Cindy Fornelli, executive director of the Center for Audit Quality, sees the demands increasing for auditors to do a better job of demonstrating independence, objectivity and professional skepticism, especially in the wake of recent financial scandals.
Her organization is joined in that effort by the Public Company Accounting Oversight Board, which has been releasing a series of reports aimed at prodding auditors to be more skeptical of the financial statements they receive from clients. Most recently, the PCAOB released a report that uncovered troubling problems with the initial series of audits of broker-dealers (see PCAOB Finds Problems with Audits of Broker-Dealers).
“Independence, objectivity and skepticism, I think, are fundamental foundational elements of audit quality,” Fornelli said in an interview at the Accounting Today offices on Friday. “Last year the PCAOB actually started looking at independence, objectivity and skepticism, and came out with a concept release and held a series of roundtables. And they’re still looking at that issue. It is foundational to good audit quality.”
She noted that the CAQ is looking at those issues as well to see how independence, objectivity and skepticism can be integrated better into the auditing process, in addition to the financial reporting process.
“Skepticism is a very important foundational tool, both for auditors as well as for all in the financial reporting supply chain,” said Fornelli. “We at the CAQ define the financial reporting supply chain as those parties that have primary responsibility. That would be management, the internal audit and external audit functions, as well as the audit committees. Really all four of those parties need to bring skepticism to the table.”
To strengthen those principles, the CAQ is allying with several other organizations on anti-fraud activities, such as Financial Executives International, the National Association of Corporate Directors and the Institute of Internal Auditors. “One of our fundamental missions is to commune and collaborate with other interested stakeholders on the issues that surround public company audits,” said Fornelli. “With respect to deterrence and detection of financial reporting fraud, we do have a collaboration with FEI, the NACD and the IIA. FEI, of course, represents management, the IIA represents internal auditors, and the NACD represents corporate directors, particularly audit committees in this case. All four of those parties—internal audit, external audit, the audit committee directors and the management—all have a responsibility to deter and detect financial reporting fraud.”
The CAQ has a number of projects underway with those organizations. In October, the NACD will be hosting a series of webinars aimed at promoting professional skepticism to increase the chances of deterring and detecting financial reporting fraud, Fornelli noted.
The CAQ has also been producing its own series of animated videos, in the film noir style of hard-boiled detective movies, highlighting the system (see CAQ Releases Sequel to Film Noir-Style Audit Video). “We’ve had great success with those,” said Fornelli. “What we’ve done, as part of an educational process, we have released a series of three videos. They’re short, three or three and a half-minute videos, animated, done in the film noir style. The first one describes the system of investor protection, using various characters, like Ledger Lines, Ida Figures, Lotta Charts, and Johnny Law, that have a role in investor protection in our financial markets. The second video, using the same cast of characters, explains the financial statement audit. And then the third video, which we just released last month, explains the important role of the audit committee in the process. So they’re really exciting, and we’ve gotten great views on that. You can get them on YouTube or at the CAQ’s Web site.”
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