Accounting’s big bet on data analytics

Study takes stock of the data analytics transformation in financial reporting and auditing

Lori Johnston | Nov. 13, 2018

Takeaways

    • UGA accounting faculty conducted one of the first empirical studies of the data analytics transformation in financial reporting and auditing.
    UGA accounting faculty conducted one of the first empirical studies of the data analytics transformation in financial reporting and auditing. 
  • Auditors and their clients agree that data analytics improves financial reporting and audit quality, increases audit efficiency and improves the relationship between auditors and clients.
  • High start-up costs, lack of clear regulatory guidance and difficulty finding employees with the right skill set has slowed the rate of adoption.
  • Recruiters target accounting students with IT knowledge and data analytics skills who can apply critical thinking and creativity to solve problems.

Accounting firms and their clients are going “all in” on data analytics. They’re spending record amounts on these powerful tools to help auditors analyze a bigger, broader range of business data than ever before.

A research team from the J.M. Tull School of Accounting led a groundbreaking study of data analytics, which is transforming financial reporting and auditing. Data analytics first emerged in audits as a fraud detection mechanism, but it is rapidly evolving into a pervasive tool for financial analysis.

Worldwide spending in audit technology and data analytics is expected to increase by about 70 percent, from nearly $122 billion in 2015 to more than $210 billion in 2020, Analyticsaccording to research firm International Data Corp. Data analytics is also an increasingly important subject in conversations between auditors and standard-setters, such as the Public Company Accounting Oversight Board.

Accounting researchers from the Terry College of Business conducted 58 semi-structured interviews with prominent professionals from 15 companies — including Fortune 100 companies and private firms — eight public accounting firms and six regulators for their study, “The Data Analytics Transformation: Evidence from Auditors, CFOs, and Standard Setters.”

“By examining both auditors and their clients, we are able to gain a more holistic understanding of the use of analytics throughout the financial reporting process, as well how it can affect the auditor-client relationship. We also wanted to be sure we understood the perspective of regulators because their guidance is a key factor impacting the adoption and use of analytics as well,” said Tina Carpenter, an associate professor and EY Faculty Fellow.

Data analytics can help auditors make sense of big data, avoid data overload, and identify stronger relationships among transactions.

“Practitioners from our interviews described how data analytics allows them to connect more dots to reveal patterns and anomalies in the data that they wouldn’t have seen using traditional audit methods,” Carpenter said. “Previously, auditors could connect two or three different pieces of information. But with data analytics they can connect four or five, and new patterns emerge that they would not have seen before.”

Auditors can use insights gained from analytics to ask more focused questions, improving both audit quality and efficiency. When searching out fraud or other problems, they’re still looking for that needle in a haystack, but data analytics makes the needle that much shinier.

“Bringing data analytics into financial reporting and auditing processes is about more than just crunching the numbers,” said Margaret Christ, an associate professor and PwC Faculty Fellow. “Accountants have to apply an analytic mindset so that they can ask the right questions and effectively interpret and communicate the insights found in the data.”

The researchers used sociotechnical theory to examine how auditors and their clients use data analytics, how its use has evolved, how it affects their interactions and how it is impacted by rules and regulations.

While acknowledging the benefits, the researchers also identified challenges that have slowed its adoption, including high start-up costs, a lack of clear regulatory guidance, and difficulty finding employees who possess technical accounting knowledge, technological savvy and an analytical mindset.

Their interviews with 12 pairs of clients and auditors revealed other potential conflicts going forward. If auditors share business insights with clients in addition to performing typical audit services, standard-setters are concerned it could impact auditor independence.

Auditors also need to play their cards right. The researchers found that clients hope to see a reduction in fees because auditors are able to complete the audit more efficiently. However, auditors indicated a fee reduction is unlikely because of the cost of technology, training and developing tools. Deloitte reported that it has invested more than $650 million.

To prepare accounting students for the digital marketplace, the Tull School of Accounting is emphasizing analytics in its undergraduate curriculum, particularly in its Accounting Information Systems and Data Analytics course, which incorporates a variety of data analytics cases using Tableau, Excel and Access.

“Historically, accounting students chose accounting because it seemed so black and white. But today, we’re challenging students to think outside of the box and leverage the power of data to improve judgment and decision-making,” Carpenter said.

The school has joined KPMG to offer an on-campus Master of Accounting with Data and Analytics program, which was the impetus for a new master’s track concentrating in data analytics that is available to all MAcc students at UGA. The track combines courses from Management Information Systems with traditional MAcc courses, as well as new courses in accounting data analytics.

In addition, professors are taking new approaches to existing MAcc courses.

“We’ve embedded additional data analytics and evidence evaluation into the fraud simulation in the Forensic Accounting course, which makes it richer, more cutting-edge, and more representative of what students are going to see when they graduate and enter practice,” Carpenter said.

Carpenter and Christ co-authored the study with UGA PhD graduate Ashley Austin, now an assistant professor at the University of Richmond, and UGA PhD candidate Christy Nielson.


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