A new report from the Center for Audit Quality (CAQ), a public-policy organization affiliated with the American Institute of Certified Public Accountants, has some interesting information about investor confidence.
In an e-mail announcing the publication of its annual Main Street Investor Survey, the CAQ presented an optimistic perspective. In addition to reporting that confidence in U.S. capital markets had improved from 61% to 65% in the past year, it said:
“Investors remain confident in U.S. public companies and the financial information they publish. Confidence in audited financial information released by U.S. publicly traded companies remained solid, with 69 percent of investors expressing positive sentiment. Investor confidence in investing in U.S. public companies also held steady at 71 percent. Public company auditors, along with financial advisors and brokers and audit committees of publicly-traded companies top the list of entities investors believe are looking out for investors’ interests.”
But is this cause for optimism? The skeptic (perhaps realist) in me says “no.” Consider this:
Did external auditors “top the list”? Yes, but I suggest that topping the list with a poor score is not something to be proud of. We are not talking about the “99%” of Americans who have been vocal about lack of confidence in Corporate America. We are talking about investors who figure to be in the top few percent.
This is what I suggest:
1. The boards and CFOs I have worked with would not be content with investor confidence at these levels. Investor confidence should be on the board agenda at least annually.
2. Boards and CFOs should ask their general counsel and investor-relations team to assess investor confidence in the board and management, and then recommend ways (if necessary) for that to be improved.
3. The quality of the external audit should be a continuing focus of the audit committee and a concern of the CFO. The competency and work of the audit partner and team should not be taken for granted, but formally assessed at least annually. In particular, pay attention to:
a. The relationship of the primary engagement partner with other firm partners involved in the audit (including tax), especially in other countries, and his/her authority over their work.
b. The experience and competence of the entire audit team: not just the partners, but the managers as well.
c. The auditors’ risk assessment. Does it demonstrate a reasonable understanding of the risks to the integrity of the financial statements? Do management and the internal auditors agree with the risk assessment? Are the auditors taking a top-down, risk-based approach and minimizing work on areas where the risk is low?
d. The relationships between the external auditors, management, and the internal audit team. Is it too close or too confrontational to be effective?
e. The results of any examinations by the Public Company Accounting Oversight Board that involved either the audit firm or one of its engagement partners.
f. Whether the comments and recommendations by the auditors demonstrate quality.
Do you know how confident investors are in your company’s board and management? Are you satisfied?
Norman Marks, CPA, is a vice president with SAP and a longtime internal-audit and risk-management practitioner.