45 minute read 30 Nov 2018
Our commitment to audit quality Ernst & Young LLP 2018 report

Our commitment to audit quality – Ernst & Young LLP 2018 report

By

US Americas

Multidisciplinary professional services organization

45 minute read 30 Nov 2018
Related topics Assurance

We know that as independent auditors, we have an important responsibility to promote trust and confidence in the capital markets by delivering high-quality audits.

One of the ways that we fulfill that responsibility is by providing our stakeholders with a better understanding of how we conduct high-quality audits and what we are doing to continuously improve audit quality. The purpose of the report is to provide transparency about our audit practice.

      Section 2 article content
      Our commitment to audit quality
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      Chapter 1

      Our commitment to audit quality

      Performing high-quality audits with independence, integrity, objectivity and professional skepticism is at the heart of our responsibility as auditors to serve the public interest.

      Tone at the top and accountability

      Our commitment to quality starts at the top of our organization. The leaders of Ernst & Young LLP (EY US) communicate that the most important responsibility of our people is executing high-quality audits. We hold all of our professionals accountable for the quality of their work, including our leaders and professionals from other service lines who execute audits.

      Over the past year, we have amplified our messaging about the specific behaviors that contribute to audit quality and how our professionals can incorporate them into their daily activities. These behaviors include remembering that we are here to serve the public interest, exercise professional skepticism and always act with integrity and do the right thing. Our partners reinforced the importance of demonstrating these behaviors in audit team meetings and in our training.

      At EY, our purpose is building a better working world. As independent auditors, we do that by delivering high-quality audits that promote trust and confidence in the capital markets.
      Kelly Grier
      EY US Chairman and Managing Partner and Americas Managing Partner

      Delivering high-quality audits consistently across the globe

      We are a member of a global organization that is committed to globally consistent, high-quality audits sustained over time. Auditors at all EY member firms around the world use the same audit methodology and related tools, and they are evaluated against common internal quality objectives, regardless of their location.

      The EY global organization’s Sustainable Audit Quality (SAQ) program continues to be the top focus for the Assurance practice at EY member firms around the world, and it reflects our commitment to conducting globally consistent high-quality audits over time.

      Independent advice on audit quality

      We believe in the power of diverse points of view in all aspects of our business. This includes harnessing the value of independent perspectives to help further strengthen audit quality, risk management and our Firm’s system of quality control. That’s why we are forming a three-member Independent Audit Quality Committee (IAQC) to provide the leaders of the US firm with insights, feedback and advice in delivering on our commitment and our responsibility to all our stakeholders in the public interest. Securities and Exchange Commission (SEC) leaders have also observed the benefits of independent, diverse thinking brought by outside leaders to support audit quality and the public interest.

      Globally, EY’s Global Governance Council (GGC) is the governance body for Ernst & Young Global Ltd, EY’s global coordinating body. Since 2011, the GGC has included up to six independent non-executive directors. These independent non-executive directors also serve on a Public Interest Committee of the GGC, which is focused on all aspects of quality and risk across the EY global network, including audit quality. This integrated approach to global governance is a hallmark of EY’s commitment to globally consistent high-quality audits.

      Transparency and engagement

      We are committed to making our audits and audit quality initiatives more transparent by providing information in this report about how we conduct our audits and what we are doing to continue to enhance our system of quality control.

      We are also taking proactive steps to successfully implement the most significant change in auditor reporting in decades. We have developed training and guidance for our professionals on identifying and communicating critical audit matters (CAMs) and are performing a dry run of reporting on CAMs before we are required to do so.

      Embracing change

      We are living in a transformative age. In response, we are providing our professionals with the guidance, training and tools they need to navigate the most significant changes in accounting standards, US income tax law and auditor reporting in decades. We are also proactively preparing them for a truly digital audit that uses data analytics and other emerging technologies in every phase of the audit.

