The global pandemic brought unprecedented challenges to public company auditors as well as the clients and the public they serve.
"Audit teams have risen to the challenge and evolved," Kelly Grier, CPA, US chair and managing partner and Americas managing partner for EY, said Wednesday during a webcast sponsored by the Center for Audit Quality (CAQ) and the US Chamber of Commerce.
With the pandemic still posing risks and the 20th anniversary of the Sarbanes-Oxley Act (SOX) approaching next year, experts shared insights on what will drive audit quality in the future.
Leading with purpose
Strong, coordinated regulatory standards and independent oversight will continue to inspire confidence in audit quality in the future, said Grier, who chairs the board of governors for the CAQ, which is affiliated with the AICPA. She said leaders need to continue promoting the values of independence, professional skepticism, and personal integrity.
Wes Bricker, CPA, PwC's vice chair–US Trust Solutions co-leader, said one of SOX's important accomplishments was to reinforce the importance of tone at the top and culture by reinforcing the roles of the audit committee and management, and requiring certifications on the accuracy of financial reports and the effectiveness of the control system.
The rise of remote work during the pandemic has important ramifications for leadership and culture, Bricker said.
"The ability to challenge, the ability to understand different dimensions of effectiveness, to assess risk and design the right test, all of that comes together in the context of communication and culture within the audit firm and communication with the audit committee that's engaged the audit firm," he said. "And I do think that's an area for us to continue to focus on as we move forward."
Accelerating digital transformation
Technology continues to provide auditors with opportunities to improve their work.
Panelists cited FASB's new lease accounting standard as an example of an opportunity for financial statement preparers to use technology. Automated applications have been built to "read" lease contracts and capture data to be used in financial accounting systems for reporting of lease assets and liabilities.
Meanwhile, auditors are using technology to analyze entire sets of data rather than relying on sampling in their testing.
"It's a little bit like when the tide goes out, you see everything on the ocean floor," Bricker said. "You can see everything on the ocean floor, perhaps, by sampling. And that's a relevant technique. But if you can take all the water out or identify all the transactions in your system, you can not only better identify risk … but you can also better understand the contours. What's the nature of the activity? What should we focus on? What should we be communicating about?"
Kathy Waller, former CFO of Coca-Cola, said technology can provide so much information that it's easier to provide an opinion on the internal control system and to comment on a broader set of issues. But she said there are also risks associated with technology.
"We do have to be sure that we are not going to be setting up unintended consequences with technology, for sure," Waller said. "… It's pretty exciting the way it might go, but I think we do have to be careful."
Investing in people
Audit quality is only as strong as the people who perform audit work every day, Grier said. Amid the pandemic, personnel losses during what's been dubbed the Great Resignation are challenging employers everywhere to keep the best people.
Meanwhile, leaders of the CPA profession are continuing to work to make sure the best and brightest people are attracted to do this important work.
"The talent pipeline probably isn't as broad as we need it to be," Dan Goelzer, a founding member of the PCAOB, said during a "fireside chat" with CAQ CEO Julie Bell Lindsay.
Audit firms can attract the best people and keep the talent they have by investing in learning and growth opportunities, Grier said. She said it's important also to rethink the pathway into the profession.
The CPA Evolution project undertaken by the AICPA and the National Association of State Boards of Accountancy is designed to evolve initial CPA licensure requirements to continue the profession's success in a rapidly changing marketplace. As part of that project, a new model for licensure and a new CPA Exam are being developed for a planned launch in 2024.
Developing diversity in the profession also is a key to performing high-quality audits, Grier said.
"Diverse teams are more innovative and drive audit quality by leveraging a range of perspectives and competencies to reach better decisions," she said.
Modernizing quality management systems
Standard setters are developing new standards for firm quality management systems with a goal of enabling higher quality.
The AICPA Auditing Standards Board has proposed a new quality management standard that is designed to enable firm management to tailor their quality control activities to address their individual, firm-specific risks.
"Firms are going to have to stop using sort of a checklist approach to quality control and [use] more of a process where they assess periodically what the actual challenges in their practice are and make sure they have measures to address those challenges," Goelzer said.
Focusing on independence
Keeping a strong culture of independence is critical to maintaining the public's trust, Bricker said.
"Auditor independence, some perhaps see it as an obstacle; I see it as an essential source of value," he said. "It's auditor independence that enables investors to have the confidence that someone from the outside has looked at the numbers, has looked at the financial statements, has looked at the disclosures. It's an essential underpinning to the value of the audit process."
Waller, who chairs the audit committees of Beyond Meat and Spelman College, said that audit committees are extremely dedicated to maintaining the quality of the financial statements.
"Therefore, independence of the audit committees and independence of the auditors is incredibly important," she said. "None of us would ever allow if we saw it — and we are looking for it — undue influence over the auditors by company personnel. Independence, to me, does say quality."
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.