The Path Forward in Auditing
When Cynthia Fornelli started her current job as the executive director for the Center for Audit Quality, she met with the CEOs of the top public accountancy firms to discuss how they could work together. She began the interview by sharing her goal of defining audit quality. Many smarter and wiser professionals have tried and failed, she was told, yet Fornelli was undeterred. While she agrees that the goal may ultimately be impossible, she knows that pursuing it is important to the future of auditing and the stability of the financial marketplace.
Her job puts Fornelli at the heart of the effort to define and improve audit quality and the very important job that auditors perform. Her interaction with 700 member firms, policy makers, educators, and investors makes her one of the most influential people in accountancy around the world as she pursues the elusive ideal of audit quality.
She knows the stakes are high but the need is great and the payoff could be a strengthening of the world financial system.
Fornelli began the first Department of Accountancy lyceum of the Fall 2010 semester by telling hundreds of students packed in the Deloitte Auditorium she was going to talk about her organization and several of the issues on the horizon for the auditing profession. She made it clear that she was there to benefit them and sought their active participation.
Fornelli identified four “big areas” that should be on every accounting student’s radar, of which she hoped to address:
1. What is the proper and appropriate role of the auditors in the marketplace?
2. What should the profession's view be in the adoption of IFRS in the United States?
3. How can we all work together to enhance the detection and deterrence of financial statement fraud?
4. What can we all do to help promote robust and valuable research initiative?
Fornelli explained that the CAQ has a vision of enhancing investor confidence and trust through fostering high quality auditing, engaging stakeholders in productive discussions of critical issues, and advocating policies and standards that promote company auditor’s objectivity and reliability. The essential distinguishing factor for CAQ, according to Fornelli, is its collaborative approach to these goals considered in an international context of accountancy, not just auditing. Achieving the goal of high quality auditing requires situating its function within the greater context of public and private accountancy practices in the U.S. and around the world.
In its deeply collaborative effort, Fornelli said CAQ works to connect with a group that is often overlooked when dealing with public company auditing: the investors. Through the annual Main Street Investor Survey, the CAQ gathers insights like the 6% drop in confidence for U.S. capital markets to 68% this year. Confidence in global capital markets has held steady at 74% and the confidence in audited financial information released by publicly traded companies stayed at 70%.
Fornelli gave one insight to the data: investors have significant trust in auditors, which supports her strong belief that there is significant value in the work auditors perform for the marketplace.
“[Auditing] students should be confident about their careers!” said Fornelli, referring to the great need for auditors and the consequence of the function they perform.
The CAQ’s survey encourages investors to voice their opinions which ultimately strengthens the role of the auditor. “I think it’s important because even where we don’t agree, I think it’s important to know where we disagree and to develop a plan where we can find common ground and then find the areas where we don’t necessarily agree and try to find a path forward to talk about these important issues,” Fornelli said.
CAQ also considers the ongoing and more widely considered debate over whether or not the U.S. should adopt International Financial Reporting Standards (IFRS). Fornelli said the center has taken a position supporting the adoption of IFRS, if for no other reason that that it sees its adoption as inevitable. She believes, therefore, that the better question revolves around how to adopt IFRS, not whether to adopt IFRS.
“Whether you like IFRS or not I think the US will adopt IFRS, so in my mind, it’s not: Should the US adopt IFRS? It should be: How should we adopt IFRS?” Fornelli said.
With the adoption of IFRS, she said one of the major issues is that companies are still wary in light of the financial crisis and are not eager to explore the new set of standards, mainly because of the high costs associated with training employees in the new standards. As a result, U.S. companies as well as the U.S. Congress do not want to transition to IFRS at this time.
In addition to the immediate hurdle of getting an IFRS transition the attention it deserves, Fornelli’s biggest concern is with a movement to partially implement IFRS. In this scenario only the largest firms would implement IFRS. She believes such a solution represents the worst possible scenario, contributing to further confusion and overall costs.
Fornelli went on to discuss fraud in financial reporting and the steps CAQ is taking to determine best practices to detect and deter it.
She spoke of an effort involving CAQ representatives who explored five cities, four in the United States and London, where they met with key players in financial report fraud detection: internal audit, external audit, audit committees and management.
With the information gathered from these individuals, the center issued a report that addresses the best ways a company can prevent and detect fraud, Fornelli said. Three important areas were identified, the first being the need for a strong, highly ethical tone at the top that permeates the corporate culture all the way to those least skilled employee. A questioning mindset and corresponding enthusiasm for regular inquiry was identified as important to the auditor’s professional objectivity. The third, and perhaps most important insight regarded the existence of strong communication among all supply-chain participants.
Fornelli rounded out her talk explaining the CAQ Symposium and its purpose of bridging the gap between auditors and the academic community. In order to advance audit quality, the symposium promotes a free exchange of ideas between auditors who are hungry for high quality research insights and the academics who want to know more about the needs of auditors.
The CAQ also funds projects directly, explained Fornelli, like doctoral student research.
Fornelli reminded everyone at the conclusion of her talk about the importance of auditing excellence and encouraged students to expect a vigorous career in auditing that is vital to investor confidence and the sustainability of capital markets.