Tim has rightly turned our attention to the future, giving us a concrete set of ideas on how to maintain relevance.

Transcription

1 "Center for Audit Quality Update: Focus on the Future" Cindy Fornelli Executive Director Center for Audit Quality December 9, 2015 AICPA Conference on Current SEC and PCAOB Developments Washington, DC As prepared for delivery. Hello, everyone, both here in person and watching via satellite. Thank you, [John May], for that introduction. And thank you to Tim Christen for your inspiring remarks. From all of us at the Center for Audit Quality, we wish you the very best during your AICPA chairmanship. Tim has rightly turned our attention to the future, giving us a concrete set of ideas on how to maintain relevance. I'd like to build on Tim's future theme, starting with a question. How do you think about the future? And by that I don't necessarily mean, what do you think the future is going to be. But rather, in what manner do you think about the future? What's your approach? After all, there are several different ways to consider the future. Let's look at a few examples. Here's a classic from the late, great Yogi Berra. "The future ain't what it used to be," he said. I could probably use my remaining 24 minutes pondering the meaning of that sentence. But let's keep going. Next, a more quantitative take from writer John Sladek. "The future, according to some scientists, will be exactly like the past, only far more expensive." Having put two kids through college, I can say firsthand that this one is certainly true when it comes to tuition payments! Finally, a quote from jazz great Miles Davis. He said this: "My future starts when I wake up every morning. Every day I find something creative to do with my life." I like this one. I like it because it reflects our vision of the future for the public company auditing profession. The CAQ emulates our member firms we think about the future constantly. Every day we look for ways to continuously improve. As I think of our future focus, I see it having five core elements. First, our future focus is optimistic, and hopeful. It is also proactive, addressing opportunities for improvement. 1

2 It is engaged, showing leadership and working with partners to push ahead on important initiatives. It is responsive to changes in the global marketplace. And it is appreciative. We never stop appreciating and building on the core strengths and attributes of public company auditing the strengths that make it such a vital part of our financial system. In my time with you this morning, I'd like to take each of these elements which happen to form a handy acronym, "OPERA" and put them in the context of the activities and priorities of the Center for Audit Quality. And don't worry I promise that I will not be singing for you this morning! So let's start with the "O" optimistic. Why are we optimistic? One big reason is investors. They are optimistic and confident. Across generations and geography, they believe in our capital markets system. We know this because since 2007, the CAQ has commissioned an annual survey of American investors on four key confidence measures. We call it our "Main Street Investor Survey," as it only targets individual investors the man or woman on the street, as I think of it. In recent years, our survey has shown that investor confidence in U.S. markets is strong. Of course, there are ups and downs. Yet in our 2015 survey investor confidence in U.S. capital markets continued to hold steady at 73 percent. That's the highest level since And this year, with an eye towards "The Investor of the Future," our survey focused in particular on younger investors: millennials. I'm pleased to say we found that the views of this generation largely mirrored those of older generations. The investor of the future is confident. In addition to broad confidence measures, our Main Street Investor Survey also gauges how investors view various members of the financial reporting supply chain. Survey respondents have been asked how much confidence they have in these entities when it comes to effectiveness in looking out for investor interests. For the fifth year in a row, independent auditors have topped this list. As this slide shows, investors also derive confidence from various checks and balances in the market system that work to their protection and benefit. This is a positive sign. It drives the optimism that is a core component of our future focus. But we can never take that strong investor confidence for granted. We need to do our part to nurture that confidence. And so we are proactive. 2

