Welcome to another edition of Capital Markets Pulse, a monthly newsletter from the Center for Audit Quality that brings you insights, resources, and tools on the latest issues impacting the capital markets.
Not only has our summer been heating up (temps recently hit a record-breaking 104 degrees in Washington D.C.) but so has the conversation around artificial intelligence (AI). From dinner tables to boardrooms, people want to know what the challenges and opportunities are for this new form of technology. Here at the CAQ, we’re particularly interested in what the use of genAI means for the public company audit profession.
To that end, I had a fantastic conversation with Richard Jackson, EY’s Global Assurance Artificial Intelligence Leader, about AI implementation in the latest episode of our Capital Markets Pulse podcast – be sure to give it a listen. And if you’re an audit committee member, the CAQ has developed a new resource to help you ask public company management and auditors the right questions about genAI use, included below.
While regulation around climate reporting in the U.S., including the SEC’s climate rule, remains in flux, public companies overwhelmingly continue to report and assure climate information according to our latest analysis of the S&P 500 and ESG reporting.
Lastly, we continue to advance efforts to attract the next generation of talent. Below, I share a few exciting partnerships we’ve made to reach GenZ.
I am incredibly proud of the work the CAQ team does on behalf of public company audit firms and the capital markets. Read on for what’s on my radar.
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.
The Opportunity of Generative AI in Audit with EY’s Richard Jackson
From boardrooms to client sites, people want to talk about generative AI. Artificial intelligence has been used for decades but, outside of science fiction, generative AI is a new concept to many of us while its utility in the business setting is rapidly expanding and evolving. In the latest episode of my podcast, I had a conversation with Richard Jackson, Global Assurance Artificial Intelligence Leader at EY, about AI implementation and how organizations, including audit firms, are focused on building confidence in the responsible use and deployment of AI.
The following are a few highlights from Richard during our discussion:
- On best governance practices: AI can get incredibly expensive very quickly, because its data-hungry, it requires huge amounts of processing power, and the very same ability to have everyone in the organization experimenting with this has the potential to turn it into a very expensive and potentially risk-worthy venture for the organization. The ability to lean into that, to recognize it, to give structure to the governance frameworks, both at the management and the board level, is what we’re seeing clients looking at and investing in.
- On employee caution about the use of genAI: One of the biggest challenges to the speed at which organizations can adopt and harness this technology is the appetite and willingness of the employee base to lean in and get excited about it… When you present the implementation of technology to employees, and when you describe how it will increase productivity, that can be heard as ‘it will put me out of a job’…There’s a very simple way of positioning that differently, to focus on the ability for this technology to enhance the employee experience, to take away the churn of the everyday mundane activities that can suddenly be automated very quickly, to release the capability of the employee to do the things that they’re most excited about and they want to focus on.
- On how firms are utilizing AI to enhance audit quality: One of the things I get most excited about and is very aligned with the work we’ve been doing with the CAQ, is the ability to reinvigorate and re-excite people about the relevancy of our profession. I genuinely believe we stand on the crest of the ability to unlock what many people got into this profession for. To create insights, deliver confidence to our capital markets and stakeholders, and return value to our clients. And do it in a way that’s exciting for our professionals and reinvigorating for even our youngest cohorts joining us straight from college, where they’re starting to see the capabilities and relevance of this profession.
Listen to the podcast here.
Be sure to subscribe to the latest episodes on Spotify, Apple Podcasts, Google Podcasts, or Amazon Music.
Profession Updates
SEC Extends Comment Deadline on PCAOB’s Standards on Quality Control and Auditors’ General Responsibilities
The SEC gave stakeholders extra time – 14 days to be exact – to submit comments on two recently approved PCAOB standards, Quality Control (QC) 1000 and general responsibilities of auditor in Auditing Standard (AS) 1000. The comment deadline extension came after many stakeholders, including the CAQ, asked the PCAOB to delay sending the 19b-4 filing to the SEC.
Read on for key takeaways from our comment letters on QC 1000 and AS 1000:
- QC 1000: As we have consistently stated – we believe that a firm’s quality control system is foundational to audit quality and that an effective quality control system is important to strengthening auditing practices and continuously improving audit quality. We have supported this effort since responding to the PCAOB’s Concept Release on QC 1000 dated December 17, 2019, and Proposed Standard dated November 18, 2022. Unfortunately, we have specific concerns and questions about the Final Standard, particularly the new External Quality Control Function (EQCF), that we believe requires further consideration and analysis by the PCAOB before a final quality control standard can be approved by the SEC. Our comment letter focuses specifically on our concerns related to this new EQCF requirement.
