The Necessity of Evolution in Our Capital Markets
The scale of US capital markets is astonishing, even for someone who has worked in and around the securities industry for decades, as I have. Publicly held companies on US stock exchanges are valued at $32 trillion, according to SIFMA, while the US market for corporate bonds—the world's largest—stands at $9 trillion. On Main Street, American retirement savers have socked away $7.5 trillion via defined-contribution plans, reports ICI, with a huge chunk of that in stock and bond funds.
Yes, US markets are an extraordinary success.
And so they must change.
Well, wait a minute, you might say, what about, "If it ain't broke, don’t fix it"? If US markets are so huge and extraordinary, why tinker?
The short answer is that evolution and the embrace of change are key drivers of the success of US capital markets. Our markets evolve along with our dynamic economy and in response to changing investor needs. Accordingly, those operating in the capital markets must search continually for opportunities to adapt.
For the public company auditing profession—which I've been proud to serve for over a dozen years as Executive Director of the Center for Audit Quality (CAQ)—continuous improvement and evolution are priorities. Here, for example, are a few quotes pulled from the annual quality and transparency reports issued by firms who sit on the CAQ's Governing Board.
"We are continually refining and improving our tools and guidance to enhance audit quality"
"We invest in our people and build our resources through continuous learning, a willingness to take risks, and a desire for self-improvement and personal growth."
"Advancing audit quality also means challenging ourselves continuously to look for opportunities to enhance it through the way we manage our business."
"Serving the public interest requires a commitment to continuously improving audit quality."
“Innovation is about constantly challenging the status quo."
"That is why audit quality is so important to us: our strategy begins with a focus on quality and further guides us to continuously improve quality and consistency through innovation."
"We consistently make significant investments in continuing to evolve and enhance our audits, as well as support continuous improvement of the broader financial reporting ecosystem."
"We are dedicated to continuously improving our quality control system and our overall audit quality."
As you can see above, the profession's embrace of continuous improvement and evolution isn't just internally focused within the firms. Consider the expanded auditor's report, which US investors will be seeing soon. Auditors of large accelerated filers will be required to communicate critical audit matters (CAMs) in auditor’s reports for fiscal years ending on or after June 30, 2019.
The expanded auditor's report grew out of changing needs in the marketplace. Investors, audit committees, and other key market participants expressed their desire for more information regarding the work and views of public company auditors. Policymakers and the US auditing profession responded to that desire thoughtfully and methodically. As part of their engagement on this issue, for example, auditors held roundtables and conducted real-world field testing on regulatory proposals, enriching the dialogue and helping the process move forward.
The result? A significant change for a bedrock feature of US capital markets: the auditor's report. I believe this development will prove beneficial for investors and others. I am confident that the profession, driven by its focus on continual improvement and the necessity of evolution in our capital markets, will continue to adapt and improve the auditor’s report over time.
As always, I welcome your thoughts in the comments.
A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.
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