Volume 5, Issue 10

October 2011

I. Report Summarizes Roundtable Discussions on the Changing the Role of the Auditor to Meet Investors’ Needs

The Center for Audit Quality (CAQ) has released a new report summarizing observations from recent stakeholder discussions exploring the value of the audit and the role of the auditor going forward.

Between May and July 2011, the CAQ convened the full range of financial reporting stakeholders – CEOs, CFOs, board and audit committee members, investors, auditors, former regulators, attorneys and academics. Observations on the Evolving Role of the Auditor: A Summary of Stakeholder Discussions summarizes the observations of roundtable participants in Dallas, New York City, San Francisco and Chicago.

Observations on the Evolving Role of the Auditor states that participants believe the audit is valuable and should not go away. Participants also want auditors to retain the attest function and not expand their reach into the realm of management by asserting new information about a company. Nevertheless, the participants observed that there is more that all participants in the financial reporting process, including independent auditors, can do to make corporate reporting more relevant for investors.

“The CAQ supports responsible changes to the auditor’s reporting model and the role of the auditor,” said Executive Director Cindy Fornelli. “Based on what we heard, we plan to continue discussions with financial reporting stakeholders to develop actionable recommendations.”

To obtain a hard copy of the report, contact Jay Hyde at 202-609-8057 or jhyde@thecaq.org.

II. CAQ Comments on Possible Changes to the Auditor’s Report in Letters to the PCAOB and IAASB

In a comment letter to the Public Company Accounting Oversight Board (PCAOB), the CAQ has reaffirmed the public company auditing profession’s commitment to responsible changes to the auditor’s reporting model to better serve investors. The September 30 letter puts forth several proposals that the CAQ believes would be responsive to many of the information needs of investors, including: a new examination report by the auditor on management’s Critical Accounting Estimates disclosure in Management’s Discussion and Analysis; an emphasis-of-matter discussion anchored to the most significant matters in the financial statement; and the addition of clarifying language on reasonable assurance, auditor independence, and management’s responsibility for preparing the financial statements. The CAQ believes that these changes to the auditor’s report would enhance audit quality, narrow the expectation gap, and meet the needs of investors without creating significant unintended consequences.

The CAQ also shared its views on enhancing the value of auditor reporting in a September 15 letter to the International Auditing and Assurance Standards Board (IAASB). The IAASB had issued a consultation paper exploring options for changes to the auditor’s reporting model. In response, the CAQ urged the Board to clearly articulate its standard-setting objectives at the outset in order to obtain broad consensus on which changes will meet those objectives and to set investor and other stakeholder expectations. As Cindy Fornelli wrote, “it is critically important that any changes retain the appropriate division of responsibilities (assert versus attest) between management and the auditor and strengthen – not undermine – the role of those with governance responsibilities over financial reporting and the external audit. The CAQ believes that any changes should be designed to strengthen the interconnected roles and responsibilities of all those who play a role in financial reporting.”

III. “Moments That Matter”: What Financial Executives Say About Deterring Financial Reporting Fraud

Over the past six months, Marie Hollein, president and CEO of Financial Executives International (FEI), and the CAQ’s Cindy Fornelli led a series of discussions titled “Deterring and Detecting Financial Reporting Fraud” at FEI chapters across the country. Speakers have included chief financial officers, public company auditors and forensic specialists.

In a recent article for FEI’s Financial Executive magazine (“What FEI Members Say About Deterring Financial Reporting Fraud,” September 2011), Fornelli and CAQ Senior Director of External Relations Angela Desmond summarized some insights, concerns and practical suggestions that were discussed during the CAQ-FEI events.

“Importantly, the need for a strong ethical tone at the top was the dominant point made at all of the meetings, closely followed by the role of communication in disseminating and reinforcing management’s tone throughout the company," Fornelli and Desmond wrote. Explaining that tone at the top drives corporate culture, they observed that “One good way to strengthen culture is to emphasize the importance of ‘moments that matter.’ These were described as instances where an employee has to decide whether to do the right thing even though no one may ever know that the decision was being made. The emphasis on making the right decision empowers employees to take responsibility for their actions and communicates management’s trust in the employee to uphold the ethics code.”

Discussion participants also emphasized that actions speak louder than words in setting a company’s tone at the top. In addition, there must be consistency in message and behavior throughout all levels of management, according to the authors.

FEI and the CAQ will present additional executive workshops on the topic in Long Beach, California and Denver in November.

IV. Fornelli Recognized as One of the 100 Most Influential People in America’s Boardrooms

Cindy Fornelli has been named to the National Association of Corporate Directors’ (NACD) 2011 Directorship 100, the annual "who's who" of influential figures in the boardroom and corporate governance.

Fornelli is among honorees in 15 categories who were recognized for their roles in advancing better corporate governance. The categories represent all spheres of the corporate governance universe, including directors, regulators, politicians, CEOs, think tanks, attorneys, investors, advisors, professors and journalists.

“The NACD D100 honorees have displayed their ability to apply their own individual attributes in raising the standards of boardrooms throughout the country,” said Ken Daly, president and CEO of NACD. “They have demonstrated core values in advancing corporate governance while also weathering the economic and regulatory uncertainties that have defined this past year.”

Fornelli and her fellow honorees will be recognized at the NACD Directorship Forum: Celebrating Boardroom Innovators on November 8 & 9 in New York.