From non-compliance with laws and regulations (NOCLAR) to sustainability assurance, regulators and standard setters have stayed busy this summer developing and issuing proposals and standards that would impact the future of public company auditing.
Newly published resources also provide insights into how companies can mitigate the risk of identity and authentication fraud and conduct robust culture assessments.
In July, I also spoke to Dante D’Egidio, who was recently appointed EY Americas Vice Chair for Assurance, about the biggest issues impacting public company audit firms today.
Read on for the latest issues I’m tracking and resources from the profession to assist audit practitioners.
Please note that these perspectives are my own. If this email was forwarded to you, subscribe here so that you never miss a public company auditing update.
We’re closely monitoring these proposals and others from audit regulators and standard setters:
PCAOB
Proposals
- NOCLAR: On June 6, 2023, the Public Company Accounting Oversight Board (PCAOB) issued for public comment a proposal to replace AS 2405, Illegal Acts by Clients, in its entirety with AS 2405, A Company’s Noncompliance with Laws and Regulations, together with conforming amendments to PCAOB auditing standards. This is a significant proposal that all auditors should be paying attention to. The Board’s proposal would:
- Replace the term “illegal acts” with “noncompliance with laws and regulations” and expressly include fraud within the definition of noncompliance with laws and regulations.
- Enhance the auditor’s risk assessment procedures related to a company’s noncompliance with laws and regulations (NOCLAR).
- Expand the auditor’s obligation to plan and perform audit procedures to address NOCLAR that could have a reasonably material effect on the financial statements.
- And more.
- Our take: We support the PCAOB’s mission to protect investors by modernizing auditing standards that support the performance of continued high-quality audits in today’s complex business environment. However, we are concerned with the scope of laws and regulations the proposed amendments would be applicable to. If you’re an audit committee member, auditor, or another member of the financial reporting supply chain, make your voice heard on this important matter.
- Technology-assisted analysis: On June 26, 2023, the PCAOB issued for public comment a proposal to update aspects of AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement. The proposal seeks to improve audit quality and enhance investor protection by addressing aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form. The proposal aims to bring greater clarity to auditor responsibilities in the following areas:
- Using reliable information in audit procedures,
- Using audit evidence for multiple purposes, and
- Designing and performing substantive procedures.
- Our take: The use of technology can help improve the efficiency and effectiveness of audits. We welcome changes to the auditing standards that bring more clarity to auditor responsibilities, but also enable flexibility such that auditors and stakeholders benefit from technology-assisted analysis. As technology continues to evolve, so does the nature of audit evidence. We look forward to providing feedback on the proposed amendments to the Board by August 28, 2023.
ISSB
- Proposed International Standard on Sustainability Assurance 5000 Approved for Public Consultation by Unanimous Vote: The International Auditing and Assurance Standards Board (IAASB) has announced the unanimous approval of the draft International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, for public consultation. The consultation will be open from early August through December 2023. This proposed standard aims to build confidence and trust in sustainability reporting by serving as a comprehensive, standalone standard for limited and reasonable sustainability assurance engagements. It will apply to sustainability information reported across any sustainability topic and prepared under multiple frameworks.
- Our take: We support the IAASB in their efforts to create a comprehensive, standalone standard for assuring ESG-related information. Global standards and regulations will ultimately enhance investor confidence and promote consistent audit quality and reliability when it comes to reporting climate and other ESG information.
Audit Quality
Audit quality in the U.S. remains high, but in light of economic uncertainty, emerging developments, and demands on talent, audit practitioners should remain up to speed on the latest developments impacting audit quality. Read on for recent news, tools, and resources.
Going Concerns: 20 Year Review (June 2023)
A new review from Audit Analytics found that the percentage of companies that received a going concern opinion grew to 24.3% in FY2022 from 21.6% in FY2021, despite a decrease in total opinions issued.
Overall, the number of new companies that received a going concern in their first annual report opinion during FY2022 increased to 535, the highest amount seen since FY2008. Special Purpose Acquisition Companies (SPACs) were a significant driver of going concern opinions in FY2022. Of the nearly 25% of Finance companies that received a going concern opinion in FY2022, 87% were SPACs.
The uptick in going concern opinions demonstrates that auditors remain focused on their responsibility to evaluate public companies’ ability to continue as going concerns. Check out the full report.
2023 Organizational Culture and Ethics Report
AuditBoard released a new report titled, 2023 Organizational Culture and Ethics Report: Internal Audit’s Role in Unlocking Culture as Catalyst and 21st-Century Differentiator. Culture is a key focus for the CAQ and contributes to organizational success for many public companies.
This year’s AuditBoard survey of more than 350 internal audit leaders across industries found that 68% of respondents identified executive behavior as the top indicator of culture risk. Despite this finding, 37% of organizations do not formally assess culture.
It is critical that organizations assess their internal culture. Without doing so, they risk experiencing varying levels of fraud and will struggle with keeping an engaged, long-term workforce. This analysis will help companies jumpstart their next culture assessment. Read more.
