Center for Audit Quality Update
Monday, December 9, 2019
Julie Bell Lindsay
Center for Audit Quality
December 9, 2019
AICPA Conference on Current SEC and PCAOB Developments
As prepared for delivery
Good morning, everyone.
Thank you, Jon [Guthart], for that kind introduction, and to Tracey [Golden] for getting us started on such an inspiring note. And, of course thank you to the AICPA for having the Center for Audit Quality back again this year to provide an update on our work and priorities.
In my remarks this morning, I’d like to cover three primary areas.
First, I’d like to start by level setting. I will tell you a bit about myself, and I’ll also touch on the CAQ: our mission, our team, and our work.
Next, I will provide my views on the state of the profession and audit quality today. The short version is that the state of audit quality is strong.
Finally, I’d like to discuss the future: where the auditing profession could—and I would say should—evolve.
So, I took over as the Executive Director of the Center for Audit Quality in May of this year. For those of you who don’t know much about me, I’m not a CPA. Sorry, I’m just one of those securities lawyers who I am quite confident has annoyed each and every one of you at some point in your lives.
But I have been fortunate in my career to have been at interesting places, at interesting times.
I started my career as a lawyer in Silicon Valley in the late 1990s. My claim to fame is that I worked on the Netscape IPO as a summer associate in 1995. While it was an incredibly exciting time, I saw the dot-com bubble grow, and I also saw it completely burst in early 2000.
At that point, I had the opportunity to move to Washington DC, where I joined the SEC in November of 2002—right after the passage of a little piece of legislation you may have heard of: The Sarbanes-Oxley Act. At the SEC, I was in the Division of Corporation Finance for a year and a half, and then I worked for Commissioner Cindy Glassman. Being at the SEC during the implementation of Sarbanes-Oxley—including the standing up of the PCAOB as well as the new internal control certifications and attestations—was indeed interesting.
After the SEC, I was in private practice when I got a call about a company that was looking for a capital markets and disclosure lawyer. This was in the summer of ’08, and that company was Citigroup.
I joined Citi in February of 2009, and it was fascinating to be part of the team that repaid the US government’s TARP infusions and assisted in the implementation of Dodd-Frank.
And now, I’ve been at the Center for Audit Quality for just over seven months. I think this job is yet another example of my being at an interesting place at an interesting time.
Why, you might ask? How can the public company auditing profession in 2019 possibly beat being in Silicon Valley during the dot-com boom, the SEC after the passage of SOX, or being at one of the largest banks in the world coming out of the financial crisis? Because, just like every other stop in my career, we find ourselves in a dynamic time, with the profession at an exciting intersection.
And, there are two principal reasons why. The first is the state of the audit profession and audit quality today. And perhaps more importantly, the second is the role of the auditor in the future.
Although not a CPA, my experiences in the capital markets have ingrained in me a deep appreciation for the audit profession’s purpose and value.
Every day, auditors contribute to high quality, reliable financial statements, which many have referred to as the “bedrock” of our capital markets system. I often say that the auditing profession is one of those “assumed” or often unremarked-upon-institutions in the capital market system. The profession largely operates behind the scenes, and people tend not to notice when things are going right.
I am proud of the profession and the trust we place in auditors, which I will talk more about in a minute. And I am proud of the profession’s focus on maintaining that trust.
But I also believe we can’t ignore evolving trends, one of which is that investors and other stakeholders in our system are increasingly seeking—and relying on—company-reported information outside of the financial statements.
What is the role of the auditor in this evolving ecosystem? That is where I will end my remarks today. But I hope to also begin a conversation on why the capital markets ecosystem needs to pivot from the status quo in order to maintain the high levels of public trust and confidence we see today.
Before we get into those topics, however, I would like to do part II of my level-setting. And that is talk about the CAQ, our mission, and who we are. The slide sets forth our mission, which was reaffirmed in April of this year by the CAQ Governing Board.
Essentially, our mission is our name: audit quality. And I will tell you that my one overriding goal at the CAQ is to advance our mission as part of everything we do.
I mentioned the CAQ Governing Board. The Board is comprised of the US CEOs of eight public company auditing firms: BDO, Crowe, Deloitte, EY, Grant Thornton, KPMG, PwC, and RSM, as well as the as CEO of the AICPA and three independent public Board members. Since October 1, Kelly Grier of EY has served as Board Chair, with Wayne Berson of BDO serving as Vice Chair.
As you might expect, our Governing Board sets the strategic vision and priorities for the CAQ. But I am certainly not implementing these priorities and vision on my own. One of the things I have been most impressed with upon taking this role has been the team at the CAQ. We produce a significant amount of high-quality content and programming with just 24 professionals.
We essentially have 4 workstreams:
- First, Professional Practice: This team made up of mostly CPAs works with our profession representatives in producing our comment letters, various publications and providing forums for the profession to meet with our key regulators, the SEC and PCAOB.
- Second, Talent: This group leads the CAQ’s various talent initiatives to ensure the profession continues to attract and retain the best and brightest—and diverse—professionals.
