The Future of Audit Quality
Thursday, November 4, 2021
In a rapidly evolving environment, external public company auditors remain committed to maintaining the highest standards of audit quality. This commitment to quality was on full display at the Future of Audit Quality event hosted by the CAQ and the Chamber of Commerce’s Center for Capital Market Effectiveness. Take a look back at the key takeaways from the event.
A Strong Regulatory Foundation
The passage and subsequent implementation of the Sarbanes-Oxley Act of 2002 (SOX) bolstered the transparency, independence, oversight, and accountability of the audit process. Its provisions strengthened internal controls and increased the demand for high-quality financial information. Many investors agree that the requirements under this legislation contribute to the reliability of the financial statements we have today.
Because detecting financial fraud is a shared commitment, SOX also rightly requires greater responsibility on the part of CEOs and CFOs to certify that company disclosures provide a fair representation of material financial and operational activities. This is an important acknowledgment that tone at the top and a company’s culture are two important points for strengthening audit quality. The pandemic has greatly impacted how auditors complete their work, but a company that allows for staff to challenge other viewpoints and ask questions enhances communication between all members of the financial reporting ecosystem and ultimately leads to greater audit quality.
The Public Company Accounting Oversight Board (PCAOB) was created by SOX to oversee the audits of public companies and protect capital market stakeholders who rely on audits to make investment decisions. Dan Goezler, a founding member of the PCAOB, agrees that the board met its objective. Financial restatements peaked in the early 2000s, but have fallen to historic lows.
Driven by Technology and Innovation
Auditors continue to enhance the public’s interest in the audit by applying new innovations to their work. Digital transformation and embracing a fully remote work environment during COVID presented new challenges, such as obtaining appropriate audit evidence, but the profession met them head-on.
Technology plays a major role in today’s financial reporting landscape. It helps our profession maintain the quality of the audit and reduces the time management must spend preparing documents. Without technology, firms would not have been able to complete the audit during this ongoing virtual work environment.
Tools such as machine learning have developed over the past two decades and enabled teams to streamline how they gather information for investors. Audit firms such as PwC invest heavily in technology to make sure auditors are analyzing full populations where relevant instead of relying on sampling. By looking at all the available data, auditors can better identify risk and understand what information should be communicated to management.
With emerging technologies comes the question of privacy and security. It’s critical that all innovations result in improvements for the financial reporting ecosystem, and it’s the profession’s duty to ensure that all technologies are being used in a safe and effective manner to collect information.
A Cornerstone of Quality Audits: Independence
Audit quality is maintained in part by auditor independence. This independence allows investors to have confidence that an objective individual outside of the organization has looked at the data and the disclosures. The independent auditor also provides assurance that financial statements are free of material misstatements. Independent audit committees provide critical oversight and reinforce the dialogue and accountability to the board of directors.
It is the combination of auditor independence and expertise that bolsters the level of trust and confidence in company financial statements and forms the basis of audit quality—and, thus, value to capital markets.
A Look to the Future
The challenges facing audit quality today include the hybrid work model, which presented new challenges to integrating new staff members and placed an extra burden on managers. The profession must remain vigilant to ensure there is effective communication between clients and that teams are able to build strong working relationships.
Keeping pace with changes to the business environment and expectations of capital market stakeholders is vital to the profession. The audit profession needs to also build a more diverse talent pipeline that encompasses a wide range of backgrounds. This will bring new viewpoints to the work of the auditor and new ideas on how to strengthen audit quality.
Auditors will likely be expected to take on a broader range of financial information as investor interest continues to grow in the areas of non-GAAP measures and KPIs, cybersecurity, and environmental, social, and governance (ESG) information. In August 2021, the CAQ released a study that found more than half of S&P 500 companies had some form of assurance or verification over select ESG metrics. This figure will likely increase as investors and the public demand more information from public companies, and in some respects, it may become a regulatory requirement as demand is likely to continue growing. Earlier this year, the SEC requested public comment on and SEC Chairman Gary Gensler recently asked for his staff to make recommendations on other ESG matters, such as workforce data.
Interested in learning more about the future of audit quality? Watch the full Future of Audit Quality event, hosted in partnership with the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, below: