Distrust and skepticism have typically characterized auditors’ approach to digitization. As a result, the professionals of the field have historically been slow to embrace technological innovations. A change of direction, however, has appeared in recent years.
The concept of digitization in the auditing industry, previously viewed with suspicion, has seen an evolution lately. This trend reversal is likely due to some key factors:
the need for business processes optimization, in line with a tendency arisen in all other business areas;
the socio-political endorsement, as policymakers and regulators initiated an open promotion of digital solutions to standardize processes internationally and improve transparency, security, and compliance;
the goal of reshaping the business sustainability profile, since going digital is seen as an effective way to demonstrate climate-friendliness and social responsibility.
Such fundamental circumstances are paving the way for innovation projects and are expected to continue to push auditors towards a digital evolution of their work habits.
Let’s have a closer look at these main drivers and how they are urging firms worldwide to implement new technologies and develop new business models.
1. Widespread digital transformation
Most businesses are going digital and expect the same from their auditors. In the last decade, “digital transformation” has been a buzzword for companies in all sectors that have embarked on the innovation path driven by the same modernization needs. The first and primary area where digitization was a necessary and successful implementation concerns the so-called paper-processes – all those activities involving the frequent and copious management of documents, records, emails, statements, and the need to print, scan, exchange, and store this information. In this area, the digital evolution has offered solutions that can be defined as almost ‘revolutionary’ for their ability to simplify and speed up daily work, save resources and time, and boost productivity. As few other industries rely on paper documentation as much as auditors do, it follows that they’re expected to adapt, sooner rather than later.
What are the benefits of digitization for audit and accounting companies?
Embracing digitization comes with a series of benefits for audit and accounting companies.
Gains in time and cost-efficiency
Converting labor-intensive tasks, like receiving, sharing, securing, and retrieving documentation from manual to digital processes, allows for error minimization. It also prevents duplication of effort and undue stress and helps avoid redundant operations that cause rework and lessen staff productivity. All this takes on huge significance, especially with the increase in workload arising during the busy season. Moreover, improved time efficiency translates into happier customers that enjoy faster service and a more flexible and dynamic experience thanks to the digital interaction.
Stronger security and data privacy
Additionally, the transition implies risk management improvements and the inherent greater safety of the data involved. Most clients trust in the ethical behavior of accounting professionals (bound to the confidentiality agreement); however, when relying on physical documents, no specific and strict security measures are usually in place to protect the privacy of the information exchanged between the parties. On the other hand, when employing dedicated software, such data is processed within a 'closed' digital system, where it can be controlled, tracked, protected – and not accidentally misplaced or lost. Replacing manual methods and multiple and disconnected systems with innovative and harmonized solutions brings major benefits beyond the business management area.
Increased customer loyalty and competitiveness
Lengthy processes, frustrating delays, and time-consuming steps do not only affect employees’ ability to perform their job on time but also, and just as importantly, the customer’s perception of the service quality. A significant driver for digital innovation is indeed the attention to customer experience and, in general, to the client’s modern expectations. Especially nowadays, when consumers demand easy and immediate access to services online and are no longer willing to physically go to a branch just to hand over their ID or put their signature on a piece of paper.
Whatever the product or service a business offers, customer satisfaction is the common denominator: it’s the clients who dictate the rules, and this awareness should be reason enough to adopt more customer-centered strategies.
To wrap up, digital investments are rewarded with positive ROI, lower business expenses, and greater customer satisfaction. Ergo, accounting firms are increasing digitization budgets to undertake significant company-wide changes towards becoming technology-driven.
2. Legislation supporting digitization
The European Union and the United Nations are incentivizing digitization in both governments and businesses to such an extent that digital and political agendas have become intertwined. The many regulatory initiatives launched are facilitating and driving the digital shift in the auditing industry. Below are a few of the most relevant:
The Digital Single Market
The European Commission launched the initiative with the stated goal of “shaping Europe’s digital future” by creating a frictionless single economy, better suited to compete in the global marketplace. To strive towards this goal, the cross-border standardization and harmonization of laws and processes are seen as a primary step to create a level-playing field for businesses and a more trustworthy environment for consumers.
The eIDAS Regulation
To act in a digital market, standards for e-identification and e-transactions needed to be addressed. The promotion of digital identification mechanisms and digital signatures operability was the first natural move to allow Europe to keep up with the rest of the world. Thanks to the eIDAS Regulation standards, digital signatures and identity authentication mechanisms enable electronic interactions with the same legal standing as traditional paper-based transactions.
