The Center for Audit Quality marked its 10th anniversary at an event in Washington, D.C., on Monday featuring a roster of high-profile figures in the accounting profession.
CAQ executive director Cindy Fornelli kicked off a series of roundtable panel discussions. “Ten years ago today, on this very day, the public company auditing profession announced the formation of a new organization, the Center for Audit Quality,” she said. “With incredible vision and foresight, the leaders of the profession saw the need to create an organization that was for investors, public company auditors and the markets. It would engage with all of the stakeholders in our financial market: auditors, investors, boards of directors and audit committees, preparers, academics, the financial press, regulators and standard-setters.”
Among the attendees were a number of the original governing board members of the CAQ, including Grant Thornton International CEO Ed Nusbaum and former Ernst & Young chairman and CEO James Turley.
Former NACD CEO Ken Daly, CAQ executive director Cindy Fornelli, Grant Thornton International CEO Ed Nusbaum and former Ernst & Young CEO James Turley
Turley noted they originally faced the question of whether the CAQ should start as U.S. or global organization. “I’m very thankful we started with the U.S., because had we started with global, we wouldn’t be celebrating our 10-year anniversary today,” he said. “We’d be celebrating the launch.”
Turley said he was grateful the CAQ had opted to be inclusive in its outreach to include representation from so many groups.
Ken Daly, former CEO of the National Association of Corporate Directors, wondered aloud how the auditing profession would be able to exist in a new era of “alternative facts,” quoting Trump administration advisor Kellyanne Conway. The NACD has worked closely with the CAQ on an anti-fraud initiative, producing reports, webcasts, case studies and webinars, in collaboration with Financial Executives International and the Institute of Internal Auditors. Daly commended Fornelli for her leadership and close collaboration with the NACD. He noted that audit committees can be a major help to other members and committees of a board of directors.
Grant Thornton International CEO Ed Nusbaum pointed out there are many variations in the quality of audit committees, however, and audit committees on companies outside the U.S. often do not take on the same role as they do at U.S. companies.
Daly said too many audit committee members prioritize reducing audit fees. “It’s still a red badge of courage when you get the audit fee down by $11,” he said. “A lot of audit committees think that’s what their job is.”
Turley, who now sits on audit committees, agreed. “I think it’s a colossally bad idea to get the audit fee down,” he said. “Our job is to make sure we’re getting high-quality auditing done to protect the needs of investors.”
PCAOB and SEC Panel
Deloitte CEO Cathy Engelbert pointed out the many facets of the CAQ. “The CAQ has been so valuable in a lot of different ways, advocating for policies and standards, fostering dialogue, supporting research, strong voices for our core values, and telling the story why this is still a great profession for our young people to join,” said Engelbert.
She introduced a panel moderated by Public Company Accounting Oversight Board chairman James Doty, featuring two former chairs of the PCAOB, Daniel Goelzer and Mark Olson, and two former chairs of the Securities and Exchange Commission, Mary Schapiro and Harvey Pitt. Doty asked them whether the Sarbanes-Oxley Act of 2002, which created the PCAOB, has been a force for good and made a difference. Congress passed the legislation in the wake of the accounting scandals of the early 2000s.
Schapiro weighed in first. “Sometimes I think legislation that is born out of a crisis is flawed, as you might expect,” she said. “It’s done quickly sometimes, without a lot of opportunity for debate and analysis. It can be highly responsive to the crisis, but have unintended consequences. It can leave people with a feeling that everything is fixed as a result of this legislation so nothing else needs attention. It can be micromanaging because trust has been lost, which is what led you to the crisis. Sometimes it’s done in a partisan way, and as a result it can be a bit one-sided. My sense is those fates did not befall Sarbanes-Oxley. In fact, the law suffers from very little of that. It has been highly responsive to the financial frauds and crises that emerged at that time in a way, in the words of Mike Oxley, that’s stood the test of time. In terms of the outcomes of the law, it’s been highly successful, though that doesn’t mean there aren’t things you need to tweak.”
