Automation Will Change Auditing Profession in Arkansas

Automation Will Change Auditing Profession in Arkansas
Michael Pierce, senior manager and CPA at Landmark PLC Certified Public Accountants, says artificial intelligence is on its way. (Kerry Prichard)

Artificial intelligence is coming for auditors — and accountants in general — but it will change what they do, not take their jobs, according to Arkansas accounting professionals.

The largest accounting firms in the state aren’t yet fully involved in automation, but they are looking at using artificial intelligence and data analytics tools to conduct quicker and more thorough audits that will allow them to move into a more advisory role.

They are also hiring or have hired people who know those technologies. That’s according to Michael Pierce of Landmark PLC Certified Public Accountants and T.J. Boyle of Frost PLLC. They work for two of the largest firms in the state.

“Twenty-five to 30% of what you do, or have to do, for audit is probably going to go away in the next few years,” said Pierce, a senior manager at Landmark. “But that gives us more time to concentrate on the advisory side, which is where I think some of the industry is heading. It’s definitely they’re moving towards more advisory and more service issues and data analytics software.”

With automation, auditors could be “doing different things on a more real-time basis to ensure that the clients are operating effectively and efficiently, you know, help them make more money vs. telling them they messed up on the back end,” he said. “It’s that kind of give and take we’re trying to move, that the industry is kind of moving towards.” However, most of the accounting firms in Arkansas are small, with two to 10 employees, and they are not on the same path as larger firms like Landmark and Frost.

“Arkansas, generally, is made up of smaller firms, and they’re not doing that kind of audit,” said Marsha Moffitt, executive director and CEO of the Arkansas Society of CPAs. “And they’re definitely not doing what the big firms are doing. In fact, a lot of the smaller firms are getting out of the audit business.”

Automation is part of that shift, but the main reason is complying with today’s peer review, continuing education and staffing requirements is too costly for audits to be profitable for them, she said.

Moffitt added that the American Institute of Certified Public Accountants is “telling us that AI is going to take over 40% of accounting processes, and we’re all looking at each other like ‘really?’

She said that technology in the form of AI and blockchain is prominent now, along with bots, big data and data analytics. “That is changing the accounting profession and it’s going to continue and it’s going to change the way accounting firms work. But I think that probably has more to do with the size of the firm and what they continue to do,” Moffitt said.

Landmark has about 130 employees, including 56 CPAs, and offices in Fort Smith, Little Rock, Rogers and Russellville.

Frost employs about 150 people at offices in Little Rock; Fayetteville; Scottsdale, Arizona; Raleigh, North Carolina; Naples, Florida; and Yuma, Arizona. It has 40 CPAs in Arkansas.

More Timely, More Thorough

Boyle, a partner and head of the Audit Department at Frost, said, “Actually, a good way to look at it is that we’re beginning to say in our industry, the audit world … will the compliance pieces become much more commodified because the tools will be able to make them faster, cheaper, easier? Now, it’s going to be the people who are willing to invest and use those tools. But then where is the value going to be for the client?”

What auditors do now is issue an opinion as to whether a client business’ bookkeeping is in compliance with Generally Accepted Accounting Principles. That will still happen, but firms can use automation to provide audits that are more timely, Pierce said.

Boyle said auditors can also produce a more thorough audit. Whereas they used to sample 10% of a client’s transactions, automation could be used to test all transactions, he said.

Pierce echoed Boyle. “A lot of what [auditors] do is sampling, so instead of having to sample, we’d be able to run an algorithm or an AI that goes in and looks for certain transactions that are more risky and it pulls those out,” Pierce said.

“So now we have this one bucket of really risky transactions we’re going to concentrate on vs. all these just random samples. So it’s giving us a way, with all the automation, to be able to find those problem areas and really hone in on them, to do a better job of auditing.”

Both CPAs said their firms are evaluating new automation tools, and the Big Four firms — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — are leading the way.

Another way automation could impact firms in Arkansas is through a national effort by the AICPA and the National Association of State Boards of Accountancy. Those organizations are reworking how CPAs are licensed (See National Entities Work to Evolve CPA Licensing).