3 We are not dragged toward the future. Rather, we step up to meet it, in the policy arena and elsewhere. We address our challenges. We seek out ways to build on our strengths, and we seize opportunities when they arise. A great example of being proactive is the profession's work on audit quality indicators, or AQIs. Of course, the CAQ and the public company auditing profession didn't singlehandedly address the idea of AQIs. But the profession and the CAQ have moved this conversation forward proactively. We kicked off our work in 2012, forming a Stakeholder Advisory Panel that would guide our investigation into a potential set of AQIs and how to use them. This panel included investors, audit committee members, former regulators, academics, preparers, auditors, and others. We also consulted with quality experts in the medical and aviation fields. In April 2014, we published our Approach to Audit Quality Indicators. It identified a set of potential AQIs and an approach for communicating them. Yet we didn't leave it at that. In an effort that was completed earlier this year, CAQ member firms pilot tested our approach. This testing involved 30 issuers and 10 audit firms of varying sizes. The confidential pilot testing gathered audit firms' feedback on the efforts required to collect AQI information. It also generated audit committee feedback on the usefulness of the proposed AQIs in fulfilling their oversight responsibilities. The pilot testing was illuminating. Some of what we found unequivocally validated our approach. Other findings showed us where more work needs to be done. In our view, three important points emerged from the pilot testing. First, audit committees are an appropriate audience for AQIs, and audit committees value engagement-level indicators. Second, the two-way communication between the audit committee and the engagement team provides the context that is critical for a proper understanding of AQIs. And third, the use and reporting of AQIs should be voluntary and flexible. This allows audit committees and auditors to tailor AQIs to their particular circumstances. Even with this pilot testing behind us, our work is far from over. More experience and empirical evidence are needed to evaluate how potential AQIs correlate with audit quality. With our proactive focus, the CAQ will continue our work. Indeed, we've already taken our AQI conversation global. This past summer, we held roundtables in London, New York, Chicago, and Singapore to great response. 3

4 The CAQ is in the process of completing a new report that integrates findings from the pilot testing and our roundtables. Stay tuned for that report, which we will issue in early 2016 and will of course share with the PCAOB and others. What's another area where we must we be especially proactive? In the fight against financial reporting fraud. We've teamed up with key partners in the Anti-Fraud Collaboration. In addition to the CAQ, this group includes the National Association of Corporate Directors, Financial Executives International, and The Institute of Internal Auditors. The goal of the Anti-Fraud Collaboration? To build awareness of the shared responsibilities that we all have in deterring and detecting fraud. We've carried out this mission in several ways. One is through webcasts. Over the past two years, we've held a series of webcasts that have explored essential topics, such as building an ethical corporate culture, effective use of whistleblowers, and analysis of SEC enforcement actions. You can find these webcasts at the AntiFraudCollaboration.org website. Leveraging this series, the Collaboration in October converted the webcasts into online selfstudy courses for corporate ethics training. Housed on the AICPA's learning platform, these free CPE courses provide up to two behavioral ethics credits per course. Another key project for the Collaboration is its series of case studies. Based on the Harvard Business School method, these case studies provide a fact pattern about a fraud scenario at a fictional company. Guided by a professor or trained instructor, people using the case studies can build their fraud awareness. The cases have used by firms and companies, as well as in college classrooms. The Collaboration's third case study Kendallville Bank was released in July. And what's it about? Well, to help get the word out, we created a short video, which I hope you'll enjoy. [Video, "Introducing the Kendallville Bank Case Study"] If there are no "Dans" in your life, and I hope there are not, you still may be interested in teaching the Kendallville case or the others in the series. The Collaboration's website also has links to tips, best practices, and other resources related to the case studies. And as with all CAQ resources, these are publicly available at no charge. Now, let's get back to OPERA and the letter "E," for engaged. To confront our issues effectively, we need to engage in robust dialogue with a variety of stakeholder communities. One of these communities is academics. This year the CAQ maintained its active engagement with professors, researchers, and students. 4

5 One way we've do that is through our Research Advisory Board. This body is comprised of members from academia and the auditing profession. Through this body, the CAQ annually awards grants to support auditing-related research. Since 2009, the CAQ has provided 28 of these grants, including three this past May. To date, seven of these projects have been published in peer-reviewed journals, and more are on the way. Another way we engage with academics is the through the Access to Audit Personnel program. The CAQ and the Auditing Section of the American Accounting Association jointly established this program in Its goal is to generate behavioral research on issues that are relevant for practitioners, while providing doctoral students and tenure-track professors with access to audit firm staff. In April, we selected four new projects to support, which involved nearly 600 professionals. Finally, our engagement with academia also takes place in person. In August, the CAQ held its Seventh Annual Symposium. At the event practitioners and nearly 50 academics exchanged ideas on the audit and engagement team of the future. It was quite a dialogue. Videos of the sessions are available on the CAQ's website. Another community with whom we are deeply engaged is audit committees. For the financial reporting process to function effectively, there must be robust communication between audit committees and auditors both internal and external. This was the theme of a report that we produced in 2015 in collaboration with The Institute of Internal Auditors. The report, titled Intersecting Roles, provides a wealth of tips and best practices for audit committees, internal auditors, and external auditors as they work to address audit challenges. We'll be discussing these challenges at a panel that I'll be moderating on Friday. So I hope you'll attend and join the discussion. We've also engaged heavily on the issue of audit committee disclosure. Two years ago, the CAQ, working with its partners in the Audit Committee Collaboration, issued a "Call to Action." We urged all audit committees to provide more insight to investors and others about the important work that they do. I'm pleased to say that more and more audit committees are answering this call. How do we know? Last month, the CAQ and Audit Analytics released the second edition of the Audit Committee Transparency Barometer. The Barometer shows substantial growth in the percentage of S&P 1500 companies that are disclosing information in key areas of external auditor oversight. What's more, audit committees are not using a one-size-fits-all approach. They are tailoring their disclosures specifically to their companies, making them more meaningful to investors. As the Barometer shows, our financial system is dynamic. So our future focus must be responsive. We must anticipate change, we must monitor it, and we must adapt to it. In this 5

