Audit Committee Oversight Makes Investors More Confident

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By Laura Tieger Salisbury

Dec. 5 — Heightened focus on management’s internal controls over financial reporting is one reason for an increase in investor confidence, Cindy Fornelli, Executive Director of the Center for Audit Quality, said.

“Effective ICFR helps reduce the risk financial statements will contain material errors or misstatements, she said.

Main Street Investor Survey

Fornelli, who spoke at the American Institute of CPA’s conference on SEC-PCAOB developments Dec. 5 in Washington, based her assertions on the latest 2016 results of CAQ’s annual Main Street Investor Confidence Survey. The survey was released Sept. 29.

This is the 10th year that CAQ and Audit Analytics have jointly surveyed “retail"—main street— investors. Of the 1004 investors surveyed in 2016:

  •  79 percent of U.S. investors have confidence in U.S. capital markets;
  •  81 percent have confidence investing in U.S. public companies;
  •  75 percent have confidence in audited financial information; and
  •  81 percent say independent auditors are effective in investor protection.
The 75 percent confidence that investors expressed in audited U.S. financial reports is approaching the confidence level from 2007, Fornelli said.

The research also showed that financial restatements also have decreased sharply since 2008. In 2015 the research showed a 14 percent drop in restatements.

Audit Committee Oversight

The “ever-strengthening role of the audit committee” is an important reason for investor confidence growth, according to Fornelli.

The “increased transparency” and “significant growth in disclosure of key areas of auditor oversight” gives investors more meaningful information about the audit committee’s oversight role, Fornelli said.

The increased oversight and transparency means that investors have more confidence in auditors ability to spot improper financial reporting.

Non-GAAP Measures

One of the audit committee’s crucial roles is to “foster dialogue” on different issues, such as non-GAAP or revenue recognition, Fornelli noted.

Non-GAAP measures are alternative financial measures that are neither calculated nor presented in accordance with the U.S. generally accepted accounting principles (GAAP).

The Securities and Exchange Commission’s division of enforcement has heightened its scrutiny of companies using non-GAAP measures in the last year.

Fornelli’s view is that non-GAAP measures are a “nuanced area” and noted CAQ’s Dec. 5 publication, Non- GAAP Financial Measures - Continuing the Conversation, contains details.

While auditors don’t audit non-GAAP metrics, the paper notes, audit committees and management may consider using auditors as a resource to assist in their evaluation.

The Dec. 5 release builds on CAQ’s June 2016 Questions on Non-GAAP Measures, a Tool for Audit Committees.

The questions are designed to target transparency, consistency and comparability, Fornelli said at the conference—not just for audit committees but for everyone “from investors to investment banks, security lawyers to standard- setters.”

The spectrum of stakeholders, according to CAQ, includes management, investors, investment analysts, securities counselors, audit committee members, internal auditors, independent auditors, regulators, accounting standard setters, and academics.

Sarah Deens, managing director, BNP Paribas, at an Oct. 27 meeting of the PCAOB’s Investor Advisory Group said that the market focuses very much on non-GAAP numbers, and many investors don’t even realize that non-GAAP numbers aren’t regulated.

Regulators’ Guidance

Non-GAAP financial measures and their relevance to assessing company performance was one of the main focus areas at the Oct. 27 meeting of the PCAOB’s Investor Advisory Group.

The S EC May 17 update of the Non-GAAP rules and guidelines contain specific examples that spell out what measures the commission would consider “misleading” and thus in violation of SEC regulations.

The PCAOB “will also continue to monitor the auditor’s association with non-GAAP data, especially data purportedly derived from the audited financial statement, " PCAOB Chairman James Doty said at the Dec. 5 meeting.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

For More Information

The CAQs Questions on Non- GAAP Measures are on the website at: Non-GAAP Financial Measures--Continuing the Conversation is at

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