Regulators overseeing the recovery were concerned enough about the reliance on older proprietary systems to warn that a reluctance to move on could bring on the next economic meltdown. Each leap forward in technology left the older solutions further behind, and then the coronavirus pandemic hit.

This Black Swan event brought enormous organisational, technological and cultural transformations that touched every aspect of our lives. For banks, it condensed several years’ worth of changes into a handful of months.

The 2021 Capital Markets Innovation Summit (CMIS) report, Letting Go of Legacy IT Systems in 2021, detailed the extent to which leaders have taken on board the lessons of the last year, and experts gathered by Confirmation explored some of the themes and findings in a special webinar.

Here are the main takeaways from Letting Go of Legacy IT Systems in 2021.

The tide went out, some were swimming naked 

“Banks, asset managers, pension funds, all had the same problem; a stack of quite old technology that is like a plate of spaghetti,” said Stephane Malrait, Managing Director, Head of Markets Structure & Innovation at ING. “It’s not good enough.”

The industry is now in what he calls the third phase of the crisis, having negotiated the survival period and the adjustment to new ways of working. “Banks didn’t think too much about legacy systems at the start of this, but now the focus is on improving technology, knowing that this has exposed how poor some systems are.”

Many survey respondents reported outdated onboarding and transaction approval processes which were a priority for improvement in the coming 12 months, having been badly exposed during the pandemic as unsuitable for the future of work.

“One large bank lost about 750 hours in one month from a single team because they were trying to sort out technology, order laptops, get VPN connections etc.,” said Caroline Winch, Commercial Director at Confirmation, part of Thomson Reuters.

“Institutions that heavily outsourced processes overseas really struggled,” said Kyle Gibbons, Europe Managing Director of Confirmation. “It may be something they think about in future, as in terms of their resilience, this could quite easily happen again.”

Be bold 

Survey respondents identified technology to mitigate risk (35%) and technology that responds to the changing expectations of their clients (32%) as the most important. The experiences of the last year have put a premium on adding value for clients, respondents said, and 38% have committed to working with third-party providers to deliver this.

“Clients became that much more demanding; they had their own challenges,” said Caroline. “All of this has accelerated partnerships with outside fintech firms, as opposed to building everything in-house that firms may have done a few years ago.”

Respondents favour leveraging in-house talent with outside expertise to build and manage new processes that will improve operational resilience and increase profitability. One-stop solutions, often run on closed platforms with expensive, multiyear, license-based models are out. Partnering with outside firms is in.

“Just having an innovation hub won’t help your business move forward, it will be far too detached from your day-to-day activities,” said Stephane. “Having your IT department work with your innovation team and partner with fintech companies requires a cultural change but you have to be bold. Be curious, be willing to learn and find companies you are not aware of. There may be a company out there who can help your business or your clients.”

Clean up your data 

“The poor quality of architecture and data is behind so many problems big banks have,” said Ange Johnson de Wet, Head of Cloud and Technology Change Risk, Risk Division in Lloyds Banking Group. “Most large incumbents should hope for a nice, clean, single data lake with all the common taxonomies and protocols. That is where many should be heading.”

Shifting operations to the cloud is seen as the most optimal route forward for most institutions, according to the survey, but the panel warned it could lead to a new set of problems if a coherent strategy isn’t in place beforehand.

“The original rationale of moving to the cloud was one of cost; moving from data centres and moving the working capital meant you’d only be paying for storage,” said Kyle Gibbons, Europe Managing Director of Confirmation, part of Thomson Reuters. “Over time, the challenges, being able to unlock that cost saving, have become more difficult.”

Both Gartner and Google said unless the way firms manage costs is significantly transformed, then around 30% will be misspent, Kyle said, adding that the true agility and flexibility of new tools will only be realised following careful integration.

“There is a realisation that if you can analyse the data and the quality is good, you can do a lot more for your company; you get a lot more insight into what the client is purchasing. You see it when you buy on Amazon or on Netflix,” said Stephane. “The value for them is in the data around the experience.”

Change is hard (but not impossible) 

Businesses are optimistic, if nothing else, and are keen to develop automated solutions to key problems, the report found.

