OPPORTUNITIES AND CHALLENGES IN THE TRANSFORMATION OF THE FINANCIAL SERVICES LANDSCAPE AND AUDIT PRACTICES BY FINTECH

Writer: Paulette MENDOUGA MAZE

1 .Introduction

Financial technology (Fintech) has undergone complete change due to its widespread acceptance in modern-day businesses. For example, Fintech is paving the way for big changes and new possibilities when it comes to financial audit processes. The fast growth of Fintech has caused a change in the way financial audits are done. Now, cutting-edge technologies are used to improve efficiency, accuracy, and risk assessment (Smith & Johnson, 2021). Businesses and investors rely heavily on financial audits to ensure accuracy, accountability, and compliance with applicable regulations. Audits have historically relied on human intervention, paper records, and limited testing. However, with the rise of Fintech, new tools have emerged that are revolutionizing the auditing world (Smith & Johnson, 2021). Auditors can quickly and accurately review huge amounts of financial data using automation, AI, and machine learning algorithms, allowing for a more thorough and accurate assessment of financial records. It has been noted that Fintech-driven audit practices could improve audit quality by using advanced technologies that make real-time tracking, statistical analysis, and remote auditing possible (Arens, 2017). In addition, auditors and businesses must deal with the changing regulatory climate to stay in compliance and uphold the integrity of financial audits as regulatory frameworks adjust to the changing financial landscape. Financial audits will likely change thanks to the creative tools made possible by the ongoing developments in block chain technology, cloud computing, and data analytics (Smith, 2022).

2. The problematization of a professional situation in the context of Fintech transforming financial audit practices 

The problematization of the professional situation in the context of Fintech’s transformation of financial audit procedures entails the identification and analysis of obstacles and concerns originating from the incorporation of Fintech into traditional audit methodologies. The point is to learn what this shift means and how it may benefit the beneficiaries and auditors. There are several potential focal points for the problematization: 

2.1 The Evolving Auditing Scene 

The traditional audit environment is changing due to the rapid development of Fintech. Recognizing the limitations of traditional audit procedures, such as manual processes and sample-based testing, that Fintech threatens to upend is part of the problematization process.

2.2  Increased Productivity and Accuracy 

Automation, data analytics, and AI in FinTech present possibilities for increasing the productivity and accuracy of financial audits. However, problematization requires recognizing the difficulties and dangers of relying largely on technology and algorithms, such as the necessity for human judgment and control and the quality of the data being used. 

2.3 Impact of Fintech on tax laws 

Some instances of how new tax regulations have influenced countries’ fintech industries include:

• United States 
  The Corporate Tax Rate was reduced from 35% to 21% due to the Tax Cuts and Jobs Act (TCJA), enacted in 2017. Fintech companies’ profitability and investment decisions have benefited from the fall in tax rates (Lynch et al., 2021). The government has also levied a 13.125% Tax break for companies whose profits come from intangible assets made outside of the United States. They also offer a federal research and development tax credit, which can be used to lower the cost of payroll taxes and urge people to start their tech businesses. Several United States Fintech companies have applied to state banking regulators or the Office of the Comptroller of the Currency (OCC) to obtain the status of a special purpose bank or trust charter. 

• United Kingdom 
  Open Banking Tax Incentives: To foster innovation in the financial technology sector, the government of the United Kingdom established tax incentives, such as the Open Banking Initiative. Investments in eligible fintech companies are tax exempted, and R&D is eligible for tax advantages. 

• Singapore 
  In 2020, Singapore imposed a Digital Services Tax (DST) on digital services rendered by non-resident businesses, including fintech companies. Online sales of software, digital material, and subscription-based services are subject to this tax, which reduces the income and profits of Singapore’s fintech companies. 

• Australia
  The Australian government’s Consumer Data Rights (CDR) Act grants customers access to and authorization to share their banking and financial information with permitted third parties. This data sharing stimulates the development of cutting-edge fintech solutions while increasing competition in the banking industry.

