Technology in the accountancy and legal sectors – what are the regulators doing? The long read…

1 December 2020

In the first of our Tech blog series, we take a look at how regulators in the accountancy and legal sectors are supporting technological innovation in their respective professional sectors, and how they themselves might adapt their regulatory approach in the new era of digital technology.

 

Undeniably, technology and artificial intelligence (AI) is becoming of increased importance in the modern world.  One definite positive in the current Covid-19 world we live in has been a generalised shift in perspective in the professional sectors.  Technology has become vital in every aspect of our business lives: from client meetings, to remote hearings, to being able to work increasingly paperless. Whilst in the ‘before’ times we all knew that technology would be the way of the future, it very much feels as though the future is now.

Accountancy

How are regulators incorporating technology into their strategies and horizon scanning?

In the past two years, we have witnessed multiple strategic initiatives in response to the growing use of technology in the accountancy sector. These have come from various professional bodes and UK accountancy regulators including the International Federation of Accountants (IFAC), the UK Financial Reporting Council (FRC), the Institute of Chartered Accountants of England and Wales (ICAEW), Association of Chartered Certified Accountants (ACCA), and Chartered Institute of Management Accountants (CIMA).

At a global level, in 2018, IFAC appointed its International Ethics Standards Board for Accountants (IESBA)[1]. This Board was tasked with establishing a strategic initiative on technology led by a new Technology Working Group (TWG). This was in response to the pace and magnitude of change caused by technological innovation on a global scale[2]. After engaging with stakeholders globally, including the UK accountancy regulators, the TWG presented its initial recommendations in a Phase 1 report published in December 2019.  This focused on AI and areas of big data and data analytics. Five focus areas[3] highlighted the need to:

  1. Build trust and promote ethical behaviour when developing and using technology, employing professional judgement to decide whether AI and big data outcomes are better or best serve the public interest.
  2. Recognise the complexity of the professional environment, the additional impact of adopting new technologies, and how these technologies might trigger threats to self-interest and intimidation.
  3. Ensure accountants are satisfied that any new technologies developed or used align with their fundamental ethical principles of accountability, fairness, transparency, and privacy and confidentiality.
  4. Ensure accountants have the necessary technical knowledge, competencies and skills required in the digital age.
  5. Ensure auditor independence is maintained, particularly when working with the sale or licensing of technology applications to audit clients and the use of an audit client’s technology in the delivery of non-assurance services to another entity.

The TWG’s latest consultation seeks further stakeholder feedback relating specifically to the second and fifth of the focus topic areas. These views will inform the TWG’s strategic plan, which following completion of phase 1 will move to phase 2. The second phase will consider technologies captured under the broad headings of blockchain, cybersecurity, the Internet of Things, cloud-based services, and data governance.

Closer to home, the five topic areas that TWG has highlighted are reflected in research and thought-leadership emanating from the FRC and the UK accountancy regulators. This is perhaps unsurprising given their stakeholder involvement with the TWG.  For example, with regard to audit quality, the FRC’s thematic review suggests the routine use of technology-led audits at the largest UK audit firms, but highlights potential ethical challenges. These relate, in particular, to auditor independence, arising from the increased involvement of third party providers and the use of tools in the audit process. The ACCA’s Audit and Technology report recognises the need for increased technical knowledge, competencies and skills when relying upon the use of technology, placing communication skills among the most important of these. In fact, its research has identified a large skills gap in the sector. In addressing the complexities associated with the adoption of new technologies, the ICAEW’s Tech Faculty report entitled Risk and Assurance in Emerging Technology considers how these risks can be mitigated through internal controls, while CIMA’s report on making good decisions focuses on the ethics of new technologies and how management accountants should act to build trust with their clients in an increasingly digital world.

 

How can regulators ensure their respective professions evolve quickly to benefit from technology?

IFAC’s on-going work through its working group is likely to result in changes to the International Code of Ethics for Professional Accountants.  It is expected that such changes will then be adopted by the UK accountancy regulators in their individual Codes of Ethics. What exactly these amendments will look like, or when they will be implemented, is yet to be determined. It is possible though that the Code revisions will be introduced incrementally as the work progress through to its anticipated conclusion in 2022.

