Technological advances. Emerging developments. Evolving corporate reporting. The world of auditing is rapidly evolving, and it’s an exciting time to be an auditor.
As a long-time accountant, I never thought I’d be using the words “auditor” and “exciting” in the same sentence (I’m joking of course, I put those words in the same sentence often). But I do believe this is an exciting time to be involved in the world of public company audits. At the same time, these rapid developments can be difficult for audit practitioners to keep up with as they recover from finishing another busy season.
As the Vice-President, Professional Practice at the Center for Audit Quality (CAQ), I am privileged to “see inside” the audit profession, working with industry and profession leaders and capital market stakeholders in the audit space to shape the future of assurance and corporate reporting. With this monthly newsletter, my aim is to provide you with timely updates, resources, and tools that can help you – whether you’re an audit practitioner or rely on the work of auditors – better understand what’s driving audit quality, the ever-evolving role of the auditor, and developments in talent, a critical issue for the profession. Read on for what I was tracking in April.
April was an active month for public company audit regulators and standard setters. We’re closely monitoring the following developments at the PCAOB and IAASB
Audit Quality
Audit quality in the U.S. has never been higher, but in light of economic uncertainty, emerging developments, and demands on talent, audit practitioners should remain up to speed on the latest developments impacting audit quality. Read on for recent news, tools, and resources.
Audit Quality Reports Analysis: A Year in Review
Many audit firms publish audit quality reports voluntarily to communicate with stakeholders about information they utilize to maintain, promote, and strengthen audit quality at their firms. The CAQ recently analyzed these reports to assess how audit firms – particularly the most recent audit quality report for each of the eight accounting firms represented on the CAQ’s Governing Board – describe their approaches to supporting and maintaining high audit quality. We observed over 100 unique qualitative disclosures and quantitative audit quality metrics in our analysis and found that while there is no single indicator or metric to measure audit quality each firm’s audit quality report is tailored to its specific facts and circumstances and may change over time.
Our analysis found that audit firms remain committed to transparency into how an accounting firm defines, approaches, and executes its audit quality mission. For examples of the qualitative and quantitative metrics used in audit quality reports, read the full analysis here.
The Evolving Role of the Auditor
April 22nd marked Earth Day, but at the CAQ we are thinking about greenhouse gas emissions on more than just this one day. When it comes to climate information and expectations for corporate disclosures, the CAQ is tracking the latest regulatory developments.
Awaiting the SEC’s final climate rule
The SEC continues to work on its final climate-related disclosure rule. The staff at the SEC has its work cut out for them as they work through thousands of comment letters they received from interested stakeholders. As we await the SEC’s final rule, the CAQ analyzed twenty-nine companies that the SEC initiated correspondence with from July 1, 2022, through December 31, 2022, regarding their climate-related disclosures in Form 10-K filings. We found that when companies provide quantitative climate-related information, that information most often pertains to capital expenses, costs associated with physical risks, compliance costs, and carbon credit or offset costs. A few takeaways of the analysis:
There is little uniformity in the definition or determination of climate-related capital expenses.
When a company described costs associated with physical climate-related risks they were typically costs incurred due to property damage from severe weather events.
Climate-related compliance costs were often described as the expenses incurred to comply with federal and state climate-related laws.
Roughly two-thirds of the companies indicated that they did not purchase carbon credits or offsets during the reporting period.
Why the CPA?
We teamed up with the AICPA to develop a resource that explores the increasing demand for independently assured ESG information – and why the CPA is best positioned to provide this assurance. Check out this resource, Corporate Decision Making: Why choose a CPA for your ESG assurance needs, to learn more.
Talent Spotlight
The CAQ is committed to working with audit firms to address issues related to talent, including the pipeline and gaps in diverse representation. Each month, I’ll spotlight our efforts on this critical issue.
