Generative AI and Its Current Impact on Audits and Financial Reporting

In recent months, PCAOB staff conducted outreach to a number of audit firms and companies to understand their usage of  generative artificial intelligence (“GenAI”) in audits and financial reporting, and shared their observations to provide greater transparency regarding the current use of GenAI in these areas.

The PCAOB’s standard-setting agenda includes a research project to assess whether there is a need for guidance, changes to PCAOB standards, or other regulatory actions considering increased use of technology-based tools in the preparation and subsequent audit of financial statements.

How GenAI is different from traditional AI

GenAI is a technology that can produce new content, including text, images, audio, or video, when prompted by a user. Unlike traditional AI, which focuses on solving specific tasks using predefined rules or patterns in users’ data, GenAI creates new content in response to user instructions or queries using algorithms that are trained using specified information, often open-source information including text and images from the internet. These algorithms use iterative training and feedback loops enabling the generative models to create a wide range of content.

Observations from the Staff Outreach

a. Related to Gen AI integration in audits

• Current Use of GenAI: Audit firms are currently using GenAI to prepare certain administrative documents, draft memos, and presentations related to audits; researching internal accounting, and audit guidance.
• Investment in GenAI: Most firms are developing GenAI-enabled tools internally or by partnering with third parties to assist in planning and performing audits. The areas in which tools are being used include assisting with summarizing accounting policy and legal documents, evaluating the completeness of audit documentation against relevant documentation requirements, performing certain risk assessment procedures, scoping the audit, evaluating the completeness of financial statement disclosures, and comparing amounts in the financial statements or notes to the financial statements with audited amounts.
• Limitations on the Use of GenAI: Firms described having policies and safeguards to limit the extent to which staff can use GenAI tools in an audit due to data privacy concerns and other risks such as reliability concerns related to GenAI output.
• Supervision and Review of GenAI: The firms that are investing in GenAI-enabled tools indicated that they expect GenAI to augment, but not replace, humans in auditing and in financial reporting. Firms indicated that supervisors who review work performed with the assistance of GenAI are expected to apply the same level of diligence as when reviewing work where GenAI was not involved.
• Risks Related to GenAI Input and Output: Firms pointed to risks related to the data used in GenAI tools (e.g., using source data in large language models that is incomplete or compromised).
• Other Risks Related to the Use of GenAI: Some firms indicated that the use of GenAI by preparers could amplify certain existing information technology risks (e.g., risks related to the segregation of duties), or potentially create risks that previously did not exist.
• Firm Policies Related to GenAI: Firms emphasized the importance of policies and procedures, internal controls, and training related to the use of GenAI.

 b. Related to Gen AI integration in financial reporting

• Current Use of GenAI: Some preparers noted that their personnel use GenAI in creating initial drafts of internal documents; some preparers also use GenAI to assist in the performance of less complex and repetitive processes such as reconciliations, etc.
• Supervision and Review of GenAI: Preparers emphasized that human involvement in supervising the use of GenAI and reviewing GenAI output continues to be important.
• Governance of GenAI: Preparers said the development and integration of GenAI was similar to the development of processes and governance for other types of technology (e.g., running technology in a parallel environment prior to deployment).
• Consistency of GenAI-Created Content: Preparers noted certain challenges including the black-box nature of some GenAI tools and lack of consistent output produced by GenAI.

Key Takeaways: 

1. GenAI has emerged as a tool with significant potential to affect the business environment, including the way auditors plan and perform audits.
2. The auditing standards are not currently viewed as impediments to the development and use of GenAI in the audit.
3. The integration of GenAI in audits and financial reporting is in its initial stages but rapidly evolving; audit firms seem to be developing a deep understanding of Gen AI technologies and their related risks.