Cindy Fornelli saw an audit industry rocked by scandal and under scrutiny by a newly created government watchdog when she took the reins as executive director of the profession’s policy advocate 12 years ago.
As she retires from the Center for Audit Quality this month, Fornelli, 58, describes a dramatically different landscape: Accounting firms are “laser focused” on improving audit quality; the relationship with that watchdog, the Public Company Accounting Oversight Board, has strengthened; and financial reporting is viewed as a shared responsibility among boards of directors, preparers, investors, and regulators.
“We’re all rowing in the same direction, which is the way it should be,” she said in an interview with Bloomberg Tax. “We all want a strong, robust system in which investors have high confidence to invest in our capital markets.”
As the PCAOB, under new leadership, considers rewriting standards, Fornelli offered some advice.
“Don’t have the standard written and then go shop it around,” she said.
Instead, the board should bring auditors, preparers and investors into a room together to hear their ideas and concerns. They should understand the issues and consequences before drafting new rules.
“It’s hard work. You’ve got to roll up your sleeves; you’ve got to listen,” she said.
Fornelli believes that the PCAOB is committed to a more collaborative approach, similar to how the Financial Accounting Standards Board’s research and outreach informs its standard-writing.
New PCAOB Approach
She already sees a difference in the new approach of the board, calling it a new era.
The board, for example, met with firms as they prepared for a rule change requiring a more detailed audit report. The firms shared their plans with the board and staff provided feedback.
“That’s new,” she said. “That’s a process that hasn’t really happened in the past.”
Historically, the board struggled to connect with other players within the financial reporting system. Some, like audit committee members, were reluctant to speak with a regulator whose narrow scope didn’t extend to them, she said.
But Fornelli urged audit committee members and preparers to talk to the board.
Defining a Quality Audit
Measuring audit quality has proved elusive.
Fornelli first pitched the idea of measuring and defining audit quality when she interviewed for the executive director job. It took over a decade before the CAQ came out with a compromise approach.
In January, the center published an industry framework designed to help both audit firms and the audit committees who hire them discuss factors that contribute to robust auditing, known as audit quality indicators.
The firms’ own internal quality control systems play an important part in maintaining effective auditing. The PCAOB plans to update its rules on quality controls, which date to 1997.
“This board is going to tackle it, and I think that is so important,” she said.
The Next Chapter
Fornelli is a securities lawyer, not an accountant. She previously served as the deputy director of the Division of Investment Management at the Securities and Exchange Commission, which oversees the work of the PCAOB. At Bank of America Corp., she was the regulatory and conflicts management executive.
That background allowed her to learn first-hand how the regulatory process works but also required her to build consensus with a large group of stakeholders.
That experience paid dividends as she has worked behind the scenes to corral opinions from CAQ members, and other stakeholders, to understand what’s driving those views.
Her successor, Julie Bell Lindsay, has a similar, mixed background. Lindsay was managing director and deputy head for global regulatory affairs at Citigroup Inc. and she served as counsel to former SEC Commissioner Cynthia Glassman.
Lindsay starts May 6 as the center’s next executive director. Fornelli, who will stay on through the end of May, said she is looking forward to starting her retirement in Florida with her husband.