The Moral Backbone of the Capital Markets: Exploring Investor Protection and the Future of Auditing

Remarks as prepared for delivery

Thank you, Larry [Kalbers], for that kind introduction.

Good evening. It is wonderful to be back on Loyola Marymount’s beautiful campus. I had the pleasure of being here in June to host our Small Business Forum and marveled at your campus that day. Thank you for the time this afternoon, for the engagement with accounting students and faculty. Hearing what is top of mind from students and professors is important and valuable as we at the PCAOB think about auditing and our oversight activities. Today’s accounting students represent the next generation of the auditing profession, and I appreciate every opportunity to connect.

I feel incredibly honored to have been invited to speak with you this evening. Those who created this speaker series almost two decades ago had the foresight to realize the value of a forum to contend with big questions affecting accounting and the capital markets. I am humbled to be able to share this podium with past speakers such as: Cynthia Cooper, who helped uncover the massive WorldCom fraud; Lynn Turner, former Chief Accountant at the SEC; former SEC commissioner Luis Aguilar; and Professor Tony Menendez, who blew the whistle on Halliburton’s accounting practices, to name but a few. They have set a high bar that I strive to be worthy of. One of the recognized hallmarks of a profession and its professionals is the ability to periodically look straight in the mirror and consider the reflection. This forum provides such a mirror.

Before I continue, please know that my remarks this evening reflect my individual views as a Board Member and do not necessarily reflect the views of the full Board, my fellow Board Members, or the PCAOB’s dedicated and hardworking staff.

I. The Crucial Role Auditors Play

Those in the audience tonight have been invited from across the business school and the larger university community. What I believe unites us is an interest in and dedication to ensuring a healthy and vibrant financial reporting ecosystem that sustains our capital markets and serves investors and the public interest.

I titled these remarks “The Moral Backbone of the Capital Markets,” and I do not think that is hyperbole. The U.S. capital markets are the envy of the world, and investors are drawn to them for one primary reason: trust. Trust that the capital markets are stable and secure and that the information they provide is accurate and reliable.

None of this is possible without the dedication of financial statement auditors. It is auditors, at audit firms of all shapes and sizes, who perform the hard work to ensure the reliability and accuracy of the financial information that flows through our markets. That is what allows investors in turn to participate in our markets with confidence, whether that means backing a billion-dollar IPO or putting a few hundred dollars from each paycheck into a 401(k) plan to save up for a comfortable retirement.

The investing public puts trust in audits because they perceive that auditors and the broader auditing profession are obligated to consider the public interest in the execution of their work. As early as 1946, it was recognized that,

The certified public accountant acknowledges a moral responsibility . . . to be as mindful of the interests of strangers who may rely on [the auditor’s] opinion as of the interests of the client who pays [the auditor’s] fee. This is at the same time a heavy burden and a proud distinction. It marks the certified public accountant as an individual of the highest integrity . . . a highly useful servant to society as a whole.¹

These words are as true and important today as they were when written nearly 80 years ago. I reflect on these words often as I consider our work at the PCAOB.

Auditors bring independence, professional skepticism, and a deep understanding of both a company’s operations and internal controls that allow for transparency, accuracy, and reliability of financial transactions. Skilled auditors are uniquely qualified to perform these tasks and stand as sentinels for investors and the capital markets. It is a profound privilege that brings with it a profound responsibility.

Former SEC Chair Arthur Levitt put it this way almost a quarter century ago: “The auditing profession is, in my mind, one of the most noble in our marketplace. At the very core of the auditor’s mandate is preserving the sanctity and purity of the numbers. In that sense, it is also one of the most elegant.”²

As I have said many times, and it cannot be said enough, the auditing profession is vibrant, resilient, and noble. It has formed the moral backbone of the capital markets for almost 150 years.

The leading accounting firms … positioned themselves as the [individuals] who would protect Victorian England from the pitfalls of big commerce: from the opportunists, frauds and other malefactors who sought to exploit the Industrial Revolution. In this role, accountants shared with teachers, doctors, lawyers and priests a responsibility to the wider community. They were the foot soldiers of integrity.³

And, while I am hopeful that auditors will continue to succeed as these foot soldiers, there is reason for concern.