- Third, Research and Anti-Fraud: We fund independent academic research on public company auditing and collaborate with other stakeholders in the continual effort to deter and detect financial reporting fraud.
- And finally, Stakeholder Engagement and Communications: This team is incredibly important in effectuating a key component of our mission, which is to convene and collaborate with other stakeholders to advance the discussion of critical issues requiring action and intervention.
Let me give you a sense of some of the work we have done this year in these areas, each of which exemplifies the convening power of the CAQ.
As many of you are well aware, this year, we’ve seen the arrival of critical audit matters, or CAMs, one of the most significant changes in auditor reporting and transparency in decades. At the CAQ, we worked with various key stakeholders—audit committees, public company management, auditors, investors, and regulators—to prepare for these changes.
The slide sets forth a sampling of our resources, all of which are free and on our website. And with the calendar year-end companies getting ready for the next wave of CAMs “entering the wild,” as we like to say, we will continue our work with stakeholders on CAMs implementation.
Another great example of our convening power is the Anti-Fraud Collaboration, an initiative whose members include:
- the CAQ,
- Financial Executives International,
- the National Association of Corporate Directors, and
- The Institute of Internal Auditors.
Just last week, the Collaboration hosted a free CPE webcast on one of its top priorities: the role of corporate culture in the deterrence of fraud. It is well established that organizations with strong, ethical cultures are more resistant to misconduct of all kinds, including financial reporting fraud.
On our webcast, our panelists discussed how to assess culture—a task that can seem both squishy and daunting. They discussed a range of ways to perform this assessment, including employee culture surveys, exit interview themes, attrition rates and more. Our webcast is up YouTube now, and I urge you all to check it out.
Let’s now turn to talent, a topic I get quite excited about. People are the foundation of the auditing profession, and they always will be.
The CAQ is partnering with our member firms to attract the best and brightest to the profession, which is critical given the increased competition from technology firms we are seeing. We are spreading the word about the purpose-driven nature of auditing—and how the profession is an incubator both for business acumen and the business leaders of tomorrow.
And, we are taking innovative steps to spread this message.
For example, the CAQ has partnered with an organization called Roadtrip Nation. If you haven’t heard of it, Roadtrip Nation is a multimedia company that is dedicated to helping young people answer that rather scary question: what should I do with my life?
They spotlight various professions from time to time. This year they chose the auditing profession. In August, three young people boarded a green van down in Austin, Texas. Picture the Scooby-Doo van. Over the next three weeks, they traveled from Austin to Boston, interviewing public company auditors. Some of their interviewees are still in the profession, while others have taken their skillset on to other careers. For example, one is a baker who is also a sensation on Instagram. Another is the Commissioner of the WNBA.
In early summer of 2020, PBS will air this Roadtrip Nation documentary that captures the experience of these three young people. All of whom, I might add, ultimately chose a career in auditing.
Also, working with Roadtrip Nation, the CAQ has launched an online career portal that collects stories about different career paths in auditing. Students, guidance counselors, and others can read, for example, about the audit partner who emigrated to the United States as a child from Ukraine. For those of you with your own auditing story to tell, I urge you to go to discoveraudit.shareyourroad.com. It takes no more than twenty minutes, and you never know how your story might influence someone out there who is just starting down his or her own career road.
Having given you a sense of the CAQ and who we are, let me now turn to the state of the public company auditing profession and audit quality today. Over the last two decades, we have seen a dramatic and—dare I say it—unquestionable improvement in audit quality.
What support do we have for this statement? First, financial restatements have trended down.
Research from Audit Analytics shows that overall financial restatement levels are down significantly and have dropped to an 18-year low—and that includes the financial crisis period of 2007-2009. And, when there are restatements, the magnitude of the restatement has also declined.
These improvements in audit quality have undoubtedly been driven in part by the Sarbanes-Oxley Act, namely:
- the establishment of an independent public company audit regulator in the PCAOB,
- independent audit committees responsible for the oversight of the external auditor, and
- robust independence standards for auditors themselves.
But we also can’t overlook the steps audit firms have voluntarily taken to improve audit quality. Firms have made massive investments in their systems of quality control and training. They have focused on codes of conduct and partner assignment processes. They have oriented partner compensation around rewarding quality—and developed robust processes for analyzing quality drivers. But you don’t need to take my word for it—many firms provide a wealth of information on these topics in their transparency and quality reports available on their websites.
The second area of support can be found via investor confidence. According to the CAQ’s 2019 Main Street Investor Survey, 78% of investors have confidence in audited financial information, 76% have confidence in public companies and 74% have confidence in the US capital markets.
Importantly, 83% of investors polled see public company auditors as effective in their investor-protection role. 83%…and that’s up from 81% last year. I’m proud of these metrics. We should all be proud of them.
But as we all know, trust is something you have to work hard to earn, and it can be lost in a heartbeat. I can assure you that the profession strives every day to safeguard this trust and continuously improve.