Furthermore, the government offers a variety of tax advantages to support the development of fintech enterprises. For example, the Early Stage Innovation Company (ESIC) tax incentive provides tax reductions to qualified investors that finance qualifying early-stage fintech startups.

• Germany
  The German government formed the FinTech Supervisory Authority (BaFin) to oversee fintech operations. The fintech sector will be encouraged to innovate with this regulatory framework’s support while safeguarding consumers and ensuring financial stability.
  The government has also developed financial incentives, such as the Research and Development (R&D) tax credit, to encourage investment in technological advancements and innovation within the fintech sector.

• France
  France’s tax legislation has undergone considerable adjustments due to Fintech to keep up with the digital revolution. First, new transactional techniques contradict traditional tax standards thanks to fintech advances such as mobile payment apps and digital currencies. Fintech has significantly increased the complexity of cross-border transactions, necessitating additional legislation to ensure adequate tax compliance and prevent tax avoidance. Fintech, on the other hand, has brought forth some beneficial improvements. Thanks to innovative data analytics and automation solutions, better tax compliance and fewer administrative costs are now available for individuals and organizations. Furthermore, digital platforms have enabled real-time reporting and transparency, allowing tax authorities to monitor transactions more carefully. French tax laws are being revised to include new tax regimes, introduce digital reporting requirements, and promote stronger relationships between tax authorities and fintech companies to adapt to these advances and maintain equitable and effective taxation in modern times. 

3. Fintech 
   Fintech, short for “financial technology,” is when new technologies are used to improve financial services and processes. It includes various technological advances and applications that change and disrupt standard financial systems, services, and transactions (Chuen, 2017). Some banks surveyed ask their customers if they are willing to start using FinTech solutions. Moreover, this is the ratio they got: 

Below are some examples of financial technology: 

3.1  Online Payment Systems 
Fintech’s introduction of online payment systems has radically altered how monetary transactions are conducted. There has been a decline in traditional banking channels due to online payment processing services like PayPal, Square, and Stripe (Dwivedi, 2020).

 3.2  Peer-to-Peer Lending 
Individuals and small businesses can now engage in peer-to-peer lending through fintech platforms like Lending Club and Prosper without going through banks. Loans at predetermined interest rates and periods can be facilitated through these platforms, which bring together borrowers and lenders (Kshetri, 2018).

3.3 Robo-Advisors 
The advent of robo-advisors in financial technology has changed how people invest their money. Betterment and Wealthfront are two examples of these digital platforms that use algorithms and automation to offer personalized investment advice and manage investment portfolios, typically at lower prices than traditional financial advisors (Chuen, 2017). 

3.4 Blockchain and Cryptocurrencies 
The technology behind cryptocurrencies like Bitcoin and Ethereum, known as blockchain, has caused widespread upheaval in the banking sector. It allows for trustworthy, unmediated financial dealings between individuals. Exchanges, wallet services, and merchant solutions are all made more accessible by fintech firms like Coinbase and BitPay (Yermack, 2017).

4. FinTech adopted by banks 

Fintech has dramatically affected the banking industry, changing how financial services are provided, accessed, and managed. Fintech has changed how banks do business and created new possibilities for innovation, efficiency, and solutions that focus on the customer. Some of the most crucial roles Fintech plays in banking are:

4.1  Improved Customer Experience 
Customers get a better banking experience due to the innovations made possible by Fintech. Customers can do their banking using their mobile devices, digital wallets, and online platforms anytime and from any location. Customers now have more financial freedom thanks to the individualized financial services made possible by Fintech.

 4.2  Financial Inclusion 
People who do not have bank accounts or do not have enough bank accounts have gained access to financial services thanks in large part to Fintech’s efforts in this area. People who do not have access to conventional banking institutions can now more easily participate in the economy. It is achieved by implementing cutting-edge technologies such as digital id, biometrics, and mobile payments. The budget deficit has been reduced, and the economy has expanded. 

