How auditors improve trust in the capital markets

10 minute read 22 May 2020
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EY Reporting

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Reporting, EY Global Assurance’s insights hub, provides high-quality content tailored for board members, finance directors and audit committee chairs.

10 minute read 22 May 2020

Center for Audit Quality Executive Director Julie Bell Lindsay discusses the key issues facing the audit profession during COVID-19 and beyond.

This is a pivotal time for the auditors tasked with scrutinizing public company financial data. The COVID-19 pandemic has posed unprecedented challenges at a time when businesses, regulators, investors and other capital markets stakeholders are already asking more of them than ever before. The profession has also been fundamentally transformed by new technologies that can automate many of the tasks auditors have traditionally performed, and that give them access to powerful data analysis tools. Meanwhile, they face increasing demands for assurance on nonfinancial matters that have not previously been part of their remit.

As its name suggests, the Center for Audit Quality (CAQ) is dedicated to confronting and advancing these issues in close coordination with the public company auditing profession. The CAQ is an autonomous, nonpartisan and non-profit public policy advocacy organization based in Washington, DC. It works with audit firms, audit committees, issuers and standard setters to help ensure that auditors meet the expectations of their stakeholders, and that the necessary standards and policies are in place to enable them to perform their vital public role.

“I often comment that the auditing profession has a greater positive impact on the capital markets system than many people realize,” says Julie Bell Lindsay, who became Executive Director of the CAQ in May 2019. “But if you think about it, a key reason why the capital markets are as efficient as they are today is that investors and other stakeholders can trust the information released by public companies.”

In a wide-ranging interview, Lindsay shared her views on issues including the response of the audit profession to COVID-19, the increased use of audit quality indicators (AQIs) and the role of technology in shaping the audit – and the auditor – of the future.

  • About Julie Bell Lindsay

    ·       Graduates from The Ohio State University in 1993 with a BA in Political Science

    ·       Receives her Juris Doctor degree from Vanderbilt School of Law in 1996

    ·       Associate at law firm Wilson Sonsini Goodrich & Rosati in Palo Alto, California, 1996-2002

    ·       Counsel to Commissioner Cynthia Glassman at the US Securities and Exchange Commission, 2002-05

    ·       Counsel at law firm Hogan Lovells in Washington, DC, 2006-09

    ·       Joins Citigroup in February 2009 as General Counsel of Capital Markets and Corporate Reporting

    ·       Promoted to Managing Director and Deputy Head of Global Regulatory Affairs at Citigroup, February 2017

    ·       Becomes Executive Director of the Center for Audit Quality in May 2019

    Also currently serves as President of the Board of Directors of the Association of Securities and Exchange Commission Alumni; as a Member of the Board of Directors of the Foundation for the National Institutes of Health; and as a Member of the Advisory Board of the Department of Political Science at The Ohio State University

Q: How is the auditing profession responding to COVID-19 while maintaining audit quality?

A: As a side effect of the COVID-19 health crisis, we’re also facing the worst economic crisis in decades. For our part, the auditing profession plays an important role in the capital markets system that provides an essential component of our national response to, and recovery from, the pandemic.

As with nearly all professions, auditors face significant challenges and uncertainties that are making their jobs more difficult during this crisis. However, auditors are well suited to operate in a virtual environment. As this crisis continues, I have confidence that they will continue to adapt and find ways to operate that enable them to maintain their high standards of audit quality.

As audit firms adapt to the challenging conditions presented by COVID-19, they are also stepping up with additional commitments to address the crisis. Several firms have made financial pledges, taken steps to mitigate layoffs and developed resources for people and businesses to navigate the crisis.

As the COVID-19 crisis continues to evolve, I know our profession will continue to focus on the safety and wellbeing of people and on ensuring appropriate actions are taken to maintain the stability and strength of the capital markets.

Auditors will continue to adapt and find ways to operate in this uncertain environment to maintain their high standards of audit quality.
Julie Bell Lindsay
Center for Audit Quality

Q: You mentioned a virtual environment: how is technology helping auditors during the COVID-19 crisis?

A: The pandemic has highlighted how the profession is using technology. First, because audit firms were already largely working in a remote, digital environment – particularly those with multinational clients working remotely across regions, which necessitates data sharing and engaging virtually in other ways. Now you have company staff, regulators and other members of the financial reporting supply chain all working remotely at the same time. Auditors have adapted to this virtual environment quite quickly without compromising audit quality.

Second, technology has also enabled firms to adapt to difficulties encountered as a result of COVID-19. One area is the reliance on technology to conduct inventory observations that may have previously been done in person. I recently learned of firms leveraging GPS-enabled smartphones to share a video feed and the location data of an inventory observation. But even with a video feed, auditors will need to identify additional ways to verify that the inventory is what it appears to be, where it appears to be. It’s amazing how auditors can adapt, because people in the profession are inherently creative and skeptical.

Q: How can technology improve audit quality more broadly?

A: The developments in technology in the audit profession are revolutionary. Firms are using technology in ways that I don’t think a lot of people realize.

A perfect example of that here in the US was the implementation of the new lease accounting standard for public companies. Historically, the auditor would just sample a subset of a company’s leases. But with machine learning and other technological capabilities, they can now review all of them – and for some large companies, you’re talking tens of thousands.

Having that automated capability is enabling the auditor to focus on other important responsibilities, such as valuations and issue spotting. It also allows them to have more strategic and risk management discussions with the audit committee. They can focus on the more high-risk, subjective areas that can lead to problems.

