Impact of social media on the auditing procedure

Introduction

Corporate governance and social media are essentially trends that have recently been met and any entity involved are only at the starting point of a learning curve that is expected to extend further into the future. ‘Social media’ is a term that has been developed and used to refer to communication platforms based on the latest evolution of the internet and the World Wide Web. The adoption of social media in an organization or corporate entity translates to various consequences to the internal stakeholders, investors, the organization, and the community outside as a whole (Hogan & Martin, 2009). By impacting the organization, social media affects almost every department, including those that regard accounting and auditing practices. Audit committees and accounting experts will, in one way or another, feel the impact of social media in their scope of operation and even adopt the positive aspects to their advantage. In that light, this report seeks to answer the question: Social media is the next surprise for the accounting and auditing profession? Will it impact our auditing profession?

Literature Summary

According to Roohani and Attaran (2013), the relationship between corporate establishments and their stakeholders – both internal and external, is changing due to the introduction and popularization of social media. In this regard, companies and corporations are required to be both willing and able to monitor their presence in social media while stakeholders’ ability to deliver their satisfaction, on the other hand, is improved, and with social media, they are more apt (Hogan & Martin, 2009). Generally, social media involves technology that collects activities using communication and actual social interaction using several channels including pictures, videos, audio files, and words in the text. The course of these communication channels is furthered by internet-based applications that give room for exchanging content. According to Roohani & Attaran (2013), corporate decisions are affected by two distinct forces: (1) Investors and creditors who care about how products or services are offered by the organization with which they identify and (2) Consumers who are directly affected by the offering of products and services by the company in terms of pricing and overall quality. Before, investors were known to disregard any considerations bent to social and environmental input directed to the company. This, however, has changed over the recent past and has been evidenced by a survey that had half of the consulted executives suggest that boards should consider and discuss perspective views of technology, more so social media, and its impact on their companies and the industry at large.

SM and Corporate Governance in the Auditing Context

Social media, along with the changes that it brings, has a significant impact on both corporate governance and auditing practices. In this regard, social media greatly improves transparency in auditing and associated practices. With advanced technology and Internet-based communication through web-based platforms, electronic reporting is possible. The world today experiences increased growth in online financial services while the internet plays a central role in the popularization of financial reporting and communication. An aspect that has been identified to level the interaction arena shared by retail stakeholders and institutions. Electronic reporting not only invites a greater audience to a company’s financial reports but also provides auditing teams with the foreknowledge of impending scrutiny from external stakeholders. Through the internet and facilitation by social media, barriers for obtaining information that companies identify with are lowered, thereby easing the process to their access and increasing the transparency of a given company as a result (Bonsón, Torres, Royo, & Flores, 2012). An illustration of this effect can be drawn from the show portrayed by most companies who post their annual and periodic financial reports for access by both prospective investors and the general public (Lehman, 1999). A good example is Apple, Inc., an American tech company that specializes in the development and production of products such as handsets, tablets, operating systems, and related services. The company makes its periodic and annual financial reports accessible to the general public. Internet users can access this information on the company’s website. Once posted, they can be shared among individuals through file-sharing platforms such as email, WhatsApp, Telegram, and Facebook among others, which are essentially social media fronts. Finally, regarding the window of transparency that SM creates, some best practices and standards help in the planning of new governance. While practices best practices provide ways in which executives and other employees can respond to social media crises – either potential or real, standards allow them to respond to public inquiries. In the present SM world, a company’s actions or inactions are defensible if the standards for social media are available on the company’s website. This is furthered by the fact that in case of an incident, the public could draw reference to the policy disclosures on the website and have the incident characterized as unintended.

Further, social media is also used as a monitoring force in auditing. Social media is an important element that not only enforces transparency but also encourages quality performance in auditing practices. The increased transparency allows users of social media to monitor any audit results through scrutiny to make sure that the auditing companies are ethical in their auditing practices.

