Welcome to the Capital Markets Pulse, a new monthly newsletter from the Center for Audit Quality designed to bring you insights, resources, and tools on the latest issues impacting capital markets from the professionals known for their objective, independent analysis. Of course, I’m talking about public company auditors.
As the CEO of the Center of Audit Quality, I’m fortunate to work with audit leaders, board members, investors, regulators, and other stakeholders to advance the discussion of the most critical issues affecting capital market stability, including audit quality, U.S. public company reporting, and investor trust in the capital markets.
Before joining the CAQ, I served as the Managing Director and the Deputy Head of Global Regulatory Affairs at Citigroup, where I formulated and executed Citi’s regulatory policy priorities and strategy across the numerous regulatory agencies with oversight over Citi. I’m also a lawyer by trade and had the privilege to work at the Securities and Exchange Commission in the early 2000s as the Sarbanes-Oxley Act was implemented. Having worked in and around capital markets for decades from a variety of viewpoints, I have learned the importance of considering different perspectives when establishing public policy.
These experiences form the basis of my perspectives and whether you’re an investor, board member, policymaker, or auditor, I hope you’ll benefit from my thoughts in this newsletter. Read on for what’s on my radar in June.
Please note that these perspectives are my own. If this email was forwarded to you, subscribe here so that you never miss a public company auditing update.
CAQ Updates
Audit Partners Pessimistic on U.S. Outlook
Over the course of their careers, audit partners spend decades honing industry-specific expertise on how companies across the economy operate. This provides auditors with a thorough understanding of the industries in which the companies they audit function, from financial services to oil and gas to healthcare. Coupled with audit partners’ deep understanding of the businesses they audit, the vast multidisciplinary skillsets within public accounting firms give audit partners and their teams a deep bench of experts and specialists to draw on when necessary.
Since May 2022, the CAQ has been tracking audit partner observations on a range of topics, including economic health indicators, challenges and risks facing businesses within their sectors, and how those businesses are adjusting their strategies in the current environment. The following are key observations from this Spring’s survey.
Audit partners remain pessimistic on the outlook for the U.S. economy.
- Amid ongoing inflation, debt ceiling negotiations – which were occurring at the time – and supply chain disruptions, it came as no surprise that fewer than 1 in 5 partners surveyed were optimistic about the economy.
- But, we did observe a silver lining. Audit partners surveyed had a slightly better outlook on the next 12 months of the U.S. economy than they had in the Fall and Spring 2022 surveys. Only 38% were pessimistic or very pessimistic about the economic outlook, an improvement over the Fall survey, when 57% had a pessimistic or very pessimistic view.
Artificial intelligence is experiencing wide adoption across industries.
- Despite fears over AI’s threat to humanity, it appears that this form of technology might be here to stay. According to the survey, 47% of U.S. businesses are already using artificial intelligence (AI) to some extent. Key uses observed include process automation (63%), customer experience, service and support (44%) and predictive analysis (31%).
- The accounting profession is no exception. In my podcast below, I discuss with Janet Malzone, Grant Thornton’s national managing partner of Audit Services, the variety of ways firms can – and already are – using AI to improve the audit process. And check out this fantastic article from PwC’s Wes Bricker on the same topic.
We may not be as exposed to China as we think.
- Tensions between the U.S. and China are at an all-time high, but a positive data point from the survey shows U.S. public companies may not be as exposed to China as assumed. According to 69% of the audit partners surveyed, businesses in their industry sector had no significant exposure to China. Of the partners who did report that organizations in their industry sector had exposure to China, top risks included supply chain disruption (59%), protection of intellectual property (43%) and risks from U.S.-government-imposed restrictions (39%).
Download the 2023 Audit Partner Pulse Survey for more audit partner insights. Keep on reading for more news about the survey in the CAQ’s new podcast series.
U.S. Investors and Board Members Confident in the Public Company Audit Profession
Capital markets serve as an important engine for driving and maintaining our economic and societal well-being. For capital markets to operate efficiently, investors must trust the information they use to make investment decisions is accurate, transparent and reliable. As a result, investors need an independent third party to provide assurance on the information provided by company management. In their public interest role, public company auditors provide an independent assessment of company management’s reporting responsibilities that investors depend on when making investment decisions.
We sought to gain insights into how the work of public company auditors is perceived and utilized by institutional investors and the audit committees that oversee their work. A few highlights:
- All audiences had a high level of confidence in public company audit firms to assure financial statements of publicly traded companies. The institutional investors and board members interviewed recognize that auditors are highly skilled, diligent, professional and an independent third party not influenced by company management.
