KPMG Australia turns to AI to improve its audits
April 24, 2023
KPMG Australia has begun using an enhanced version of its auditing software on local clients which can search for outlier transactions within a complete dataset during an audit.
The capability, already in use by the firm in the US, UK and Canada, allows KPMG’s auditors a faster analysis of more client data and should improve audit quality, which is critical to investors who rely on financial statements to make decisions.
The enhancements to KPMG’s audit software, called KPMG Clara, uses aspects of artificial intelligence in its operation, such as machine learning, to work out what constitutes a normal transaction within a dataset.
This use of advanced technology comes after the corporate regulator last October called for KPMG and its big four rival Deloitte to take immediate action to improve their audit processes after it found their standard of audit work had declined dramatically in the previous year.
It is also part of an ongoing trend within the world’s largest accounting firms and will have long-term implications for the usefulness of audits as well as the professionals who work within the audit sector.
‘Analysing 100pc of transactions’
KPMG is initially using the enhanced software on five audits in Australia with “some teams doing [a traditional] audit in parallel” to test the effectiveness of the machine learning functions, said Julian McPherson, the partner in charge of national external audit and assurance at the firm.
The new features work by “analysing 100 per cent of transactions” and then scoring each transaction against a battery of tests seeking to uncover statistical outliers, he said. “Every transaction is given a score” as high, medium and low risk, allowing the firm’s auditors to focus their “attention on high-risk transactions”.
“The solution was able to identify high-risk transactions that wouldn’t have been able to be identified normally,” Mr McPherson said.
The KPMG partner said that the new capability would not, at first, reduce the time or manpower required to carry out an audit because of the amount of work initially involved in setting up the data feeds to allow the software to analyse entire datasets.
“My team has grown, we are now recruiting more data scientists,” he said.
AI and auditing
In the long term, researcher are split on what the increased use of artificial intelligence technologies will mean for white collar jobs and for auditors specifically.
Two recent reports looked into the effect of AI chatbots, such as ChatGPT, on white collar jobs. They concluded that while many office tasks will likely be sped up or completely automated by AI tools, it was too early to predict if that will lead to net job losses around the world or simply change the nature of many jobs and create a range of new occupations.
A separate 2022 research paper published before ChatGPT was made public – Is artificial intelligence improving the audit process? – concluded that “investing in AI helps improve audit quality, reduces fees and ultimately displaces human auditors”.
The study examined the use of artificial intelligence by the world’s 36 largest audit firms found that increased investment in AI-related technologies would reduce the likelihood of an audit restatement, lead to lower audit fees and reduce the number of accounting employees.
“Our empirical results document substantial gains in quality, as AI investments by audit firms are associated with significant declines in the incidence of restatements, including material restatements and restatements related to accruals and revenue recognition,” the authors of the paper wrote.
“[Moreover], we find preliminary evidence that improved audit quality is accompanied by a move towards a leaner process: as audit firms invest in AI, they are able to lower the fees they charge while reducing their audit workforces and showing increased productivity, as measured by total fees per employee.”
[Financial Review]