An example of how social media activity can negatively affect a company is that of Singtel, a telecommunications company that to acquire more customers, released statistics on Facebook that indicated that it had the fastest broadband around and directly compared with itself with competitors. The post was followed by harsh comments from Facebook users who claimed the statistics were untrue and that the company’s fiber broadband was slow and their statement was not justified thus causing resentment.

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Regarding the monitoring force that is social media, auditors need to thoroughly investigate the social media presence of their clients before taking up any audit engagement regardless of their previous relations. For example, Deloitte withdrew from its audit engagement with Tianhe Chemical Group after learning of its fraud allegations presented by Anonymous Analytics. The group alleged that the company was making false representations by providing incorrect information to Deloitte. The group published a direct letter to the CPA Company. According to Analytics, if the fraud was proved to be real and Deloitte failed to inform investors of this risk, it could be held reliable in court (Yu, & Shih, 2014).

Social Media Impact the Auditing Procedure

Social media, as established above, has a significant impact on auditing procedures and the processes involved. Like any other procedure, auditing procedures involve several elements. These elements include planning, risk assessment, test controls, audit evidence, and substantive procedure. This section broadly discusses each of these elements about auditing grounds and requirements of the Public Company Accounting Oversight Board. Social media impacts each of these elements differently as they profess different natures.

Planning

It is a universal rule that planning is a key element of success in every endeavor. On such grounds, the auditor has a responsibility to properly plan an audit before execution. Ideally, planning an audit should take into account the many dimensions of an organization with regard to its operational culture (Moeller, 2016). Access to information is one of the key approaches that the auditor can have a comprehensive understanding of the business he/she audit, which is imperative in the planning phase. In the modern business environment, it is possible to acquire extensive information about a company through social media. Indeed, Statista (2016) shows that around 97 percent of corporates and medium-sized companies use social media – mainly for marketing. Despite the debate surrounding the classification of LinkedIn as social media, the website, which facilitates much professional interaction through social networking is one of the key sources of information about companies. A search on the website reveals much about a company including the industry the company operates, the breadth of its market, type of company, number of employees, and much more. Surprisingly, it is also possible to know some of the company’s employees besides acquiring recent articles about the company. While this information may not generally affect or influence the conduct of the audit, the auditor acquires clues about the environment (Scott & Jacka, 2011).

Social media provides a platform for interaction between a firm and its clients as well as the public. Much of the communication is often available through social media, except for that which is private. The social media conversations can give insights about the credibility of the company’s products or services as it is possible to read the attitudes of the clients. Such information, which can be easily found in reviews, can lead the auditor to a better understanding of the organizational culture; it is key to a better audit planning process (Gattiker, 2012). The International Standards of Auditing (ISA 200) provides extensive information pertaining to professional skepticism in auditing as well as the different scales of professional skepticism. It explains professional skepticism as “An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of the evidence”. While it is a critical part of auditing, it is often challenging to apply the ideal level of skepticism, especially due to the lack of knowledge about the managerial culture. However, the information acquired from social media conversations and reviews can enable the auditor to pick a more informed level of skepticism when planning the audit (Puncel, 2007). For instance, if the conversations and reviews on social platforms place blame on the management for delivering low-quality products or failing to pay its employees, the auditor can suspect possible misstatements and, thus, plan for an intensive and ‘deep’ audit. Therefore, by accessing different social media platforms, it is possible for the auditor to create a mental picture of their subject and, thus, be more likely to plan for a successful audit. In this regard, social media can impact the effectiveness of audit planning mainly by improving access to information about a firm.

