By John Filar Atwood
SEC Chief Accountant Wesley Bricker praised the largest audit firms for voluntarily providing audit quality reports to communicate how they perform individual audits, how they run their businesses, and how they think about the role and relevance of the audit profession. In remarks at the Baruch College financial reporting conference, he emphasized the importance of an audit firm’s governance and culture to ensuring quality audits.
Bricker said that trust in the transparency, accuracy and reliability of financial information is the foundation of the auditing profession. He believes that trust has to be maintained and nurtured to meet the realities of growth and the need for greater consistency in audit quality around the globe.
Risk management. Governance plays a key role in maintaining an effective firm-wide risk management system that anticipates and mitigates the risk of failures, he said. Risk management frameworks can provide guidance that is flexible and scalable, he noted, but they are not a substitute for the standards of quality control for a CPA firm’s accounting and audit practice, and governance and reporting practices more generally.
Bricker cautioned that even with robust risk management systems and a strong commitment to quality control standards, some risks will still materialize that require mitigation and remediation. These are the circumstances where governance and reporting are especially critical, he said.
Good governance. Regulators and leaders in the profession have come to understand the importance of independent and diverse thinking on corporate boards, particularly on audit committees, Bricker noted. Independent directors can take on responsibilities with substance and credibility because of their independence. Key examples include resolving disputes between management and the external auditor, and oversight of complex and sensitive investigations, he said.
Another advantage of independent directors, according to Bricker, is that they can deliver candid, sometimes tough, messages to management and other board members without fear of retribution. He views the strengthening of corporate audit committees with independent members as one of the most prominent recent enhancements to the corporate governance scheme.
Good governance is necessarily intertwined with tone and culture, he stated. Accordingly, audit quality can be more difficult for firm leaders to integrate into regular processes unless the firm as a whole sees the mandate for audit quality as a driver of its success. In his experience, poorly diagnosed or designed culture initiatives do not last long in addressing underlying behavioral norms.
Bricker said that he is encouraged that the leaders of the largest, most complex firms have appointed, or are taking steps to appoint, independent directors with meaningful governance responsibilities. They understand the overriding goal of fostering audit quality to safeguard against noncompliance threats and the resulting costs to the reputation of the firm, its network, and the audit profession, he noted.
Audit firms in the U.S. are subject to local ownership, licensing, and regulation, but are appropriately challenging themselves to think across a network of firms to deliver consistency in quality around the world, he said. Using globally common tools and world-wide quality monitoring, firms must consider risk management at both firm-wide and global network-wide levels, he added.
General purpose versus special purpose financial reporting. Bricker also expressed his support for general purpose financial reporting over special purpose financial reports. Special purpose reports are prepared using a special purpose framework to address particular needs of specific users, he noted, and have more limited purposes and uses.
He stressed the value of keeping and maintaining general purpose financial reporting free from other objectives. When formulating standards for general purpose financial reporting, he said, the FASB and the IASB do not try to influence the outcome of investor capital allocation decisions or actions taken by management. Instead, they design standards that provide better information to inform those decisions and actions.
When standards are designed to privilege certain objectives, economic activities, financial products, or market participants, he continued, it could diminish confidence in the accuracy or quality of reported information. He encouraged industry participants to support the standard setting bodies that maintain general purpose financial reporting frameworks instead of special purpose ones.