The Evolving Role of the Auditor
As investor demand evolves, so does the role of public company auditors. The CAQ is dedicated to providing resources to keep you up-to-date on trending topics in corporate reporting.
Anti-Fraud Collaboration Publishes Resource on the Paycheck Protection Program (PPP)
The Anti-Fraud Collaboration (AFC) is a leader in the fight against fraud. The Fraud and Emerging Technologies Series spotlights drivers of innovation and major disruptors that are redefining the future of financial reporting, audit, and risk management. In their recent exploration of new technology in fraud deterrence and detection, the AFC examines two key control objectives related to the prevention of fraud with the Paycheck Protection Program (PPP).
Fraud and Emerging Tech: Identity and Authentication with the Paycheck Protection Program dives into some of the technologies and processes that could have improved the verification of applicants’ identities for the PPP.
The Need for Controls
The PPP was designed as ‘forgivable’ COVID relief for small businesses struggling during the Pandemic, and it largely met the goal of distributing money to millions businesses quickly enough to prepare our economy for the pandemic. However, the program has been reported to have experienced widespread identity and eligibility fraud, largely enabled by stolen or forged documentation. Identity and authentication verification could have been implemented to mitigate this widespread fraud
Identity
The National Institute of Standards and Technology (NIST) describes how digital identity controls consist of “proofing” and “authentication.” This is the initial process of verifying the authenticity of an individual’s ID credentials. The SBA utilized it’s existing loan processing system, E-Tran, which features fraud prevention, detection and monitoring capabilities, but the PPP suspended numerous controls and authorized FIs to approve their own applications. The PPP’s failures were largely a result of inadequate fraud prevention controls.
Authentication
Authentication is the process of verifying that the holder of ID credentials like SSNs or EINs is the authorized user. Processes should include more than one type of authentication, called multi-factor authentication, to improve the strength of control.
The PPP could have implemented biometric authenticators such as signatures, photographs, fingerprints, or palm prints to help mitigate the failed singular authentication process in the program that led to elevated levels of fraud.
Read the full analysis from the Anti-Fraud Collaboration.
Talent Spotlight
The CAQ is committed to working with audit firms to address issues related to talent, including the pipeline and gaps in diverse representation. Each month, I’ll spotlight our efforts on this critical issue.
CAQ Report Shows Significant Barriers Deter Students from Pursuing a Degree in Accounting
The CAQ in July released a report, Increasing Diversity in the Accounting Profession Pipeline: Challenges and Opportunities, July 2023, that builds upon the CAQ’s research from January 2022 on diversity within the accounting profession. Specifically, the CAQ again commissioned Edge Research to gain deeper insight into why undergraduate business students do or do not choose accounting, and why accounting majors and graduates do or do not pursue CPA licensure.
Some of the interesting findings from the research include:
- While openness to accounting exists at the undergraduate business school level, the most significant reasons for not choosing accounting as a major included a lack of interest or passion for the major (driven in part by negative experiences with introductory accounting classes), higher starting salaries in other majors and students not wanting to pursue the 150 academic credit hours required for CPA licensure. The 150 credit hour requirement was more pronounced for Black and Hispanic students.
- The CPA license is highly regarded by both accounting majors and graduates. However, a variety of structural supports are correlated with plans to pursue the license, including encouragement of a professor/mentor and whether a student’s college offered a 150 credit hour program (i.e., an accelerated undergraduate program covering 150 credit hours or a 5-year Masters in Accounting program…shout out to my alma mater, La Salle University’s accelerated program). Black and Hispanic majors and graduates reported less access to such structural supports.
- The research further shows that for majors and graduates who are planning to pursue CPA licensure, and have already met the 150 credit hour requirement, the time required to study for the CPA exam and the difficulty of the exam content were the top obstacles; and for those not planning to pursue the license or undecided, the time required to study for the CPA exam and the associated cost of exam preparation classes were the biggest obstacles. For those majors and graduates that have not yet completed the 150 hour requirement, the additional cost and time needed to reach it were the biggest obstacles.
Download the report for more of the results.
This month we are featuring 
Audit Insider Dante D’Egidio, EY Americas Vice Chair — Assurance. Dante, who was recently appointed to the role, leads more than 25,000 professionals across the US and the Americas in Audit, Financial Accounting Advisory Services (FAAS), Climate Change and Sustainability Services (CCaSS) and Forensic & Integrity Services, and has been with the EY organization his entire career (almost 30 years). Dante has worked with large multinational and high-growth companies in a variety of industry sectors and has experience in SEC financial reporting issues, capital market transactions and M&A activity.
Read on for my Q&A with Dante:
Dennis: First, congratulations on your appointment as EY Americas Vice Chair — Assurance. What are you most excited about in your new role?
Dante: Thank you! As I step into this role and lead our talented teams during this pivotal time for our profession, quality remains EY’s priority as we empower our people to embrace change and help us transform our business.
I believe the audit profession is a people business that is constantly evolving with how our clients and people use technology; to that end, we are reinvigorating our teaming model to foster collaboration and provide our younger professionals with the mentorship and learning and development opportunities they need to continue to grow.