- AS1000: Implementation resources will be necessary to promote consistent implementation and application of the new standard and amendments. It will be important for the PCAOB to engage with the public company audit profession throughout the implementation period to resolve questions as they arise, as well as with investors and other key stakeholders to reduce potential expectation gaps. We suggest that the SEC encourage the PCAOB to provide such support to ensure a successful implementation of the Final Standard.
ICYMI: PCAOB’s SEIAG Discusses Fraud Recommendations
The PCAOB continues to shine a spotlight on fraud. During their meeting on May 9, the Standards and Emerging Issues Advisory Group (SEIAG) discussed fraud identification and indicators of fraud. The participants discussed several suggestions for addressing fraud concerns, including:
- Making revisions to audit procedures, standards, or guidance to enhance auditor fraud detection, and change PCAOB operations to address fraud risk.
- Specific to enhancing auditor detection of fraud, revising audit procedures and guidance including expanding required auditor inquiries, adding more auditor responsibilities around whistleblower programs, expanding brainstorming, and staff guidance from the PCAOB.
- SEIAG members also suggested creating a fraud data center to compile data and research on emerging fraud schemes, case studies, and industry trends.
It is important to remember that updating the PCAOB’s existing standard on the auditors’ responsibilities for fraud detection is on the Board’s mid-term standard setting agenda, and that any changes or additional requirements would be over and above what the PCAOB has proposed in their company noncompliance with laws and regulation, or NOCLAR, standard.
In November the Anti-Fraud Collaboration (AFC) will host a roundtable to discuss the current fraud landscape that US public companies are facing and what all stakeholders in the financial reporting ecosystem can do to prevent and detect fraud, including considering some of the SEIAG recommendations. More to come!
As we wait to see what else comes from the PCAOB, be sure to visit the AFC, which offers resources and education – some of which is called for by the SEIAG recommendations – for public company auditors, audit committees, public company management and regulators.
CAQ Submits Supplemental Audit Committee and Investor Data to PCAOB in Comment Letter
The CAQ recently submitted a supplemental comment letter to the comment letters we submitted to the PCAOB on June 7, 2024 in response to recent Public Company Accounting Oversight Board (PCAOB or the Board) Proposals, Firm and Engagement Metrics and Firm Reporting (Proposals or Proposed Requirements). We continue to echo the points raised in those comment letters.
In the interest of further understanding the information needs of audit committee members and investors, we have conducted two surveys – one of nearly 250 audit committee members and one of 100 investors – to gather data to understand how they currently evaluate the quality of the external audit and oversee and evaluate the auditor.
The purpose of this supplemental letter is to share the results of these surveys as the PCAOB determines its next actions with respect to these and other standard-setting projects. Findings from the surveys include:
- More research is necessary to establish whether evidence supports the need for and benefits of proposed metrics.
- Audit committees and many investors already have the information they need.
- Any reporting should be voluntary.
- Any changes to the PCAOB’s standards should promote auditor-audit committee discussion.
- A majority of investors and audit committee members are of the view that the PCAOB’s auditing standards and rules have kept pace with change and require only targeted updating.
The findings from these surveys provide evidence as to the validity of the concerns raised by the CAQ and other commenters as to whether the PCAOB’s recent proposals will achieve the intended objective for investors and audit committees. Notably, there was disparity in what investors say would be helpful compared with what they are likely to seek out and audit committees say the information available to them to fulfill their external auditor oversight responsibilities meets most to all their needs. Accordingly, there needs to be further study and evaluation, including potential pilot testing, prior to adopting any final standard as the PCAOB’s stated value is not sufficiently supported by the expectations or needs of intended beneficiaries.
See our comment letter here.
CAQ Updates
CAQ Releases Resource for Audit Committees on Generative AI Oversight
Related to my conversation with Richard on genAI, the CAQ recently published a new resource exploring what genAI is and offering questions audit committees can ask public company management and auditors to better understand company management’s approach to the use of genAI as well as how they can oversee the related risks.