6 fashion, we can avoid being reactive getting caught flat-footed and having to scramble when change occurs. As an example of our responsiveness, I'll raise an issue that has been top of mind for nearly everyone: cybersecurity. Tim spoke of the AICPA's laser-focus on cybersecurity. And at the CAQ, we share that same intensity of focus, starting with our efforts to educate the public on the current role of the auditor regarding cybersecurity. When performing the mandated audit, the auditor must obtain an understanding of how the company uses IT; the impact of IT on the financial statements; and the extent of the company s automated controls, as they relate to financial reporting. When a cyber breach occurs, the external auditor must assess the potential impact of the breach on financial reporting and ICFR, including management s financial statement disclosures. Remember, however, our future focus is responsive. Cybersecurity is an evolving area, and this evolution has implications for the role of the public company auditor. Separate and apart from the mandated audit, audit firms can be a valuable resource for providing attestation services related to cybersecurity. These potential attestation services can provide independent insights to management, the audit committee, and others charged with governance. As Tim noted, the AICPA's Assurance Services Executive Committee is undertaking the foundational work of updating the existing framework of attestation standards to accommodate auditor work in this area. As their work continues, the CAQ has begun a coordinated effort to explore market needs, expectations, and trends. Our aim is to help illuminate the profession s efforts to provide assurance services in this area. We'll hear much more on this topic at the cybersecurity panel tomorrow afternoon. Tim also spoke of another development that we must be responsive to: the changing workforce. We need to make sure that young people the auditors of tomorrow see auditing for what it is: a dynamic, high-tech, and exciting profession. And so, complementing the AICPA's extensive and innovative work in this area, we at the CAQ have been focused intently on audit talent. We are telling the positive story of careers in auditing. In fact, we're doing it this week. Tomorrow, the CAQ and its members are launching a social media day, and we invite you all to be a part of it. Share your positive stories about your experience with and in the profession. Do it on Twitter, Facebook, Instagram, LinkedIn whatever network you like. We've created a hashtag #AuditorProud, which you can find on these nifty pens that we're handing out at our booth outside. Tag your posts with #AuditorProud, and tell the world why you love your job. Tag others and challenge them to join in. 6

7 This leads to the final element of the CAQ's focus on the future. We are appreciative. We appreciate and never lose sight of the fundamentals that make public company audits a core component of the U.S. capital markets. These fundamentals of course are independence, objectivity, and skepticism. And that's not the only way we are appreciative. We also appreciate the role of other key players in the financial reporting system. I've already discussed a few of our efforts with these stakeholders, efforts that will grow. We appreciate the regulators with whom we will continue to work constructively. I am eager to hear from Chair White next, Chairman Doty, Chairman Golden and all the representatives from the SEC, PCAOB, and FASB. When we gather together to discuss our challenges and opportunities, we are better prepared to address them. Last, but by no means least, let me salute the hardworking men and women of the accounting and auditing profession: those of you in this room and watching virtually, those of you interacting with us at the CAQ day to day, and those we ve not yet met. I appreciate all of you, because you are optimistic. You are proactive. You are engaged. You are responsive. And you are appreciative. You appreciate what must be done to ensure a bright future for the public company auditing profession. Thank you. 7