For the remainder of my remarks this evening, I will focus on three main topics. First, I will begin with a story from auditing’s past that highlights some key features of what makes a quality audit important. Second, I will move to auditing’s present by talking about the PCAOB and what we are doing. And third, I will look to the future and how this period of transformation in which we all find ourselves today may affect audits, auditors, and audit firms in the years to come.

II. From Silk Stockings to SOX: Fraud at Interstate Hosiery Mills⁴

The PCAOB was established in 2002 by the Sarbanes-Oxley Act (affectionately referred to as SOX) in the wake of a series of financial scandals that caused investors to question financial reporting and the audit itself. At that time, many felt the capital markets had lost their moral backbone – the financial statement auditor. Most students here were not born when companies like Enron and WorldCom were on the front pages for weeks if not months on end, and so these events may seem like the distant past. But, for those of us who were there, the memories remain vivid.

Accounting students may put these names into the same bucket as McKesson & Robbins, a pharmaceutical company at the center of a notorious fraud in the 1930s so impactful on the history of accounting regulation that it appears in nearly every auditing textbook. So, let me call your attention instead to a different scandal that broke around the same time, one that received fewer headlines but still offers valuable insights and lessons for us today. We already talked about SOX; let us now talk about silk stockings.

Journey back with me to the early 1920s. The Treaty of Versailles has been signed, ending World War I. The international Spanish flu pandemic, which was estimated to have infected a third of the world’s population, is slowly, finally, becoming more manageable. Though race and labor riots are fresh in people’s memories, America has entered a period of prosperity. Like today, it is a period of transition, uncertainty, and a drive for experimentation.

One place that drive for experimentation found a voice: fashion. In particular, during that period, production of the new style of silk hosiery increased by 500%. Fortune magazine observed that in 1925, hosiery sales “suddenly roared up like a rocket into the industrial heavens.”⁵

One group that leapt onto the stocking bandwagon was Interstate Hosiery Mills, which ran several mills in New Jersey and Pennsylvania. Interstate did a decent business and weathered the labor troubles of the 1930s and the early years of the Great Depression.

What brought the headlines to Interstate Hosiery was an investigation in the late 1930s launched by the New York Attorney General’s Office and a fledging SEC. They uncovered a trail of fraud that led directly to a gentleman by the name of Raymond Marien who oversaw the bookkeeping at one of the mills in Pennsylvania.

Between 1934 and 1937, Marien manipulated the company’s books, making it appear as though Interstate had significantly more assets than it actually did. He inflated the books by approximately $1.9 million, which represented about 40% of the company’s total reported assets and would be over $40 million today. He falsified accounting entries and forged financial documents.

The company’s external auditors failed to detect these manipulations in part because Marien himself was employed by the auditing firm: the sort of conflict that would be inconceivable today. Apparently, Marien had done such a good job running the audit at the Pennsylvania mill that the company also asked him to supervise the mill’s bookkeeping staff. So confident was the company in Marien’s honesty and abilities that eventually he became almost the sole contact between the Pennsylvania mill and the corporate offices, going so far as to “certify” the materials that he personally had reviewed as supervisor.

It was false checks that Marien wrote to himself that eventually got him caught in 1938. But, even after the audit firm fired him, the company wanted to keep him on to complete the annual report. They thought it “improbable” that there would be any problems.

They were wrong. As the scope of the falsifications became clear, the company and the auditors reported the problem to the SEC, who promptly suspended trading in Interstate’s stock.

The subsequent investigation uncovered the sheer lack of effort Marien made to cover his tracks. The SEC concluded “that had someone at the company actually read the reports from Marien, the problems at the company would have been discovered.”⁶ The only reason the fraud lasted as long as it did was that no one – not the company, and not the auditors – thought to do more than the most cursory review of Marien’s work. They trusted him, and he betrayed that trust.

