Auditing in th e New Era

1. Auditing in the New Era A perspective on the modernization of the accounting profession Chris J. Lindner, CPA, CGFM | John Hemmer, CPA

2. What is Causing Rapid Change? Why Should we Change? The Evolution of Accounting Tools Auditing Examples The World of Big Data Your Approach for the Future Future Talent Our plan for today 2

3. Sue Siegel Chief Innovation Officer, GE CEO, GE Business Innovations “The pace of change will never be as slow as it is today.”

4. 1998: DVD rental Streaming 7 million subscribers 2007: Original content 33 million subscribers 2012: 125 million subscribers 2018:

5. External forces driving change Technologyand cyberissues Financialchallengesworldwide Geopoliticalshifts Regulatorycomplexity Workforcechanges

6. Companies are driving disruption 74% of CEOs said their businesses aim to be disruptors see digital disruption as an opportunity 65% Sources: KPMG 2017 Global CEO Outlook

7. Rise of a digital world 4.39 billion 1.992 billion 412.8million 2.6 million 2000 2010 Today 1990 Growth of internet users

8. “At Deloitte we’re investing several hundred million dollars in data analytics and artificial intelligence with some cutting-edge applications that we really believe differentiate us and our audit approach.” 4

9. Considerations for Firms People & Change Management Technology & Data Other Practice Mgmt Impact Methodology Quality & Oversight 6

10. a Firms are at a fork in the road Path 2 Auditing with new methodology – Dynamic Audit Solution (DAS) Two path alternative Path 1 Automate existing methodology

11. Journey to create audit of the future by and for the profession Dynamic audit solution (DAS) 2017 2018 2019 2020-22 Bold strategy developed DAS plan finalized Executing build DAS product releases • Firm engagement • Options reviewed • Due diligence done • Key conditions set • Tech partnership • Firm funding • PCR solution • DAS team hired • Roadmap • Agile sprints • Firm stakeholders • Advancing PCR • Initial MVP • Industry buildout • DAS firm roll-out • Ongoing support

12. DAS to transform assuranceDrive greater value for public interest, markets and clients Efficiency Quality Value Significant opportunity for profession to advance delivery of trust

13. Capacity to Invest • Consider capacity for investment • National firms (38) with revenues > $100M (excluding international networks) • Combined revenue – $15B • Average – $400M; range: $100M to $2B • International firms (4) • Combined revenue – $52B • Firms #43 to #300 • Fee range: $10M to $99M Source: Inside Public Accounting 2017 IPA 100 Firms 8

14. Translating Our Mission to Our Audits • Delivering Quality to Stakeholders & a Great Experience to Clients • Engaging the Minds of Our People – Reducing Low-Value Activities & Leveraging Data • Managing Firm Risk & Results – The Value Proposition 5

15. EVOLUTION OF ACCOUNTING TOOLS 1998 1988 2018 2008 Fax Machines 3.5 in. Floppy Disks 10-Key Calculators Paper Ledgers Suitcases of Papers E-Mail Internet Popularity Microsoft Excel Suitcases of Papers Smartphones Data Analytics Tools “Paperless” Firms Laptops Working Remotely Big Data & Analytics Working Remotely Real-Time Information Artificial Intelligence Constant Connection 15

16. The goal of auditing Remains unchanged Opine whether the financial statements are presented fairly, in all material respects, in relation to relevant accounting principles Evolution of process: • Improve the effectiveness and efficiency of the audit by deploying technology 16

17. “Balancing the Checkbook” Making sure your records and the bank’s agree • Bank balance and your balance won’t agree – timing or error • Reconcile the differences to account for timing and eliminate error • Deposits you’ve recorded (in transit) not yet recorded by the bank • Checks you’ve written (outstanding) not yet received by the bank • Other items (charges or interest recorded by the bank) Basic objectives and underlying data is the same today as 30 years ago. Example of change Bank Reconciliation 17

18. 2018 Integrated system reconciliations and reports Evolution of the process 1988 Handwritten ledgers and reconciliations 1998-2008 Spreadsheet analysis of balances 13

19. Consider manual, spreadsheet and integrated reconciliations: Which is more prone to error? How easy can you research / find errors? How easy would it be in each to make a change / create fraud? How much time does each method take? Which has greater risk of external hacking / interference? Where do you and the records have to be to do the work? Even in today’s technology world – getting the data can sometimes be the hardest part… Same process but improved results? 19

20. Obtaining and using data Normalize Get the report from client – not always in database form Visualize / Analyze 15

21. Example: Analyzing Property & equipment • Client has a capitalization policy of $5,000 • Client has the following policy for useful lives: • Computers – 3 years • Other equipment – 5 years • Furniture – 10 years • Buildings – 40 years • Building improvements – 15 years How do we take data from the client and test that they are following their policy? 16

22. Core Data Provided by Client

23. Flattening the file so all key info is on one row – “normalizing data” Then convert formulas to values so they don’t change