We are transforming our audit practice to respond to the constant evolution in technology and scaling best practices, while continuing to enable our professionals to learn the valuable skills of understanding business and financial risks and controls, analytic thinking and problem solving, and fostering a continuous improvement mindset.
The EY organization has always been a proving ground for future leaders in finance and accounting, and I’m committed to helping our people develop deep technical accounting and auditing skills while also building the business acumen and leadership skills they need to thrive in today’s environment.
Dennis: You’ve been an auditor for close to thirty years. What do you think the single biggest issue impacting public company audit firms is today?
Dante: The world is not static, and like all businesses, audit firms need to continuously adapt and respond to evolving economic conditions, technologies, consumer trends, geopolitical events, generational shifts, investor and market expectations, and the regulatory environment.
As we prepare for the future, we are using technology to equip our people to deliver quality audits with independence, objectivity and professional skepticism, and realize our vision of an agile audit practice that is responsive to evolving market conditions and regulatory trends.
For example, we are integrating data analytics and automation into how we work, centralizing procedures to systematically incorporate the skills of EY specialists into our audits, and developing tools that use AI to help our auditors analyze data and identify risk.
Also, as a profession, we need more young people pursuing careers in accounting — an area in which the CAQ is very active — and one way we are trying to address this is through the EY Career Path Accelerator, which offers an alternate, affordable path for students to earn extra college credits to meet CPA licensure requirements.
Dennis: When you envision the profession in ten years, what do you think will have changed, and what do you think will have remained the same?
Dante: With the adoption of innovative technologies, the way we work will continue to change — our auditors are already using analytics to drill deeper into the data and ask better, more informed questions about risks, trends, transactions and anomalies. They are also automating the more routine audit tasks, which frees up time for early career auditors to develop analytical, technical and problem-solving skills.
Looking ahead, automation and robust analytics will be instrumental to auditors as they provide assurance services to companies seeking to meet continuously evolving expectations from investors and comply with new and upcoming regulations in areas such as ESG, helping them audit required information the capital markets stakeholders rely on.
At the same time, the foundation of the audit profession – independence, objectivity and professional skepticism – will remain the same.
Dennis: As you know the CAQ through its Accounting+ initiative is looking to raise awareness about careers in accounting. You were a first-generation college student. What made you pursue an education in accounting?
Dante: First, a big thank you to the CAQ for everything it does to break down barriers to a career in accounting through the Accounting+ initiative, which EY US is proud to support.
Accounting appealed to me because of its versatility and the wide range of opportunities it could provide — since I joined EY US in 1994 in Philadelphia, I have learned from inspiring mentors who encouraged me to work overseas and learn about global markets from a different vantage point. In 2001, I repatriated to the US into the Washington, DC market, and I am so grateful for the diverse experiences I’ve had across different sectors, working with small private to large public companies on a variety of capital market transactions, including many IPOs, mergers, acquisitions and divestitures.
My career at EY US has presented me with leadership opportunities that prepared me for the leadership role I hold today, and I hope to help others gain similar opportunities during their EY careers.
Dennis: We both have roots in the suburbs of Philadelphia. Do your summer plans include any trips to the Jersey shore?
Dante: My wife and I are both from Philadelphia, so we do try to get back there quite often to visit our family and friends, but we’ve shifted our summer vacations to the Maryland shore! We love to travel as a family. As a first-generation American, I especially enjoy getting back to Italy, where my parents were born, as much as we can.
Each month, I’ll answer questions from readers. I received the following question in July:
Question: I saw your report in the newsletter last month on the S&P 500 and ESG reporting. How do you think the SEC’s final rule will shift the current assurance dynamic? Will more organizations engage a third-party assurance provider?
Answer: Great question. In the U.S., assurance of climate-related information is largely voluntary. If this shifts to mandatory, as the SEC has proposed, certain public companies will be required to receive third-party assurance, from a public company auditor or other assurance provider, over certain of their climate-related information. In our view, the inclusion of this requirement would be a positive outcome for our capital markets, as public company auditors are uniquely positioned to enhance investors’ trust and confidence in ESG information. This is because auditors have a distinct skill set steeped in bringing accountability, standards-based analysis, and objectivity to the review of company-reported information.
Submit your questions for next month to jgermain@thecaq.org.
Check out these upcoming CPE-eligible events from the CAQ.
Audit Committee Effectiveness Series
Public company boards are dealing with more than ever before. In an increasingly unpredictable future, this free CPE-eligible episode of the CAQ and NACD’s Audit Committee Effectiveness series discusses principles from the Audit Committee Blueprint, developed by the NACD in partnership with KPMG’s Board Leadership Center. The Audit Committee Blueprint centers on 10 key principles that boards can use and adapt to ensure they are prepared for the future, with a focus on audit quality, internal audit, and audit committee focus and effectiveness.
See you next month Audit Insider.
Dennis McGowan
Vice President, Professional Practice and Anti-Fraud Initiatives