The Future of the Accounting Profession

1. The Future of the Accounting Profession By Robert Pawlewicz, Ph.D., CPA George Mason University

2. Agenda • Technology Poised to Change Public Accounting • Politics and Public Accounting • Politics and the PCAOB

3. Technology & public Accounting • Firms tout the benefits and uses of new technologies • Technologies possibly make audits more EFFECTIVE and EFFICIENT • Lack of “standard” technology makes common implementation difficult • Three Categories: • Data-driven Technologies • Remote work Capabilities • Physical Access and Imaging

4. Data – Driven Technologies • Data Analytics / Visualization • Cognitive Technologies (Artificial Intelligence) • Blockchain

5. Data Analytics / Visualization • Can analyze, visually represent and interpret large databases • Would allow auditors to test entire populations of transactions, rather than samples • Young professionals expected to be versed in this technology • Requires access to data from clients • No common software and platforms • PCAOB investigating how standards need to be changed

6. Cognitive Technologies • Algorithms allow software to absorb information and process it in ways similar to humans • Machine learning can provide computers the ability to problem-solve • Also can incorporate information from non-traditional sources • Depends on auditors understanding what information is relevant • Algorithms need to be client-specific and improved in real-time

7. Blockchain • Public, online register for transactions • Captures transaction information, participants and a unique “hash” • Transactions must be verified, stored in a block and given a hash • Secure and somewhat Private • Requires both parties to a transaction to use blockchain • Auditors need not verify assertions in a transaction, as long as…

8. Remote Work Capabilities • Using “smart platforms” auditors can perform more audit tasks remotely • Provides flexibility for auditors • Allows for integration of analytics and AI • Not all audit work can be done without client interaction • Most manager and partner time still necessary at client locations

9. Physical Access & Imaging • Drones, Sensors and the Internet of Things (IoT) can allow auditors to process information on operations in real-time • These technologies can be combined with analytics and AI to improve inventory observations and test counts • Efficiencies gained in inventory, procurement and operations allows either greater scope of procedures or testing in other areas • Restricted to use for only particular types of clients • Concerns about security of imaging and validity of sensor data

10. Politics and Public Accounting • Prior to the Sarbanes-Oxley Act of 2002 (SOX), public accounting was largely self-regulated • Industry lobbying focused mainly on maintaining the prestige and autonomy of the profession • Most concerns arose after clear audit failures • Concerns about legal liability and firm viability spiked after the Andersen indictment • SOX changed all of this…

11. Public Company Accounting Oversight Board (PCAOB) • Created by Title I of SOX to PROTECT INVESTORS • Public Accounting could no longer be self-regulated • Sec. 101 limited board membership to two CPAs • Roles to include registering, and inspecting public accounting firms that audit public clients, in addition to setting and enforcing auditing standards • big 4 focus due to their clients’ market capitalization • Board members have been Fed Bankers, SEC Accountants, Lawyers, GAO Managing Director and one audit partner (non-Big 4)

12. Recent PCAOB Controversy • Former PCAOB passed two controversial standards • Disclosure of Audit Participants (Form AP): Dec. 2015 • New Audit Report: June 2017 • Former Board Member Jay Hanson unexpectedly resigned Dec. 23, 2016, leaving only four Board members • “This is to notify you that I have submitted my resignation as Board Member of the Public Company Accounting Oversight Board to the Commissioners of the U.S. Securities and Exchange Commission.” • Former PCAOB inspectors and KPMG partners fired and indicted for conspiracy to steal confidential PCAOB inspection information (April 11, 2017)

13. PCAOB Turnover • Remaining four members of the PCAOB are unexpectedly replaced on Dec. 12, 2017 • The new Board was sworn in over the following few months (January 2018 – April 2018)

14. The “New” PCAOB • The “Usual Suspects”: • Kathleen Hamm – Former U.S. Treasury Dept. and Promontory Financial group • J. Robert Brown – University of Denver Professor of Corporate Governance and Director of the Corporate and Commercial Law Program

15. The “New” PCAOB • The CPAs: • James Kaiser – Former partner & member of the PwC Global Assurance Executive leadership Team • Duane DesParte – Former Andersen & Deloitte partner and Corporate Controller of Exelon (Fortune 100 Company)

16. The “New” PCAOB • The New Chairman: • William Dunke – Former staff director and general Counsel to the U.S. Senator Richard Shelby (R-Alabama); Twice served as staff director and general counsel to the Senate Committee on Banking, Housing and Urban Affairs (Oversees the Securities and Exchange Commission)

17. More PCAOB Turnover • In May of 2018 the following Key Staff Members “leave” the PCAOB: • Gordon Seymour (General Counsel) – May 1 • Helen Munter (Director of Registrations and Inspections) – May 18 • Martin Baumann (Chief Auditor) – May 22 • Nirav Kapadia (IT Director) – May 24 • Claudius Modesti (Director of Enforcement and Investigations) – May 29 • These five had over 62 years of combined experience at the PCAOB

18. What’s Next? • Concerns about scaling back inspections and enforcement • No major cuts in 2019 budget • Changed tone from firms and Board interactions with them • Greater “Cooperation” • Inclusion of randomly-selected audits for inspection • Possible inclusion of best-practices in future inspection reports • April 2019 PCAOB / AAA Meeting could offer more insight

19. A warning… • Over the past decades, audit quality has a cyclical time trend and moves inversely with oversight • Increased scrutiny leads to higher audit quality • Decreased scrutiny leads to audit failures • Increased scrutiny follows the failures • Pressures in E.U. may make their way to the U.S. • Push to create audit-only firms and limit Big 4 market share • Contentment makes for complacent auditors

20. Questions???

21. THANK YOU!!!