      Information security

      Safeguarding the confidentiality of information we receive from the companies we audit is core to our information technology (IT) strategy and operating model.

      We maintain a globally consistent and regionally based approach to information security that incorporates aspects of people, process and technology in how we protect information and technology assets. We invest heavily in protective and detective technologies, and we monitor our systems. One of the most important elements of our strategy is maintaining a security-aware culture.

      Our multidisciplinary strategy

      Industries are converging and business models are changing rapidly and becoming more complex. We are committed to a multidisciplinary model because it provides the structure, breadth and depth of technical skills and industry expertise necessary to deliver high-quality audits. Access to the additional resources available in a global multidisciplinary organization enhances the quality of our audits of complex businesses.

      Specialists play an important role in the audit to help address the increasingly complex IT environments, technical tax matters and valuation issues.

      IT specialists accounted for 10.1% of US public company audit hours. Tax and valuation specialists’ time represented 6.7% and 1.1% of total US public company audit hours, respectively. Total specialists’ involvement was consistent with last year.

      Our multidisciplinary model provides the breadth and depth of technical skills and industry expertise necessary to deliver high-quality audits. It also gives us the scale and resources to invest in the digital audit and other cutting-edge technologies that are reshaping the way information is gathered and analyzed.
      Francis C. Mahoney
      Vice Chair of Assurance
      Innovation and continuous improvement
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      Chapter 2

      Innovation and continuous improvement

      We are deploying a truly digital audit that improves audit quality by bringing a new level of insight, perspective and execution to the audit.

      Leveraging technology to improve audit quality

      We are leveraging our unique global EY Canvas digital audit platform and using our EY Helix data analytics throughout the audit to help us develop an even deeper understanding of a business and its financial reporting, enhance our ability to perform our risk assessments and obtain better-quality audit evidence. Executing a truly digital audit also means using emerging technologies such as artificial intelligence and blockchain.

      The digital audit

      Our EY Canvas audit platform is the foundation of our audit technology. All EY teams around the world use it to apply our audit methodology and manage their day-to-day audit work, including communication with other EY teams.

      Our EY Helix suite of data analytics can be embedded in every significant aspect of an audit, regardless of size. Our auditors can use them to analyze full populations of data generated by the companies we audit.

      As a result, our auditors can more readily identify risks and concentrate on focusing on the most important risks in an audit rather than collecting data. Professional skepticism and the quality of audit evidence are increased with this information more readily available.

      To accelerate our use of technology in our audits, our US teams held digital planning sessions this year, and 90% of our teams on large US public company audits have incorporated the use of our EY Helix analyzers into their audits. We also launched the 10x Accelerator, a specialized team of data and audit professionals who focus on enabling our audit teams to effectively implement our digital audit technology.

      More than 800 data analytic professionals, up 45% from 550 last year, help our audit teams capture and use the data produced by the companies we audit.

      We have integrated our EY Canvas audit platform with our EY Helix suite of data analytics to change the way we audit, deliver valued insights and focus on the things that matter most.
      Scott Zimmerman
      Assurance Innovation Digital Leader

      Other audit technology

      We are making significant investments to both take advantage of emerging technologies and to proactively address technological changes at the companies we audit. For example, we’re testing a tool that uses artificial intelligence to “teach” a computer to identify key terms in contracts, even when different words are used. We also have a proprietary EY Blockchain Analyzer to review cryptocurrency business transactions.

      New approach for understanding business processes

      We have reimagined the audit to drive a deeper understanding of key business processes and the risks on which we need to focus.

      Our new approach incorporates team-based analysis of end-to-end business processes and the related risks and controls. With that understanding, we are asking management better questions and focusing our procedures on the most important risks. Senior executives are also taking the opportunity to provide even more timely on-the-job coaching and supervision.

