Podcast: The Evolution of the Audit Industry and What’s Next


When it comes to ensuring high quality financial audits, it takes a village and a whole lot of dialogue.

It is a shared responsibility, said Cindy Fornelli, executive director of the Center for Audit Quality—the advocacy group created in the years after the 2002 Sarbanes-Oxley Act. The law regulated the audit profession and was intended to restore trust in financial statements after the Enron and WorldCom accounting scandals.

Fornelli will retire this month after 12 years of working to build consensus among audit committees, regulators and auditors and preaching best practices. She spoke with reporter Amanda Iacone about the evolution of the profession.

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Amanda Iacone:

From Washington. This is Talking Tax. I’m Amanda Iacone. Siri blue suit is down for the count due to allergy season this week. Today we’re talking to the first and only executive director of the Center for Audit Quality, which the audit industry stood up in the years after the Enron and WorldCom accounting scandals.

Cindy Fornelli:

Back when we started the CAQ, the profession, the ecosystem, the regulators, we were all in a reactive mode and I think these 12 years later we’re much more in a proactive mode, all of us collectively, which I think is a great thing.

Amanda Iacone:

The Center was created in reaction to the 2002 Sarbanes-Oxley Act. The law was intended to restore trust in public company financial reporting, but it also created the Public Company Accounting Oversight Board, which is the U.S. audit regulator. Cindy Fornelli, the Center’s director is retiring this month. She spoke with me about her career, the new extended audit report that will show up as part of the company’s annual financial statements later this year, plus a controversial change in accounting standards.

What are the big takeaways, if you, as you look back over these last 12 years?

Cindy Fornelli:

Well, as I look at the last 12 years, as I think about things that have changed, I would say looking from then to now I would say now the profession and the CAQ is much more future focused. So, you know, back in 2006, 2007, the profession, the ecosystem, we were all still trying to figure out what this new thing called Sarbanes-Oxley was. It had been adopted in 2002 or it had been passed in 2002, but, you know, it took a few years for the PCAOB to get stood up for companies to understand their new responsibilities under Sarbanes-Oxley, audit committees to figure out what their roles and responsibilities, how they had been enhanced. So I would say back when we started the CAQ, the profession, the ecosystem, the regulators, we were all in a reactive mode.

And I think these 12 years later, we’re much more in a proactive mode, all of us collectively, which I think is a great thing. Obviously we at the CAQ still react to things. So if the PCAOB comes forward with a new standard, obviously we’re going to react to that. But it’s also more proactive in that we’ve got a PCAOB who was very interested in what a variety of stakeholders have to think, including the profession. You know, if you think about it, the auditors are the subject matter experts that the PCAOB can and should go to get perspectives on how a standard might work, how it would be implemented, how it would be audited once it went into effect. And so, so it’s been an exciting evolution over these past 12 years to witness and to see and to be a part of.

Amanda Iacone:

Well, wonder if you could talk about your own experience coming here. You are not an accountant, you’re a securities lawyer. You worked at the SEC, you worked at Bank of America doing regulatory compliance. What, how has that, what is it about that set of skills that has been a benefit to both the audit industry and this new advocacy organization? And just making this thing work.

Cindy Fornelli:

I cannot emphasize enough how valuable my time at the SEC was. Seeing how the regulatory process works firsthand and being part of the regulatory process is really invaluable in my mind. And whether you do that at the beginning of your career, or if you do it in the middle of your career, or if you do it toward the end of your career, it is just really insightful. So, you know, if you’re an accountant you can be one of the professional accounting fellows, right? The PAFs, the PCAOB now also has fellowship. So you don’t have to be a lawyer, you don’t have to work full time at the SEC or the PCAOB. But I just really think understanding how the regulatory process works is a very helpful thing. So, you know, you’re young readers, you’re young listeners, I would encourage them if you can’t do it right out of school, which to be honest with you, I couldn’t, right out of law school, I did not have the financial wherewithal to be able to work on a government salary.

I had to work in private practice to pay off some of those student loans. But I did it later in my career and it was just really invaluable. Working at Bank of America is where I really understood the importance of convening, collaborating. I was charged with creating the first ever bank-wide complex of interest program at the bank. So cutting across the various business lines. And so understanding everybody’s points of view, sitting down, talking it out was helpful to me as I went to go build that program. Again, not everybody agreed with my recommendations and my vision for the path forward, but they understood it. They felt as though they had a voice in it and they felt some ownership for it, which is another great byproduct of convening and collaborating. Those who are a part of the process feel some ownership in that process and in the end result, which I think is very, very helpful.

Amanda Iacone:

When you talk about doing the hard stuff, it makes me think of the tool that came out about the audit quality indicators.

Cindy Fornelli:

Yeah.

Amanda Iacone:

It’s been a long journey.

Cindy Fornelli:

It’s has been and it’s still ongoing too.

Amanda Iacone:

Well, and I wonder if that was one of those hard projects that you just had to push through. I mean, talk about a diversity of opinions. I mean, how to measure the quality of an audit. I mean, I just wonder if you could talk about how difficult that was to wrangle all those different opinions and you came up with that list.

