The Center for Audit Quality (CAQ), an affiliate of the AICPA that represents audit firms, published the results of a survey of audit partners on July 6. Here’s what’s trending in terms of accounting disclosures and stakeholder concerns.
What the survey says
The CAQ survey queried 700 audit partners across the CAQ’s governing board firms. Partners who were surveyed audit small public companies with valuations of less than $700 million to large companies valued at more than $50 billion. The survey asked respondents a question about which types of disclosures they believe will be voluntarily increased. Audit partners were given a list of disclosures, from which they could choose up to three.
Almost two-thirds (61%) of audit partners believed public companies in their primary industry sector would voluntarily increase environmental or climate-related disclosures over the next 12 months. The next two most chosen disclosure topics were cybersecurity with 38% and workplace diversity with 35%.
Other areas where auditors expect enhanced disclosures include:
- Human capital (31%),
- Financial performance (26%),
- Business strategy (25%), and
- Board diversity (25%)
“These areas of potential increased voluntary disclosure likely reflect investor demand and anticipated regulatory action,” the survey states.
The demand for greater disclosures about environmental, social and governance (ESG) matters has been significantly increasing in the past several years. In fact, the Securities and Exchange Commission is currently working on disclosure rules that would increase information that public companies would disclose related to climate change, human capital and cybersecurity.
The CAQ survey asked audit partners about the top challenges that companies have faced in their ESG reporting processes. For this question, audit partners were given a list of known issues and were asked to identify the challenges that companies in their primary industry sector face. Almost half (49%) said the lack of tools supporting collection, collation and analysis of ESG-related data was a major challenge. The next two top challenges were:
- Diversity of standards and frameworks (40%), and
- Lack of expertise (38%)
More than one-third (37%) said aggregating and controlling data also presented challenges when disclosing ESG information.
While more than one-third of audit partners chose cybersecurity as an area of increased disclosure in the next 12 months, survey results suggest more improvements in cybersecurity may be needed. The survey reports “that enhancing cybersecurity disclosure, managing cyber risk, aligning cybersecurity with company goals, and establishing a culture of cybersecurity were areas for improvement.”
There were variances in perceived cyber risks across industries. Cybersecurity issues were consistently identified as a top concern in the following industries:
- Financial services,
- Media, and
The CAQ asked audit partners about their views of the companies’ level of preparedness to mitigate the risk of a cyberattack. Roughly one-quarter (26%) said the level of preparedness was high, and about two-thirds (65%) said there’s a moderate level of preparedness. But 8% said the level of preparedness was low.
The COVID-19 pandemic has brought about changes and challenges in the business environment. However, 71% of audit partners said that the fraud landscape for companies in their primary industry sector had remained the same.
About one-fifth (22%) said fraud risk has increased, while only 1% said the risk has gone down. The remainder were unsure. These responses were consistent across industry sectors and company size.
Additionally, the survey asked audit partners to predict where the economy was heading over the next 12 months. This comes as inflation has sharply increased in the past year, and stock prices have plummeted in the past several months.
The report said that most audit partners anticipate the current inflationary cycle to affect their primary industries for more than 12 months. And 77% said that they believe prices will continue to rise in the next 12 months.
While 44% of respondents had a pessimistic outlook on the U.S. economy over the next 12 months, only 4% were very pessimistic. On the flip side, 16% had an optimistic outlook, and 1% had a very optimistic outlook. A significant amount (40%) had a neutral outlook, suggesting that uncertainty abounds.
Again, there were notable differences across industries. “Almost all audit partners surveyed in consumer products and retail (95%) and industrial products (94%) expect price increases, while only 50% of partners in health care and life sciences expect the same,” the survey states.
Transparency is key
Rather than wait for new accounting rules that require you to disclose critical information, proactive companies should voluntarily disclose information that will help investors, lenders and others make informed business decisions. Contact your CPA for the latest trends in financial disclosures for your industry.