Thank you for the introduction. It is a pleasure to spend the morning with you, here at the 2022 Deloitte/University of Kansas Auditing Symposium. The views that I express here are my own and do not necessarily reflect the views of other PCAOB board members or staff.
I appreciate the amount of time you are giving me to share my views. I sat in the audience before myself many years ago and I realize that you have a great deal on your mind and a lot of work to do. What can I say that would make it worthwhile to keep you focused for almost an hour? By the way, I don’t anticipate talking for that long. I certainly know that telling you what you already know would not provide value. Do I have a crystal ball on the future of auditing? I wish.
Nonetheless, I have some unique perspectives based on my diverse experience as an auditor, issuer, standard setter as well as regulator that I will share with you, not because I have the answers already, but I hope to stimulate meaningful conversations about “The Future of Auditing.” I would like to frame my discussion today using five questions: 1) who should care about the future of auditing; 2) what is the ultimate goal; 3) when will the future happen; 4) how can we be prepared for it; 5) why should we care?
- Who should care about the future of auditing and whose future is it? Sarbanes Oxley was enacted almost twenty years ago in response to several significant accounting scandals. The law passed nearly unanimously by the U.S. Congress (99-1 in Senate, 423-3 in the House), the law contained a wide range of measures aimed at – in the words of the Senate Banking Committee – addressing the systemic and structural weaknesses affecting our capital markets which were revealed by repeated failures of audit effectiveness. The most significant of these measures was the creation of a strong independent board to oversee the conduct of the auditors of public companies, you guessed it -the PCAOB - which ended more than 100 years of self-regulation by the accounting profession. The statute, which I refer to as “SOX,” also clearly and firmly established that the PCAOB’s mission would be to protect the interests of investors and further the public interest. As I reflect on the past nearly 20 years of PCAOB’s existence, I believe that the creation of the PCAOB shifted the audit firms’ commitment to audit quality. As a new board member, I have met with the leadership of many audit firms. What struck me most about our conversations was how eloquent they were about the mission of investor protection as well as their commitment to audit quality. It stands out in my mind that audit firms are more vocal today than 20 years ago, openly expressing a commitment to their mission and audit quality, not only to the PCAOB, but also to their employees. During my audit years, I do not recall the partners articulating the audit mission to their engagement teams. I appreciate that this mantra of audit quality is actively imparted on audit staff today, so that they understand their value and contribution to audit quality, and by extension protecting investors. Therefore, the future of auditing impacts all of us. We all should work to proactively shape the future. One thing I have learned from my time at Treasury as a policymaker was the power of ecosystems. As you can see from this visual:
Each of these roles is crucial in maintaining the health and well-being of the entire capital market ecosystem. Auditors play a critical role in ensuring the integrity of the financial reports that issuers prepare and that the investors rely on in making
investment decisions. Many of you here today are from academia, part of the stakeholders’ group, and are sources of important research about the future and pipelines of future talent. With technology disruption and market transformation, auditing
is becoming more complex and involves more judgment. Consequently, PCAOB’s mission to protect investors has become more challenging and even more crucial. That’s why in my public statement on 3/29/2022, I noted “As regulator, we have the duty to be forward-thinking when evaluating the impact of technology and data on the future of auditing, and proactively address them in our standard-setting,
inspection, and enforcement activities.” I know many of you are investing in the future, whether it is people and/or technology. Regulators are typically not at the forefront of cutting-edge innovation because we typically want the best practices
to be established and then develop standards based on those established practices. In this case, if we don’t take an active role and let each firm figure it out themselves, there will likely be less standardization. Without standardization,
there will be no economy of scale or quality.
- What is the ultimate goal? When I was thinking about my remarks, I asked my 9-year-old daughter and her friend what the future meant to them. Their answer was both precocious and Yogi Berra like. They said, “the
future is better than today because more problems are getting solved.” I was so impressed by their optimistic outlook. Yes, the future of auditing should be better than it is today, and it should solve more problems. So . . . what are the
biggest challenges with the current auditing model? In my opinion, there are three inherent/structural constraints:
- First, timeliness, the current auditing model is backward-looking. Audits are performed after all the transactions already occurred in the year. Under this current model which has been in place for almost a century, investors have to wait for months before getting the audited financial statements. We are already seeing the need for more real time auditing with digital assets as the distributed ledger is maintained on a real time basis.
- Second, auditors are selected and paid by the issuers and therefore are inherently not independent. Both the SEC and PCAOB have rules on ethics and independence to set guardrails for independence. Firms also have implemented controls to comply with these rules. Still, the lack of inherent independence and the perception of incentive misalignment limit trust in the system and continues to be an area of emphasis for regulators as well as investors.
- Finally, lack of competition, according to Audit Analytics in 2021, over 90% of the large accelerated filers are audited
by the Big Four firms, over 70% of the accelerated filers are audited by Big Four plus the two next largest firms.
In what ways might the future model improve the timeliness, independence, and competitiveness of auditing? These are challenges that we should collectively think about solving. However, regardless of the ways the future of auditing evolves, the goal is still Quality, as it is today. In other words, the end does not change as it relates to the future of auditing, even if the means are changing significantly. Technology and other transformation should be making it easier and more efficient to achieve the end – audit quality. Further, technology could elevate the level of quality possible.