Risk Assessment

Risk identification and assessment are one of the key elements in auditing and social media has become a key point of consideration. Auditors, especially chief audit executives and internal auditors and are keen on the prevention of risks that have been associated with the use of social media by organizations. Many publicized studies point out the rise of social media risks that have been seen to affect the performance of audits by significant margins (Flynn, 2012). Some of the common risks posing a threat to professional auditors are associated with interrupted continuity of business, intellectual property, overall productivity, and financial loss (ACCA, 2016). The nature of social media makes the associated risks quite exceptional considering the speed that which information is transferred from one individual to the other (Roohani & Attaran, 2013). For instance, controversial statements spread within hours and have the potential to destroy a brand. The major issue that individuals and companies on the receiving end of social media misgivings are the lack of control, which results in the aforementioned risks not forgetting the possibility of malware, data security, and lack of regulatory compliance. Previous studies produced by Protiviti indicated that social media is felt like an ideal threat by auditors. A 2014 study by the company that included 600 internal audit professionals reported the financial loss as the leading risk at 7.3 on a 10-point scale. It is on these grounds that auditors have to consider social media as an element of audits and risk assessment.

As social media continues to become a major way that businesses interact with their clients the risks associated, the identification of the risks has not become any easier. According to the research by Protiviti, internal auditors have found it challenging to assess the risk and only 25% of the respondents had successfully included social media risk assessment as part of their audits. The inability to adequately handle social media risk identification and assessment has been associated with the lack of data, IT support, relevant training, and the support of the management. The challenges become even worse when a company does not have social media policies and when employees do not have knowledge about the risks of a particular use of social media at work considering that such risks go beyond productivity. Some of the actions leading to an escalation of the risks include the extensive use of clicks, giving unauthorized persons the firm’s social network logins, sharing personal files, and making contact with strangers (ACCA, 2016).

Considering the social media risks, auditors should find a fit into the audit risk assessment model. While it is clear that social media risks should be a major consideration in risk assessment, there lacks clarity on the approach to quantification of value, measurement, and approaches to management and control. Despite the surrounding ambiguity, it is possible to exercise the flexibility of the risk model in ensuring that social media is a component (Deloitte, 2013). For instance, it is possible to classify it is as a control risk, which is classified as the existence of a weakness in the control of the internal systems in a case where a company does not have any social media policies. However, the auditor must consider a course of action to ensure effective assessment such as the creation of a collaborative relationship with the IT department in a bid to successfully monitor social media activities that pose the highest risk. It is also important that the auditor considers the social media activities against the set policies put in place – if any exist (KPMG, 2012).

Test of Controls

Public Company Accounting Oversight Board standard AS 2201 provides information about the audit of internal control over-reporting. According to the standard, the auditor has a duty to offer an informed opinion concerning the degree to which the company has been effective in ensuring control over financial reporting as it cannot be effective if any weaknesses exist (Delaney & Whittington, 2010). Internal control goes beyond financial reporting to include aspects of operational efficiency and effectiveness, which can be done through the identification and assessment of risks. Test of control as a procedure in audits involves assessment of the effectiveness of the control mechanism applied by a company in the detection of material misstatements (Roohani & Attaran, 2013). There are various controls that a firm has to apply in a bid to ensure proper reporting such as the director of finance signing the payroll before payment is made. The COSO Framework simply defines internal control as a process that can be influenced by the environment. It has five framework components including control environment, risk assessment, control activities, information and communication, and monitoring activities (Cenowski & Mair, 2013).

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From the previous section, it is clear that there are risks associated with the use of social media within a company. To mitigate such risks and improve the effectiveness of the company in financial reporting, it is important that it considers the improvement of internal control. Within the COSO Framework, social media can fit into the risk assessment, control activities, and monitoring activities components (Moeller, 2011). Risk assessment mainly involves the identification and analysis of risks such as the potentially harmful ways of social media use. Control activities can involve the identification of suitable social media use policies with respect to the identified risks while monitoring can involve the evaluation of adherence among employees (Hogan & Martin, 2009). There are various ways to test the controls of social media risks, which can be most productive when coordinated with the IT department. In some cases, the auditor can pose as an ‘outsider’ and assess the behavior of employees towards various stimuli such as clicks and requests to transfer files among others.