“Firms are looking to be more strategic, and the pandemic showed us the need to increase automation to maintain operational resilience,” said Caroline. “We’ve also seen a keen interest in both banks and accounting firms to deploy APIs, to automate some or part of processes.” The Confirmation team encountered a lot of enthusiasm for single sign-on implementations, Caroline said, in order to maintain control of access systems. “You can’t have too many people having too much access to different platforms, without some sort of control,” she said.

More than half of respondents (52%) said machine learning and AI tools were a priority in strengthening regulatory compliance and operational efficiencies.

“A great, smart strategy when transforming is to take a selective approach,” said Ange. “I saw one bank break things down into an optimisation zone and a transformation zone. Certain things they transform, other things they will optimise. It’s simple and it makes a lot of sense.”

Have a plan, and don’t wait for the next pandemic

One in four firms reported challenges in adopting new technologies, and this is forcing reflection and redefinition of strategies.

“Look into your processes, what is efficient and ineffective and think about technology that can provide flexibility to deliver exceptional customer experiences and keep yourself ahead of the curve,” said Caroline. “Don’t wait for the next pandemic to make these leaps.”

Businesses are looking long-term, the report found, and in the face of increased competition are more aware of their limitations than they were 18 months ago.

“If you can’t fix your legacy, at least put a plan in place to do so,” said Ange. “Think outside the box and leverage best practice, and look at other industries, such as what the big tech firms are doing. If you make sensible, achievable, actionable moves towards your target, you will get there.”

For all the headaches it has caused businesses, the panel felt the last year has triggered a sea-change in attitudes, and in the next 12 months, capital markets will accelerate the move away from legacy systems.

“When Ford started building cars, it built every component,” said Stephane. “But looking at Tesla today, all they make is the battery; all the other parts are built by outside companies. We are moving to this model in finance. It may take 12 to 18 months to integrate a new technology and see the value of automation at first, but after a while, as you mature and rely less on legacy infrastructure, that will become three to four months.”

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The white paper states that “professional scepticism and the ability to exercise constructive challenge are both key in delivering quality audits”. These key attributes depend in part on auditors’ ability to manage the audit process, of which confirmation is a major component.

Confirmation is “the process of obtaining and evaluating a direct communication from a third party in response to a request for information”. And at the heart of a successful confirmation process is the critical step of validation. It ensures that your own company, your auditor and the individual third-party respondents (such as your bank) have been authenticated – supporting a thorough and reliable audit.

Confirmation, the world’s leading provider of online confirmations, has responded to the revised ISA (UK) 240 standard issued by the Financial Reporting Council (FRC), emphasising “the importance of validation of the responding party, both as a crucial step in establishing the authenticity of third-party audit evidence and as an action in the exercise of professional scepticism”.

To ensure “reliable audit evidence”, auditors have a duty to control confirmations – whether working within a paper, electronic or hybrid process. With effective validation, they can have confidence that the party responding to their request is who they claim to be, and that they are authorised to respond.

By validating where confirmations are sent and authenticating individual responders, your auditor can maintain a bias-free operation, support their opinions with reliable evidence, and reduce the risk of confirmation fraud.

There are too many recent instances of major financial statement frauds for you or your auditor to be complacent, particularly where paper-based procedures are still in use.

In a recent webinar with the Institute of Chartered Accountants in England and Wales (ICAEW), Confirmation’s Managing Director of Europe, Kyle Gibbons described “a highly instructive multiyear fraud in a smaller institution, Austria’s Commerzialbank Mattersburg, which claimed to have €800m of assets at eight different banks”. But it had relationships with none of them, and the assets didn’t exist.

The auditor had repeatedly failed to explore the integrity of the communication channel – confirmation letters were routinely sent through the post – or the data’s validity.

We have learned from the Wirecard scandal, for example, what happens when an auditor fails to identify fraudulent documents and fake third parties or to investigate suspect addresses.

With such demands on your auditor, you should consider whether they have access to the right technology. When they use a secure electronic platform such as Confirmation – which follows strict procedures relating to the validation of users within its network – then you can be assured that the responding party is the true one.

You will be able to sign the required authorisations digitally, after which your auditor can initiate requests for information and receive quick responses. By communicating with respondents directly via an online platform, your auditor will be able to save countless hours by eliminating a great deal of manual, time-consuming tasks.

