AI will not replace auditors’ judgment, says regulator chief
The rise of AI presents a critical moment for the accountancy profession to prove that its “value-add” goes beyond tasks that can be automated, according to the industry’s watchdog boss.
Speaking to CityAM, Richard Moriarty, chief executive of the Financial Reporting Council (FRC), said that with every technological shift, the accountancy sector loses low-level tasks to automation but must “reinvent or reimagine” the parts of the job that add real value.
“I’m personally optimistic about it, but obviously the firms and the professional bodies need to step into that space, not just for the clients… but to develop a compelling vision for the next generation coming through.”
He argues that the “stock in trade of an auditor”, which he deemed to be professional scepticism, the challenge of management, and fine judgments, will have an enduring value that AI cannot replace.
While professional services firms have been heavily investing in AI, the rise of new tech has also sparked AI-driven fraud, putting auditors under more pressure than ever to adapt to an evolving risk environment.
However, despite the anxiety in the sector, Moriarty maintains that humans must remain accountable for the “fine judgments” that define the profession.
“I think we have to also be clear that our role is not to regulate algorithms. Our role is to regulate the accountable people for the deployment, the use, the control, and the assurance around those algorithms,” he explained.
Over the years, the FRC has shifted from a ‘gentle’ supervisor to a proactive prosecutor, issuing hefty fines in the millions against firms and individuals for shortcomings in audits of businesses that went into trouble.
This comes after the “dark period” of 2018, when Carillion, Patisserie Valerie and BHS fell, plunging the audit sector into scandal after scandal. Moriarty told CityAM that audit quality, particularly among the Big Four firms, has “tracked consistently upwards” since those days.
‘Disappointed’ audit reform Bill fell through
The Audit Reform and Corporate Governance (ARGA) Bill, which was added to Labour’s first King’s Speech, was scrapped in January to “avoid significant new costs to firms”.
The primary goal was to replace the FRC with ARGA, a body with significantly enhanced statutory powers to oversee the audit profession and corporate reporting.
Moriarty had previously expressed a preference for passing such legislation in “peacetime,” warning that a future corporate scandal could lead to the Bill being resurrected in a more reactive manner.
However, since the Bill was dropped by the government, he has said that “although disappointed that we didn’t get the Bill, albeit not surprised, it will not deflect the contribution that the organisation’s got to make to supporting growth.”
“The Bill was to improve audit quality after a very difficult time… but now audit quality has improved significantly in the last few years, but no one should be complacent,” he added.
Private equity stalks the sector
Along with the Bill to overhaul the FRC falling through and the debate over how to handle AI, the professional services sector is also seeing increased interest and activity from private equity firms. The accountancy sector is at the forefront of this trend, with notable deals including Apax’s £700m acquisition of Evelyn Partners’ accounting arm, and Cinven’s investment in Grant Thornton UK.
Moriarty stated that the FRC is “agnostic on the source of capital but not disinterested”.
He stated that he had invited private equity firms to “come and talk to us” before buying into audit firms to ensure they meet independence and ethics standards.
Moriarty confirmed that the FRC has turned away some who approached it, explaining that some investors don’t fully appreciate the constraints that come with owning an audit firm.
“If private capital can bring additive capital and know-how and meet the safeguards and the outcomes that we want around audit quality, ethics, then actually this could bring a bit of dynamism and innovation into the market,” he explained.
He added, “Private equity won’t be for all firms… but I’m really keen to position the FRC as a pragmatic regulator that is concerned with the right outcomes rather than an ideological regulator.”