- The value of the audit was acknowledged by all because it brings trust and credibility to financial statements, which is critical to capital markets. Independence from company management was the most important attribute of audit firms to ensure an unbiased assessment of financial statements.
- Leveraging technology for audits was the most cited trend in audit firms over the past few years. This includes using technology to enable increased remote work, digitizing the audit process, and applying machine learning to assess large datasets and identify risk. Use of technology is mostly seen as a positive trend because it allows for greater efficiency in the audit process.
- Turnover was the most cited negative trend. The Board Members expressed they are seeing younger, less experienced auditors.
- Reactions to public company audit firms assuring public company ESG statements are overall positive. Board Members and Institutional Investors cited skills and knowledge of the business as reasons why public company auditors are suited for the task.
Download the report to access the full research findings, which includes some constructive insights for the audit profession to consider as well.
CAQ Launches New Website
A bit of an organizational plug, but the CAQ has launched a new website designed to better meet our stakeholders’ needs. Visit thecaq.org for information, news and resources tailored for public investors, regulators and policymakers, company auditors, audit committees and more.
We remain committed to serving our stakeholders and the U.S. markets and welcome your feedback. You can share your thoughts with us at info@caq.org.
Talent Updates
The CAQ is working to enhance diversity across the accounting profession, focusing on the talent pipeline. Each month, I’ll spotlight our efforts on this critical issue.
Accounting+
In 2022, the CAQ launched Accounting+, a first-of-its-kind, multi-stakeholder nationwide campaign to attract a new generation of diverse students into the talent pipeline.
In the year since our launch, this initiative has been highly successful at reaching students. Below are a few key metrics:
- 964M online engagements with the Accounting+ website
- 2.6M Black and Hispanic students visited the website
- 22K students provided their email address for information on Accounting+
- 21% measured increase in accounting consideration among students exposed to Accounting+
Here are some program updates covering more recent activity.
Accounting+ Launches Internship Hub
Accounting+ recently launched an internship hub featuring accounting internship opportunities at a variety of organizations, from firms to public companies, who have joined this campaign with us.
The Center for Audit Quality and EVERFI Create Limitless Opportunities in the Accounting Field
As part of our Accounting+ campaign, in April the CAQ and EVERFI, the nation’s leading social impact education innovator, hosted an event 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, being rolled out in high schools nationwide, aligns with Jump$tart National Standards in K-12 Personal Finance Education, ASCA National Standards, and Common Career Technical Core standards. Check out this story on the event in Accounting Today, CAQ and Everfi launch accounting education DEI program.
Profession Updates
CAQ Responds to Washington Post Opinion: “How to fix the global audit industry? Get rid of it.”
In his June 1 Thursday Opinion column, “How to fix the global audit industry? Get rid of it.,” Duncan Mavin acknowledged that the audit profession is composed of “people who are well-qualified, well-trained, and mostly good corporate citizens.” In the same column, he called for abandoning the mandatory audit and leaving only the most well-funded investors with the opportunity to seek an audit of a company’s finances.
I could not disagree with his position more. Read my response in this letter to the Washington Post’s editor.
CAQ Submits Response to PCAOB’s AS 1000
In late March, the PCAOB issued a proposed new standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit. We continue to be supportive of the PCAOB’s efforts to modernize and streamline audit standards. But there is a difference between modernizing existing standards and changing the auditor’s fundamental role. In the CAQ’s view, we are concerned that certain elements of the Board’s proposal would expand the auditor’s responsibilities and potentially create confusion for stakeholders, including investors and other users of auditors’ reports, regarding auditor responsibilities and the level of assurance provided and required within the financial reporting ecosystem.
Read the CAQ’s comment letter here.
In addition to this this newsletter, the CAQ also launched the Capital Markets Pulse podcast, a series exploring all things related to the capital markets from the public company audit profession’s perspective.
This month, hear from Janet Malzone, Grant Thornton’s national managing partner of Audit Services and Amanda Iacone, financial services reporter at Bloomberg Tax, on their thoughts on the CAQ’s recent Audit Partner Pulse Survey results.
Listen to the episode, “Economic pessimism, labor challenges & technology shifts,” on Spotify, Amazon Music or Apple Podcasts.
Julie Bell Lindsay
Chief Executive Officer, CAQ