Cyborg are here! Well not quite, but this is amazing!

True there has been a lot of excitement around drones, driver-less cars and robotics more generally. Each of these technologies herald an exciting potential to automate and make efficient tasks that are mundane. Amazon, most famously, is looking to see how drones will enable them to deliver their packages use this technology - replacing their need for couriers with a 24-7 army of robots.

With all that amazingness, there is something yet even more amazing - cyborgs! Wall Street Journal posted the following video today:



The seamless integration of machine and man has been the focus of science fiction for decades. However, the founders of personal computers actually always had such a vision in mind. I have been going through the Master's Switch by Tim Wu, a really amazing book on how yesterday's tech-entrepreneur becomes today's tech-mogul-tyrant squashing innovation (this is definitely a topic for another blogpost) . In the book, he also discusses how Douglas Engelbart came up with the idea that computers can be tools to augment human intelligence. When you think about your relationship with your smartphone or laptop, it is something to augment your intelligence. With this development, however, it takes it to the next level: to actually augment and repair the human being.

Can one expect the development of super soldiers? That too has been the story behind science fiction, but I wouldn't discount such a possibility outright.

SEC and the Quants: Will RoboCop get a BigData overhaul?

As reported in this Forbes article in 2013, the SEC began to use so-called RoboCop to assist with their regulatory duties.

Who is RoboCop?


No, it's not that infamous crime-fighting cyborg from the late-80s (coincidentally remade in 2014). It is actually the Accounting Quality Model (AQM) - not quite as exciting I know. According to Forbes:

"AQM is an analytical tool which trawls corporate filings to flag high-risk activity for closer inspection by SEC enforcement teams. Use of the AQM, in conjunction with statements by recently-confirmed SEC Chairman Mary Jo White and the introduction of new initiatives announced July 2, 2013, indicates a renewed commitment by the SEC to seek out violations of financial reporting regulations. This pledge of substantial resources means it is more important than ever for corporate filers to understand SEC enforcement strategies, especially the AQM, in order to decrease the likelihood that their firm will be the subject of an expensive SEC audit."

Another interesting point raised by the Forbes article is the use of XBRL in this accounting model: "AQM relies on the newly-mandated XBRL data which is prone to mistakes by the inexperienced. Sloppy entries could land your company’s filing at the top of the list for close examination."

(On a side note: AICPA has published this study to assist XBRL filers ensure that they are preparing quality statements, given that there are many possible errors; as noted in this study).

Within this context, we should take note of how the SEC is hiring "quantitative analysts" (or "quants" for short). As noted in this WSJ article:

"And Wall Street firms, for their part, are able to offer quantitative analysts—or “quants”—far higher pay packages than the regulator. The SEC’s access to market data also remains limited. In 2012, it approved a massive new computer system to track markets, known as the Consolidated Audit Trail, but the system isn’t likely to come online for several years, experts say."

Could the SEC pull a fast one and become the source of innovation? Although the WSJ article seems to downplay the possibility that the SEC can outpace the firms, it is not something that the audit industry can ignore.

As noted in a previous post on Big Data, it was just this type of mindset that Mike Flowers of New York City looked to revolutionize how the NYC leveraged big data to improve its "audit" of illegal conversions. Perhaps the SEC may follow in his stead.

Worth mentioning: KPMG's take on the state of tech in the audit profession

In a recent post (as in just this week) on Forbes, KPMG's  James P. Liddy who is the Vice Chair, Audit and Regional Head of Audit, Americas put out a great post that summarizes the current state of analytics in financial audits.

He diplomatically summarizes the current state of the financial audit as "unchanged for more than 80 years since the advent of the classic audit" while stating "[a]dvances in technology and the massive proliferation of available information have created a new landscape for financial reporting. With investors now having access to a seemingly unlimited breadth and depth of information, the need has never been greater for the audit process to evolve by providing deeper and more relevant insights about an organization’s financial condition and performance –while maintaining and continually improving audit quality." [Emphasis added]

For those that have started off our careers in the world of financial audit as professional accountants and then moved to the world of audit analytics or IT risk management, we have always felt that technology could help us to get audits done more efficiently and effectively.

I was actually surprised that he stated that auditors "perform procedures over a relatively small sample of transactions – as few as 30 or 40 – and extrapolate conclusions across a much broader set of data". We usually don't see this kind of openness when it comes to discussing the inner-workings of the profession. However, I think that discussing such fundamentals is inevitable given those outside the profession are embracing big data analytics in "non-financial audits". For example, see this post where I discuss the New York City fire department's use of big data analytics to identify a better audit population when it comes to identifying illegal conversions that are a high risk and need to be evacuated.

For those that take comfort in the regulated nature of the profession as protection of disruption, we should take note of how the regulators are embracing big data analytics. Firstly, the SEC is using RoboCop to better target financial irregularities. Secondly, according to the Wall Street Journal, FINRA is eyeing an automated audit approach to monitoring to risk. The program is known as "Comprehensive Automated Risk Data System" (CARDS). As per FINRA:

"CARDS program will increase FINRA's ability to protect the investing public by utilizing automated analytics on brokerage data to identify problematic sales practice activity. FINRA plans to analyze CARDS data before examining firms on site, thereby identifying risks earlier and shifting work away from the on-site exam process". In the same post, Susan Axelrod, FINRA's Executive Vice President of Regulatory Operations, is quoted as saying "The information collected through CARDS will allow FINRA to run analytics that identify potential "red flags" of sales practice misconduct and help us identify potential business conduct problems with firms, branches and registered representatives".

As a result, I agree with Mr. Libby: sticking to the status quo is no longer a viable strategy for the profession.