      We have significantly simplified how we document our procedures. Rather than using long-form narratives, we are documenting the risks and responsive controls in flowcharts that enable us to more readily pinpoint risks. We are applying this new approach on all of our integrated public company audits and are already realizing the benefits to audit quality. Our efforts are also getting management to challenge and enhance its own risk assessments and documentation of business processes.

      Serving the public interest requires a commitment to continuously improving audit quality. For us, that means leveraging technology, taking fresh approaches to how we assess risks in an audit and getting it right the first time when adopting new standards.
      David Kane
      Vice Chair of Professional Practice
      Our people
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      Chapter 3

      Our people

      Attracting, developing, inspiring and retaining great people and promoting an inclusive culture are central to our purpose.

      Attracting exceptional talent

      We recruit talented people who share our values and our commitment to serving the public interest.

      This year, we hired nearly 2,100 people from college and university campuses. Given the growing importance of technology to our audits, we are hiring more people who have both an accounting degree and a major or minor in management information systems, data analytics or computer information systems.

      In our campus recruiting, we stress the importance of the work we do as auditors, our vision of the digital audit and the value of the EY brand. Our reputation as a great place to work enhances our ability to attract great people.

      EY US is widely recognized as a great place to work, as demonstrated by the following:

      • Fortune magazine’s 100 Best Companies to Work For® list for the 20th consecutive year
      • Universum’s annual Most Attractive Employer rankings for the US (EY US was ranked 1st for professional services)
      • DiversityInc’s Top 50 Hall of Fame recognition for companies that have achieved a No. 1 ranking on the publication’s Top 50 Companies for Diversity list

      Leveraging diversity and promoting inclusiveness

      We believe that high-performing teams maximize the power of diverse opinions, perspectives and backgrounds and conduct higher quality audits. Our commitment to diversity and inclusiveness (D&I) is a key element of our culture.

      To measure our progress, we look at various metrics, including the percentages of women and minorities we recruit and promote into leadership positions. The percentage of women who lead our most complex multinational audits is rising. We expect women to lead 19% of these audits for periods beginning in 2019, up from 11% two years earlier.

      Percentage us audit partners who are women or minorities

      We are proud of the recognition we have received for our D&I efforts, especially from DiversityInc. This year, we were inducted into DiversityInc’s inaugural Top 50 Hall of Fame made up of companies that have achieved a No. 1 ranking in its list of Top 50 companies for Diversity. We also ranked first this year on DiversityInc’s specialty lists for mentoring, diversity councils, employee resource groups and people with disabilities.

      Percentage of women or minorities in our US audit practice

      Engaging and retaining our best people

      We recognize and reward our top performers to keep them engaged and make sure we have the continuity of skills and experience we need to perform high-quality audits, especially on our most complex engagements.

      As part of that effort, we are identifying ways to promote top performers when they’re ready, rather than requiring them to complete a specified number of years of service in each rank. This program will help improve the career experience of our people and give us more flexibility to meet our staffing needs.

      Number of us audit partners and professional staff

      The table above does not include professionals at shared service centers who work on US audits. The number of hours they worked on US public company audits were the equivalent of having another 701, 556 and 459 full-time auditors in fiscal years 2018, 2017 and 2016, respectively. (See the Executing high-quality audits section for more details.)

      To further support EY personnel, we launched a new global approach to career, development and performance called LEAD. It provides our people with future-focused career conversations, regular and useful feedback and ongoing insight into their performance.

      In its first year, LEAD is already having a positive effect. Our people are telling us that they are getting more feedback and having more meaningful conversations about their careers, enhancing their career experience.

      In its first year, LEAD is already having a positive effect. Our people say they are getting more feedback and having more meaningful conversations about their careers. That’s helping us build strong teams, develop key skills and prepare our people for success in today’s rapidly changing business environment.
      Sandra Oliver
      Assurance Talent Leader

      On-the-job coaching and supervision for less-experienced staffers is critical to delivering high-quality audits. That’s why we focus on maintaining our ratios of executives to less-experienced members of our audit teams.