4.3  Disintermediation and Competition
Fintech has increased competition in the banking industry by attracting new entrants. The situation is difficult for conventional banks. Both small and large technology companies have developed and released new products and services in the financial technology sector that address consumer needs. It has increased competition, which has compelled conventional financial institutions to adapt to new circumstances by trying new things and improving their practices. 

4.4  Decisions based on data
Fact-checked conclusions- Data analytics, AI, and machine learning are used to examine financial data. It lets banks make choices based on data, improve risk assessment and management, and give customers personalized financial advice. Fintech has also made it easier to find and stop frauds by making it possible to track and analyze transactions in real time. 

4.5  Efficient Operations and Cost Savings 
Automation, digitization, and process improvement are all things that Fintech has brought to banking operations, which have made them more efficient and saved money. Tasks like signing up a new customer, opening an account, and processing a loan can now be streamlined and done automatically, reducing the amount of work needed by hand and improving operating efficiency. Because of this, banks have saved money, which they can give back to users through better rates or lower fees (Smith, 2022). 

4.6  Collaboration and Partnerships 
Fintech has made it easier for banks and Fintech firms to work together. Many banks have signed on to open banking programs and started working with fintech companies to use their specialized technologies and skills. Working together has led to new solutions, like API integration, which makes it easy to share data and gives customers access to more services. 

Fig #2 is survey data taken by some banks in which they asked their customers about the reasons for using FinTech. 

Fig#2 What are the reasons for using FinTech?

Source: (Consultancy-me.com, n.d.)

5. Financial audit
A financial audit is a systematic, independent look at a company’s financial records, statements, transactions, and internal controls to give an unbiased assessment of the organization’s financial health, accuracy of financial reporting, and compliance with accounting standards and regulations (Arens, 2017). A financial audit aims to show investors, creditors, and regulators that the financial statements give an accurate and fair picture of the organization’s financial situation, performance, and cash flows. During an audit, the organization’s financial records, internal controls, and accounting methods are examined to ensure that the financial information is accurate and reliable. 

6. Fintech is changing traditional audits 
Financial technology (Fintech) has a profoundly transformative effect on the financial services sector. Regarding audit procedures, Fintech is making waves by disrupting the status quo and opening the door to new ways of doing things. Fintech’s use of cutting-edge technology and introduction of novel opportunities are revolutionizing the financial auditing industry. (McKinsey &Company., 2021) writes, Fintech is fundamentally altering the traditional audit process, allowing auditors to harness the power of automation, data analytics, and artificial intelligence to drive greater efficiency and effectiveness (Kshetri, 2018). Manual procedures, paper records, and limited tests from samples have long been the backbone of auditing. These approaches have been useful but are typically laborious, costly, and narrow in scope (Deloitte, 2021). However, Fintech threatens existing norms and reveals new ways auditors might improve efficiency. The automation of previously manual procedures is a major way in which Fintech is altering audit practices. Data extraction, reconciliation, and analysis are automated using RPA and machine learning algorithms. Auditor productivity can be increased in areas such as data interpretation, risk assessment, and giving strategic insights by automating routine, time-consuming operations. This change will help auditors work faster and more accurately while decreasing the likelihood of making mistakes (PwC, 2020).

Fintech is reshaping audit data analytics. Auditors today use cutting-edge analytical methods and technologies to sift through mountains of financial data, thanks to the information explosion of the digital age. AI and machine learning algorithms have made it easier than ever for auditors to spot trends, outliers, and vulnerabilities in a system. As a result, auditors can better comprehend financial transactions and spot possible problem areas, leading to more fruitful and efficient audits. Furthermore, Fintech is leading to the widespread implementation of real-time auditing. Conventional audits often make use of retrospective evidence and routine inspections. On the other hand, auditors now have real-time access to financial data thanks to fintech tools and technologies. This change equips auditors with cutting-edge information, facilitating the timely recognition of new risks, trends, and opportunities. Auditors’ increased capacity to give timely and appropriate suggestions in a real-time audit facilitates proactive risk management (Johnson, 2021).

