How tech is shaping internal audit

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The role played by internal audit functions is changing. Traditionally, auditors were known for financial statements and operational audits, and were skilled and trained to do just that.

However, in the last few years, amid global disruption in business and technology, the role and skillset of internal audit has changed. The modern internal auditor is now tech-savvy, environment conscious and socially aware.

In just the last two years, the world has experienced economic instability occasioned by high inflation and debt defaults, cybersecurity attacks affecting banks and government entities, geopolitical tensions, evolving regulatory landscapes and environmental concerns. The last evidenced by the recent floods experienced in Kenya and other parts of East Africa.

Additionally, social awareness and emerging technologies, such as artificial intelligence (AI) and machine learning (ML) have disrupted traditional business operations and created new risks.

The Global Risks Report 2024 by the World Economic Forum (WEF) lists misinformation and disinformation from AI as the top risk in terms of severity. Extreme weather events and societal polarization were ranked second and third respectively.

The recent happenings in the global economy, technology and environment have created new risks for businesses. These have come with high expectations from regulators, customers, and other stakeholders.

As a result, internal auditors have had to adapt and navigate the murky waters of these new risks to protect businesses. This has been done in two major ways. The use of new technologies like AI and Data Analytics as well as adoption of Environmental, Social, and Governance (ESG) auditing and reporting.

A 2023 report by consultancy firm PwC, found that 72 percentof internal audit functions were either using or planning to use AI technologies. This indicates a substantial shift towards AI adoption within the profession. So far, AI has been used by internal auditors in a number of ways.

Firstly, internal auditors have leveraged on ML (a part of AI that develops statistical algorithms that can learn from data, generalize to unseen data, and thus perform tasks without explicit instructions) and adopted advanced analytical tools. These tools have allowed for prediction of, and hence early mitigation of risks.

Secondly, auditors have used AI to cut down on audit time. A study by Deloitte found that AI-powered tools can automate up to 70 percent of repetitive tasks in audits. Through AI, extraction, and analysis of vast amounts of data from various sources have been automated.

Consequently, this has freed up valuable time for higher-level analysis and stakeholder engagement.

For instance, AI can sift through millions of transactions, detect patterns that could indicate fraud or errors and present results.

Thirdly, Continuous Auditing through AI and data analytics, has enabled real-time, continuous review of entities’ operations including financial transactions. This approach allows auditors to identify and address issues as they occur as opposed to waiting for some point in the year to execute planned audits.

Fourthly, as a result of the stringent yet dynamic regulatory environment globally, as well as technology-related, social risks like data privacy and intellectual property rights, internal auditors have leveraged on Natural Language Processing (NLP) to review and analyze textual data. NLP is an AI-powered technology that can review contracts and agreements to assess compliance with regulations and policies.

Internal auditors have also acquired skills and competencies required in conducting ESG audits. ESG auditing refers to the assessment of a company's performance in terms of its ethics and sustainability.

The competencies required include technical knowledge on ESG frameworks such as Sustainability Accounting Standards Board, and the Task Force on Climate-related Financial Disclosures. To evaluate a company’s practices and reports from an ESG standpoint, internal auditors must be able to apply these standards.

As we celebrate Internal Audit Month, the wakeup call cannot be louder for internal auditors to adapt to the changing times and adopt the required skills. The modern auditor is not only a guardian of assets and reputation, but also a tech-led, forward-thinking, strategic adviser.

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