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    Consequences of Big Data and Formalization on Accounting and...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.01 Changes in Reporting Formats, 01.02 Changes in Audit Standards, 10.0 Engagement Management, 10.02 Materiality and Scope Decisions 
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    Title:
    Consequences of Big Data and Formalization on Accounting and Auditing Standards.
    Practical Implications:

    In light of cost reductions in data generation, storage, retrieval, and transmission, the inherent compromises within the paper paradigm are of little benefit. Users are entitled to more in-depth, granular values that they can manipulate, drilling down and up for more or less detail where needed. Financial reporting standards that govern presentation and arbitrary aggregation must likewise give way to rules regarding the limits and frequency of data transmission, as well as the quality of those data. 

    Audit standards must change as well. Error detection and risk quantification are no longer sufficient targets, but must be seen as small components of an audit of broader scope. The deep analysis of tremendous volumes of data and potentially thousands of exception reports necessitates a different paradigm of reporting and assurance. The role of auditing standards, far from being diminished in the face of increasing automation, must shift from governing sampling procedures to embracing the broader, deeper data availability and analysis of the modern era in an effort to create a better, more thorough audit.

    Citation:

    Krahel, J. P., and W. R. Titera. 2015. Consequences of Big Data and Formalization on Accounting and Auditing Standards. Accounting Horizons 29 (2): 409-422.

    Keywords:
    accounting standards, auditing standards, Big Data, continuous audit, materiality
    Purpose of the Study:

    The level, breadth, and quality of externally presented financial information have always represented a compromise between the preparer’s cost and the user’s benefit. While preparer costs vis-a`-vis data collection and transmission have decreased significantly, the compromises made in the paper-based era have persisted, creating a set of anachronistic accounting practices that, in the authors’ view, unfairly handicaps statement users. A similar effect can be observed in auditing practices. While data availability and standardization have increased, audit standards continue to focus on sampling and other practices indicative of a low-information environment. This paper will address the problems that result from such anachronisms, present a set of axes along which accounting and auditing standards must evolve, describe the avenues through which such changes can be accomplished, and discuss the new paradigm from academic and practical perspectives.

    Design/Method/ Approach:

    This article is a commentary.

    Findings:
    • Accounting and reporting standards must adapt to deal with the frequent (possibly even continuous) transmission of granular data, not only their presentation in the aggregate.
    • Such standards need to consider addressing company-specific data, as well as macro-level data that may be important to the analysis of a company’s financial condition. They also need to consider enhancing historical reporting to include other data elements that may enable predictive analysis by users.
    • Auditing standards must address situations where data are abundant, not only where data are sparse. The concept of materiality in relation to a company’s financial statements, taken as a whole, needs to be reevaluated.
    • Auditing standards must also do more to address the concept of process auditing. When data are available on a continuous basis, the processes generating those data must be continuously assured. Internal and external auditor competencies must be broadened to include more advanced types of data analytics. 
    • All parties along the financial reporting value chain must recognize the latent value in unstructured and semi-structured data.
    • Care must be taken to minimize the expectations gap between users and auditors in the face of increasing data and analytical capacity. A user’s role (and responsibility), which could change, must also be considered.
    Category:
    Engagement Management, Standard Setting
    Sub-category:
    Changes in Audit Standards, Changes in Reporting Formats, Changes in Reporting Formats, Materiality & Scope Decisions