In the meantime, UK regulators are already putting in place initiatives to support technological transformation in the sector. In terms of educating members about new technologies and how to adopt them, the ICAEW has incorporated within its syllabus for the ACA qualification, material regarding technological concerns, addressing what students are expected to learn and what they will be examined on. The ICAEW has also recently launched its Data Analytics Community for existing members, with a host of topic area guides, learning courses, webinars, and insights. CIMA has also this year published support for its members in the form of the 2020 Digital Mindset pack. This aims to up-skill and increase confidence in understanding new technologies. Taking a more formal route, the ACCA has introduced two new professional certificates, the Certificate in Data Analytics (CertDA) and the Certificate in Digital Innovation for Finance (CertDIF) to develop knowledge, skills and awareness of data analytics and digital technology innovations, and explain how they might impact the profession.

Finally, the FRC continues to promote participation in its Financial Reporting Lab, with the objective of supporting innovation in corporate reporting. Among its current projects, the FRC is calling for investors and companies to participate in a new project on corporate disclosures on risks, uncertainties, and scenarios. This is a similar initiative, albeit within a slightly narrower remit, to the Tech Nation initiative taking place within the legal services sector.

 

Will the regulators be able to regulate effectively in the new technological world?

There will be inherent challenges for the accountancy regulators, particularly relating to regulating audits where a lot of the work is done by AI or the use of complex algorithms. On the one hand, a key concern will be assessing whether professional accountants have applied adequate professional care and competence, and have undertaken robust road testing when developing and using third-party technology tools to deliver their services. On the other hand, regulators must equally ensure their regulatory policies do not attach unreasonable assumptions, different levels of caution, or higher threshold standards in such situations compared to non-technological situations that precede them. The ICAEW’s Risk and Assurance of Emerging Technologies report advises accountants and auditors that it might be appropriate, in particularly important cases, or where the risk is unacceptably high, to bring in additional technological expertise to validate models and controls. Equally, we might see regulators adopting this approach when called upon to assess the reasonableness of particularly complicated professional conduct cases involving complex AI or algorithmic models.

It remains to be seen how the new accounting and audit standards and codes of ethics will evolve to account for the development and use of new technologies in the accountancy sector. It is clear though, that this will be driven largely by the IFAC’s technology project, which no doubt the individual regulators, along with the FRC, will continue to feed into. What is promising though is that the regulators are already putting technology at the forefront of their strategies, and making significant steps to up-skill, prepare, and support their professional accountant members. With the ‘Big 6’ already using a significant amount of AI, and having the resources to invest in it, the regulators will need to be nimble and make sure that regulation is fit for purpose in the new technological age as it becomes more prevalent across the whole sector. 

 

Legal

How are regulators incorporating technology into their strategies and horizon scanning?

In recent years, we have certainly witnessed an increase in the use of technology and AI within the legal sector, with a particular focus on how this might lead to more innovation and address legal need. This can be clearly seen in the strategic planning of many of the legal services regulators and its oversight regulator, the Legal Services Board (LSB).

The Solicitors Regulation Authority (SRA has stated clearly in its objectives set out in its three-year corporate strategy (from now until 2023) that it will “actively support the adoption of legal technology and other innovation that helps to meet the needs of the public, business community, regulated entities and the economy”. Under the driver of collaboration and engagement, the SRA has also committed to look for new ways to draw in expert views on developing innovation and technology. This will include developing ways to learn from the experience of users and consumers, including those with protected characteristics and from different communities.

The SRA’s strategic plan also states it will work with technology providers who are looking to develop legal products and services, and will assist them to create networks and have access to expert support and investors. The SRA’s commitment does not stop there though in that it pledges to engage with Government on developments in digital legal processes and work together to leverage resources, as well as working with the Law Society, the LSB, other legal services regulators, and of course those it regulates, on innovative ways of offering services. It sees collaboration as key to driving forward lawtech in order to promote innovation in the delivery of legal services.

AI is also a focus for CILEx Regulation; it has recently been promoting the LSB’s collection of articles on legal technology, having itself contributed content. These “Perspectives” articles highlight the importance of innovation and focus on how access to legal services could be improved by those seeking to push the boundaries and explore new opportunities. One of the key themes in the papers is ‘AI: AI is emerging, and needs to be carefully considered’.  

CILEx Regulation’s three-year strategy also supports this approach with its mission statement being to “deliver forward-thinking legal regulation”, with a strategic priority being to promote high standards by supporting new technologies for legal services. Essentially this is a commitment to innovation. Last summer, CILEx Regulation’s representative arm, the Chartered Institute of Legal Executives (CILEx) also launched various specialist reference groups for its members and those with an interest in legal technology can join the ‘Tech & Digital Specialist Reference Group’. The idea behind these virtual networks is that CILEx engages with members on policy and professional matters and represents their views to decision makers and the wider legal community. Again, this is underpinned by the golden threads of collaboration and engagement.