Marien was ultimately sentenced to two-and-a-half years in prison, and that is where the historical record on him runs out. The SEC allowed trading in Interstate’s securities to resume after a little over a year, and while the company had to do some serious clean-up of its accounting department, it emerged relatively unscathed.

The Interstate Hosiery case and others from the late 1930s like McKesson & Robbins helped shape the foundational principles for modern auditing standards and the regulatory environment. They highlighted the need for stronger auditor independence, better supervision of accountants and auditors, and better regulatory oversight. Interestingly, many of these are the same issues we continue to grapple with today.

Let me make one thing clear: the lack of oversight and accountability that Raymond Marien took advantage of was not exceptional at this point in time. It was standard practice. The only reason that status quo changed is because something went wrong.

This happens time and time again in the history of auditing, and indeed in financial regulation more broadly. New laws are enacted in reaction to harmful events, from the Great Depression through today. I understand why; it is human nature to focus on the most pressing matters before us and assume things that appear to be working are working just fine.

But, the last few years have made it abundantly clear that, in our increasingly complex and interconnected world, waiting until something goes wrong to make changes can have disastrous consequences. We have seen it in public health; we have seen it in banking. I am worried we are seeing it in auditing as well, and that auditors will not remain the moral backbone of the capital markets if they do not commit to sustained proactive work to serve market and investor needs. The audit profession will only endure if it remains worthy of trust.

III. Overview of the PCAOB and Our Current Standard-setting Agenda

This brings me back to the present, and the PCAOB. Let me provide a brief overview of who we are, what we do, and some of our recent activities and priorities.

Congress established the PCAOB to “oversee the audits of public companies . . . to protect the interest of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.”⁷ Essentially, the PCAOB audits the auditors of public companies and SEC-registered broker-dealers. This new design replaced self-regulation within the profession, which was ineffective to prevent the Enron and WorldCom scandals.

The PCAOB does three main things. First, we issue standards that must be used in audits of public companies and broker-dealers. Second, we inspect all firms that conduct these audits. And third, we bring enforcement actions when we uncover misconduct.

I believe that one of the best decisions the drafters of SOX made was to put both inspectors and standard setters of public company audits under the same roof. This allows those who are seeing firsthand how audits are being performed at firms of all sizes to communicate their observations and findings directly to the standard setters, who in turn incorporate that information into their processes.

The PCAOB is in the midst of an ambitious standard-setting agenda. When we first opened our doors 21 years ago, we took the existing auditing standards and adopted them as interim, with the idea that we would undergo a systematic review to consider which of those interim standards to adopt as permanent with minimal changes, which to revise more significantly, and which to replace.

Let me highlight two recently adopted standards to give a better sense of what this looks like, both of which were approved by the SEC in August.

A. QC 1000

QC 1000, A Firm’s System of Quality Control,⁸ might be thought of as a generational standard that will significantly change the requirements for the quality control system under which public company audits are performed. The standard was designed to offer a proactive, risk-based approach to quality control, with certain mandated quality objectives to ensure firms appropriately design, implement, and operate their quality control system. The changes captured in the new standard have been designed to strengthen the systems supporting a registered firm’s audits of public companies and SEC-registered broker-dealers, ultimately with the aim of ensuring the consistent performance of high-quality audits.

I want to touch on two key features of QC 1000. First, the standard specifically emphasizes the importance of firm culture on the system of quality control through its inclusion as an additional risk consideration. The standard requires firms to obtain an understanding of the culture of the firm, and the extent to which a culture of integrity and a commitment to audit quality is promoted within the firm and embraced by firm personnel across all levels. Through this requirement, I am pleased that the PCAOB is sending a strong message that culture is critical to a firm’s system of quality control and is not limited to the tone at the top.

Second, the standard has provisions to support a strong “speak up” culture. It requires a program for collecting and addressing complaints and allegations for all firms that must operate a quality control system. In addition, firms must protect those who make complaints or allegations from retaliation. These provisions are intended to encourage proactive work by the firm to address concerns before they become problems.