      Ratios of audit executives to other audit professionals

      As part of our strategy to reduce the workloads of our US audit professionals and give them a better work-life balance, we have reduced overtime hours for our non-partners.

      Average overtime hours by rank

      We believe our efforts to keep our people engaged and make them feel connected to the firm’s mission are working. Our 86% retention rate for non-partners who received our top performance rating for the previous year far exceeded our overall retention rate for non-partners of 78%.

      US audit overall non partner retention rate by rank
      Retention for top rated us audit non partners

      Developing our people

      In our training, we continue to focus on teaching our professionals how to think critically and apply the knowledge they have gained.

      While accounting and auditing knowledge will always be foundational for our auditors, we believe our auditors need additional skills, attributes and knowledge. We refer to this combination as accounting plus and are incorporating these additional skills into our training programs to deliver high-quality audits.

      Executing high-quality audits
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      Chapter 4

      Executing high-quality audits

      We carefully assess the risks of auditing companies and build teams that have the skills and capacity to address those risks.

      Selecting the companies we audit

      We believe the companies we audit should share our commitment to quality and transparency in financial reporting. We have a rigorous process to assess risk and identify companies we want to audit, considering factors such as the company’s financial condition, management’s integrity and the strength of the audit committee.

      As part of the process, we identify and assess risk factors that are considered in developing an overall risk designation. Our leaders consider the risk designations and factors in determining assignments and the level of oversight to provide and identifying teams that might benefit from additional coaching.

      Market share

      We continue to have the leading market share among auditors of Fortune 500 companies (30%), Fortune 1000 companies (30%) and Russell 3000 companies (25%). In 2018, we are auditing six of the top 10 companies in the Fortune 500.

      Number of public companies we audit

      The number of public companies we audit has declined in recent years due to the overall decline in the number of companies listed on US exchanges. Our total audit hours on US public company audits in fiscal 2018 rose 2.6%.

      Building high-performing teams

      The assignment by leadership of the partner in charge and engagement quality reviewer to the audit is important to deliver high-quality audits. About 58% of our audit partners serve as the partner in charge of a public company audit, and they each lead an average of two public company audits. We also assign an engagement partner to nearly one-third of our public company audits to assist the partner in charge.

      We review the workloads of audit partners semiannually to make sure they have enough time to execute quality audits.

      Shared services

      Professionals in shared service centers that support EY’s global organization perform certain routine audit procedures and other tasks under the supervision of our US audit teams. As an example of these other tasks, the shared service personnel, including people with IT training, received extensive training and are helping our US audit teams document their understanding of the data flows in companies’ key business processes.

      Managing the audit

      Timely and direct executive participation is critical to the execution of a quality audit. Our experience indicates that teams that complete their work, including reviews by audit executives, at the appropriate time execute higher-quality audits. Our milestones program helps us promote strong project management and accelerate the pace of work.

      While a significant amount of work needs to be completed at or after year end, our milestones program helps our teams perform as many tasks as possible before that busy period. In recent years, our teams have performed about 60% of their work before the fiscal year end of the company under audit.

      Supporting our teams

      Our Quality Network focuses on improving audit quality by coaching our audit teams, providing training, monitoring our teams’ performance and executing various risk management and quality control procedures. This year, Quality Network coaches supported our teams in applying our new approach for understanding and documenting data flows in key business processes. They also worked with teams auditing a company’s adoption and/or implementation of the new revenue and leases standards.

      Our Professional Practice group supports our audit practice by consulting with our teams on financial reporting, auditing and SEC and other regulatory matters, providing audit teams and the companies we audit with guidance and thought leadership, developing materials that help our teams deliver high-quality audits, performing risk management activities, evaluating our quality control system and operating our monitoring and internal inspections programs.

      Our ratio of Quality Network and Professional Practice partners to audit partners remained consistent in fiscal 2018 at 1 to 6.