In its Strategy for 2018-2022, the Council for Licensed Conveyancers (CLC) also sets out its vision for the future and highlights legal tech providers wanting to work with it to develop new tools for the sector.  This is reflected in one of its three strategic objectives, namely to adapt regulation to the changing market and in its mission statement, which is to deliver effective regulation that not only protects consumers but also fosters innovation in the provision of legal services.  As a precursor to this Strategy, the CLC published a paper, following a round table with Legal Futures. This considered the potential of legal tech and was titled ‘Regulating the robots; preparing for a conveyancing revolution’. The CLC said it wanted to “understand how legal services could change” so that it could “continue to support innovative lawyers who want to build new businesses to meet the needs of clients of the future while maintaining the high standards of consumer protection that are our hallmark.” This paper discusses how the CLC views regulation in a world of advancing technology, and the debate about the role of regulation in the era of digital conveyancing.

Turning finally to the LSB, ideally placed one might say in terms of its oversight role. The LSB has made clear in its three year strategy that it aims to encourage change in pursuit of a modern and effective legal services sector that works better for consumers, citizens and practitioners. The LSB’s work is organised around three strategic priorities, one of which is “increasing innovation, growth and the diversity of services and providers”.  The LSB’s Strategic Plan 2018-21 states that by 2021, the LSB envisions a growth in new delivery models, and an increase in the levels of service innovation. This includes promoting the wider use of regulatory sandboxes so that regulators can create a ‘safe space’ where providers can develop their innovations and test them with real consumers under the regulators’ supervision.

 

How can regulators ensure the profession evolves quickly to benefit from technology?

One of the most exciting and current initiatives is the Lawtech Sandbox Pilot. This is being run by Tech Nation with Government backing and its aim is to transform the UK legal sector through technology. The Pilot has been designed to promote and propel into the spotlight “pioneers” with the most forward-thinking and transformative ideas, products, concepts and services that seek to address the legal needs of businesses and society. The idea of the Pilot is to proffer to lawtech pioneers – who could be tech companies, academics, legal businesses or individuals - a range of tools, services and experts for a period of three months from December 2020, to help them develop their lawtech at a game-changing rate. The Pilot sought applications from those who are keen to test, build and push the boundaries with their products and ideas and the closing date was 16 November.  

Legal services regulators and the Financial Conduct Authority have joined forces to establish the “Regulatory Response Unit” to provide a fast response forum to the chosen pioneers, enabling them to navigate the rules of the relevant regulators and move forward with their ideas. This could be particularly helpful where an idea pushes the boundaries of the underpinning regulatory framework as well as engages different regulatory rulebooks.   

It is evident when looking at the regulators’ approach to lawtech that there is clear focus on improving access to justice and addressing legal need. For example, as well as recently writing about the Pilot and its involvement with the Regulatory Response Unit, CILEx Regulation - on its “Regulation Matters” space – has also written about LawTech and Access to Justice.  This article looks at whether the lessons learned from the LSB’s Perspectives paper are still relevant in a post-pandemic legal sector.

The CLC launched its Conveyancing Tech Guide in August and recently responded to the Legal Services Consumer Panel report on developing regulatory sandboxes for legal services innovation. All further evidence that regulators see lawtech as a priority area.  

Finally, the SRA’s longstanding message is to ensure that its approach to regulation is not placing unnecessary barriers in the way of those wishing to use technology or deliver service in new and innovative ways, while being clear that consumer protection and other obligations remain the responsibility of the solicitors and firms they regulate. This is underpinned by its regulatory reform culminating in the new Standards and Regulations which are now a year old.

The SRA has focussed on innovation for a while, running various initiatives. It has operated SRA Innovate since 2016, with the aim of supporting solicitors and firms wishing to innovate. The SRA also developed the Legal Access Challenge, an initiative funded by the Government's Regulator Pioneer Fund. This brought together potential collaborators with an interest in developing technology-driven legal solutions whose objective was to increase access to justice for people and small businesses. With a support programme in place, it is a similar concept to the Lawtech Sandbox Pilot.

