In a time of uncertainty, auditors have met the challenges of the COVID-19 health pandemic and economic crisis, successfully maintaining audit quality.
It’s no secret that COVID-19 has been hard on all of us. Our day-to-day lives have been tremendously impacted, whether by loss, fear, profound change or a combination of all three.
Auditors’ experiences are no different and that’s one of the reasons I’ve been so impressed by the public company auditing profession – it hasn’t skipped a beat. Auditors have quickly adapted to the new normal while remaining laser-focused on audit quality.
A lot of people think the biggest challenge was adapting to the remote working environment. That’s part of it, but auditors have actually been operating remotely in many situations in recent years. Long before COVID-19, audit firms were already leveraging advanced technologies to enable remote work and automation of basic tasks.
The pandemic has absolutely brought added complexities and new challenges. But audit firms quickly reinforced, tailored, or instituted new policies and procedures to maintain the high standards we hold for ourselves and our work. Maintaining audit quality has really been the north star for the profession since the pandemic struck.
Audit quality is essential to our economic recovery and long-term economic resilience. America needs healthy capital markets to power our economy, create jobs and opportunity for all, reduce poverty, and allow for greater innovation. For healthy markets to thrive, auditors are essential. They help ensure company-reported information is consistent, reliable, and comparable, tapping their unique competencies in standards-based analysis, objectivity, professional skepticism, and critical thinking, while asking the tough questions and gathering evidence to help corroborate the answers.
I’m confident the public company auditing profession will continue to be an essential component to the continued, orderly operation of our capital markets – an essential element of our national response that will help our economy recover from the COVID-19 crisis.
The challenge of maintaining audit quality has played out in unexpected ways. Here’s how auditors have met four key challenges facing public companies during this crisis:
Complex Accounting Situations New to Many Companies, but Not to Auditors
Audit firms bring independent perspectives to complex accounting issues arising from the pandemic. Many companies are for the first time having to issue going concern warnings, which alert investors of potential liquidity issues. Another issue new to many companies is the existence of a triggering event that requires an interim impairment test on goodwill to detect the excess book value over its fair value.
“The audit profession draws on deep experience with clients from varying sectors and of differing sizes to successfully navigate complex financial reporting issues stemming from the onset and continuation of the pandemic,” said Wes Bricker, PwC Vice Chair and US & Mexico Assurance Leader. “Auditors have an important role in helping to ensure that stakeholders in the capital markets have credible and timely communications relevant to the quality of financial information companies are reporting, as well as their future operational and financial planning.”
COVID-19 and the remote work environment have heightened the risk of fraud at public companies. In fact, fraud experts have already documented increases in financial statement fraud during the pandemic. They expect this trend to continue over the next several months.
Management and other employees are working remotely while experiencing unexpected challenges. As businesses fail and unemployment reaches historic highs, companies come under pressure. As this pressure rises, work from home situations create unique opportunities for fraud and individuals rationalize bad acts to help their company and themselves. Add to the mix trillions of dollars in federal aid flushed into the system at a time when our normal sensibilities are compromised, and you get the perfect recipe for a fraud feast.
Auditors are increasingly leveraging data and technology in new ways to successfully fulfil their responsibility under US auditing standards. The standards require auditors to obtain “reasonable assurance” about whether public company financial statements are free of material misstatement, whether caused by error or fraud.
Grant Thornton CEO Brad Preber asserts that detecting and deterring fraud is a shared responsibility.
“The entire financial reporting ecosystem has a role to play fighting fraud – regulators, internal and external auditors, audit committees, and especially public company management, which is ultimately responsible for designing and implementing programs and controls to deter and detect fraud,” said Preber.
Remote Inventory Observations
Public company auditors are working – remotely in many cases – to execute their responsibilities. And technology is playing a central role in this new environment.
Inventory observations are just one example of auditors leveraging technology. Auditors are implementing innovative solutions, such as using their cellphones to observe inventory if doing so in person is not an option. Using their cell phone’s live video feed and GPS features, auditors have an additional piece of evidence that the inventory is what it appears to be, where it appears to be.
KPMG is even using smart glasses, augmented reality glasses that let auditors conduct inventory observations remotely.
“Smart glasses can be accretive to quality, because they provide for seamless communications with high resolution and zoom capabilities, empowering the auditor to lead the inventory observation,” said Christian Peo, KPMG National Managing Partner Department of Professional Practice. “Senior leaders and subject matter experts can more quickly and efficiently respond to any challenges or questions that arise, solving issues in real-time,” he said.
KPMG’s Audit Chief Technology Officer Matt Bishop thinks smart glasses will become even more important in the future.
“Smart glasses will enhance audit quality, while protecting the health and safety of our auditors and the people at the companies we audit,” said Bishop. “But the use of smart glasses is not tied strictly to the pandemic. We’ve already been testing and piloting this technology, because, while we are confident smart glasses will be effective and uniquely valued today, we know they will be an expectation tomorrow.”
Whether developing new technologies like smart glasses or repurposing consumer technology like cellular phones to conduct inventory observations, auditors have equipped themselves with the technology needed to maintain audit quality in this remote environment.
Remote Paper Records
Something as simple as reviewing a client’s paper records can become challenging if it’s no longer safe to review the records in person.
BDO National Managing Partner and Assurance Practice Leader Bill Eisig explains, “The profession has remained steadfast with a clear focus on audit quality even as we navigate emerging areas of risk in this new and more complex environment. While auditors are still reviewing paper records in-person when they can do it safely, the profession had to be innovative given the constraints put in place by the pandemic. Where and when needed, auditors quickly adopted a ‘touchless’ audit approach while still delivering ‘high-touch’ client service. This means working with our clients using traditional or technology-enabled methods to secure necessary documentation – everything from shipping paper records to using a live camera feed to capture files being scanned and emailed to the auditor.”
Auditors play a role in nearly every industry, from entertainment to healthcare. The profession understands that diverse backgrounds, minds, and capabilities produce innovative solutions. These solutions have assisted in the response to COVID-19 and the continued stability and evolution of capital markets.
And of course, from the earliest days of the pandemic, public company audit firms have made their employees’ well-being and safety a priority, as well as stepped up their philanthropic efforts within their own communities to help those in need. They have pledged millions of dollars, taken steps to help prevent layoffs and developed resources for people and businesses in need during this crisis.
I’ve always been proud to be an auditor. But, I’ve never been prouder to see how my profession is stepping up to meet the challenges of these unprecedented times.