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Digitalisation of audit procedures: a pilot project for the financial audit of the European Commission’s executive agencies

In the private sector auditees and auditors are looking more and more for smarter ways to capture business processes digitally and transform the way in which audits are conducted. In public audit, too, there is an appetite to follow this path. But this requires certain levels of standardisation and design harmonisation. In 2019, in order to move the annual EU agencies audits towards digital transformation, the ECA started a digital audit pilot project focusing on the European Commission’s executive agencies. Valeria Rota is a Principal Manager deeply involved in the financial audits the ECA carries out annually on all European Commission’s agencies . As she is following closely the pilot project that is ‘experimenting’ with audit automation, Valeria is well positioned to provide some insights.

By Valeria Rota, Regulation of Markets and Competitive Economy Directorate

Digital technologies are transforming the world at an unprecedented speed. With the creation of its Digital Steering Committee (DSC), the ECA identified an urgent need to undertake a digital transformation in the way we audit. The aim of this transformation is to use the potential of technology to deliver our audits more easily, quickly, accurately and extensively than ever before and provide more useful information for the accountability process.

Digitalisation, the development of robotic process automation (RPA), artificial intelligence, machine learning capabilities and big data analytics provide substantial opportunities for compliance and financial audits to become more precise and comprehensive. The characteristics of millions of entries can be checked in a few minutes, immediately flagging any exceptions so that auditors can concentrate on higher risk transactions. The increased processing speed means that instead of checking samples, auditors can analyse full populations of transactions. For example, a mock demonstration of a partial automation of two audit procedures already led to a significant increase in the processing speed — of nearly 96%. The plan is to no longer simply discuss the opportunities and challenges of digitalisation for the audit profession, but to put audit automation into practice.

Within the ECA, the audit chamber dealing with the regulation of markets and the competitive economy is carrying out the first pilot project on digitalisation of audit procedures at the ECA — the Digital Agencies Audit Project. We identified the financial audit of the six executive agencies of the European Commission as the ideal environment to start with. Executive agencies share similar administrative procedures and similar IT systems. An ECA project team composed of auditors (specialised in the financial audit of the agencies) and IT experts has been exploring ways to perform the audit of accounts and transactions, to the greatest extent possible, with automated procedures. Since the agencies use the information systems of the European Commission to deal with some administrative procedures, the experience gained will also be useful for other non-agency audits, particularly for the audit work for our Statement of Assurance.

ECA staff members participating in the Digital Agencies Audit Project, from left to right: Spyridon Pilos, Denis Navarre, James McQuade, Zsolt Varga, Paulo Oliveira, Ioanna Metaxopoulou, Frank Verheyen, Magdalena Cordero Valdavida, Claudia Albanese, Hans Christian Monz, Konstantinos Chatzis, Andreja Pavlakovic-Milosavljevic. Valeria Rota, not depicted here, is also member of the project team.

The project started in mid-2019 with the mapping of the existing audit procedures — around 180 of them according to our audit programmes. This exercise consisted in sorting the data sources and the tasks to be carried out for every existing audit procedure and identifying the potential for automation. This included exploring possible modifications of existing audit procedures and working methods, in particular in respect of how to obtain paper-based information in electronic format in order to move from manual to automated processes.

Based on this mapping, two main technologies for automation have been identified — Data Analytics (DA) and Robot Process Automation (RPA):

  • DA is not a new technology but has gained significant importance with the development of data warehouses, clouds and other powerful storage capabilities. Today, ECA auditors already have access to several data sources for the agencies which can be used for DA. Auditors can use DA for data extraction, analysis and/or interpretation to support the identification and assessment of risks, or the planning and performance of audit procedures;
  • Robot Process Automation (RPA) software provides advanced macro-like capabilities that can be deployed at an enterprise or business unit level. In this case the robot is computer-coded software, which is used for automating repeatable and rule-based tasks. The robot is programmed to perform the sequence of steps that a human user does, e.g. downloading documentation and other data from agencies’ IT systems and organising the files for the transactions audited. The robot can interact with the same applications a human would use, but operates much faster and can be run at any time.

The focus of the Digital Agencies Audit pilot project is on the audit of the accounts and on the audit of the commitments and payments of the executive agencies, as well as substantive testing of the salaries. Consequently, the pilot covers both financial and compliance audit procedures. We identified suitable audit procedures and analysed them in detail. Most of these procedures could be automated by using DA, some others by combining DA and RPA. Naturally, the scope of the project is changing as it is developed and implemented, as new things are learned and assumptions are challenged and tested within the ECA project team. Some of the procedures cannot be automated at this stage, as they would require the use of artificial intelligence systems, which are still under development in auditing.

The first set of audit procedures implemented at the ECA are using DA. The objective is to run specific checks on the full population of transactions (e.g. payments) and to produce an exception report that will be followed up by the auditors on the spot. We will use RPA to prepare the documentation related to these exceptions, as far as it is available in the IT systems of the agencies.

In the pilot phase (see Figure 1 for the different stages and status), many of these exceptions might not result in audit findings but rather may be linked to the algorithm(s) used for the checks. Our project team will analyse the results of this phase and will refine the checks to make them more reliable, if necessary. The auditors will also test the controls around the evidence to ascertain their authenticity and reliability.

Figure 1 — Pilot project stages and status

The Digital Agencies Audit pilot is scheduled ‘to go live’ in the six executive agencies in March 2020, in parallel with normal audit work. The results of the pilot, as well as the next steps, will be assessed and reported by mid-2020. This is the first wave and the lessons learned can be used for the next steps, which can hopefully be taken for the subsequent annual exercise. Possibilities we anticipate are that:

  • more audit procedures can be automated for the executive agencies;
  • the project can be extended to the decentralised EU agencies and/or the EU Joint Undertakings. It has to be noted, however, that the IT systems and administrative procedures of these bodies are less homogenous and that automated procedures would have to be tailored for groups of these entities;
  • the experience gained from this pilot project can contribute to automation of audit work for the ECA’s Statement of Assurance. However, given the extent of this task, a considerable effort still has to be made to analyse the thousands of underlying audit procedures, in order to identify those with potential for automation.

This pilot project is only the first step in a fundamental transformation process at the ECA and in leveraging the use of automation in its audit work. A key success factor in this digital transformation journey remains the strong commitment and close cooperation of all stakeholders involved — including auditees. Our ambition is to design business processes controlled by design to facilitate, and even automate, audit. Combining IT and digital working methods with auditors’ professional judgement promises to be the most successful way forward into the future.

This article was first published on the 1/2020 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.

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The ECA Journal features articles on a variety of current audit topics, the ECA’s role and work. It is available in electronic form below, and paper copies can be ordered online at the EU Bookshop.

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