7. Fintech has prompted revisions to IFRS standards 
Accounting and reporting standards, such as IFRS, have been impacted by Fintech, which refers to technologically driven advances in the financial sector. Some examples of how Fintech has prompted revisions to IFRS standards are shown below: 

7.1  Cryptocurrency Accounting 
Following a meeting in 2019 to study how current IFRS standards might apply to cryptocurrency ownership, the IFRS IC observed that various crypto-assets, including cryptocurrencies, were accessible on the market then (Coveney). According to the IFRS IC, IAS 2 applies to cryptocurrencies held for sale in business. If IAS 2 is not applicable, a firm applies IAS 38 to its Cryptocurrencies assets. 

IAS 38 related to intangible assets is applicable if retained for Capital Gains. Because these are measured according to IAS 38, we should use the Cost or Revaluation Model. IFRS considers cryptocurrencies held by an entity for sale in the ordinary course of business to be inventory, which must be documented using IAS 2 Inventories. Inventory values are frequently calculated using the lowest cost and net realizable value (Indrayono, 2019). Broker traders would be granted an exception, allowing them to value their goods at fair value, less selling costs (Sterley, 2019). A cryptocurrency broker-trader frequently purchases cryptocurrencies to quickly sell them to profit from market volatility (Mlambo, 2022).

7.2  Peer-to-Peer Lending Accounting 
International Financial Reporting Standards (IFRS) have been adapted in response to advancements in Fintech, particularly in the peer-to-peer (P2P) lending space, to meet the peculiar accounting difficulties associated with this expanding business (Suryono et al., 2021). One IFRS standard influenced by fintech advances in P2P lending is IFRS 9 – Financial Instruments. This standard defines the ideas for categorizing, measuring, and recognizing financial instruments. Fintech advances have resulted in revisions to IFRS 9 to handle the complicated nature of peer-to-peer (P2P) lending transactions and improve the integrity of financial reporting. The changes to IFRS 9 are designed to provide more detailed guidance for identifying, evaluating, and impairing P2P lending assets. These modifications make it easier for accountants to analyze credit risk, forecast probable credit losses, and make necessary provisions for potential defaults associated with P2P lending transactions. 

The purpose is to ensure that financial statements accurately and honestly portray P2P lending activities and associated risks. Refining the disclosure requirements for peer-to-peer lending transactions could be part of the IFRS 9 amendments made in response to fintech trends. Enhanced disclosures can give stakeholders a more comprehensive understanding of the risks, uncertainties, and performance metrics associated with P2P lending activity (Nisar et al., 2020). It could include sharing data on the number of P2P loans originating, borrowers’ credit standing, default rates, and the effectiveness of risk management strategies utilized by P2P lending platforms (Lyócsa et al., 2022).

8. Benefits and risks associated with these changes and what it means for businesses, investors, and auditors 
Here is more about the pros and cons of how Fintech is changing the way financial audits are done, as well as what it means for businesses, investors, and auditors:

 8.1  Benefits

• Increased Efficiency: Audit practices that FinTech drives make auditing more efficient by automating manual chores and streamlining processes. It gives inspectors a better way to use their time and money, letting them focus on more critical tasks like data analysis and risk assessment (Deloitte, 2021). 
• Accuracy: Using advanced technologies like AI and machine learning, Fintech allows auditors to analyze enormous amounts of financial data more accurately. It makes audit results more reliable and makes it less likely that a person will make a mistake (McKinsey & Company, 2021). 
• Real-time Insights: Fintech makes viewing and analyzing data in real-time more accessible, giving auditors the most up-to-date information. It makes it easy for auditors to spot new risks, trends, and possibilities quickly. Up-to-date audit information can help businesses and investors make better choices (PwC, 2020). 
• Improved Risk Assessment: Through advanced analytics and predictive models, FinTech tools make it easier for auditors to spot possible risks and fraud. It makes risk management more effective and helps businesses deal with possible threats (KPMG, 2021). 
• Remote auditing: Fintech allows auditors to do audits from afar, removing geographical obstacles and lowering costs from being in person. Remote auditing makes working together easier and lets auditors view data from different places without traveling (EY, 2021). 
  
