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Snapshot | April 2021

Thursday, April 29, 2021

Companies Turn to Auditors for ESG Assurance

A new CAQ analysis found that 11% of S&P 100 companies are now getting public company audit firms to independently evaluate, or “assure,” certain aspects of their ESG disclosures.

  • Starbucks, Google and Nike, to name a few, are leading the way and obtain assurance from public company auditors on certain ESG metrics.
  • Why it’s important. We found that all companies in the S&P 100 had some ESG information available.*

Read more in CAQ Executive Director Julie Bell Lindsay’s LinkedIn post on Earth Day. For a deep dive on auditor assurance of ESG information, check out the ESG Reporting and Attestation: A Roadmap for Audit Practitioners.

Need more information on ESG? The CAQ is continuously developing new resources to help all those who play a role in financial reporting navigate the ESG reporting landscape. Explore our newly-created ESG resource hub here.

*As of March 12, 2021, most companies had released 2019 ESG information, a handful of companies had released 2020 ESG information, and for very few companies the ESG information was for earlier than 2019.

In the News: Senate Confirms Gary Gensler as SEC Chairman

After a Senate vote of 53-45 in April, Gary Gensler was confirmed to lead the SEC. Mr. Gensler’s to-do list is already long – here are some key actions to watch for:

  • ​​​​​​Corporate Disclosures: According to U.S. climate envoy John Kerry, President Biden is set to issue an executive order on climate disclosure that could shift investments. The SEC has already requested public input from investors, registrants and other market participants on climate change disclosure. In addition to seeking more transparency from companies on their climate risks, Mr. Gensler may also look at other topics, including diversity on company boards and political contributions.
  • SPACs: Over the past year, SPACs have boomed, generating over $100 billion in the U.S. alone. This drew the attention of the SEC, who recently issued a warning on SPACs, including that they are looking carefully at filings and disclosures as well as a warning regarding recent SPAC accounting errors related to warrants. Mr. Gensler’s decisions on how to address these concerns will likely have major impact over the current SPAC market.

Mr. Gensler is known for his reputation as an aggressive regulator of Wall Street and if history can predict the future, more regulation may be on the way.

Speaking of Famous – Or Infamous – Figures of Wall Street… 
Bernie Madoff, the criminal mastermind behind a major investment Ponzi scheme that frauded celebrities from director Steven Spielberg to actor Kevin Bacon, died in April. However, his legacy leaves a very important reminder for the financial industry: sophisticated fraud schemes never stop evolving.

Fighting Fraud with AI Technology

For auditors, there are many emerging technologies that can enhance the effectiveness of fraud deterrence and detection. The CAQ led Anti-Fraud Collaboration’s most recent report, Fraud and Emerging Tech: AI and Machine Learning, examines the implications of AI and machine learning to mitigate fraud risk due to the technology’s ability to understand complex relationships among a vast amount of data.

According to PWC’s 2021 AI Predictions survey, managing risk, fraud and cybersecurity threats is the most important AI application for companies in 2021. The AFC report details a few examples of how machine learning can identify fraud, including:

  • Bribery and corruption – Sales contracts can be reviewed to identify and predict which sales transactions and third parties create the most corruption risk.
  • Expense fraud – Expense reports can be interpreted based on a historical set of proven expense fraud cases to identify spending patterns and employee behaviors, and detect suspicious, exaggerated, or falsified expense claims.
  • Vendor fraud – Invoices can be scanned and grouped into categories to identify commonalities or disparities in an effort to identify vendor fraud. Anomalies can be flagged for further review.

AI is a complex technology that continues to change and adapt once it is implemented. While reaping the benefits of AI, it is also important to balance the risks and rewards. For forward-looking companies seeking to embrace AI, accelerating and enhancing governance to keep up with AI is as critical as improving and reinforming the technology.

CAQ and Financial Education Resource Foundation Release
​​​Insights from Management Review Controls Roundtable

The Center for Audit Quality and the Financial Education & Research Foundation (FERF) of Financial Executives International (FEI) commissioned an independent qualitative research study on Internal Control over Financial Reporting (ICFR) management review controls (MRCs), Perspectives on Management Review Controls: Challenges and Solutions (the Research Report).

Following the publication of this research, the CAQ and FERF hosted a virtual roundtable to obtain perspectives of additional preparers and auditors. The discussions were designed to further explore areas that continue to create challenges in implementing effective design, precision, and operation of MRCs and the related documentary evidence issues associated with assessing their effectiveness. Highlights from those discussions have been complied in a follow-up report, Issues Related to the Assessment of the Effectiveness of Management Review Controls.

Why it matters: The breakout discussions highlighted key best practices to address MRC challenges. This is what we heard:

  • A well-documented risk-assessment by management with respect to the importance of its MRCs to its system of internal controls may help to align the auditor’s risk assessment with management’s views.
  • Auditors can directly observe MRCs to reduce the documentation requests made by the auditor.
  • Holding detailed walkthrough meetings for management and the auditor allows the parties to align on expectations before the auditor commences testing of the MRCs.
  • Management, and the auditor, should each perform a risk assessment of the underlying data to determine which of its elements are the most critical to the operation of the MRC.

 

CAQ Announces 2021 Access to Audit Personnel Grant Recipients

Now in its ninth year, the Access to Audit Personnel Grant program was established by the CAQ and the Auditing Section of the AAA to facilitate accounting and auditing academics’ ability to obtain access to audit firm personnel to participate in their research projects. The CAQ is thrilled to announce its 2021 recipients:

  • Brazel, Joseph, North Carolina State University; Dereck Barr-Pulliam, University of Louisville; Jennifer McCallen, University of Georgia; and Kimberly Walker, Virginia Tech. “Data Analytics and Skeptical Actions: The Countervailing Effects of False Positives and Consistent Rewards for Skepticism.”
  • Hillison, Sean, Virginia Tech; Carissa Malone, Virginia Tech; and Sudip Bhattacharjee, Virginia Tech. “Auditing from a Distance: The Impact of Remote Auditing and Supervisor Monitoring on Analytical Procedures Judgments.”
  • Holmstrom, Kathryn, Georgia Institute of Technology. “The Effect of Opaque Audit Methods and Auditor Ownership on Reliance on Independent Expectations.”
  • Rowley, Truman, University of Georgia; and Jacqueline Hammersley, University of Georgia. “Intimidation and Repetition: How Client Behaviors Influence Auditor Judgments.”
  • Walker, Kimberly, Virginia Tech; Karneisha Wolfe, Virginia Tech; and Sudip Bhattacharjee, Virginia Tech. “The Effect of Clients’ Usage of Artificial Intelligence on Auditors’ Judgments and Decisions.”

The CAQ will begin to accept submissions for the 2022 grant cycle in late Fall 2021. The deadline for submitting proposals will be Thursday, February 3, 11:59 pm PST. To learn more about the application and review process, click here.

 

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