As the end of the year approaches and organizations prepare for financial reviews, coronavirus continues to pose a significant challenge for many, if not most, auditors. Physical presence is an essential aspect in several steps of the auditing process. Months into the pandemic, many firms are still requiring staff to work from home and banning company travel. In some places, businesses are legally prohibited from opening their doors. Even where restrictions have loosened, many people understandably feel uncomfortable with unnecessary travel and in-person contact. Compounding this problem, the same conditions that have made auditing more difficult than usual have also made it more necessary. The economic impact of global closures poses an unprecedented threat to business models. Organizations are especially concerned about their financial health. Remote work has introduced a host of new risks as employees adopt untested technologies and procedures on the fly. Can auditors rise to this challenge when they can’t be physically present to verify inventory, conduct interviews, and observe processes? Are they even allowed to perform these tasks remotely? And if they are allowed, how can it be done? Video technology might be part of the solution.
But first: is it even permissible under auditing standards to, say, count inventory without physically being there? According to AICPA Chief Auditor Bob Dohrer, it probably is. Paragraphs .11 and .14 of AU-C Section 501 of the AICPA auditing standards state that the auditor must attend the physical inventory counting unless it is impracticable to do so. If nationwide shutdown due to global pandemic doesn’t qualify as “impracticable,” then what does? Indeed, the standard suggests that one circumstance that makes physical observation unrealistic is if the inventory is held in a location that could threaten the auditor’s safety. Says Dohrer, “I think it’s a very reasonable interpretation…to say that COVID-19 is putting auditors’ safety in jeopardy."
Does that mean that auditors use video technology to observe inventory? Dohrer says, yes. “The overriding consideration when using remote video like that is that the auditor needs to have a pretty good feel for the authenticity of the video feed.” For this reason, live feeds are more appropriate than videos recorded by the client and sent to the auditor after the fact. (More on that in a bit.) But both may be perfectly acceptable alternatives to the on-site visit in the age of coronavirus. And just because video is permissible doesn’t mean it’s advisable in every case. Depending on an organization’s circumstances, delaying the audit could be a better option than performing it remotely. This is especially true if the client has demonstrated and verified reliable and complete records in the past; if that is the case, states the PCAOB, the auditor’s observation could occur at some time other than period- or year-end. Requesting an extension on audit deadlines is a bit of a gamble right now since no one knows how soon things will get “back to normal” or what that will even look like. But a reasonable extension is likely preferable to implementing a 100-percent remote audit under the gun, without careful thought and preparation. If an organization determines that video-enabled remote audit is both permissible and advisable under its current conditions, the question becomes how best to perform a nontraditional audit while satisfying the same stringent regulatory requirements. How can video technology be adapted to meet the standards of in-person auditing? Are there ways in which video technology can improve on in-person capabilities? Let’s consider how two audits, traditionally carried out in person, might be conducted using video technology.
Verification of physical assets
How can an auditor satisfy the physical requirements of inventory observation and validation at a time when gatherings and unnecessary travel are discouraged or forbidden? Video—especially live video—may be the best alternative to in-person auditing of physical assets. Providing the audit client is willing to cooperate, video technology can provide the auditor with a live, first-person view of the count while enabling constant communication. What does this look like? An employee straps a GoPro camera to a hard hat. Someone wears a Google Glass headset. Or, if the cameraperson is good enough, she can hold a smartphone at eye level. The key is to recreate as much as possible the experience of being in person. This method requires a reliable internet connection, as interruptions to the stream due to a dropped network connection would likely render the video useless as audit evidence. It requires an impartial third party to hold the camera and run the production in the auditor’s stead. It requires that at least some people access company property, which is far from a given in the era of COVID-19. And there are potential drawbacks. Depending on the industry, important details may be difficult or impossible to detect in video feeds—damaged or dusty goods, bad smells (though there’s a drone for that).
But there are also potential advantages over the traditional in-person method. A recording of a live feed could provide a piece of strong nontraditional audit evidence. Even once auditors return to in-person inventory verification, why not don a pair of Google glasses and record the whole thing for posterity? (AI can even be used to count things in an image or video still, further reducing the absolute need for an in-person count.) Though there is currently little guidance from the PCAOB or the AICPA regarding the reliability of videos as audit evidence during financial audits, they might continue to provide lasting, objective support even in a post-pandemic world for operational and compliance reviews.
That said, videos recorded by a third party or by the audit client—and not initially conducted with the auditor using a live video feed—are a weak form of evidence because they preclude direct oversight by the auditor, are easier to tamper with, and require a lot more work after the fact if the auditor needs additional information or has questions about the count. One way to mitigate tampering is for the audit team to provide the recording technology to the auditee preinstalled with controls that detect interference. Ideally, the client would have nothing to do with sending the video file to the auditor; rather than transferring it via the Internet, they could send it by mail with the equipment without touching a computer. Even so, digital forensic services may be necessary to ensure that the video meets the threshold of strong audit evidence.
In the Before Time, in-person interviews were an essential aspect of the audit process. Now, these interactions will likely happen via a video conferencing tool such as Zoom or WebEx. From an audit evidence standpoint, there are few downsides to this change. Tools like Zoom make it extremely easy to record interviews, and as such remote interviews may provide even more substantial audit evidence.
The main concerns with remote interviewing have to do with security, privacy, and communication. To ensure that remote interviews are conducted securely, always use firm-approved video conferencing vendors. Avoid “Zoombombing” by employing waiting rooms and passwords. These controls are critical for audit interviews, during which sensitive information is regularly shared. Always inform the client that they are being recorded.
By now, most of us are well aware of the adverse effects video conferencing can have on face-to-face communication. It might be challenging to pick up on nonverbal cues, a significant component of human interaction. Interviewees may be more easily distracted, whether by family members also working from home or notifications popping up on their computers. Eye contact is more easily maintained in person than over video. Reviewing interview recordings later may help auditors mitigate these issues and better understand their interview subject.
Post-pandemic uses of video technology
The video technology solutions described above are not new. Along with many other far more advanced tools (AI, RPA, ML, data analytics, etc.), they have been knocking at traditional audit’s door for years or even decades. COVID-19 has accelerated the adoption of these techniques, which in many cases provide the only means we have of dealing with pandemic restrictions. As a result, regulators are becoming more accepting of these technologies alongside more traditional audit methods.
But if video technology is to be a permanent fixture of the audit landscape even post-pandemic, it will require much more in-depth consideration. Right now, regulations are being broadly interpreted out of necessity, and remote audit is seen mainly as a compromise. However, as this article has attempted to show, the technological solutions we need now likely have utility beyond this challenging season. As Vice President of Content and Programming at ACI Learning and an experienced auditor, I have argued that the potential of remote audit extends far beyond dealing with COVID-19 restrictions. What if it was part of a client’s regular procedure to record the contents of their warehouse with a GoPro? What if a robot took daily pictures? It might not be necessary to verify the existence of inventory, the condition of fixed assets, or the safeguarding of equipment in person. It remains the mandate of the profession to use whatever tools necessary to protect our stakeholders best. Hopefully, we won’t wait until the next pandemic to embrace more of the possibilities of technology-enabled audits.
Dr. Hernan Murdock, CIA, CRMA, VP - Content and Programming at ACI Learning