The 5th AML Directive
Enabling the use of these digital tools to carry out other compliance-related activities was the next step. The 5th AML Directive explicitly promoted the use of e-signatures and digital identification to carry out the verification of the customer’s identity. Auditors, external accountants, and tax advisers are among the entities required to comply with KYC requirements. They are now prompted to perform more thorough customer background screenings, which, in turn, leads to a more considerable amount of personal data to be collected, processed, and be responsible for.
The General Data Protection Regulation
With the increase of personal data shared, the protection of such sensitive information had to be ensured. GDPR forced businesses worldwide to adjust their procedures by updating privacy policies and security practices. Bearing in mind the amount of confidential information auditors get exposed to, they are expected to be in the front line of protecting clients’ organizations. To guarantee the utmost privacy of the information they handle, process automation is a key solution that provides a high level of comfort about security and compliance.
The European Single Electronic Format
Digitizing financial reporting was a long-awaited turning point to open the doors of the EU's capital markets. More recently, the regulatory framework for statutory securities of EU-listed companies, known as ESEF, established a consistent and homogeneous electronic format for annual financial reports. On one side, a common machine-readable digital reporting format is a huge breakthrough for accelerating the digital maturity of the European market. On the other, it also increases auditors' need to embrace digitization and evolve their traditional working methods.
As the EU Commission and the IFAC share a common vision to future-proof accounting, new steps forward are on the horizon. ESEF is just the first piece of a larger forthcoming puzzle. Digitization earned its dominant role as a valid means to make accounting information more accessible and usable, boosting the value of professionals in the sector. In the EU strategy, other initiatives are already under consideration – such as the activation of a European Electronic Access Point (EEAP) - to complement ESEF in the revamp of public corporate reporting. In addition to the political leanings, the International Auditing and Assurance Standards Board (ISAAB) of the International Federation of Accountants (IFAC) is also openly promoting digitization for the cross-border standardization of financial accounting and reporting processes, assurance, and quality control.
3. Raised awareness about environmental issues
The “myth” of the paperless office has been promoted for decades, and it was expected to become a reality by 2020. However, truth be told, the volume of paper being used has actually expanded, as people now print emails, web pages, contracts, reports, and so on. The same has been witnessed for the (ab)use of paper in packaging and postage, as well as the rising demand for printer ink. Production, transportation, and recycling have a significant impact on the environment too.
It’s only in recent years, thanks to technology advancement and legislative pressure that environmental efforts began to be included more seriously in business conversations and found fertile ground in the concept of Corporate Social Responsibility. Climate change and environmental issues have become so profoundly rooted in the public conscience that the commitment to green initiatives has begun to manifest in corporate actions as well.
Regardless of their size, all companies have large carbon footprints. Consequently, it is every business's responsibility to make sure it is doing its best to preserve the world’s resources. And accountants certainly have a prominent place in the matter. As mentioned, accounting is a profession typically reliant on documentation – where the use of paper is (tremendously) remarkable, recurrent, and wasteful. Therefore, the need for a more earnest environmental approach is emerging in the industry as a core element in the company strategy to achieve sustainability goals and competitive advantage. High ethical standards also reduce business and legal risk and, if coherently aligned with the business model, play a big part on the road to success.
As corporate responsibility spreads, it is more and more prioritized to build and project a socially conscious image. Consumers, employees, and shareholders size up CSR levels when choosing a firm and hold corporations accountable for effecting social change with their business beliefs, practices, and profits.
Consequently, CSR is taking on a strategic role as it highly contributes to positive public relations, brand reputation, and, as a result, to long-term profits. Indeed, econometric studies found a correlation between social-environmental performance and financial outcomes, and businesses are discovering that focusing on social responsibility helps them maintain a competitive advantage:
87% of respondents will purchase a product because a company advocated for an issue they cared about
76% will refuse to purchase a company’s service upon learning it supported an issue contrary to their beliefs
63% are hopeful businesses will take the lead to drive social and environmental change moving forward
The next generation of employees is seeking out employers focused on the triple bottom line: people, planet, and revenue.
Digitization has a crucial role in CSR as it removes the need for physical documents and supports organizations’ mission of limiting their paper usage. Diminishing the demand for paper is key in reducing businesses’ environmental impact and shaping technology in a way that respects European values. Therefore, it’s to be considered of cardinal prevalence for both the company and the overall society.
All these trends and drivers are pushing audit professionals towards upgrading their traditional processes. Ultimately, for auditors, it is ever more meaningful to observe that digital should be seen less as a thing and more as a way of doing things. A better way, to be more precise.