Reflections on IFIAR’s 25 Percent Initiative

Early in 2018, the International Forum of Independent Audit Regulators (IFIAR) will release its 2017 global inspection survey. That survey, for the first time, will report on the progress that the six largest global audit networks have made in reducing significant inspection findings by 25 percent across the jurisdictions represented by the membership of IFIAR's Global Audit Quality (GAQ) Working Group,^[1] a group that I chair.^[*]

This morning, I would like to address the 25 percent initiative. In particular, I would like to reflect on our creation of the target, the progress made to date in achieving it, and what should be top of mind for regulators and audit firms alike as the four-year period for measurement draws to a close.

I. Background on the 25 Percent Initiative

IFIAR conducted its first annual survey of global inspection findings in 2012.^[2] The goal of the survey was simple: inform the public, investors, auditors, and regulators about current trends and developments in audit quality, as reflected through the lens of regulatory inspections.

Perhaps most important, the survey was the first compilation of inspection results by regulators across the globe. Regulators from 22 jurisdictions contributed data on listed public-interest entity audit inspections in that initial survey.^[3] In 2016, regulators from 34 jurisdictions provided such data.

Although the annual survey is far from a perfect tool and is best understood as providing only a proxy for measuring audit quality,^[4] it has accomplished its initial goal of providing meaningful information regarding trends and developments in global audit quality. Since IFIAR published its first survey in 2012, the annual survey has also provided stakeholders with the means to hold consistent, fact-based conversations regarding audit quality. Those conversations have been productive, both internationally and in local jurisdictions. They have provided regulators and audit networks an opportunity to identify specific areas for improvement and to take targeted actions to address them.

By the time IFIAR published its 2014 survey, however, the reported results highlighted the obvious need for more to be done to drive improvement in audit quality. For the first time, in 2014, IFIAR collected information regarding the number of audits on which regulatory inspections identified significant findings, rather than simply the number of audit firms inspected with significant findings.^[5] This change, subject to certain limitations, allowed IFIAR to report a specific percentage of audits inspected on which a local regulator identified a relevant deficiency.

The results were equal parts disconcerting and sobering. The survey revealed that on nearly half of inspected audits, or 47 percent, regulators identified at least one significant finding.^[6]

Yet, for all of the challenges that the high findings rate in the 2014 survey posed for the profession, it also presented a clear opportunity for IFIAR and the GAQ Working Group in particular. Using the new data available, the working group was presented with an actionable opportunity to drive accountability for audit quality within the six largest global networks.

For years, the GAQ Working Group had been meeting two to three times per year with the leadership of those networks. Those meetings provided the working group with both the opportunity and the means to encourage meaningful change within the networks, all with the goal of promoting consistent audit quality around the globe.

Based on the 2014 survey results, the working group resolved in 2015, with agreement from the leadership of the six networks, to set a specific, measurable target to reduce findings reported in the annual survey. Specifically, the working group and networks agreed that the networks would take actions to reduce the significant findings rate by 25 percent over a four-year period in the GAQ Working Group member jurisdictions, to be measured by the results of the 2016 to 2019 IFIAR surveys.

They further agreed that their progress would be measured against the findings rate reported in the 2015 survey for the applicable jurisdictions. For 2015, that number stood at 39 percent of audits inspected, resulting in a goal for the firms to collectively reduce their findings rate on inspected audits to 29 percent or lower by the 2019 survey.^[7] The parties decided that the results of their efforts would be made public for the first time in the 2017 inspection survey.

II. Progress to Date

2017 is now upon us. IFIAR, through a task force led by a staff member of the PCAOB, is currently finalizing the results of the 2017 survey. We fully expect those results to show that the six networks have made significant strides towards reaching the 25 percent reduction in findings across the working-group member jurisdictions.

The GAQ Working Group welcomes and applauds that positive development. Setting a targeted goal and holding the networks accountable to it has helped focus the collective minds at the networks and has driven them to identify and take actions to improve audit quality and promote consistency of execution. It has also caused them to more readily compete specifically on the quality of the audits they deliver. Such changes are necessary and healthy for the profession.

Unfortunately, however, we are concerned that the six networks have not made the same progress in improving the findings rate in jurisdictions outside of the membership of the GAQ Working Group. As much as we applaud the networks for the progress to date in the working group jurisdictions, we will be disappointed if the gains do not spread uniformly across the broader set of member firms in the six networks.

The networks must do more, to ensure not only that progress made in the working group jurisdictions continues, but also that such progress spreads throughout the entirety of their networks. For those of you in non-GAQ Working Group jurisdictions, I urge you to become part of the dialogue. Both the GAQ, and IFIAR as a whole, welcome your views and ideas.

In addition, firms that are part of the six largest global networks are only a small part of the universe of audit firms. We encourage you to reach out to the local firms in your jurisdictions — whether or not they are part of the global audit firm networks — and prompt them to undertake specific measures to reduce their inspection findings. Ask the firms you regulate about lessons their affiliates have learned in other jurisdictions and how those lessons can be carried into your local jurisdictions.

III. Next Steps

The question now facing the GAQ Working Group, as well as all independent audit regulators, is where do we go from here? Even assuming the six networks achieve the 25 percent target by the 2019 inspection survey, more remains to be done. Inspection findings across jurisdictions remain unacceptably high, including in the United States.

The networks must continue to put concerted focus and effort into improving audit quality across their member firms. We, as regulators, must also continue to put concerted focus and effort into holding the audit firms that we regulate accountable for meaningful, positive changes.

Of course, we do not expect inspection findings to reach any specific, identified level. Nor can we do so. Audits for most public interest entities are inherently complex and necessarily based on innumerable judgments made by fallible individuals. We can, however, continue to focus the networks on specific action plans they can take to improve the consistency of their delivery.

In particular, we can push the firms to take actions to improve their cultures around quality and consistency of execution, to provide adequate coaching and training, to develop and monitor audit quality indicators, to improve their root cause analyses, to hold their partners and employees accountable for quality outcomes, to create proper incentive programs, and to focus on critical issues such as audit planning and time management.

In sum, while I recognize that inspection findings are not the sole measure of audit quality, I welcome the progress we have made to date towards the 25 percent target. And I look forward to seeing what we can all do collectively to continue to improve audit quality across the globe.