Cindy Fornelli:

It was a long journey. And we’ve started several years ago and when we came out with our approach to audit quality indicators, where we put forth some considerations for firms and frankly audit committees to think about how to talk about audit quality using these factors if you will. Because you can’t really measure it. We always want to measure things. And when I first was interviewing frankly with the CEOs who ultimately hired me, they said, what is your vision for the CAQ? And I said, well, I think the first thing we should do is define and then measure audit quality. And they laughed a little bit at me and said, well, that is a worthy goal, but many people before you have tried to do that to little or no success, so don’t set yourself up for that failure. But that always kept in the back of my mind that, well maybe we couldn’t define audit quality, but you can define it by saying audit quality is adhering to the standards, but that’s doesn’t really get to the heart of it.

It is the problem with it I think, or the difficulty with it is it’s a qualitative question, not a quantitative question. So you’ve got to think about those quality factors. And so we tried to do that when we started our audit quality indicators journey. And then the tool to which you just referenced I think takes it the next step, right? Because it gives the firms who want to do one of these transparency reports, who wants to talk about how they think about audit quality within their own firm, a framework or common framework to talk about it. And it’s important when you’re talking about audit quality indicators or KPIs or any of these things that you don’t go to the cookie cutter, right? You don’t go to the one size fits all. So it’s got to be a conversation. It’s gotta be an evolution.

And it’s so important that the auditor, whether you’re talking about firm-wide indicators or engagement level indicators, have conversations with the audit committee about this because it’s a dialogue. It requires a dialogue. It’s not just a number. And so that was the difficulty in it. That was the challenge in it. But that’s also the opportunity in it. Helping everybody talk about this, in using a common language, but that allows for different approaches based on the facts and circumstances.

Amanda Iacone:

CAMs. What do you see as the benefit, the long-term benefit of this significant change in the auditor’s reports?

Cindy Fornelli:

Well, selfishly, on behalf of the profession, I see a huge benefit in providing more insight into what auditors do and the importance of audit, right? So this is meant to be what the auditors have identified as the critical audit matters. And while we know from investors that they like the pass-fail model, they want more, and they want more insight into what the auditors think and see and do. And so I think this is a start. I don’t think it’s, I worry that it’s what people might assume it’s going to be, the be all and the end all and I don’t think that’s true. But I think it’s definitely an opportunity for others to get some insight into the audit process. And how you know if you take the auditor’s report and look at it alongside the company’s report. Right? I think a misperception is that there could be a one-to-one or there should be a one-to-one parallel between the critical audit matters and the company’s critical accounting estimates are critical accounting policies. That’s not, I don’t think that’s the case. I don’t think it should be that way, but I think if you read the two together, it’ll give an investor or a reader of that information more insight into the financial reporting process.

Amanda Iacone:

This could be a way to identify accounting standards that need revised or updated in some way because if preparers, are struggling with the accounting, auditors might struggle with their accounting, right?

Cindy Fornelli:

Yeah, yeah. It could flush out some of that, you know, it’s a good opportunity. The auditors’ identification and reporting at a critical audit matters is a good opportunity for the company to go back and revisit their accounting to see, you know, are our disclosures up to the task, do we need to revise our disclosures? Do we have old things in there or should we be looking at other new things? And so again, this is that shared responsibility where I think if you look at the ecosystem, it’s great that you know, financial reporting or corporate reporting isn’t just one piece of the information. It’s a continuum. And again, going back to, or looking at it through a different lens, right? This is what the auditor’s see from when they’re doing the audit. And then you look at also what the company has seen as they’re going about preparing the financial statements. And then I think that’s good information to look at holistically if you’re an investor.

Amanda Iacone:

Speaking of FASB and financial accounting. I have to ask, you worked in regulatory compliance for Bank of America, the big accounting standard that everyone’s talking about right now is CECL, current expected credit loss model. Will it improve the reporting landscape?

Cindy Fornelli:

Well you know, this is a big change and there’ve been a lot of big changes in the accounting standards over the last two years. So CECL in and of itself is a complex and then you add that to companies having to implement Rev Rec (Revenue Recognition) and, and some other changes. So that in and of itself is challenging. I think that FASB goes through a pretty robust process in coming up with the new standard. And then I believe that FASB also goes through a fairly robust process afterwards, post-implementation review. So I’m going to trust that process. I think anytime there’s a new standard that comes out, whether it’s from the FASB or the PCAOB or if there’s a new rule that the SEC comes out, it’s easy to sit back and pick at it if you will. And, it’s good, that’s part of the process is picking at it, right?

That’s why there is notice and comment period. That’s why there is post-implementation review. So I’m going to trust the process but I do think it highlights why it’s so important to do post-implementation review and a robust implementation review. And I’m pleased that on the auditing side, the PCAOB and the SEC have said many times that with respect to CAMs, there’s going to be robust post-implementation review. And I believe that’s true. And I sincerely hope that it’s true because again, another huge change in the process, a welcome and a good change, but we need to make sure that it’s tweaked so that it works as intended. And so that would be my hope and my expectation per CECL as well.

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