B. AS 1000

The second standard I want to highlight is AS 1000, General Responsibilities of the Auditor in Conducting an Audit.⁹ It replaces and improves a foundational set of four standards that had not been updated significantly since their adoption as interim standards in 2003 and which have their roots decades before that. These foundational standards represent the general principles and responsibilities of the auditor when performing an audit and consist of reasonable assurance, due professional care, professional skepticism, independence, competence, and professional judgement. Collectively, these areas represent the necessary building blocks for high quality audits.

The standard’s introductory language reaffirms the auditor’s fundamental obligation to protect investors through the preparation and issuance of informative, accurate, and independent auditor’s reports. It is critical to underscore the interests of investors in the bedrock of our standards. In other words, this standard recognizes the auditor’s role as the moral backbone of the capital markets.

C. Proposed Standards and General Priorities

The PCAOB has additional standards that have been proposed, but are pending further action. One example is firm and engagement metrics,¹⁰ which aims to offer insights into the work of audit firms with informative metrics that would aid investors, audit committee members, and other stakeholders in their decision-making. I believe in promoting transparency into as many aspects of the financial reporting ecosystem as possible, and this proposal is an example of that goal.

A separate proposal on firm reporting¹¹ focuses on enhancing firms’ disclosure of information about firms’ governance, finances, and, to the extent applicable, network information, as well as more timely and detailed reporting on certain events. This proposal recognizes the critical role audit firms serve in our capital markets, and why information concerning their ability to conduct quality audits is of paramount importance. I was pleased to support both of these proposals, and glad to see how much they were engaged with during the comment period.

That is our present. Now, let us turn to the future.

IV. Maintaining Necessary Friction in the Future of Auditing¹²

In today’s world, anyone can do almost anything with a simple swipe of a screen. On our smartphones, one swipe can order food, one swipe can pay our expenses, one swipe can do our banking, and even buy or sell stocks. When it comes to routine daily activities, frictionless transactions (with a swipe) have become the norm.¹³ I think many people assume that the future of auditing should have minimal friction as its main goal.

I disagree. Being the moral backbone of the capital markets requires, as it has for over 150 years, precision, discipline, deliberation, and a commitment to the duty “to ascertain whether figures [are] facts.”¹⁴ “[The audit] profession always has had a vision – this urge to find and tell the truth – and we should cling to it and continue to strive for its accomplishment.”¹⁵ High quality auditing – the type that fulfills this duty – necessarily comes with friction. The metaphor tells us why. A strong backbone is needed to stay upright in the face of pressure to do otherwise.

Audits of the future may certainly become more efficient to some degree, and audit quality may even benefit. But maximizing efficiency cannot be what guides the way on its own. Maximum efficiency, taken to its logical conclusion, could easily take us back to the days of Mr. Marien, when it was efficient to trust that everything was going well without bothering to check. In auditing today, I worry that the temptation to avoid this friction is prevailing, as evidenced by our inspection results. For example, as noted in our recent Spotlight on the 2023 inspection activities, on an overall basis, 46% of the audits the PCAOB reviewed had at least one Part I.A deficiency.¹⁶ This means that 46% of the audits inspected should not have had the opinion issued.¹⁷ If we focus only on the U.S. Big Four firms, that figure is 26%. While there are many factors impacting these figures, this leads me to fear that auditors may, all too frequently, be prioritizing efficiency over audit quality.

To be clear, the auditing profession is facing a number of new or amplified challenges that have converged to bring us to an inflection point. From a broad perspective, public confidence in all institutions is at an all-time low.¹⁸ Specific to the auditing profession, the talent shortage is a real and complex issue that needs dedicated attention from all parties. Rapid technological advances have the potential to move the execution of audits forward in dramatic ways, but can also raise questions about reliability and consistency.¹⁹ As audit firm competition becomes even more salient, substantial investments in advanced technologies, such as generative AI, are being seen as a requirement to allow firms to keep pace with potentially leaner staffing models. This is in addition to a greater volume of audit work being shifted to shared service centers. It is not hard to see why many regard this as a time of turbulence for the profession.²⁰

In the face of all this turbulence, I understand the temptation to cling to a simple and well-recognized goal like maximizing efficiency as the path forward.