- When will it happen? Like I said, I don’t have a crystal ball, but I have a hunch. It will be happening soon. I saw a session scheduled for later today titled “Audit of the Future – the Future is Now”. That might be true too and sounds like a great session to attend. I may be dating myself, but I still remember the day that I first used the internet, via dial-up of course. What a novel concept at the time! Since then, technology has changed our daily lives, with the convenience of ordering an endless variety of goods from our living room that are delivered to our front door in hours or days and not weeks, i-Robot self-cleaning vacuums, self-driving cars, to instant processing of financial transactions through an app on our smartphones. Most of us already have Alexa or Siri at home. That is essentially AI, and the list goes on. Technology has empowered us to delegate routine tasks so that we can expend our precious time on more critical matters, our families, our health, and contributing to the greater good both professionally and personally. Is it possible that AI will become so refined that it can replace in whole or in part the professional judgment and skepticism of living, breathing auditors? Is it possible that audits could be done in real time? Robots don’t have feelings or affiliations; they don’t get tired; they don’t get yelled at by their children or their spouses, or their boss. With no affiliations, would we have to worry about their independence then? Today, auditors cannot say “Alexa, reconcile revenue”, but maybe one day in the not-too-distant future. Conversely, I recognize that all these possibilities may present new challenges and issues to wrestle with including data standardization and reliability, data privacy, cybersecurity risks, and AI ethics, all of which are something that would require extensive thought and exploration.
- How can we be prepared for the Future? During my role as Deputy Assistant Secretary for Accounting Policy and Financial Transparency at Treasury, I was responsible for overseeing the governmentwide efforts around spending
transparency and the implementation of the Digital Accountability and Transparency Act of 2014, also known as the DATA Act. I had the vision that unlocking and providing the data to the public in a reusable and understandable format will lead
to a better government with greater transparency and innovation. The biggest challenges that I faced at the time still resonate today across the auditing profession and the global workforce as a whole.
To be prepared for the future, we need to have a bold vision of what is possible and take bold steps to achieve it. That requires innovative leaders, talented and highly trained practitioners, disciplined risk-takers, and diverse thinkers to work together
for the common good. Although I am passionate about leveraging data and technology for public good and believe that technology plays a critical role in the future of auditing, technology alone does not hold the future, people do. People are “The Future of Auditing”. YOU are
The Future of Auditing.” I am most inspired by the amalgamation of people and technology. No machine can replace people. Technology enables people to focus on more critical and complicated issues. In auditing, every
minuscule task, from selecting a sample, conducting a client interview, to testing an internal control, represents an extension of the entire audit, like branches to a tree. Simultaneously, the roots provide stability and the foundation, like the
core fundamentals of auditor ethics, independence, integrity, and commitment to quality.
Integrating technology-based audit tools into the branches, allows auditors to focus more on the more complex and riskier areas. Technology is also changing the current linear audit approach of planning, conducting a risk assessment, performing internal
controls testing, and performing tests of details and/or substantive analytical procedures. Technology will enable auditors to perform concurrent tasks, with a continual loop of assessing audit risks and enabling an agile audit process to respond
to these risks effectively and efficiently.
Further, the integration of the audit methodology with structured and unstructured data analytics illuminates the needle in the haystack. Technology has the capacity to test large volumes of data to ultimately draw attention to the particulars that we
cannot see with the proverbial naked eye. It can point out historical and predictive data patterns and data anomalies that may indicate possible fraud, risk of material misstatement, incomplete or inaccurate data, or missing or ineffective internal
controls. As the saying goes, we don’t know what we don’t know. These advanced analytics capabilities could help expose transactional interrelationships between accounts that do not characteristically align and highlight
unusual fraudulent data patterns.
As you may know, the examples I am highlighting here are merely scratching the surface. For the audit profession, this is a transition period and a defining moment. Every aspect of auditing is changing because of technology, the elevated risk landscape
resulting from the pandemic, regulatory and political influences, and talent shortages. The profession’s preparedness will have a significant impact on issuers and investors. As regulator, I believe that it is in the best interest of the investors
for PCAOB to play an active role in facilitating this transition.
- Why should we care about the future of auditing and invest in it? It is especially important for us to understand the why when considering any significant endeavors. After all, the journey into the future or any transformational
effort is never easy. There will be many challenges and knowing the why will sustain us through hard times. With the evolution of auditing practices in unification with technology-based audit tools, standard setting is of paramount importance
to the PCAOB. This week, our Office of the Chief Auditor updated its standard-setting and research agendas to
communicate the Board’s intention to pursue a significantly expanded standard-setting agenda, and also to enhance transparency to the public on our expectations of the timing of those actions. Like how ICFR from SOX section 404(b) became
one of the cornerstones for audit quality, and other regulators around the world are still trying to enact something similar, I would like the PCAOB to continue to be at the forefront of creating standards that encourage and drive innovation. From
my own journey when driving large scale transformational changes and reforms in the past, I have learned that vision often requires courage. Courage because being a visionary is risky and even lonely. I am fully aware that in a regulatory environment,
you are not always rewarded for taking risks. However, to quote Peter Drucker who is considered the single most important thought leader in the world of management and wrote extensively about innovation, “no one can foretell whether a given
innovation will end up a big business or a modest achievement. But even if the results are modest, the successful innovation aims from the beginning to become the standard setter, to determine the direction of a new technology or a new industry,
to create the business that is—and remains—ahead of the pack. If an innovation does not aim at leadership from the beginning, it is unlikely to be innovative enough.” I hope that you would aim to lead the way because integrity
in financial reporting is one of the bedrocks of a transparent and efficient capital market.
Auditors are trained to analyze and solve problems. We are living in challenging times with big and complex problems. Future auditors should not be merely content with getting through the busy seasons, getting the next promotion, or making partner. Similarly, firms should not be merely content with acquiring the next big client or maximizing profit. Technology should challenge us to strive for greater impact and more meaningful impact. I hope you are excited about building a better future together for investors and our world. To borrow from the courageous and inspiring Ukrainian President Zelensky’s speech to Congress in March, to be a leader of the future (of auditing), you must be the leader of quality.Thank you for inviting me to this event. It has been a pleasure speaking to you today, and now I’d like to open it up for any questions.