The top executive overseeing Ernst & Young LLP ‘s audit practice supports retooling out-of-date rules for how accounting firms police their own performance.
He just doesn’t want the U.S. audit regulator, the Public Company Accounting Oversight Board, to act in a vacuum.
John King, EY Americas’ vice chair for assurance, said he prefers that any changes to the U.S. requirements align with international quality control standards currently being vetted.
“Because we run a global practice, we think as much consistency in the standards for looking at quality control or quality management in the audit firms, as much consistency as there can be, we’re supportive of it,” King said in an interview with Bloomberg Tax.
The PCAOB is expected to seek public feedback later this year on how it should modernize its quality control standard. With audit deficiencies ranging between 20% and 50% among global network firms, the board aims to raise compliance with PCAOB audit standards and ultimately improve audit quality.
The International Auditing and Assurance Standards Board is working on a similar project. It issued three draft rules earlier this year that would address how firms oversee quality for audits and other types of assurance services.
King, a 17-year EY veteran named to his leadership post in July, talked about his vision for EY’s audit practice and some of the biggest challenges facing the profession. He oversees 20,000 professionals—spread across 31 member firms—whose work extends beyond auditing to include financial accounting, forensic accounting, and sustainability assurance.
Among the questions King addressed were:
How Do Audit Reform Debates Impact EY in the U.S.?
Audit quality, the structure of audit firms and oversight of those firms are at the heart of an ongoing debate in the U.K. after a series of accounting scandals. EY is monitoring closely those discussions that largely center on whether to mandate audit-only firms.
“Things that occur there always have the risk they could be exported other places in the world,” King said.
“While we think there is a need for good, well-coordinated improvements in the system in the U.K., we also feel good about where we are here in the U.S.,” he added.
He described the U.S. environment as “calmer” than the U.K. The 2002 Sarbanes-Oxley Act, he said, has bolstered the U.S. with strong audit committees, “more mature” governance structures, and shared oversight from both the Securities and Exchange Commission and the PCAOB.
He echoed leaders of the largest U.S. accounting firms who in a 2018 open letter praised Sarbanes Oxley, the law that created the PCAOB in response to corporate accounting scandals involving Enron Corp., WorldCom Inc., and others.
Among the hallmarks of Sarbanes-Oxley are strict auditor independence requirements, which bar firms from providing lucrative consulting services to its audit clients. Despite those rules, the consulting arms of the major accounting firms have flourished.
EY, for one, remains committed to the multidisciplinary firm, arguing it delivers high-quality audits, King said.
“As the accounting model has become more complicated and more intricate, as the precision of auditing standards has become higher, the value and the necessity, absolute necessity, to have folks of different disciplines—from tax, and IT, valuation—play important roles in the audit has never been higher,” he said.
What Are the Top Priorities?
“An area that we’re very focused on is expanding beyond the traditional financial statement audit,” King said.
And that means providing services that are relevant and needed to the marketplace, like assurance for blockchain, cybersecurity, and sustainability. The financial statement audit and the audit of internal controls for financial reporting—which are required by federal securities laws—should be considered baseline services that firms provide, he said.
“As investors become more sophisticated—as their interests tend to move beyond that,” he said of the financial statement audit, “then we need to pivot.”
EY isn’t alone in its focus on expanding the type of assurance services it can provide. Investors are increasingly basing their strategy on such non-financial metrics as sustainability reporting—offering the firms a fresh market to sell their work.
How is EY Advancing in Technology?
Ten years ago, auditors were still working with paper records and toiled through their clients’ multiple computer systems and databases.
Fast forward and public companies now have access to a secure site to share documents and data or track the progress of their audit. Data analytics tools are baked into the auditing of almost all of the firm’s largest clients. EY has built a product to validate blockchains and is investing in artificial intelligence, King said.
EY has invested heavily—$600 million and counting—in both the technology and training to help staff make the most of those tools, he said.
Understanding and using technology isn’t optional for EY auditors, but is a basic part of how the firm serves its clients, King said.
“Tech isn’t where we are headed, it’s really where we are today,” he said.
All of those tools increase the efficiency of the audit and allow much of the work to be done remotely. But they don’t negate the need for professional skepticism or in-person visits.
“It’s also important to remember, though, that audit is more than just a narrow look at numbers,” he said.
Auditors still have to understand how management and the board operate the business and whether the numbers make economic sense.
“You are looking at the business itself. You are looking for all these risks that might not be apparent in just looking at a rote analysis of numbers,” King said.