Findex CEO speaks out about Xero's recent moves

1/09/2015

There have been some interesting developments in the world of cloud accounting, with Xero recently announcing plans to move further into financial services, as well as overhaul the audit process. Chief Executive Officer, Spiro Paule has provided comments on these new moves in an article published in the Australian Financial Review, see below.

Sharemarket darling Xero's founder Rod Drury has assured auditors the software maker is not trying to eat their lunch, following comments at a Melbourne conference that the cloud-based software is fast reaching a level where it could be used to "provide assurance" of the integrity of clients' data.

"We are pro-auditors," said Mr Drury, who started his career as an auditor with Arthur Young before it merged to become Ernst & Young.

"But a lot of things [auditors] spend weeks and weeks checking we can do automatically in cloud accounting," he said.

Mr Drury incurred the wrath of auditors, having just hosed down a social media stoush with bookkeepers, by saying that rather than getting accounts audited to secure a bank loan, accountants could use Xero's "assurance dashboard" and model of "continuous certification" to increase SME's access to capital.

Frustrated auditors fear Mr Drury's proposal will compound the "expectation gap" about what auditors do.

"It shows a complete misunderstanding of what the audit process involves," Leanne Smith, an audit partner at intentus in New South Wales' central west, said.

Natalie Lewicki, a former PricewaterhouseCoopers auditor and current Asia Pacific chief executive of audit technology company Confirmation.com, said: "Fundamentally the audit is an independent process. That independence is what our capital markets rely on."

National Australia Bank, which is working on tighter integration with Xero's software, has watered down Mr Drury's enthusiasm, saying its credit assessment process is unlikely to change dramatically as a result of its partnership with Xero.

Mr Drury said Xero was meeting risk officers of the banks to understand what they needed, as part of a plan to lower the cost of assessing and processing small-business loans.

Xero's auditor PricewaterhouseCoopers is confident it won't be assigned to the scrap heap in a hurry by the listed software maker.

"Audit will always need humans for those areas that possess risk characteristics," PwC audit technology leader Nadia Carlin said.

APPEASE BOOKKEEPERS

Earlier in 2015, Xero was forced to appease bookkeepers, who act as a vital distribution channel and advocate for its products, following a social media storm about Xero's marketing, which led consumers to believe its software did all the book work on its own.

Similarly, auditors fear Mr Drury's comments will diminish the value of the assurance they supply to capital markets.

"My big worry is audit clients who use Xero may expect less work by their auditor and lower fees," audit practice management coach Thea Foster, a former auditor, said.

Ms Foster has begun cautioning her accounting firm clients with audit practices about touting Xero to their clients.

But Mr Drury said Xero was "absolutely not trying to get away from the independence of the audit".

"It's about a professional adviser understanding the system, connectivity and controls within Xero.

"We want to use technology to make them [auditors] use their big brain."

Ms Foster is not the only one worried about Xero's growing influence in the market.

Spiro Paule, boss of one of Xero's biggest distribution partners in Australia, Crowe Horwath, is acutely aware that half his company's income is under threat from players like Xero.

His biggest fear is losing control of clients' data.

"Mr Drury is the friend of accountants, but if he controls the data he can use it‎ and lead them to solutions that don't require people," Mr Paule said.

POWERFUL POSITION

"That's a very powerful position. I'm worried about that," he said.

"We're friendly enemies at the moment. We're all helping each other out, but I'm not under any illusion."

Xero has already begun using its vast volume of data about small businesses to inform governments.

In New Zealand, where Mr Drury says 25 per cent of all businesses use Xero, the software maker has taken the lead on a number of red-tape-reduction projects to enable business-to-government transactions and reporting.

"In New Zealand the official number of small businesses was 450,000. We were able to go to government and say, 'Actually, there are 620,000'," Mr Drury said. "The nature of work has fundamentally changed in the last few years, where people are partially self-employed."

Xero says 250,000, or about 10 per cent, of small businesses in Australia use its software.

Mr Drury's next goal is to use Xero's expanding influence to improve small businesses' access to credit.

Despite practitioners' reaction to Mr Drury's comments, smaller firms bemoan the costs associated with providing audit services.

UNDER PRICE PRESSURE

It is a low-growth practice area, under constant price pressure. But technology could change this.

Ms Carlin said there was enormous scope for automation in the audit process. However, this would require auditors to migrate their skills towards interpreting data.

"Automation is coming faster than we think," she said. "But it's a good thing for both clients and the profession."

Mr Paule believes that while software is not across the qualitative part of audit yet, like driverless cars it will get there.

He gives it five years.

View the published article online here.