Another SRA initiative is Safe Space and in April 2018 the SRA invited solicitors and firms to apply for waivers to get round rules that may have been stifling innovation. The SRA gave the green light for an increased ‘safe space’ for practitioners wanting to push the boundaries through new ideas. Later that year, the SRA won a £700,000 award from the government to support and accelerate the ideas of law firms and others to improve access to justice, using AI. The SRA worked in partnership with BEIS and Nesta, the innovation foundation, to create the ‘SRA Innovate Testbed’, an innovation competition. It aimed to give up to six legal services innovations – all powered by AI - the opportunity to test their services in a controlled environment, working closely with the SRA. The competition was open to lawtech firms, tech companies, start-ups, civil society organisations, universities and other innovators looking to develop ethical AI-driven solutions for the legal services market. The funded period ran between October 2018 and April 2020.

SRA Innovate Educate is again slightly different, aimed at providers of legal education. The SRA wanted to develop their professional legal education and training in new ways, and to support new types of providers who are thinking of offering legal education courses for the first time. It is seen as a way for new entrants to innovate, compete and grow. This could help improve access to quality courses at affordable prices, and will be of utmost relevance now that the LSB has approved the Solicitors Qualifying Examination (SQE).

 

Will regulators be able to regulate effectively in the new technological world?

Legal services regulators are certainly much better placed now to ensure they can regulate effectively in this technological world than they were even a few years ago. A number of the regulators have brought technology and innovation fully onto their radar and this is evident by it not only featuring in their respective strategic plans, but being positioned as a priority. And crucially, many of these regulators have recently undertaken or are about to embark on a review of their regulatory arrangements, and building in flexibility to be able to adapt effectively to change and to foster innovation by removing unnecessary regulatory hurdles is certainly very much one of the ‘must haves’ in these reviews.

The LSB can also play an important role in ensuring the regulators are ready for lawtech. The LSB, as the oversight regulator, is well placed to get a better understanding of what technology can do and what the challenges are that the regulators might face.  This is another opportunity for horizon scanning. Indeed, the LSB ran a Legal technology event addressing these very issues.  In assessing the lie of the land, regulators will need to ensure they exercise their functions in accordance with the underpinning regulatory objectives, including improving access to justice. Ultimately, it will be a question of having in place and being able to further develop a regulatory framework which can withstand the test of time. While this framework will need to be robust where it needs to be, it will require an in-built flexibility which does not stifle innovation.  

 

Final thoughts

Technology and innovation are certainly priority areas for regulators in both the accountancy and legal sectors. This is clearly evidenced by the collective efforts seen among the regulators, their individual strategic objectives, and the wave of initiatives they have implemented to support their respective professions. The focus appears broader than simply a drive to get the accountancy and legal professions to where they should be to reap the benefits of technological transformation; there is also a strong focus on ensuring that existing regulatory frameworks evolve appropriately to encourage and inspire new and innovative ways in which accountants and lawyers work in the future, while ensuring adequate protection remains in place for the clients they serve.

 

FURTHER INFORMATION 

If you have any questions or concerns about the content covered in this blog, please contact a member of the Regulatory team.

 

ABOUT THE AUTHORs 

Jessica is a Senior Associate with extensive experience specialising in legal services regulation. Jessica’s work in this sector focuses on advising her clients in relation to complying with regulatory obligations, better understanding the importance of legal ethics within regulation, regulatory investigations and public law matters, including reviewing regulatory frameworks and decision making processes.  Outside the legal services sector, she acts both for and against the regulators of the accountancy and actuarial professionals

 

Julie Matheson is a partner in the Regulatory Team. Her expertise lies in advising professionals and professional services firms, particularly in the accountancy and built environment sector, on regulatory compliance, investigations and enforcement proceedings.Julie assists clients with a range of regulatory issues, ranging from non-contentious advice on compliance with a regulator’s rules and procedures, to defending clients subject to regulatory investigations and prosecutions.

Lucinda is a professional support lawyer in the Regulatory team, and is responsible for knowledge management and practice development.She has previously advised individuals and professional bodies in the legal and accountancy sectors, on authorisations, compliance, ethics, and regulatory policy.

 

REFERENCES 

1] IESBA is responsible for setting the International Code of Ethics for Professional Accountants, which is adopted locally in the individual codes of practice of the ICAEW, ACCA, CIMA, and CIPFA.

[3] A more detailed summary of the TWG’s phase 1 report findings and recommendations was published in its February 2020 update.

 

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