The Center for Audit Quality and EVERFI Create Limitless Opportunities in the Accounting Field
In April, I had the opportunity to join the CAQ and EVERFI, the nation’s leading social impact education innovator, at H.D. Woodson STEM High School in Washington, D.C. to celebrate the launch of Accounting Careers: Limitless Opportunities, an interactive course that covers the extensive benefits accounting skills can provide in business or in daily life, including contexts like entrepreneurship, investing, and personal finance. The course aligns with Jump$tart National Standards in K-12 Personal Finance Education, ASCA National Standards, and Common Career Technical Core standards, and is being rolled out in high schools nationwide. Check out this story on the event in Accounting Today, CAQ and Everfi launch accounting education DEI program.
Fun fact for the football fans in this audience: The event was moderated by Dhani Jones, who began his career in the NFL playing with the New York Giants, Philadelphia Eagles (my hometown team…go birds!) and Cincinnati Bengals. But these days, he’s focused on more philanthropic efforts, like helping students understand the benefits of a career in accounting.
This Month's Audit Insider
Each month I will feature a special guest, an audit insider, who is leading our profession in exciting and emerging areas. As April is Earth Month, it seemed very fitting to feature Kristen Sullivan of Deloitte who is leading our profession to do great things when it comes to Sustainability and ESG efforts.
Read on for my Q&A with Kristen:
- What is your view on an auditor’s role with respect to the ESG or sustainability reporting movement?
Sustainability reporting can enable companies to communicate to the capital markets information about their long-term value creation risks and opportunities – it is becoming one of the biggest business transformation opportunities in a generation. Auditors have been performing assurance on sustainability reporting for more than a decade, and assurance can drive trust and confidence in the data which in turn can improve the board’s confidence and the trust of stakeholders. If they’re making decisions on incomplete data, that’s fuel for inefficiency and risk. For many companies, the governance and control environment will need to quickly mature to get into alignment with traditional corporate reporting. Auditors apply professional standards, no different than the financial statement audit, and we have professional requirements around independence, objectivity, professional skepticism, and quality control. Given rulemaking proposed in multiple jurisdictions, the auditors’ may increasingly be requested to perform ESG attestation services, which can accelerate rigorous and financially relevant reporting.
- What can auditors be considering in advance of the SEC climate rules?
- We don’t know where the final rule will land, but we do know that the importance of governance, an effective control environment, and independent assurance will likely be central to capital markets’ expectation around ESG information. Assurance is an important component of an effective governance structure and can act as a tool to help companies accelerate more rapidly around the discipline and rigor of anticipated enhanced ESG reporting requirements. I suggest auditors who have not been as close to the ESG reporting evolution quickly gain an understanding of what is driving the demand for material and reliable climate-related information. I encourage all auditors to embrace the opportunity to be catalysts in this evolution in corporate reporting. Data from Deloitte’s recent Sustainability action report shows:
- Nearly all executives (96%) plan to seek external assurance for the next reporting cycle.
- 61% are already seeking external assurance. 35% first time seeking external assurance
- The CAQ’s The Role of the Auditor in Climate-Related Information is also a terrific resource to learn more.
- What makes you passionate about your role as Deloitte’s Global Audit & Assurance Sustainability and Climate Services Leader?
- I have been playing a leadership role in the Sustainability and ESG market for more than a decade, and I am as passionate today as ever. I can’t think of a higher purpose than applying my skills, experience, and training as a CPA to advise companies on ways to measure what matters to operate their businesses in a more environmentally efficient manner, and ways they can deliver meaningful impact to people in society. Keeping that broad mindset of long-term sustainability, resilience of business, and a thriving capital markets and society — it’s just an exciting place to be for any organization. We have an enormous opportunity in front of us, and it’s increasingly clear that regulation can serve as a catalyst for business transformation.
See you next month Audit Insider.
Dennis McGowan
Vice President, Professional Practice and Anti-Fraud Initiatives
The latest news and
resources from the CAQ.
Stay Connected.