The audit is going to transform; that is a certainty that we cannot control. But, the specifics remain to be written. The profession can and must take a proactive role in shaping that transformation. The good news is that we have been developing the compass to guide us in this endeavor for over 150 years – investor protection and audit quality.

I submit that the questions we should be asking are, what would a future of auditing look like that ensures the best protection of investors and consistently performs high audit quality? And, how do we get there? Said another way, how do we ensure the moral backbone of the capital markets remains present and strong? If we can agree on where we want to go, focusing on that goal will help us navigate the path there.

Let us explore this idea along three different dimensions. First, the audit. Next, the auditor. And finally, the audit firm. What might the future hold? And how do we get there?

A. The audit of the future

To envision the audit of the future, again, consider the audits of the past. I think of paper. Ledgers, journals, and trial balances were all maintained on paper for the majority of audits’ existence. The audit focused on auditors manually adding (or as we called it “footing”), ticking and tying those transactions to other pieces of paper, whether they were contracts, invoices, purchase orders, or shipping manifests. With the rise of computing came the rise of spreadsheets – simply an electric form of manual ledgers. While they made computing sums and equations easier, they did not fundamentally change the mechanics of the audit process.

If I were to pinpoint where I have seen that sort of fundamental change during my three decades as an auditor, I would focus on risk. In the 1990s, auditing incorporated aspects of risk ratings – for example, sample designs and thresholds for substantive analytical reviews incorporated risk factors. These pale in comparison with today’s sophisticated and integrated risk assessments and visualization tools. Adopted in 2010, the PCAOB’s suite of eight risk assessment standards has transformed how auditors assess and respond to risks throughout the audit.²¹ The processing power of computers and their accompanying algorithms mean that even the tiniest fluctuation can be identified, analyzed, and acted upon in hundredths of a second.

I believe this is just the beginning.

Audits in the future will harness the power of technology even more fully with structured and unstructured data. Already, we see how distributed ledger technology has revolutionized the way supply chain management transactions are tested, increasing the level of assurance auditors can place on recurring purchase and sale transactions with minimal incremental analysis.

The largest accounting firms are investing billions in generative AI.²² Future technology will be able to analyze transactions against the risk assessment and identify only those transactions that appear as outliers. Imagine sophisticated tools to analyze vast amounts of data to audit estimates, whether those be expected credit losses or complicated impairment analyses.

All of these changes will make the audit more efficient. Of course, that efficiency must be balanced against the necessary friction that ensures investor protection remains the principal goal, rather than choosing the easy way or bending to company preferences. And, once that equilibrium is found, we can further explore how the scope of the audit can transform to better meet the needs of stakeholders, investors, and financial statement users.

One idea I am particularly focused on is transparency.

As audits possess many of the attributes of a credence good,²³ investors may find it challenging to evaluate the quality of the services provided by auditors. Instead, they and other financial statement users may look to certain indicators, like the audit partners’ reputation, or whether mistakes are being caught, but at the end of the day, the audit has a tendency to be a black box.

Left to its own devices, I worry that the incorporation of new technology into the audit would only exacerbate this. The audit would become even more opaque to the point that audit quality became indiscernible. If audit firms are no longer competing on audit quality, then an audit will likely be viewed as a commodity similar to those offered by utility companies, interchangeable with others such that price is all that matters. And again I say, without exaggeration, that result would imperil the capital markets and diminish the auditing profession.

I believe that for the audit itself to maintain its relevance going forward, we need to proactively cultivate more transparency. Even as the audit is being made more efficient, it will be equally important to ensure that it is understandable along the dimensions that investors and other stakeholders identify as most important. That is part of the reason why I supported the firm and engagement metrics proposal I mentioned earlier.

