Volume 6, Issue 10

October 2012

I. 6th Annual Main Street Investor Survey Finds Individual Investors Still Confident

On September 19th, the Center for Audit Quality (CAQ) released the results of its 6th Annual Main Street Investor Survey.

Since 2007, the CAQ has conducted the Main Street Investor Survey, an annual survey that measures individual investors’ confidence in U.S. capital markets, global capital markets, investing in U.S. public companies and the audited financial information released by those companies.

The 6th Annual Main Street Investor Survey results found that confidence in U.S. capital markets increased four percentage points, to 65 percent, after declining or remaining static every year since the economic crisis was fully underway in 2008. Investors’ confidence in investing in U.S. companies and in audited financial information remained steady at 71 percent and 69 percent, respectively. Confidence in capital markets outside the United States fell eight percentage points to 35 percent, continuing a decline that began in 2008.

Investors also were asked about which entities are most effective in looking out for investors’ interests, other than themselves. As in 2011, investors expressed the most confidence in independent auditors (70%), followed by financial advisors and brokers (66%) and independent audit committees (65%).

In an interview with CNBC’s “Closing Bell” to discuss the survey results, CAQ Executive Director Cindy Fornelli noted that investor confidence tracks the stock market. “When we ask investors why they’re confident, they say it’s based on the news that they hear and what they’re finding in the stock market.” Asked by host Bill Griffeth whether this increase in confidence will encourage investors to return to the market, Fornelli suggested that “perhaps they’re not as rational as they are confident.”

II. CAQ Hosts 2012 Investor Confidence Forum

To mark the release of the Main Street Investor Survey on September 19th, the CAQ welcomed approximately 100 attendees to the 2012 Investor Confidence Forum in Washington, DC. The Forum featured an expert panel discussing the state of investor confidence and providing context to the survey results.

In her welcome remarks, Cindy Fornelli noted that individual investors’ confidence in U.S. capital markets tends to mirror the performance of the stock market, which recently has approached levels reached prior to the economic crisis.

Investor Confidence Forum moderator Ben White (Right) with Douglas Elliott and Cindy Fornelli

The continued resilience of the individual investor in the face of turbulent economic news was the focus of the ensuing panel discussion, “What Is Driving Investor Confidence?” The panel was moderated by Ben White, Wall Street Correspondent for Politico, and featured Douglas Elliott, Fellow of Economic Studies with the Brookings Institution; David Gardner, Co-Founder and Chief Rule Breaker of the Motley Fool; Gail MarksJarvis, author of Saving for Retirement (Without Living Like a Pauper or Winning the Lottery); John Nofsinger, Professor of Finance at Washington State University and author of The Psychology of Investing; and Cindy Fornelli.

According to the Motley Fool’s Gardner, it’s never been a better time to be an investor. “I feel really good about where the economy is today for me as an investor, because I think we’re living through the most amazing innovation and technological age that the world has ever known,” he said.

However, MarksJarvis, a syndicated columnist with the Chicago Tribune, sounded a cautionary note. "[Individual investors] don’t trust the stock market. They don’t trust the regulators. They do trust individual companies.” According to this year's survey results, confidence in investing in U.S. public companies stood at 71 percent.

Gail MarksJarvis makes a point during the panel on “What is Driving Investor Confidence?” with David Gardner, John Nofsinger, Douglas Elliott and Cindy Fornelli

Nofsinger of Washington State believed that with the market at a five-year high, individual investors are ready to return to the market but cautioned, “One of the problems we have as investors is we get a little too exuberant at the highs and a little too pessimistic at the lows.” The behavioral economist continued, “If we follow through with our investing like that, we buy high and we sell low, which is not the first rule of investing.”

Brooking’s Elliott suggested that as declines on investment returns during the recession have settled, investors have “gotten used to the fact that we're growing at 2 percent a year and they're no longer comparing that so much to the growth rates of five or six years ago. There are more of them who are adjusting to the new normal.”

III. New Tool to Help Audit Committees Evaluate the External Auditor

The CAQ was among a number of governance organizations that have joined forces to release a new tool to assist audit committees in performing an annual evaluation of the external auditor. The Audit Committee Annual Evaluation of the External Auditor provides a brief, scalable approach, including sample questions, to help audit committees objectively evaluate the auditor’s performance and the quality of services provided during the audit.

The tool was developed jointly by the Association of Audit Committee Members, Inc.; Corporate Board Member, an NYSE Euronext Company; Independent Directors Council; Mutual Fund Directors Forum; National Association of Corporate Directors; Tapestry Networks; and the CAQ.

The organizations involved in this effort share a commitment to enhance the effectiveness of audit committees through education and other types of support. The assessment tool is the first project of an ongoing collaboration designed to expand access to useful tools and materials with the objective of strengthening audit committee performance and transparency.

IV. Anti-Fraud Webinars Continue with “Skepticism and the External Auditor”

On October 22, the Anti-Fraud Collaboration – the CAQ, National Association of Corporate Directors (NACD), Financial Executives International (FEI) and The Institute of Internal Auditors (The IIA) – released a new webinar on “Skepticism and the External Auditor.” The webinar is the second episode in the NACD-developed Skepticism Webinar Series, following the October 1 release of the introductory webinar, “The Etiquette and Ethics of Skepticism.”

Featuring moderator Michele Hooper, an NACD and CAQ Board Member, and panelists Cindy Fornelli and Greg Weaver, Chairman and CEO of Deloitte & Touche LLP, “Skepticism and the External Auditor” takes an in-depth look at professional skepticism as exercised by the external auditor. Skepticism requires an environment that encourages questions. It means “I trust you, but my responsibilities require me to verify what you’re telling me.”

Weaver and Fornelli discussed the importance of professional skepticism to auditor independence and audit quality, and how firms train their auditors to be skeptical. Training is paramount for exercising skepticism to make sure the audit evidence fits. “Auditing, like law, medicine, and other professions, requires an educational foundation. But it also requires a lot of ‘on the job training,’” according to Weaver. “A good auditor is really one who is continually learning.”

“Skepticism and the External Auditor” is part of a five-webinar series that highlights the importance of skepticism – as applied by external auditors, audit committee members and other directors, financial executives, and internal auditors – in the overall effort to deter and detect financial reporting fraud. Future webinars in the series include “Skepticism and the Audit Committee” (Oct. 29); “Skepticism and the Financial Executive” (Nov. 5); and “Skepticism and the Internal Auditor” (Nov. 12).