24. Now you have a clean database you can “visualize and analyze” Sort the rows to eliminate the headers, subtotals, etc. 19

25. Pivot table to see how many assets are out of alignment with assigned lives (e.g. – furniture policy is ten but one asset is assigned 7 years?) Filter to find capitalized assets below the $5,000 capitalization policy – Why? 20

26. Sometimes Normalizing Requires Combining 21

27. THE BACKWARDS BRAIN BICYCLE Backwards Brain Bicycle

28. Big Data & Visualization • Big Data • Beyond 1 million lines in a single table • Structured & unstructured, but related • Quickly changing & evolving • Visualization • Making sense of the data … timely • PowerBI, Tableau, Google Chart • Data is less impactful without human interpretation 24

29. Commonly Deployed Tools • Ledger Systems, Microsoft Office, CAATs • Pros – familiarity, customization, baseline objectives • Cons – functionality limits, customization, limited visualization, limited automation, disaggregated data, version control (& how cloud is changing) • Specific Excel issues • Data integrity & access/control • Advancement – PowerPivot, PowerBI, etc. 25

30. Robotic Process Automation (RPA) • A true human threat in low-value activities • Picture a typical AP department • Audit application & current practical limits • Advanced OCR plays a role • “Robots” – a digital workforce, but not physical machines • Repetitive actions or rule-based decision making 26

31. Artificial Intelligence/Machine Learning • Artificial intelligence – pattern recognition, language processing, predictive analytics, etc. • Flags conditions & identifies options but requires human assistance to obtain the data & interpret final results 27

32. Future Matters • Blockchain • Record permanence & third-party elimination • Transactional assurance vs. human-assisted needs (judgment, disclosure, classification) • Entering Trough of Disillusionment** • Drones • Situational deployment • Observation vs. RFID counting **Gartner Hype Cycle for Emerging Technologies, 2017 28

33. Resources/Considerations • Get Up to Speed • Gartner, Forbes & McKinsey • Journal of Accountancy & Accounting Today • Quality reports of major firms • Center for Audit Quality • Organizational Effort • Focus on data integrity • Inventory challenges/ opportunities rather than chase tech • Prioritize people & change management • Don’t overlook cybersecurity 29

34. Future Talent Needs: By 2030, up to 375,000,000 people may need to switch occupationsand learn new skills Source: McKinsey Global Institute, December 2017

35. Top 10 declining roles Data entry clerks Accounting, bookkeeping and payroll clerks Administrative and executive secretaries Assembly and factory workers Client information and customer service workers Business services and administration managers Accountants and auditors Material-recording andstock-keeping clerks General and operations managers Postal service clerks The job landscape in 2022 Global change by 2022 • 75 million Source: Future of Jobs Report 2018, World Economic Forum

36. Top 10 emerging roles Data analysts and scientists AI and machine learning specialists General and operations managers Software and applications developers and analysts Sales and marketing professionals Big data specialists New technology specialists Organizational development specialists Information technology services User Experience and Human-Machine Interaction Designers The job landscape in 2022 133 million Global change by 2022 Source: Future of Jobs Report 2018, World Economic Forum

37. Complex compliance • Advisory services • SOC services • Technology and big data • Higher-level analysis • Technological innovations • + • Changing marketplace demands • = • Data entry • Compliance tasks • Transactional tasks • Repetitive, rules-based jobs

40. Literacy in the 21st Century Technical skills Business skills Learn. Unlearn. Relearn. Digital skills and mindset People skills Leadership skills Ethics, integrity and professionalism

41. By 2025, up to 50% of Big 4 Workforce will be supplied from the GIG economy

42. Source: 2017 AICPA Trends Report Firm hiring of new accounting graduates has slowed 8,300 New accounting graduate firm hires since 2014 20%of total new hireswere non-accountinggrads

43. Your Approach for audit of the future • Read! • Be innovative • Expand Excel skills • Develop data analysis skills • Formal education • Study on your own 43

44. BKD HISTORY Our firm was founded in 1923, when three CPAs started Baird, Kurtz & Dobson with $1700 in the bank. Today, we’re one of the largest CPA firms in the country 44

45. Who is BKD? Mission: The mission of BKD is to always strive for excellence in providing services to clients, create rewarding career opportunities and maintain sound professional, business and financial standards. Clients: Individuals and private and publicly traded businesses in the health care, manufacturing, distribution, financial services, construction and real estate industries, as well as not-for-profit and governmental entities Total Personnel: Approximately 2,650 Partners & Principals: Approximately 280 Net Revenues: $564 million Fiscal Year-End: May 31 Founded: 1923 Locations: 36 offices serving clients in all 50 states and internationally. International Presence: Member of Praxity, an alliance of 66 firms with 40,000 professionals in 103 countries 45

46. Questions?

47. Thank You! John Hemmer, CPA (402) 392-1040 jhemmer@bkd.com Chris J. Lindner, CPA, CGFM (402) 473-7600 clindner@bkd.com