      Cybersecurity

      We obtain an understanding of the company’s processes and controls related to IT relevant to the audit, including how cybersecurity risks are identified and addressed. We also consider the adequacy of a company’s cybersecurity controls as part of our risk assessment procedures to identify and evaluate the risks of material misstatements to the financial statements.

      Monitoring
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      Chapter 5

      Monitoring

      The results of our monitoring provide us with a basis to conclude that our work meets professional standards and regulatory requirements.

      Early monitoring

      We conduct pre-issuance reviews to provide timely feedback to teams and to help us determine whether the actions we are taking are achieving our objectives or whether enhancements to our training, guidance or tools are required during the current audit cycle.

      This year’s reviews focus on our implementation of our new approach for performing and documenting our risk assessment procedures for business processes and testing the design of internal controls over financial reporting. Certain of our pre-issuance reviews also focus on our planned procedures related to the company’s reporting under the new revenue recognition standard. We’re also using feedback from Quality Network coaches to evaluate our new approach.

      Internal inspections of completed audits

      We conduct internal inspections of selected engagements after we issue our auditor’s report. In these reviews, we focus on specific audit areas to measure compliance with professional standards, regulatory requirements and our policies and to evaluate audit quality. This year, we continued to accelerate the timing of these reviews to obtain information we could use to continue to enhance audit quality.

      Independence monitoring

      Independence from the companies we audit is foundational to providing trust and confidence to the capital markets.

      Our policies require managers through partners to record securities and other financial relationships held by them and their immediate family members in the Global Monitoring System, which initially assesses and then monitors the permissibility of the securities and financial relationships. Managers through partners are required to have automated feeds from their brokers to make sure the records are updated in a timely fashion.

      All EY US professionals who work on audits and certain others, based on their role, are also required to confirm compliance with our independence policies and procedures each quarter.

      Restatements

      We monitor restatements of the financial statements of the companies we audit and evaluate whether there are potential trends that require additional action.

      The data in the table below is based on our audits of SEC registrants, including our audits of mutual fund issuers each year.

      Restatements
      External inspections
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      Chapter 6

      External inspections

      The Public Company Accounting Oversight Board (PCAOB) conducts annual inspections of the audit work we perform and aspects of our Firm’s quality control system.

      The role of the PCAOB

      The PCAOB has played an important role in improving audit quality since its creation in 2002. Through annual inspections and standard setting, the PCAOB has helped the profession identify areas for further attention and develop processes to determine the root cause of audit deficiencies. PCAOB inspections have helped us validate areas we have identified for improvement in our internal inspections and identify other areas where we can continue to improve our performance.

      The PCAOB has said it plans to provide more timely and relevant feedback on its inspection activities to help audit firms better prevent audit deficiencies. The Board has also said it plans to analyze inspection and other data to identify and communicate factors that correlate with the quality of audit services. We support these efforts.

      Part I of the PCAOB report

      Our inspection results improved slightly in the 2016 inspection year.

      The table below does not reflect results from the 2017 inspection cycle, which generally covers our audits of 2016 financial statements, because the results were not available when we issued this report.

      Part 1 of the pcaob report

      Part II of the PCAOB report and status of inspection reports

      This nonpublic section of the PCAOB’s inspection report provides observations on a firm’s system of quality control. The PCAOB issued its 2016 report in December 2017, and we will submit our response no later than December 2018.

      International regulators

      The International Forum of Independent Audit Regulators (IFIAR) has challenged the six largest global network audit firms to reduce the number of audits with at least one significant finding as reported by the nine members of IFIAR’s Global Audit Quality Working Group by at least 25% over four years. The EY global network is making progress toward the IFIAR target.

      Summary

      EY US is committed to conducting globally consistent, high-quality audits sustained over time. In this report, we describe our focus on audit quality throughout the EY global organization.

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      US Americas

      Multidisciplinary professional services organization

      Related topics Assurance