A letter from the Center for Audit Quality’s CEO Julie Bell Lindsay:
Public company audit partners are trusted leaders who are uniquely positioned to objectively assess the state of our capital markets. They play an important role by overseeing the completion of high-quality audits for public companies within their industry sector. For this reason, they possess a breadth of experience that arms them with insights across businesses of all sizes, industries, and geographies in the United States.
The Center for Audit Quality (CAQ) is pleased to provide you with the inaugural edition of the Audit Partner Pulse Survey, a first of its kind survey that delivers U.S. public company audit partner observations on a range of topics, including the overall outlook on the economy, business transformation, and quality of corporate disclosures.
Public company auditors are vital to the efficient functioning of the capital markets by helping to build trust in company-reported financial information. On the other side of capital markets is the complexity of modern-day life that is made possible by public companies raising funds to operate, innovate, and grow. Retirement accounts, mortgages, small business loans, credit cards, stock ownership, and all the goods and services Americans rely on to live their daily lives while building for their future depend on strong, reliable, and efficient capital markets.
But amid the prolonged effects of the pandemic, international conflicts, rising inflation, and business transformation, the markets that public companies tap into remain complex and ever-evolving.
This report is based on a survey of 700 audit partners from among the eight CAQ Governing Board firms; data was collected from May 14 through May 27. Collectively these firms audit U.S.-listed companies with nearly $50 trillion in market capitalization. Survey participants work with small-cap companies with a valuation of less than $700 million to large-cap companies valued at more than $50 billion. The industries these audit partners serve – such as mining and manufacturing, consumer products and retail, health care, technology, financial services, and oil and gas – represent virtually every industry sector and geography of the U.S. economy.
The depth and breadth of experience represented by this group of public company audit partners provides insights from a well-informed stakeholder group not typically canvassed on a range of issues affecting the U.S. economy, including:
- Economic risks and outlook
- Business transformation
- Business readiness on cybersecurity
- Emerging corporate reporting priorities
These survey results shed light on the economic environment and industry trends at public companies in the U.S.; we hope readers find them both insightful and instructional.
Julie Bell Lindsay
Chief Executive Officer, CAQ
Executive Summary – Audit Partner Observations May 2022
Economic outlook: Continued inflation and rising prices on the horizon
The timing of the survey coincided with the lowest market performance the S&P 500 has seen since the beginning of the COVID-19 pandemic in the early months of 2020. During this period, rising inflation, largely driven by post-pandemic demand, public spending, and the war in Ukraine, have been a top headline, affecting businesses and consumers alike. With this and other economic factors in mind only 16% of survey respondents hold an optimistic outlook regarding the US economy over the next 12 months, compared to 84% neutral (40%) or pessimistic (44%).
Rather, most audit partners expect the current inflationary cycle to affect their primary industries for more than 12 months. While many businesses initially absorbed increased costs to produce and deliver their goods and services, with high inflation also comes the potential for rising prices. Survey respondents overwhelmingly (77%) reported that they expect prices to continue to rise in the next 12 months. This is no surprise to consumers who have felt the pinch of inflation at the gas pump and grocery store checkout lines, but it is notable where respondents see prices rising and where prices might remain steady. Survey responses reflect differences by industry, with almost all audit partners surveyed in consumer products and retail (95%) and industrial products (94%) expecting price increases, while only 50% of partners in health care/life sciences expect the same.
Audit partners also expressed similar economic concerns across industries. After inflation – which 62% of partners identified as the largest economic risk – labor shortages (52% of respondents) and supply shortages and supply chain disruptions (50%) comprised the set of the three largest economic risks identified in the survey.
These areas of concern are in turn driving what the respondents see as public companies’ priorities for 2022 and beyond. Amid what some have described as “The Great Resignation,” the labor market is tight, so it is no surprise that 53% of audit partners believe that talent is a top priority for businesses. The analysis revealed that public companies are using a variety of methods to attract and retain talent but the top two are increasing flexibility (75% of respondents) and increasing compensation (73% of respondents). Aside from talent, partners cited growth (40%), cost management (38%) and financial performance (38%) as top priorities for the companies they audit.