Questions for management include:
- How does management identify processes that are appropriately suited for augmentation by genAI?
- How does the company test genAI technologies prior to deployment to determine that they operate as designed?
- What fraud risks associated with the use of genAI technologies has management identified and how have they been addressed?
Questions for auditors include:
- What is the experience of the engagement partner and other senior engagement team members with genAI technologies? Would the firm be able to supplement the engagement team’s expertise if necessary (e.g., by engaging qualified specialists)?
- Has the auditor identified any risks related to data privacy or security of genAI technologies that are relevant to the audit?
- How does the company’s use of a foundation model or development of its own model impact the auditor’s risk assessment?
Download the resource: Audit Committee Oversight in the Age of Generative AI.
Annual Analysis of S&P 500 Finds More Companies Assure ESG Information
The CAQ has released our annual analysis of S&P 500 companies and ESG information. This effort, which we have undertaken for several years, seeks to better understand how public companies are reporting ESG information in light of existing reporting standards, frameworks and rules.
The results of this year’s analysis, which looked at 2022 period-end data from S&P 500 companies and compared these findings with our findings for the 2021 and 2020 reporting periods, show that the majority of companies (98%) on the S&P 500 reported some form of ESG information. This is unsurprising given that public companies have been responding to investor support for climate disclosures but also because in the U.S. they were preparing for the SEC’s final climate rule, which was adopted this March (though currently stayed).
As many anticipated, the SEC’s final rule did include an assurance component, which may explain why we also continue to observe an increase in the number of organizations obtaining assurance over ESG information (70% in 2022, up 5% from 2021). More organizations also used a public company auditor to provide this assurance.
View the full report: S&P 500 ESG Reporting and Assurance Analysis.
Accounting+ Updates
CAQ Attends the 2024 NABA Convention and Expo
The CAQ again this year attended the 2024 NABA Inc. Convention and Expo, where we engaged in conversation with some of the most innovative and dynamic Black business leaders.
I had the opportunity to participate in a C-Suite plenary, alongside Robert Fauber, President & CEO, of Moody’s, and other C-Suite representatives from Meta, Warner Brothers, and TIAA & Prudential to discuss the steps our profession is taking to ensure our future accountants reflect the population they serve, how AI will enhance audit quality and navigating change in times of uncertainty.
The event was yet again a fantastic success, and we continue to value our partnership with NABA as we work together to pave the way toward a more inclusive, future state of audit.
A+ Teams Up with Gen Z Influencers
As part of our ongoing efforts to reach future talent where they are, Accounting+ this summer partnered with a few influencers to discuss the opportunities of a career in accounting:
- In June, musician DannyLux sat down with Accounting+ and shared that he can enjoy his career, stay financially responsible, and plan for his future with the help of his trusted accountant. The conversation emphasized the endless possibilities of a career in accounting, including working alongside industries like entertainment, sports, and the environment. On the accounting field, he said, “With accountants, they don’t have to just work with musicians. A sports team can have an accountant, a chef can have an accountant. It’s really easy to make a career out of it.”
- Ainatou Tapsoba, audit & assurance senior at Deloitte & Touche LLP, also shared the benefits of an accounting career in her conversation with TeenVogue. In her interview, Tapsoba discussed the misconceptions about the role of an accountant and how the career is always in demand regardless of job market volatility. “There are many opportunities related to the accounting profession that are available within the field. The skills acquired with an accounting degree can be leveraged into different career paths within the accounting profession,” said Tapsoba.
- Lastly, we partnered with Buzzfeed to develop a quiz that allows students to find out what accounting field they should work in, from the sports industry to entertainment. While the answer might surprise them, one thing is for sure: possibilities in an accounting career are endless.
ALPFA and NYSCPA Join A+
This summer, we were thrilled to welcome the Association of Latino Professionals For America (ALPFA) and the New York State Society of CPAs (NYSCPA) to our growing list of Accounting+ partners. These organizations both share Accounting+’s mission of introducing the next generation of students to the limitless possibilities a career in accounting holds and share our commitment to diversity, equity and inclusion in the workplace.
The continued engagement and support of our partners is instrumental in realizing our ambitious goals. With their steadfast partnership, we are poised to make significant strides in increasing the number of diverse students entering the accounting pipeline.
See a full list of our partners here.
Julie Bell Lindsay
Chief Executive Officer, CAQ