A shared commitment to informative, accurate and independent audits – Accounting Today

Securities and Exchange Commission Chairman Gary Gensler recently said that he wants to make sure public company audits are informative, accurate and independent. The audit profession shares this commitment and stands ready to work with the SEC and Public Company Accounting Oversight Board on measures that will continue to promote high standards of audit quality in the United States.

Public company auditors serve as gatekeepers, building investors confidence on both Wall Street and Main Street that financial information disclosed by public companies is reliable. This trust-building function is in the public interest, and it is a big part of the audit professions mission worldwide.

Two decades after Congress passed the landmark Sarbanes-Oxley Act, the corporate disclosure system is dependable and audit quality has never been higher. Among other things, SOX established that the independent audit committee is responsible for the hiring, firing and oversight of the external auditor including the auditors fees and independence. SOX also created an independent regulator for the public company audit profession, the PCAOB.

As just one proxy of the current state of disclosure and audit quality in the United States, financial restatements have trended down significantly. The severity of restatements has also fallen the largest adjustment in 2019, $276 million, is the lowest in 18 years and significantly lower than the top adjustments in 2004 and 2005 of $6.3 billion and $5.2 billion, respectively. Other countries have recognized this and are currently pursuing measures to replicate the strength of the U.S. financial reporting system, including adopting SOX-like components in their own jurisdictions, such as an independent regulator for public company auditors.

But improvements to audit quality over the past 20 years go beyond regulatory changes. Audit firms heavy investments in their people and technology have taken the consistency and depth of audits to the next level. Technologies such as artificial intelligence and data analytics have the potential to transform and in some cases already are transforming the way audits are conducted, further improving audit quality and effectiveness. As just one example, technology enables auditors to move away from sampling of the past to, in many cases, review wider and deeper swaths of information while at the same time permitting auditors to focus on those truly subjective, judgmental areas of the audit that can present the highest risk of material misstatement. Its quantity and quality enabling.

Despite enhancements already made to audit quality, the audit profession will never rest on its laurels. Stating the obvious, trust is incredibly hard to earn and can be eroded in an instant. Auditors face strong market-driven incentives reputational risk, litigation risk and regulatory risk to perform high-quality audits.

Given the importance of auditors public interest role, from time to time there are policy proposals by regulators and other stakeholders designed to reinforce audit profession regulation in the United States. But any such policy proposals should be considered through a costbenefit analysis ensuring that they build on, rather than disrupt, existing strengths.

One area of auditor regulation that is sometimes a topic of discussion is auditor independence. Auditor independence is one of the cornerstones of the profession and undergirds audit quality. Public policy proposals that seek to implement more stringent requirements on auditor independence (e.g., a complete ban on all non-audit services provided by the audit firm, even those permitted under SOX; mandatory firm rotation) need to consider the tradeoff that can occur between auditors expertise and independence, which may reduce audit quality.

The Center for Audit Quality recently published Value of the Audit: A Brief History and the Path Forward, which delves into these issues and considerations in more detail. As noted in the paper, no conclusive evidence attests that a complete ban on non-audit services or a long audit firm tenure, among other proposals, in fact impairs auditor independence and thus audit quality. The paper instead notes that attempts to increase auditor independence often ignore the market-based incentives referenced above and the potential negative impact on necessary audit expertise, thus hindering the strides made in audit quality in the U.S.

Looking forward, SEC Chairman Genslers recent proposed rulemaking agenda highlights evolving stakeholder needs and public company disclosures, including disclosures on climate change and human capital (often considered part of environmental, social, and governance matters). As noted in our recent submission to the SEC in response to its request for input on climate disclosures, the CAQ convened a roundtable with investors, board members, auditors and public companies to discuss ESG reporting. When asked if climate-related and other ESG disclosures should be subject to public company auditor assurance, approximately 90% of the participants said yes although half of those stated, over time. The audit professions remit was expanded in SOX to cover assurance on internal control over financial reporting. The multidisciplinary expertise and understanding of a companys business and controls are just two reasons why the audit profession is thought of to enhance the reliability of ESG information, and the profession stands ready to engage with the SEC in these areas.

The audit profession has long been an independent guardian of the public interest. Reevaluating audit profession regulations to ensure they best serve their intended purpose is both important and necessary, but it is critical to audit quality that such evaluations strike the right balance that enables the audit profession to fulfill its responsibility to protect our capital markets.

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A shared commitment to informative, accurate and independent audits - Accounting Today