How to Keep Investor Confidence Strong?

Looking back on 2017, one of the most encouraging developments in financial reporting has been investor confidence. As shown by the Center for Audit Quality's Main Street Investor Survey, retail investor confidence in US capital markets, publicly held companies, and audited financial statements is strong. In some areas, investors have never shown more confidence in our market system than they do now.

Healthy investor confidence is fundamental to our economic wellbeing. It helps power our capital markets, which over the years have proven themselves as one of the most powerful engines of jobs, opportunity, and prosperity that the world has ever known.

So how do we keep that engine humming? How can policymakers and market participants honor the trust that investors place in our capital markets? As 2018 approaches, here are three important ways.

1.      There must be robust collaboration and dialogue among key stakeholders across the financial reporting supply chain.

If our capital markets are an engine, dialogue and collaboration are the motor oil that enables various parts to work together smoothly and effectively. That's why the public company auditing profession promotes steady dialogue on many fronts with important partners, including our regulators.

One of those fronts, to take an example, is the fight against financial reporting fraud, which is without doubt a shared responsibility. In that spirit, the CAQ teams up with leading organizations in the Anti-Fraud Collaboration. The fruits of this collaboration are reports, videos, and other resources—all available to the public at no charge.

2.      We must strive constantly to advocate for policies that work for investors and our markets.

Collaboration and dialogue are critical, but alone they are not sufficient to enhance investor confidence. We also need sound controls, processes, rules, and standards. The regulatory framework for markets and financial reporting must be durable, effective, and flexible—to the benefit of investors.

The public company auditing profession prides itself on its constructive engagement to help build this framework. In 2017, that engagement was illustrated well by the approval in the United States of the expanded auditor’s reporting model in October 2017, the culmination of a multiyear policy process. In that process, the public company auditing profession engaged energetically. We hosted workshops with key stakeholders, proactively field tested aspects of proposals, and submitted multiple comment letters.

Now the focus for all shifts to implementation of the expanded auditor's report. As implementation proceeds in 2018, all stakeholders must continue to engage with each other and share insights.

3.      We must innovate to respond to changes in our ever-evolving markets.

As the evolution of the auditor's report shows, change is one thing we can count on in our capital markets, and there is no hiding from it. The public company auditing profession, which embraces continual improvement, is excited about what lies ahead. You can see this excitement in the profession's cutting-edge use of data analytics, artificial intelligence, and other technology. Companies are changing the way they use data and AI, and the public company auditing profession is harnessing these advances to enhance work that auditors do.

For the profession, innovation is not just about enhancing audits of financial statements or internal control over financial reporting. Outside those functions, there are key areas, such as cybersecurity and sustainability, where public company auditors are exploring new ways to bring to bear their experience and their core values of independence, objectivity and skepticism. In doing so, they can strengthen confidence in information that investors increasingly need and desire.

I welcome your thoughts in the comments, and I wish you a happy holiday season and prosperous new year—one filled with dialogue, engagement, innovation, and confidence.

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.