Runbook CEO, Herman Heller, says automation of close processes is set to change the annual audit

3rd May 2010

On a recent visit to London, Runbook CEO, Herman Heller, took time out to explain how the company’s innovative thinking around the financial close process could significantly change the audit process.  Runbook a specialist in financial process automation, compliance and control in SAP ERP environments told FSN’s managing editor, Gary Simon, that, “changes to the audit are inevitable as automation increases the dependability of the close process”.

Auditing Global 2000 companies is a complex business. The vast majority of these giant companies are audited by the Big 4 accountancy firms yet despite their resources and expertise the audit of the group financial reporting process represents significant risks to audit firms and is costly to the companies that they audit.  Auditors habitually have to contend with fragmented systems, undocumented applications and controls.

Yet new information technology is bringing about significant change. Runbook is part of a rapidly developing and important breed of vendors that provide applications and expertise to help large corporate automate the financial close. It counts companies such as Novartis, Procter and Gamble and Adidas amongst clients which use its technology to bring the financial process and the underlying controls together in one auditable environment.

Heller told FSN, “The trouble is that in many companies the controls and the financial process are completely separate.  This not only duplicates work but makes it difficult to assess the reliability of controls from an audit perspective.”

However, Heller is convinced that new technology will change the role of the accountant forever. “Accountants will become reviewers of a largely automated process.”

But they will not necessarily welcome the change.  “Accountancy firms fear this model, especially in these difficult times. But they don't have a choice,” he adds.

According to Runbook and its devotees the accountancy world is on the threshold of one of the biggest changes in its history. In the next decade, recent developments in information technology will drastically change the role of the accountant during inspection and review of a company's financial statements. Auditing will become even more of a commodity.

“By using cutting edge software the time consuming process of year-end close can largely be automated, because all relevant data can be produced and reviewed without human intervention. This includes the document trail. So the role of the accountant in the complete audit can be limited to its final phases,” comments Heller.

What's going on? “Currently the first phases of an audit are time-consuming because large amounts of information from various parts of a company need to be collected manually. Piles of binders and box files need to be browsed through. This is no longer necessary, because with the help of the right software all necessary data can be produced automatically from all locations throughout the organization where they originate. This data can be checked for accuracy automatically and then be integrated and standardized before being delivered to financial specialists. Simultaneously, a document trail is produced,” explains Heller.

It is this level of automation and dependency that Heller believes will not just revolutionize the process of closing the financial year and quarter, but also the structure of the accountancy industry itself.

In his most radical suggestion, Heller adds, “Specialized software will in future do the bulk of the work. Responsibility for the preparatory stage of the audit can be delegated to an IT service provider. It will guard the automated process and guarantee the delivery of accurate and relevant data to the accountant, whose role will be limited to reviewing aggregated data.”

Nevertheless, Heller is realistic enough to recognize that this huge shift in audit thinking, organisation and positioning will need more than a leap in faith if audit firms and their major clients are to be convinced. Something that Heller has already anticipated!

“This radically new operational procedure needs new safeguards: the preparatory stage will need certification from a top accountancy firm. Ideally this is a Big Four or comparable accountancy firm that possesses the necessary technical expertise. The final review will then be executed by another accountancy firm: this way the process and the review will remain separated. The total time and effort spent by accountants will very probably be reduced however,” he suggests.

“We believe this new model for period closing will turn the accountancy world on its head. Auditing costs can be reduced drastically; a result that especially the corporate world will appreciate,” adds Heller.

Heller believes that there will be little downside for accountancy firms.  “Society is gradually changing the demands it sets for accountancy firms, in part caused by their role in the recent financial crisis. Public opinion is calling for more safeguards against financial risks. Partial automation of the auditing process will give accountants the opportunity to shift their attention in this direction.”

“In the end it's a matter of adapting or losing for accountancy firms, because there is no way back. CFO's are already welcoming the new auditing model, because it saves them time and money. The Dutch Tax Authority has given its permission to use it and it's a matter of time before the first accountancy firm will adopt this new model integrally. From that moment onward, competing accountancy firms are left without a choice. But when accountancy firms will adjust their procedures accordingly, they too will become winners in this new model.”

But there are concerns – not least of which is auditor independence and the massive consolidation in the audit profession which makes it difficult for CFOs to appoint Big 4 auditors that do not have a conflict of interest. Splitting the final audit between audit firms could become an obstacle. But it is not insurmountable.

“The first part of the audit is really a process audit – it could be carried out by a second tier firm, in the case of a conflict, or perhaps a trusted or certified external body that specialises in internal audit.  Conflict of interest is a challenge but huge savings are at stake as well as improved risk management. Pressure for change is inevitable,” concludes Herman.