What currently is not a priority for most public companies, according to 67% of audit partners, is cryptocurrency. However, two industries, financial services and technology, telecommunications, media, and entertainment, appear to be early adopters of cryptocurrency per the survey results, and were slightly more likely to be considering or preparing for accepting crypto as a form of payment (77% and 69%, respectively).
More Progress Needed in Cybersecurity
Following increased ransomware attacks on U.S. businesses, schools, and local governments, the Biden Administration and the federal Cybersecurity and Infrastructure Security Agency recently sounded the alarm over elevated cybersecurity threats from Russia and other bad actors. Public companies, for their part, have rapidly been accelerating their cybersecurity technologies, expertise, and capabilities. Survey results indicated significant progress in communications on cybersecurity matters between management and the board. While 45% of partners noted that there has been significant progress made in cyber risk management, it was primarily partners in the financial services sector (43%) and the technology, telecom, media, and entertainment sector (31%) who observed that these companies showed a high level of preparedness for identifying and addressing a cyberattack.
However, survey results also indicated that areas such as enhancing cybersecurity disclosure, managing cyber risk, aligning cybersecurity with company goals, and establishing a culture of cybersecurity were areas for improvement. There were also nuances in terms of perceived cybersecurity risk across industries, with respondents whose primary industry was financial services or technology, telecommunications, media, and entertainment reporting cybersecurity as one of their three top economic threats.
Climate Change: A Short-term and Long-term Priority, Challenges with Reporting
Nearly two-thirds of audit partners (63%) said businesses take climate change into account when developing their corporate strategy. With the SEC working on a proposed rule that would require public companies to include certain climate-related disclosures in their registration statements and periodic reports, audit partners say businesses are focused on both short-term climate priorities such as enhancing sustainability reporting (46%) and long-term projects like climate-related risk (45% of respondents).
Here, there are also a few nuances by industry and market cap, with 68% of audit partners whose primary industry is in oil, gas and chemicals, and 54% of audit partners whose largest audited company had a market capitalization that exceeded $50 billion, reporting prioritizing climate-related risk more consistently than other industries and market caps.
While nearly all public companies are placing an emphasis on climate disclosures, the survey reveals some challenges exist in the reporting process. Overall, survey responses suggest a lack of tools supporting the collection, collation, and analysis of environmental, social and governance (ESG)-related data presents the greatest challenge in terms of climate and other ESG reporting (48%). Rounding out the top three challenges are diversity of standards and frameworks (39%) and the lack of expertise (38%).
Even with climate reporting a high priority across industries, investor demand for ESG information has also driven increased DEI efforts at US businesses. Top actions observed include addressing board diversity (48%), establishing, and tracking DEI effort metrics (41%), and increasing transparency and disclosure around DEI progress (35%). Audit partners observed that smaller public companies (with market capitalization less than $700 million) tended to prioritize employee welfare (45%) and building a more diverse board/leadership team (39%).
About the Survey
The Center for Audit Quality’s (CAQ) Audit Partner Survey presents findings from a survey distributed to audit partners at public audit firms in the U.S. that comprise the CAQ’s Governing Board. The survey was conducted from May 14 to May 27, 2022. There were 700 completed responses from audit partners who work with small, mid, and large market capitalization companies (less than $700 million to greater than $50 billion) across multiple industry sectors (transportation and hospitality; technology, telecom, media and entertainment; professional services; power, utilities and renewables; oil, gas and chemicals; non-profits; mining and metals; industrial products; healthcare and life sciences; government and public services; financial services; consumer products and retail ; and automotive).
Throughout this report, responses by market capitalization are categorized based on the partners’ self-reporting of the market capitalization of the largest company that they audit as of its most-recent fiscal year end; responses by industry sector are based on the partners’ identifying the primary industry in which they practice.
Survey results are presented for all firms in total. The data provided in response to the survey were presented and analyzed anonymously by the CAQ. Therefore, responses and results cannot be attributed to a specific firm, firm audit partner, or publicly traded company. In some cases, percentages may not total 100 due to rounding and/or a question that allowed respondents to select multiple choices.