As technologies reshape industries, we wonder if disruptive startups could come between CPAs and our clients one day. Might these outsiders undercut fees in financial statement auditing much like ride-sharing enterprises revolutionized transportation?
To delve into this emerging threat of audit "Uberfication," I invited
The time is now to leverage promising technologies before disruptive forces dictate change on their terms.
How tech is disrupting SOC 2 audits
SOC 2 attestation offers essential assurance regarding system security, availability, processing integrity, confidentiality, and privacy. However, as Rob and I discussed, SOC 2 audits also pose significant challenges in terms of complexity and cost. This has created a significant opportunity for disruptive startups to provide innovative solutions that address these pain points and create value for their customers.
Certain tech companies have capitalized on this niche audit market by developing platforms that automate portions of the audit process. The software simplifies tasks such as audit planning, PBC requests, and control testing.
Some CPAs have signed up to partner with these tech companies. Rob detailed how the relationship works: "The platform comes along and standardizes the request list to some large degree. It effectively automates a bunch of the evidence-gathering. And then because of that, the tech company tells the CPA, 'Hey, this is basically automated. It's going to take you a very short amount of time.'"
The end result? A business model where third parties conduct substantial audit work while the CPA performs a reduced role and signs off.
Of course, humans still oversee these engagements. But make no mistake — the tech intermediary captures a meaningful share of the profits. And audit quality may suffer in some cases. As Rob explained, "I'm not going to name names, but some of those reports are not the type of quality that I'm used to seeing."
While SOC2 auditing serves a relatively small niche currently, it provides a testing ground for disruptors. As successes mount, we can expect these players and their business models to edge towards more mainstream audit work.
The risk of mainstream audit disruption
Given the ongoing disintermediation of SOC 2 audits, why couldn't hungry startups expand into bread-and-butter financial statement auditing? After all, if automation and outsourcing work for one assurance service, ambitious entrepreneurs will certainly explore similar plays for the much larger audit market.
Rob agreed this scenario is plausible given the right conditions. The recent wave of private equity investments in midsized accounting firms could accelerate it.
Investors seeking returns from newly acquired businesses may push hard for cost reduction and technology leverage to boost margins. The model has played out in other industries: Apply automation to tasks humans handled manually, reduce headcount, and pocket the savings.
The big incentive? Ongoing talent shortages leave many firms understaffed and vulnerable, providing an opening for disruptors. Caught between hungry startups, the potential of AI technology, and private equity's focus on profitability, CPA firms face an unprecedented competitive threat.
Examples of disintermediation
Companies in all industries, including travel, transportation and lending, are facing the challenge of external competitors coming between them and their customers. CPAs should take note of this and take steps to strengthen their client relationships.
Consider ride-sharing apps like Uber and Lyft. These are the most obvious disruptors over the past decade. As Rob points out, "We've been asking ourselves for years, 'What is the 'Uberfication' of our profession? If we're the taxi cab companies, who is Uber?'"
These platforms provide riders with an on-demand alternative to taxi services while claiming a cut of every ride. Without evolving, incumbent taxi firms saw earnings plummet as these apps ate their lunch.
Similarly, sites like Expedia and Travelocity squeezed travel agents by letting consumers book flights and hotels directly at reduced prices. And companies like LendingTree and Rocket Mortgage optimized the borrowing process to divert customers from traditional banks.
In each case, new intermediaries wedged between consumers and incumbent service providers, significantly eroding the latter's profits. Savvy CPAs should expect ambitious startups to pursue similar plays for accounting, given the huge size of the potential market.
Impacts on CPA firms
If automation-focused startups succeed in entering mainstream auditing, incumbent accounting firms face major downside risks. Firms that fail to compete technologically risk compromising their business models long-term.
For starters, auditors would lose coveted client relationships. As third-party disruptors directly interface with customers, they erode the bonds between CPAs and the businesses they serve.
Additionally, the widespread use of efficiency-boosting software would trigger rampant fee compression — which is exactly what we are seeing now in SOC 2 engagements. New competitors would leverage superior productivity to undercut pricing, and clients would demand similar audit savings. Margins and profits would shrivel up quickly with limited means to respond.
The very nature of services would also shift as disruptors scale automated offerings. Bespoke audits tailored to each customer's risk and needs could morph into templated, one-size-fits-all engagements. CPAs would sell simplified audit commodities rather than customized guidance and expertise around financial reporting risks.
And yet, resistance to change may persist among firm owners, as senior partners enjoy market strength from the status quo. Unfortunately, that short-term thinking surrenders strategic high ground to outside challengers.
The window of opportunity
Many CPAs working with other high-profile services often overlook SOC 2 auditing services. However, automation platforms for SOC 2 auditing are testing business models with the potential to disrupt the industry.
Startups see weaknesses in auditing processes, staffing, and technology. Traditional auditing firms should use new technologies like artificial intelligence to improve their services before startups take over the market.
Forward-thinking firms will:
- Use better tools and processes to automate routine tasks, freeing up teams to focus on more valuable work.
- Build and maintain trusted relationships with clients instead of relying on intermediaries.
- See external disruptions as opportunities for strategic change.
The audit need not follow the course of taxi companies left behind by Uber and Lyft. But without action, CPAs may one day convey clients as passengers, rather than steering the profession's future journey.
