider adoption of algorithms from April 2016, when the new rules take effect.

“As Indian companies as well as multinationals operating in India have grown tremendously in the past years, and accounting systems have become more technology dependent, auditing too has undergone a sea change. Now we see a significant use of technology as enablers to a more effective and risk-based audit,“ said Russell Parera, partner and assurance leader at Price Waterhouse Chartered Accountants LLP, which is part of PwC India.

So, while earlier an auditor would just sample the data and look if there are any problems, now with the help of algos, he could run a search through a sea of data. “Say, for examples, there are around 1,00,000 transactions in a company with its vendors, customers and debtors and creditors. Earlier we would just take a 10% to say find out related-party transactions. Now we can go through all the transactions,“ said an auditor.

“Adoption of the technology is in response to a need to obtain greater assurance than what traditional approaches using sampling or reliance on controls provide. These tools help us focus the audit on risk areas, increase coverage of the population tested and also enhance the ability to respond to fraud risks,“ said Sudhir Soni, partner at an Indian member firm of EY.

The different tools used by the auditors give them specifics of even the smallest of the transactions once it is defined by the auditor. The auditors need to have a basic knowhow to run these tools, but the results are transparent and elaborate.

In a recent case, for instance, the algorithms pinpointed some problem transactions in a commodities firm.“...out of about 10,000 transaction of sale, about 100 came from the same customer, who had given his PAN number. We suspected that this was a related-party transaction not permitted by the regulations,“ said a midlevel executive working on the audit.He refused to share more details.

In India, the Big Four audit about 27% of the top 1,437 listed Indian companies, according to a data compiled by Prime Database. Deloitte is the biggest when it comes to auditing, followed by PwC. These rankings, however, could change starting April 2017 when the rule on audit rotation kicks in, making it compulsory to change auditors every 10 years, say industry trackers.

The Big Four have been investing in technologies and training chartered accountants to use the software. In some cases, clients can see the auditing happening real time and even respond to the queries right away. PwC has such a system, called Connect.

The toughest part, however, is to train the young auditors with the technology. “We spend a significant amount of effort on training and through these auditing technology tools we can cover larger populations of data analysing unusual transaction types and ensuring that the audit effort is more risk-based and effort is directed to areas perceived of greater audit risk,“ said Parera of Price Waterhouse Chartered Accountants.

The Economic Times, New Delhi, 17th Nov. 2015

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