Research being done today on Critical Audit Matters, or CAMs, may also help show the way. CAMs are defined in AS 3101 and relate to especially challenging, subjective, or complex auditor judgments. I often speak on the value of CAMs – how they are integral to investors gaining an enhanced understanding of the audits that are performed for their benefit, and offer a real and tangible example of where an auditor can use the audit to tell the story of the company.²⁴

Recent surveys and scholarship have confirmed that investors value CAMs and want to see more of them.²⁵ I hope this recent information will put an end to the assertions that investors do not read, use, or even want CAMs. Scholarship has also found that more extensive disclosed audit procedures performed over CAMs are positively associated with audit quality.²⁶ I believe that the ability of investors to understand the risks and the corresponding auditor response will only become more important going forward in making investment decisions. Making sure that audits remain in step with those concerns will guide the audit forward and ensure the moral backbone is in place.

B. The auditor of the future

Will the auditor of the future be unrecognizable to us today? I do not think so. In previous remarks, I have shared my belief that there are four fundamental components of the DNA of an auditor, which interact and combine to capture a successful auditor’s essence: first, a commitment to the auditor’s responsibility to investors and the public interest; second, a drive to obtain an understanding of a company’s business, operations, and strategy; third, a dedication to lifelong curiosity; and fourth, an obligation to professional skepticism.²⁷ I do not see any of these changing in the auditor of the future. Indeed, I see the future necessitating the auditor to lean into all of these areas to ensure the performance of the audit maintains the needed level of precision and quality to provide investors the trust they need and have every right to expect.

One obvious change that we are already seeing is the specialization of auditors. When I entered the profession, there were two distinct types of auditors at the firm: the financial statement auditor and the “IT” or “systems” auditor. While we collaborated, we generally stayed in our respective, separate lanes.

Today, the distinction between these roles has blurred. To understand the company’s business, operations, and systems, what was traditionally the role of the financial statement auditor has expanded to require the knowledge of systems, transaction processing, data analysis, and internal controls over general computing. And, the role of the system auditor has evolved to require advanced knowledge of enterprise risk management systems, fraud characteristics, and risk assessment. Those with a drive to obtain an understanding of a company’s business, operations, and strategy, and a dedication to lifelong curiosity, will flourish under these conditions.

As in the audit of the future, technology plays a key role in the auditor of the future. Such a breadth of familiarity is only possible if there are enough technological aids to support them.

So, we can see where auditors need to get to, and what they may need once they do. But, what we do not know for certain yet is the how.

With profound changes to the audit, the skills of the auditor do have to evolve. That begins at the university level. A look at Loyola Marymount’s course catalog identifies classes that did not exist when I was a student but will be enormously useful to auditors of the future.²⁸ I applaud the faculty here and at programs across the country for thinking creatively and practically about how best to prepare students for the changed landscape that lies ahead. I look forward to watching the continuing evolution of audit education.

One area that remains murky for me in this regard is how we move today’s university students to tomorrow’s auditors when the traditional training tools may be disappearing. Auditing has been an apprenticeship model, where new auditors learn by doing in the same space as more experienced ones. But, with a combination of remote work and outsourcing more tasks to either technology or service centers, how does a new auditor learn? This is something I think about a lot and have concerns over. I am eager to hear ideas on this.

Against the backdrop of the transformation of required technical skills and in light of our current level of Part I.A inspection findings, I believe certain core auditor skills will only become increasingly relevant to ensure audit quality meets the needs of investors. One of these is professional skepticism, the last strand of the auditor’s DNA. No matter what level of machine learning is used in future audits, I do not believe it will replace nor reduce the need for professional judgement and skepticism. As the nature of fraud becomes more sophisticated and transactions become more complex, the judgement of auditors will become even more critical. Auditors must continue to ask the uncomfortable and probing questions, evaluate responses through the lens of skepticism, and be able “pull the thread” to determine if transactions have been appropriately recorded in the underlying financial statements. These skills are critical to maintain the auditor’s place as the moral backbone.

C. The firms of the future

We have talked about the audit and auditor of the future. Now, let us end by looking at the structures in which they are housed: public accounting firms.

Audits come in all shapes and sizes. So too do audit firms. As I mentioned earlier, larger firms are making significant investments in technology. I recognize smaller firms do not have the same level of resources to develop similar tools. But, I believe that in the future, the market for audit services will remain sufficiently diverse to support healthy firms of all sizes. So again, the question is, how do we get there.

