Technological and economic developments, changing laws and regulations, the influence of regulators and politics: there are many factors that are currently driving the audit profession. In this blog series The Audit Files, KPMG experts discuss developments in the world of audit. This time we hear from: Marc Hogeboom, member of the Board of Management and Head of Assurance at KPMG Netherlands, writing in his personal blog.
Back from being (not far) away. Having been a member of the Board of Management of KPMG Netherlands during a previous crisis, I returned to the board early this year, not knowing that I would be faced with another one. At KPMG, as with every company, it is all hands on deck during this Covid-19 crisis. And yet this is also a great time to be a director. The auditing profession is changing rapidly and the pandemic is giving these developments an extra boost. This is a perfect opportunity for auditors to demonstrate just how relevant they can be.
If anyone had said on January 1 of this year that the vast majority of KPMG's more than 3,000 staff members would be able to work from home without any adverse effect on quality, I would have called them crazy. However, the past six months have shown that this is very possible. First and foremost, because our digital backbone is extremely robust and our staff have been able to work from home as if they were at the office. Then professionals in the field, together with our Department of Professional Practice (DPP), looked at the implications for our profession and how we at KPMG want to respond to them. Because we need additional security now that we cannot for the time being physically visit our clients to do our on-site monitoring work. Over the past six months, we have approved more than a thousand financial statements using this new way of working. This is an achievement that makes me proud."
‘Quality' as the elephant in the room
In the years when I was not a member of the Board of Management and I was working as an auditor with our major client ING (2016-2020), the auditing profession came under some heavy fire. We have seen the publication of various reports that took a highly critical look at our industry. Meanwhile, the government has appointed two ‘quartermasters’ and their work may well lead to new measures to improve the quality of auditing. The only elephant in the room remaining is that there is still no clear definition of exactly what is meant by 'quality'. When has an accountant performed well? Is a thoroughly documented dossier sufficient? Or is quality also about calling out irregularities? What forthright discussions has the accountant had? There are a lot of voices in this discussion, but one important voice is often missing. That is the voice of supervisory board members, one of the auditor’s key clients. I know for a fact that many supervisory board members are highly satisfied with audits of their companies. As a sector, we could definitely be highlighting that fact a lot more.
Suddenly, another fraud case comes to light, like the case of Wirecard this summer. It is only logical that people question the functioning of the entire chain, including the role of the auditor. At KPMG, we study these kinds of cases closely, as we can always learn from them. One of the things I’ve noticed is that the Netherlands is more advanced than Germany in terms of financial regulation. For instance, the fact that in the Netherlands auditors answer questions from stakeholders at general meetings of shareholders is unique in the world. As an ING auditor, I also got to experience that. And although it can be extremely stressful, I actually think it's a good thing that auditors also proactively step up to the plate to contribute to the transparency of financial statements.
There is still work to be done
The recent evaluation reports are right to conclude that auditors should not sit back and rest on their laurels. It is necessary to improve quality wherever possible. KPMG has focused on a number of spearheads in recent years, including the culture in our organization. I am proud of the fact that ours alone in the Big4 is colored dark green. We have managed to make major strides forward. For example, we have added a lot more reciprocal guidance and engagement. Mistakes are allowed, provided we learn from them: that starting point is now deeply embedded in our DNA. But culture is not the only thing. We are also striving for technological innovations. Clients can see that in our digital assurance. That is the front end of the control process. At the back end, we are looking at the design of our processes. Traditionally, auditing has always involved a master-apprentice relationship, in which as an auditor you start at the bottom and learn to master the entire process. But perhaps it would be better and more effective to think more in terms of production lines, in specializations, and also outsourcing parts of the process. We already do this, for example, with our Service Centers in India.
The need for human instinct will remain
This outsourcing is necessary because we need to reduce costs. That is what our clients want. But how do you Improve quality in a highly competitive market? One might ask, for example, whether in the future KPMG will still need all the offices we currently have. Working from home, outsourcing and continuing digitalization give us an opportunity to look at physical spaces in a different way. But digitalization will not make the auditor superfluous, as you sometimes hear. I do not believe that at all. Yes, we can digitalize a great deal of the auditing process, but the auditor’s most important task is to interpret and explain figures. Behind the numbers lies a complex world and auditors provide understanding of that world. IT cannot and will not replace that. Computers do not have a critical eye or instincts. As an auditor, you don't just pay attention to documents; you also notice things about a company’s culture. For example, how directors behave towards their staff. Is that open or more closed and authoritarian? A computer or algorithm would not be taking note of that. And speaking of algorithms: human interpretation is needed to determine whether an algorithm makes decisions ethically or not. Auditors should also play a role on this front.
In every crisis, including this one, there is a lack of confidence in figures. More than ever before, auditors need to step up the plate and prove their value and relevance. On top of this, non-financial indicators are now becoming increasingly important in reporting. Do you as an organization create jobs? What is your contribution to averting climate change? How diverse is your organization? Auditors have the tools to build a bridge to this type of non-financial information that is increasingly important to stakeholders. That makes our profession more relevant than ever. Fortunately, from the influx of new accountancy students this year, it is easy to see that many young people feel the same way. My wife is a pediatric oncologist. That is a profession with a vocation. Auditors, in an entirely different position, also have a sort of vocation. Everything comes together in finance and there can be no doubt whatsoever about the figures. As an auditor, you are allowed to investigate and have an opinion. And the best part is that the CEO of ING or any other company listens to you.