I’ve heard some people insinuate that technology is going to replace the auditor. My answer to that is: no, it won’t. Technology cannot replace the human elements of being an auditor. What I do think you can have is an exciting collaboration of technology and the human auditor, combining the benefits of both. Ultimately, that’s going to lead to the highest quality of audits.

Technology cannot replace the human elements of being an auditor. But I think you can have an exciting collaboration of technology and the auditing profession, combining the benefits of both.
Julie Bell Lindsay
Center for Audit Quality

Q: What impact do you think the proposed new International Standard on Quality Management (ISQM 1) will have on audit quality?

A: The CAQ is very supportive of ISQM 1. One of the main reasons for that is that it’s principles-based. The standard doesn’t prescribe the risk to audit quality. Rather, it allows the firms to identify the risk to audit quality from their perspective. More importantly, they are required to devise and implement responses that will address those quality risks. The firms are also required to annually evaluate their system of quality management and control.

It’s important to have consistent and aligned standards because, to the extent that you have unnecessary requirements, it could actually detract from audit quality. So encouraging a collaborative and communicative environment across the standard setters around the world is key.

Q: How does the multidisciplinary method adopted by audit firms impact audit quality?

A: We believe it’s a significant contributor. Global businesses are becoming much more complex, so it’s more important than ever for companies to have the benefit of the breadth and the depth of auditing firms’ subject matter expertise.

With the advent of artificial intelligence, blockchain and other technologies, we only see this trend continuing. So we feel very strongly that the multidisciplinary model – with all the protections around independence between audit and non-audit services – is a win for the capital markets, public companies and investors.

  • Kelly Grier: Harnessing the power of diverse perspectives

    Kelly Grier, Ernst & Young LLP Chair and Managing Partner and Americas Managing Partner, and Chair of the Governing Board of the CAQ, says:

    “The CAQ is in a unique position to shape the future of the audit profession. We’re able to bring together voices from across the financial reporting ecosystem – investors, board members, auditors, standard setters, regulators and academics – for dialogue about the ways in which we collectively contribute to trust and confidence in the capital markets.

    “As the leader of Ernst & Young LLP, having this forum is extremely valuable. First, because it elevates the importance of audit quality as a business and societal imperative, which is critical as we engage with audit committees and boards. And second, because it enables us to see issues from multiple perspectives, which enhances our understanding as we develop our emerging priorities.

    “As the profession addresses the depth and breadth of accounting and financial oversight issues resulting from the COVID-19 crisis, the CAQ is a source of insight for the profession and all our stakeholders. Even in these challenging times, it continues to be a catalyst for extending the value we bring as audit professionals to the broad spectrum of reporting, and for finding new and exciting ways to broaden and deepen the skills of our people.”

Q: How important are AQIs, and should they be used more by audit firms, audit committees, regulators and companies?

A: The use of AQIs is very important, but it’s a complex issue. Beginning several years ago, we reviewed the use of AQIs in conjunction with audit committee members and regulators and a range of other stakeholders. In 2014, we published an approach to the use of AQIs and then tested that approach on 30 audit engagements.

In the course of that work, we learned four things:

  • One size does not fit all. The types of AQIs and the number of them need to be tailored to the company, the audit firm and the engagement
  • Quantitative metrics are not the end of the story. Equally important is the audit committee’s desire to monitor the qualitative nature of audit quality, and that’s more subjective
  • Context matters. You can’t have a discussion about audit quality by focusing solely on AQIs. It’s just one piece of the overall puzzle
  • Working with AQIs is an iterative process. Audit committee members don’t want to come up with one framework and never look back. It needs to be updated from time to time
Global businesses are becoming more complex and it’s more important than ever for companies to have the benefit of the breadth and depth of auditing firms’ subject matter expertise.
Julie Bell Lindsay
Center for Audit Quality

Q: What steps is the CAQ taking to help the profession attract the auditors of the future?

A: We partner with our member firms and we are always highlighting the attractiveness of the profession. By that, I mean the role the auditor plays in our capital markets, doing away with the notion that auditors are folks that sit in a room, not talking to anybody and just checking numbers.

We’ve embarked on some innovative steps to educate young people on what it means to be an auditor. We’ve partnered with an organization called Roadtrip Nation that focuses on younger individuals and tries to answer that daunting question: “What do you want to do with your life?” We’ve developed a documentary with them on life as an auditor that is due to premiere in June.

We’ve also built a portal with Roadtrip Nation called Share Your Road. Current professionals can go there and share their own experience as an auditor: how they got to where they are, what pitfalls exist and what advice they’d give to the younger generation. It’s a great way for younger folks to see if auditing could be a career for them.

The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

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Summary

Julie Bell Lindsay believes the role of the audit in helping to maintain confidence in the capital markets is more important than ever during the COVID-19 pandemic. She is positive about the ongoing initiatives to improve audit quality, including ISQM 1 and the use of AQIs. But she emphasizes that there is no one-size-fits-all solution, and that the human skills of the auditor will continue to be key. Those skills will increasingly need to be augmented by those of a broader range of specialists as part of audit firms’ multidisciplinary model.

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EY Reporting

Insights from external journalists, academics, practitioners and EY professionals

Reporting, EY Global Assurance’s insights hub, provides high-quality content tailored for board members, finance directors and audit committee chairs.