Ultimately, this is a question to be addressed above the level of individual firms by the profession as a whole.

Whether [they] like[] it or not, the professional public accountant frequently is required to appraise the activities, the transactions of others and say what [they] think[], let the chips fall where they may. It is not unreasonable that once in fifty years or so, the profession should look at itself and attempt an appraisal.²⁹

In previous remarks, I have referred to the idea of a voice or voices emerging from the profession.³⁰ Those who can step up and herald the path forward with a clear focus on audit quality to meet the needs and expectations of investors and the public interest. It is a challenging but vital role but is currently absent. I strongly believe the profession needs to hear this voice and rally around it.

Firm culture plays an outsized role in driving consistent high-quality audits. It includes the tone at the top, the middle, and at lower levels as well as the written and unwritten rules. Understanding firm culture can involve asking some uncomfortable questions. For example, what are firm leadership, industry service line leadership, and regional and office leadership talking about behind closed doors? Are they primarily focused on meeting the needs of investors, promoting audit quality, and ensuring staff have sufficient time to perform their audits, or is the focus more on driving new consulting services or other commercial endeavors? That is an example of what I mean by the unwritten rules.

If the audit firms of the future cultivate strong and lasting cultures that promote and support the sorts of audits and auditors we have been exploring, I believe that will help ensure the profession’s continued relevance and success. I believe this is an area that needs more attention and focus. QC 1000 will provide a renewed emphasis on culture, and I encourage firms to embrace this opportunity.

One question I have been focused on in this regard is the changing structure of audit firms, and how those changes may affect firm culture with a particular focus on incentives and implications for independence. We have seen what happens when these issues are not kept top of mind. In the years leading up to Enron, “the rush to commercialism made the accounting firms much bigger and more profitable. But, it also made their staff more susceptible to flexibility and compromise when faced with awkward requests from clients. Rather than hold companies to account, accountants looked for ways to say yes.”³¹ Actively guarding against such risks will prove more effective than cleaning up after something has gone terribly wrong.

In the last five years, we have seen an unprecedented level of audit firm consolidation through mergers and acquisitions, as well as evolving firm ownership structures.³² As the profession evolves, independence assessments are becoming increasingly complex. Corporate structures become more intricate, and companies outsource to and partner with other entities. As firms accept investments from private equity and operate under alternative practice structures, they will need to evaluate their independence systems to ensure safeguards are in place to evaluate the complex web of relationships between the firm, its owners, its affiliates, and the investments and business partners of those owners and affiliates, as well as those of its clients. Since the value that investors and the public place on audit reports is predicated on trust, ensuring independence of the auditor, in fact and appearance, is critical to that trust. Much work remains to be done.

Conclusion

As I conclude, let me underscore how incredibly rewarding I have found my own career as an auditor. For those in the audience studying accounting, you have my profound thanks for continuing in this calling. For those of you who are still deciding, I hope my remarks tonight will convince you to seriously consider this path. It is not always easy, but nothing ever worth pursuing is. 

I have covered a lot of ground, and I would sum everything up in three main takeaways:

• First, the auditing profession is vibrant, resilient, and noble and is the moral backbone of the capital markets, but it can only remain so when it avoids the temptation of the swipe, embraces necessary friction, and promotes public trust.
• Second, the auditing profession is in the midst of a profound period of transformation, and the best compass to steer the course will be adherence to its core values: consistent audit quality and investor protection.
• And third, for auditing to have a bright and prosperous future (as I hope it will), it will take deliberate and proactive effort by the profession to successfully navigate a path there. This will not be easy and there is no guarantee of success – there is real work to do here. I believe others have a role, but the auditors hold the wheel.

As we look toward that promise, I would like to leave you with a quote from physician and poet Oliver Wendell Holmes, Sr. He said that “to reach a port we must sail, sometimes with the wind, and sometimes against it. But we must not drift or lie at anchor.”³³

Thank you very much, and I welcome your questions.