We concluded our submissions to the FRC by describing the ideal context for validation. Responses are made within an online platform by a trained and authorised team, access is strictly limited and monitored, and robust authentication procedures are meticulously followed. In such circumstances, validation is greatly enhanced and the evidence received is far more reliable.

By deploying Confirmation in this way, you are guaranteed that your data is sent between validated users within a secure platform, eliminating the risk of being intercepted or compromised by unauthorised actors.

For more information on how Confirmation can streamline and digitise your audit, contact us today.

Confirmation pioneered the idea of digital confirmations in 2000 and still leads the industry today. More than 16,000 audit firms, 4,000 banks and departments, and 5,000 law firms have put our platform to work. We span 170 countries and process more than one trillion dollars in confirmations each year.

The post The importance of validation in the audit process – and why your company should be vigilant appeared first on Confirmation.

The paper incorporated many of the recommendations from recent reports, such as the Kingman Review’s proposals for a new regulator, the Audit, Reporting and Governance Authority. Sir John Kingman also advocated “a duty of alert: a duty for auditors of Public Interest Entities (PIEs) to report viability or other concerns to the regulator”. PIEs are organisations that are “of significant public relevance” because of their size or the nature of their business, and whose collapse can cause major socioeconomic fallout. This was true of Carillion, a textbook example of audit failure.

The government has adopted the Brydon review’s recommendation for “a new, distinct professional body for corporate auditors”, which will enable good practice to thrive. The aim is for all corporate auditors to have a core set of audit-specific skills and experience. These will reinforce their authority to provide appropriate challenge to company management, exercise professional scepticism, and look for “signs of over-optimism, judgmental bias or possible fraud”.

The Department for BEIS intends to impose equivalent duties on company directors, legislating “to require directors of PIEs to report on the steps they have taken to prevent and detect material fraud”. Confirmation plays a pivotal role in this space. We provide a digital platform for auditors to verify a company’s financial statements – they can quickly initiate requests and receive responses from validated institutions and authorised responders, such as banks and law firms. This eliminates the opportunities for fraud presented by paper, fax or email communications.

The evolving relationships between auditors, clients and service providers

As a result of these reforms, the relationship between you and your auditor will change, creating mutual obligations to work cooperatively in the public interest. Auditors need to be “objective and provide findings and opinions unaffected by bias, prejudice, compromise and personal or corporate conflicts of interest”. Companies, especially larger corporations, are required to act more sustainably and make their own financial reporting more transparent. This will empower investors, creditors and other stakeholders by giving them access to reliable and meaningful information on company performance.

However, companies – their CFOs in particular – need to bear in mind that the confirmation process involves extremely sensitive and confidential data, such as bank account numbers, loan numbers and bank balances. In this context, Confirmation supports the highest level of security for all parties, providing reliable audit evidence that is maintained in a secure environment with end-to-end encryption. This enables auditors to reach sound and verifiable conclusions on the basis of “audit procedures performed and relevant audit evidence obtained”, as the International Standard on Auditing (UK) demands.

The experience of COVID-19 has intensified the speed of change, both in the use of technology and in working practices. It has prompted many organisations to rethink their traditional models and rely even more on technology in their strategic thinking. As Confirmation’s Kyle Gibbons explained in a recent ICAEW webinar, Quality audits and the beginnings of a new audit era, companies and their auditors need to develop close working relationships with tech service providers. They should be asking themselves: “is the provider managing data robustly and ethically? Which providers am I going to work with, and will they give me better audit quality outcomes?”

Later in the same webinar, the panel emphasised the importance of the BEIS consultation. They saw it as a perfect opportunity for all those involved in the audit profession – auditors, clients, third parties, and service providers – to steer the reforms in positive and forward-thinking ways.

For more information on how Confirmation can streamline and digitise your audit, contact us today.

Confirmation pioneered the idea of digital confirmations in 2000 and still leads the industry today. More than 16,000 audit firms, 4,000 banks and departments, and 5,000 law firms have put our platform to work. We span 170 countries and process more than one trillion dollars in confirmations each year.

The post What pending audit reforms mean for you and your auditor appeared first on Confirmation.