Audit Evidence

The PCAOB standard AS1105 emphasizes the availability and use of appropriate and sufficient audit evidence “to provide a reasonable basis for his or her opinion” (PCAOB, 2015). While appropriateness involves the quality or relevance of audit evidence, sufficiency pertains to the quantity. It is important to note that if the material is appropriate, it does not require much corresponding evidence as it can be relied upon (Pickett, 2006). In this case, there must be a connection between the evidence and control under test (relevance) besides the source and nature of the evidence being credible (reliability). As noted in the preceding sub-sections, social media is a rich source of information about a company, especially with regard to internal operations (Gupta, 2005). Although financial information is not often available through social media, there is the likelihood it happens, which can have catastrophic implications. However, information about customer dissatisfaction, environmental issues, social responsibility, and sustainability is readily available. Some financial and nonfinancial information have the potential to influence the company’s financial statements and auditing, especially when there is some information that is not disclosed (Woo & Lim, 2015). Also, issues concerning compliance with any particular standards can arise from social media sources, thus affecting the company’s financial position in the form of fines due to noncompliance and withdrawal of investments by shareholders among others.

Substantive Procedure

Engaging a substantive procedure involves steps and processes that create considerably conclusive evidence about the completeness, rights, disclosure, existence, or valuation of accounts on financial statements.

Test of details is another aspect of effective auditing that involves testing for errors within particular documents or on the items in account disclosures and balances. There is not much difference with the substantive analytical procedures as they involve a contrast between the auditor’s expectations and recorded values (Gray & Manson, 2008). It is important that the auditor considers any relevant information acquired through social media when performing the substantive procedures as a way of forming expectations, supplementing other evidence, and ensuring that their opinion is well informed. As such, by forming expectations on social media, auditors have a rough idea of what they are required to deal with. In addition, supplementing the evidence does not only provide space for effective auditing but also prepares the ground for increased accuracy. This aspect is also backed by the fact that it ensures that their opinion is well informed and that they are well versed.

Social media impact the auditing profession

Auditor’s responsibility to social media risk

The objective of the typical audit financial statements by independent auditors is primarily to express an opinion regarding the fairness with which the statements present in operation results, cash flows, financial position, and all other material aspects in conformity with GAAP. This opinion is expressed through the auditor’s report, where he states whether his audit was conducted parallel to the standards of the Public Company Accounting Oversight Board (PCAOB).

Reasonable Assurance & Active role

Auditors have the responsibility to plan and perform auditing practices with the primary goal of obtaining reasonable assurance about whether the financial statements they are presented with are free of material misstatements, either through fraud or error. It is through the nature of this evidence that auditors obtain reasonable assurance that the material misstatements are detected.

By obtaining reasonable assurance that the financial statements are free of material misstatements through fraud or error, auditors play an active role in ensuring adherence to GAAP standards. Although financial statements are essentially the responsibility of management, auditors may make suggestions regarding the content of the financial statements or draft them, wholly or partly, as per the information provided by the management during the audit. However, the responsibility of the auditor to the financial statements to which he or she has performed audit is confined to his or her opinion regarding them, a responsibility that they have to be thorough at with the monitoring force from the social media.

Even though auditors cannot exactly provide absolute assurance that a business or a company is safe or free from social risk, it is important to note that its importance in providing reasonable assurance cannot be overlooked. Because social media provides a large pool of information, auditors can make good use of the information. This can be done by detecting most of it and making reasonable assurance. This is however difficult since it is practically impossible to detect all the information and make deductions for 100% assurance. For this reason, auditors cannot turn a blind eye to any of the information and risks presented by it. In support of that, according to the AICPA code of professional conduct: due care principle, auditors should not only respond to the information but also engage in further investigation, reassessment of audit risk, management inquiry, and adjustment of auditing procedures accordingly. By engaging each of the aforementioned elements, auditors may then provide reasonable assurance.

