How KPMG is using Formula 1 to transform audit
KPMG is applying the innovation and technology from Formula 1 racing to audit through their new alliance with McLaren Applied Technologies (MAT).
We quiz KPMG Audit Senior Manager Chris Walters on how technology could move audit to the fast lane, ahead of his appearance at the New ICAS Conference on 27 November 2015.
Can you tell us more about how MAT’s predictive analytics can be applied to the audit process?
Within the audit process, technology allows for the automation of evidence gathering and the analysis of ever-larger populations of data, enabling the audit team to focus on actual exceptions, rather than sampling the data set – ‘audit by exception not selection’.
Our strategic alliance with MAT has the power to radically transform the audit process by creating automated tools that will help us to deliver more effective data analysis. For clients, that results in more actionable intelligence. For audit committees and investors it delivers greater insight. Essentially, it will make audits more relevant and forward-looking.
We believe that this combination of MAT’s predictive analytics expertise and our own audit and advisory capability will give us a competitive advantage in an increasingly competitive market.
What kind of automated tools are you developing and how will they work in practice?
The first tool to be developed is the Audit of Impairment Tool, which is designed to respond to the asset valuation risk – a key audit judgement for virtually all the companies in the FTSE 100. Tools such as this will improve audit quality in an area which has been subject to criticism by regulators. Not only quality, it provides stakeholders with a broader and much more valuable perspective on the variability of the forecast models and the key sensitivities.
The tool uses advanced modelling techniques, incorporating a broad range of internal data and external data, such as geographic GDP and inflation growth, to analyse forecasts supporting the value of assets under multiple scenarios. Our tool allows us to perform sensitivity analysis over all assumptions simultaneously, and benchmark assumptions to external sources.
These custom-made tools and technology incorporate McLaren’s unique blend of engineering, design and high performance expertise. This allows us to deliver solutions to complex audit issues with a focus on significant judgements and the use of past, present and future data. These models are then used to support audit teams in making critical accounting judgements, adding an element of science to their existing experience and insight.
How would you characterise KPMG's approach to auditing and advisory services?
Our strategy as a firm is underpinned by four strategic priorities:
- We prioritise and give relentless attention to our clients
- We focus on the issues that keep our clients awake at night
- We grow profitability by being cost-effective, and by allocating our resources efficiently
- We create a high performance culture, guided by our values, where our diverse talent feels included and excels
In terms of audit, our approach is to ensure that every KPMG audit exceeds national and international standards. Our experienced audit teams aim to challenge assumptions and provide deep insights based on a thorough understanding of the business and sector.
Going beyond requirements in the UK, we have adopted a bold new policy for our audit reports: we will include findings in our long-form audit reports, where companies engage us to do so before the final audit commences. In implementing this approach, we aim to improve openness and transparency for shareholders and ultimately help restore trust in corporate reporting.
Do you feel it’s important that accountancy practices look outwith their own profession for business inspiration?
I think it’s critical. We’ve already got huge capability in the area of D&A, but when you harness innovations from other industries, you start to unlock its full potential and apply it in new and exciting ways; so you get both synergy and breadth, which is really powerful.
At KPMG, our alliances with McLaren and Imperial College highlight our desire to get the best from other industries and bring value to the profession and the wider stakeholders.
How transformative do you feel predictive analytics has been for financial services?
Technology and data are reshaping everything that everyone does, and it’s crucial that we keep on the front foot. Through technology we can be better informed, more focussed and therefore be more effective and valuable in what we do.
It’s the focus that can really add value. Firstly, we can now get the full picture over a set of data as opposed to extrapolating samples statistically onto the dataset. These days, we not only know what is in there but how much is in there and where. We call that ‘Blow away the hay to find the needle’.
This is very powerful because it makes our responses more focussed and our opinions more informed.
Secondly, it’s important to note, the accountant is not replaced by effective data analytics. Rather they enhance the effectiveness of the accountant, linking us closer in with the full reality of the business. This is the watershed moment we've been waiting for that should be embraced quickly and fully.
This is a very unusual partnership between a technology business and a professional services firm. What common values brought you together?
We each have a passion for innovation and a reputation for being first movers. Equally we share a commitment to excellence and a deep sense of purpose with a desire to make a wider impact on society outside our core business areas.
During the initial discussion both teams worked very closely together to explore the potential for the alliance and to develop some prototype tools, and we found a natural fit between KPMG people and McLaren people. The words ‘we have each met our match’ have been used frequently to describe the quality and cultural fit between our two organisations.
Find out more
Chris Walters will be speaking about how F1 is transforming the future of audit at the New ICAS Conference on 27 November in Glasgow.