Technology Skills Wanted

Pierce, asked how automated Landmark is, said, “We’re getting there.”

Boyle had a similar response. He said Frost is constantly evaluating tools, started using some new tools this year and is interviewing people with tech skills. Specifically, Frost is looking at hiring data analysts.

Landmark has already hired a few tech folks. It has a four-person team — overseen by four managers with other duties — to keep up with shifting technologies. Pierce said the firm aims to have “one version behind the latest” and gaining efficiencies in tech was one reason Beall Barclay & Co. PLC and the Little Rock office of Thomas & Thomas LLP merged to form Landmark in 2018.

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Both men said people are still critical to auditing. “Somebody has to tell [the computer] what to do,” Pierce said. “AI is getting better. Obviously, it’s going to continue to get better ... But somebody, at the end of the day, has to translate what it’s putting out there and put their name on it.”

Boyle said data produced by an automated process must be fact-checked, and industry experts with business knowledge are needed to do that and to effectively use automation tools.

Pierce cautioned that, if you don’t enter good information into your system, you won’t get good information back to analyze, and there is still room for error with automation. But the pros outweigh the cons, he said. Those include that an understanding of automation tech will eventually be required to obtain a CPA license, and that automation is more efficient and cost-effective.

Pierce also said firms must balance their need to keep up with the latest tech with their need to implement tech when it is most cost effective to do so.

National Entities Work to Evolve CPA Licensing

Automation in accounting is not having a large-scale impact in Arkansas, but it’s part of a national discussion on how to rework the licensing of CPAs.

The latest news is that, several weeks ago, the American Institute of Certified Public Accountants and the National Association of State Boards of Accountancy proposed that CPA licenses become more like engineering licenses, Carl Mayes told Arkansas Business. Mayes is associate director of CPA quality and evolution at the AICPA.

That model, he said, would involve an exam on core competencies (accounting, auditing, tax and tech), and then CPA candidates would select a discipline in which to become proficient. No matter what discipline they choose, they’d be licensed CPAs after completing the two-part process. Disciplines being looked at include information systems and controls, business reporting and analysis, and tax compliance and planning, he said.

Mayes declined to speculate on a specific timeline for this change, but he said the AICPA would like to see it happen in less than 10 years. Feedback on the engineering-like model is still being gathered.

It is also the second model the organizations have proposed. The first, a two-pathway model they proposed in 2018, found little support. “The thinking around that was this, and it really was, I think, valid: It’s that, in order to be a CPA, there are certain competencies that everybody has to demonstrate. There should be a common core,” Mayes said. “And that two-pathway model really didn’t have a common core. It had two different, disparate paths to the same license, so I think that gave folks pause.”

Since then, he said, the organizations have gathered feedback from more than 2,000 stakeholders and developed these guiding principles for a new licensure model:

  • The profession has to adapt to what is happening in the market;
  • Newly licensed CPAs should have technological expertise;
  • A rethinking of the way licensure works is needed;
  • The view of what a CPA candidate is must be expanded; and
  • Changes should be thoughtful and deliberate but also rapid to keep pace with how the marketplace is changing.

All these efforts have one name: the Evolving CPA project. The organizations launched the project in mid-2017 to address several ways the profession is being disrupted, including by automation. “Technological innovation is driving new marketplace demands,” Mayes said. “It’s impacting our pipeline. It’s impacting hiring trends.”

Increasing complexity is also disrupting the profession. For example, there are three times as many pages in the Internal Revenue Code today as there were in 1980, four times as many accounting standards and five times as many auditing standards, Mayes said.

The Evolving CPA project was launched because the national organizations had noticed that automation and related services were areas of rapid growth for firms, and the hiring of accounting graduates by accounting firms had dipped by 29%, Mayes said. Overall hiring was level, he said, but more non-accounting graduates were being hired for their tech skills.

“When we’re hearing all of that, that makes us take a step back and say two things: From a profession perspective, are we producing the types of talent, the types of CPAs, that the market needs?” Mayes said. “And then, from a public protection perspective, is our licensure apparatus keeping pace with the way the market is today, with the changes that we’ve seen?” The project’s goal is to make “yes” the answer to both questions.