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Auditor’s career opportunities and challenges

Embracing social media presents the auditing profession with opportunities and challenges in the modern world. To start with, auditors face considerable hurdles, and more often than not, they figure the risks they are presented with are not always worth the rewards. Independence rules, overzealous regulators, skeptical leadership, and clients that avoid the use of social media stand in the way of these rewards. In regard to the opportunities, social media may present to the auditing profession, the rewards of those that engage it appropriately can be handsome.

Regulators are often included in the top reasons as to why auditing professionals do not embrace social media. However, technologies and platforms companies make it easier for auditors to track and report social media trends and activity in adherence to strict demands of compliance. With the transparency provided by the engagement of social media, various elements of the profession might be at risk in the face of regulators (Birkhahn, 2015). Social media publications from auditors may escape the eye of the general public but not that of regulators. Regulators use social media to cover more ground in ensuring compliance of various standards, as such, incompetence, genuine or motivated, may not be of any good results to auditors. Social media provides auditors with a platform through which they can publish and circulate content. Proper use of social media by auditing professionals such as focusing content on aspects such as thought leadership instead of plainly conducting business may help auditors manage compliance issues and keep regulators’ wrath at bay. In addition, it may prove significantly effective in reaching the target audience. To avoid unnecessary risks, auditors should act like publishers and familiarize themselves with the content needs of their audiences. Fortune and success in social media are more like advertising and as such, require an altruistic approach to the provision of content that not only focuses on the needs of the audience but also adds tangible value to them (Kumar, & Singh, 2014).

Positions of stakeholders in financial reporting supply chain

Stakeholders such as companies, analyst investors, financial publishers and data aggregators, trading partners, auditors, management accountants, and regulators are, in one way or another, associated with the advent of social media and the consequences of engaging this technology in their operations. While some are positive about incorporating elements of social media, others are doubtful of its advantages and rewards. Companies are positive about social media and consider it a vital tool in increasing the quality of their media coverage. However, most senior-level executives, either from companies or other agencies, are not visibly active on social media. However, they passively utilize platforms such as Twitter and LinkedIn to access commentary and discover smart news (McRitchie, 2012). In regard to auditing, financial publishers and data aggregators push for the use of social media for the publication of content, which allows them to have access to more transparent content from various companies. The same applies to analysts, investors, and regulators. Social media allows for easy access to information that each of these entities can use to carry out their responsibilities. Management accountants, in addition, are welcoming of social media since it provides them with a chance to access a range of important issues regarding their scope of operation.

Conclusions

Social media presents a number of unique opportunities and challenges to both individuals in the auditing profession and corporate governance. Social media opens up new communication channels where auditors and associated professionals can explore new business opportunities. Also, as discussed, it plays the role of advocacy for services provided by auditors. For this reason, the power of technology and social media in revolutionizing operations should not be underestimated. Like other professions, the auditing profession is impacted significantly by social media in more than one way. In this light, social media has made changes to the way auditors collect information for the sake of auditing procedures. Also, social media provides a wider pool of talent that auditors can make use of thus covering more ground. An aspect that boosts their performance and overall effectiveness. Further, through social media, transparency has been increased and organizational audits are, more or less, public information. Lastly, social media has provided a monitoring force that enables auditors to ensure effective procedures and safe practices in their profession.

Future Direction

As social media evolves to a more efficient and multifaceted platform, it will become more permeative, creating changing methods and forms of interacting with counter-parties, clients, employees, and the general public at large. At the same time, interactions within its scope will continue to preset unique risks to professions and organizations alike. As auditing professionals venture to develop their influence models in social media as a tool for efficiency, it is important that they be mindful of the legal and regulatory environments that require them to attend to certain obligations and control their conduct (Maxwell, 2012). More importantly, auditing professionals should focus their attention beyond the mere ability to capture social media interactions to access their meaning.