One of these areas of continuous improvement is the use of technology in auditing. In my time in this role, I have been amazed by how audit firms are using technology. With new automation and cognitive capabilities, the audit profession is moving from sampling small subsets of relevant data to looking at larger swaths, or even complete sets.
As just one example, this is already underway for auditing management’s implementation of the new lease standard here in the US. In some cases, auditors have been able to apply machine learning to effectively evaluate all leases that a company may have. For larger companies, that could be in the tens of thousands.
And, with technology picking up that rote work, auditors can focus on areas that are more complex or judgmental in nature—those areas that have the greatest risk to the business.
Technology is also enabling auditing to become timelier as well, occurring as transactions happen rather than waiting until year-end to see the impact on a company’s financial statements. This evolution can lead to detection of errors earlier, thus avoiding misstatements later.
This increased use of technology has led some to insinuate that technology will ultimately replace auditors. My answer to that is a firm “no.”
As I said earlier, people will always be the foundation of audit. You can’t replace the human elements of auditing—critical thinking, subjective judgment, and the ability to be skeptical. In my view, the audit of the future will be a collaboration between humans and machines—one that will provide even higher levels of audit quality.
Speaking of the future, let’s move to the final area I’d like to cover today: where the auditing profession could—and I would argue should—go in the future. We have talked about the current state of the profession and audit quality in the existing financial ecosystem. But that ecosystem is being disrupted.
What do I mean by that?
Not how auditors are using technology, but rather how technology and data have given rise to unprecedented business models and company structures. We continue to shift towards a service- and IP-based economy, where the massive amount of data generated is now an enterprise asset.
Second, information beyond the financial statements. As I mentioned earlier, stakeholders have increasing interest in—and are relying on—company-reported information outside of the audited financial statements.
This information includes:
- non-GAAP financial measures;
- key performance indicators, such as the sales pipeline;
- intangible indicators of value not included in the historical financial statements, such as a company’s brand and IP;
- ESG and diversity metrics; and
- cyber-risk management or other types of enterprise-risk management disclosures.
And third factor in the disruption of the financial ecosystem is timeliness of information. What do I mean by that? A couple of things.
First, I think everyone would agree that the markets typically move on a company’s unaudited earnings releases and analyst presentations—not the annual release of its audited financial statements.
Another aspect of timeliness is the speed of the news cycle: how quickly negative new stories—accurate or not—can spread. And, as I mentioned earlier, how fast trust can be lost: trust in auditors, trust in companies, trust in boards, and trust in the markets themselves.
When you look at these changes, I believe we must pivot from the status quo in order to support this new financial ecosystem.
Why does this matter?
Because the health and stability of the US capital markets depend on consistent, reliable, and comparable information. And most of the increased company-reported information that I just described does not go through the rigor of independent, third-party assurance like the company’s financials and internal controls.
At the CAQ, we believe auditors can help fill these existing and growing gaps in assured information. It’s a natural evolution for a profession with unique competencies in standards-based analysis, objectivity, professional skepticism, and critical thinking.
In fact, to help market participants get a handle on this evolving environment, just last week, the CAQ released a new resource titled, The Role of Auditors in Company-Prepared Information: Present and Future. I urge you check it out, if you haven’t already.
In clear terms, the paper delineates where the auditor’s role begins and ends today. It also highlights the need for the auditor’s role to evolve for the benefit of investors, public company board members, company management and the markets.
For better or worse, changes to auditing standards and the regulatory framework often happen in reaction to significant, negative events. Think Sarbanes-Oxley.
I would suggest we have a unique opportunity to recognize the trends and change the status quo ahead of time.
The public company auditing profession’s goals are aligned with those of all other stakeholders in the ecosystem—maintaining trust and confidence in the accuracy and reliability of US public company reporting and the capital markets.
But it is not simply the auditors, but this entire US reporting ecosystem, that makes trust in our markets work.
That entire ecosystem can and should work together so that we don’t wait for the next crisis to meaningfully adapt to the changes we are experiencing.
Of course, the changes I am discussing will not happen overnight, and they won’t occur without considerable discussion and effort. The Center for Audit Quality is uniquely positioned to facilitate the stakeholder conversations which need to happen on these topics, and we intend to do so going into 2020 and beyond.
There is no time like the present, I hope the conversation has started today.
In closing, as I stated at the beginning of my remarks, the auditing profession finds itself at an interesting time and place as we enter 2020.
In these interesting times, the Center for Audit Quality will continue to be laser-focused on our mission.
Today, we carry out our mission on behalf of a profession that is strong. Audit quality remains high—and has the potential to improve further thanks to the use of technology.
But as we look to the future, we need to acknowledge the increasing amount and types of company-reported information that stakeholders are asking for and relying on to make investment and capital-allocation decisions. And, more than ever, we need to remember that trust and confidence in our markets can be gone in a flash.
Consistent with our mission, the CAQ intends to convene and collaborate with stakeholders on these critical issues requiring action, intervention, and discussion.
I hope each of you will be a part of this discussion as well.