Pitt, as SEC chair, supported the legislation when it passed as essential for restoring investor confidence.
“It was very important at that time for there to be a national response to what we were seeing, and Sarbanes-Oxley provided that response,” said Pitt. “It said that the official view of the country was that things had to improve. They had to get better, and there were efforts made to provide guidance on that. In that sense, I think the Act did make things better. I think that as with any legislation, there are some classic flaws.”
Among the flaws Pitt cited was that Congress decided not to make Sarbanes-Oxley part of the 1934 Securities Exchange Act. Sarbanes-Oxley also takes a “one size fits all” approach, which placed a greater burden on the PCAOB.
“In a sense there was an irony because Congress had inappropriately somewhat of a punitive perspective on the accounting profession,” said Pitt. “I think Sarbanes-Oxley has provided the accounting profession with much greater leverage and the ability to improve audit quality than it had before the Act, so in that sense, I would consider it a huge success.”
Former PCAOB chair Daniel Goelzer noted there was a great deal of uncertainty about the PCAOB at the time it was set up, and consumer advocate Ralph Nader even set up a “shadow PCAOB” at the time.
PCAOB chair James Doty (left) with former SEC chairs Mary Schapiro and Harvey Pitt and former PCAOB chairs Daniel Goelzer and Mark Olson
Another former PCAOB chair, Mark Olson, pointed out that capital markets in other countries eventually followed the lead of the PCAOB and set up similar auditing oversight boards of their own. “The PCAOB emerged out of whole cloth, and in a short period of years that model was embraced around the world,” he said. “The world looked at the PCAOB as a model.”
The panelists expressed fear, however, about the U.S. withdrawing its support from international organizations, as the Trump administration has signaled. They urged the PCAOB and other U.S. organizations to remain involved in groups like the International Organization of Securities Commissions (IOSCO) and the International Accounting Standards Board (IASB).
On the sidelines of the conference, Accounting Today asked Doty for his thoughts on the matter of staying involved internationally. “I think we have had an extraordinarily fortunate, constructive and useful experience internationally,” he said. “For the nations with whom we have bilateral arrangements, we have been able to collaborate with and share information, instruct and promote cross-border audit regulation with colleagues around the world. And in those places where we’re not yet, we’re working on it and we’re making progress.”
Sustainability and Diversity
Goelzer noted during the conference that there is “hunger from investors for more kinds of assurance.” He sees that leading inevitably to a greater role for auditors in areas such as sustainability and cyber risk, and that will mean greater demands for high-quality auditing.
Nusbaum said he sees a need for more integrated reporting, but acknowledged that most American businesses aren’t rushing to do integrated reporting or sustainability reporting. Many companies don’t want to spend additional money on auditors, unless the regulators step in, he pointed out.
Jean Rogers, CEO of the Sustainability Accounting Standards Board, said her original vision was that any investor should be able to look up the fundamentals on a company’s sustainability efforts right alongside the financials. Her group used technologies such as artificial intelligence to draw information for the EDGAR database about companies’ disclosures on sustainability. They found that nearly every Fortune 500 company does sustainability reporting, but most of the sustainability reports are not audited and often are more like marketing pieces.
Michele Hooper, president and CEO of the Directors’ Council, which has worked closely with the CAQ, agreed that audit committees should improve the disclosures on sustainability and said they also need access to cybersecurity experts. She and other panelists also pointed to the need for greater diversity in the audit profession.
“It’s important to build diverse, inclusive cultures,” said Deloitte CEO Cathy Engelbert.
Peggy Foran, chief governance officer at Prudential Financial, emphasized the need for greater transparency. Deloitte vice chairman Bob Kueppers closed out the event by stressing the need for the CEOs and managing partners of the major auditing firms to remain involved with the governing board of the CAQ since they are the decision-makers, while also including other constituencies such as investors and not making it just about the auditors.
“I think the mission of the CAQ is congruent with the mission of our regulators,” he said. “We’re not oppositional. We’re trying to supplement, moving the model forward in a positive way for the markets at large.”