  8.2  Risks 

• Data Security and Privacy: The increased use of technology and digital data in audits brings questions about data security and privacy. Auditors must ensure that solid cybersecurity means are in place to protect sensitive financial information from unauthorized access, data breaches, and cyber threats (Deloitte, 2021). 
• Dependence on technology: Using fintech tools and platforms too much puts you at risk. Technical problems, bugs in the system, or a lack of infrastructure could mess up audit processes and make audit products less accurate or late (PwC, 2020). 
• Skills and knowledge: As Fintech keeps improving, accountants and auditors have to learn new skills and adapt to technological changes. (McKinsey &Company., 2021) says that this needs ongoing training and professional development to keep up with the changing landscape and use fintech tools well. 
• Compliance with regulations: When Fintech is used in financial auditing, new regulations exist. Auditors must keep must changing rules to ensure that security, privacy, and reporting requirements are met. Businesses and accountants can face legal and reputational risks if they do not follow the rules (KPMG, 2021). 

Here are some examples: 

• Open Banking and PSD2: Because of Open Banking and the Revised Payment Services Directive (PSD2), the European Union’s financial services have changed completely. PSD2 authorized open banking regulations requiring banks to use Application Programming Interfaces (APIs) to grant trusted third-party service providers access to their client’s financial data. This legislative framework allows fintech companies to use client data to create new goods and services. Open banking, therefore, promotes a dynamic environment by fostering competition and bringing in new competitors, giving customers more power, giving consumers more options, and driving innovation in the financial sector. When financial data is accessible via APIs, it facilitates integration, cooperation, and the development of personalized financial solutions. It is beneficial to customers and advances the industry. 

• Regulations “Know Your Customer” (KYC) are being updated to consider digital identity solutions. Biometrics, blockchain, and machine learning are just some technologies Fintech firms have used in customer identification procedures and maintaining AML/CFT compliance. The EU’s eIDAS Regulation was enacted to encourage member states to use electronic identification and trust services. It establishes a legal framework for digital seals, timestamps, and document signatures. The legislation makes it easier for these services to be recognized and acknowledged across international borders by ensuring interoperability and boosting digital transactions within the EU. 
  
  8.3  Impact on businesses and investors 

• Businesses: Audit practices are driven by FinTech drive nesses to improve working efficiency, gain timely insights, and better manage risks. Businesses can make decisions based on data, react faster to new risks, and improve their financial transparency and governance (Deloitte, 2021) 
• Investors: Audits that use Fintech give investors more faith that financial statements are reliable and correct. Real-time insights and better risk assessment make it easier for investors to judge companies’ financial health and success (PwC, 2020). It helps them make better investment decisions. 

9. Conclusion 
Fintech is changing financial audits by adding automation, data analytics, and real-time features. When Fintech is used in audits, there are many benefits, such as better audit efficiency, better risk rating, and better fraud detection. However, this makes it more challenging to maintain privacy, acquire new knowledge, and behave lawfully. Auditors and organizations must adopt fintech developments to get the most out of technology in financial audits and address these challenges. The advent of Fintech has provided auditors with new tools to increase the value, efficiency, and understanding of their financial auditing practices. Financial auditing is dynamic, but with the help of modern tools, data analytics, and on-the-spot expertise, auditors can adapt to new circumstances. Fintech advances can help auditors and businesses with data security, employee training, and regulatory compliance issues. It will allow them to make the most of Fintech to revolutionize financial auditing in line with modern expectations. 

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