The PCAOB’s Standards and Emerging Issues Advisory Group (SEIAG) discussed artificial intelligence (AI), environmental or climate change issues, and the decreasing number of accountants and auditors as the top three emerging issues that the board should take a look at.
A subcommittee of the advisory panel first came up with seven emerging issues—AI, fraud detection, the environment, accountants in labor market, financial services and banking, China and Hong Kong, and crypto—but narrowed them down to top three issues. While fraud detection ranked high, the PCAOB could select that on its own, and the panel for now decided not to delve into the issue.
Artificial Intelligence: ‘Do No Harm’
This year, AI, especially generative AI like ChatGPT, has become widely usable very quickly. Companies and their auditors, which have already been using machine-learning and other sophisticated technology, are also trying to incorporate the ever-evolving AI into their operations.
In terms of finance and accounting functions of a company, AI can be beneficial in producing financial statements and reduce manual effort, said David Fabricant, a senior vice president with American Express.
“I can see it impacting nearly every accounting role across a range of companies in nearly every industry,” he said during a meeting of SEIAG on June 29, 2023.
For example, companies can use GenAI to interpret accounting and tax rules and to help write accounting policies and implementation memos. GenAI can also be used to create financial statement footnotes, including data population in the footnotes, perform balance sheet account reconciliations, monitor the general ledger for anomalies, help to analyze vast amount of data and even help to determine fair values, among other uses, according to Fabricant.
Brian Croteau, a partner with PricewaterhouseCoopers LLP, said that while there are a lot of areas where AI can be used, it is critical that it should not replace human judgment. And he emphasized the governance aspect of properly using AI.
At PwC, he said auditors are trained to make sure that they ask audit company management questions about the use of AI, and what it is doing to address risks of using AI, such as implementation of appropriate controls and the skills required of employees to use AI.
Croteau said that PwC has also begun experimenting using machine learning and some aspects of AI.
“And when I say experimenting, we’re not relying on it in any way relative to the work that we are conducting without the appropriate human involvement,” he explained. “We do continue to think about how we could use other forms of AI, including generative AI, including in our system of quality management.”
Dane Mott, an accounting analysis at Capital Group Companies, also said that AI is not the be-all and end-all, emphasizing the need for proper levels of reliance.
“First, do no harm,” Mott said. To better illustrate, he pointed out driverless cars and safety. “We shouldn’t be in a rush to get rid of the steering wheel.”
In the financial reporting process, he believed that it is going to be a long time before AI can be trusted. “Everything that it’s doing, we are going to have to verify; we are not at a point where trust is really an option,” he added.
For example, GenAI may give compelling answers to a given question, but often times, those answers may be inaccurate, which in Mott’s view, could lead to more “fake news.”
However, AI may be useful in helping to detect fraud, which is a very important concern for investors, he said.
The International Sustainability Standards Board (ISSB) last month issued the first-ever sustainability disclosure standards, and in the U.S. the SEC is planning to finalize its own set of standardized requirements in the fall this year. While it is likely that some of the proposed requirements will be changed as a result of feedback, as proposed, there are requirements inside and outside the financial statements, including some sort of assurance over certain data.
In summarizing discussions during a non-public breakout session, James Hunt, a corporate director, said that some SEIAG members talked about how climate change rules would affect other standards.
If noncompliance with laws and regulations (NOCLAR) “is ultimately implemented, then there will be a regulatory consideration there…, further considerations around going concern as we think about the environmental disclosures and ultimately regulations that are promulgated,” Hunt said.
In terms of the SEC’s proposal related to the 1 percent financial disclosure, he said there should be a consideration about the controls over such disclosure in the financial statements as well as full attestation versus reasonable or limited assurance.
“The discussion indicated that there’s a bit of marketplace confusion about this,” he said. “We then discussed the fact that there are current as well as more dated guidance that already exist out there.”
During the breakout session, Hunt said that there was also a brief discussion about critical audit matters (CAMs) on climate change disclosures, such as estimates and assumptions used to make the disclosures.
“For most companies, there’s likely to not be a great risk of material misstatement or restatement related to the significant estimates. So not sure which way it would go, but certainly a consideration,” he said.
Low Starting Salaries
Fewer students are studying accounting today, and there has been a real worry that it will be harder and harder to hire and retain accountants and auditors.
Over 300,000 U.S. accountants and auditors have left their jobs in the past two years, a 17 percent decline, according to the Bureau of Labor Statistics. And this exodus is expected to accelerate as baby boomers retire. And 75 percent of CPAs will be retiring or close to retiring in the next 15 years, according to the AICPA.
Students who are getting a bachelor’s degree in accounting declined almost 9 percent to about 52,500 in 2020, compared to almost 57,500 in 2012. In some universities, there was a 50 percent decline.
While there are a number of potential reasons for the decline, one may be the comparatively low starting salaries. Those in other finance or in tech or data science are likely to get much higher salaries than those who become accountants.
Using personal experience, University of Arizona accounting professor Preeti Choudhary, who graduated in 1999, said that her starting salary was about $48,000 in 2000. She has private sector experience. Her students in 2019 were getting an average starting salary of only $5,000 more than what she first got. “That is not good enough,” she said.
Some of the ways to reverse the decline could be better messaging both by accounting firms and the PCAOB, she said, summarizing discussions during a closed break-out session. This would mean that firms could emphasize the exciting parts of businesses and where accounting fits in the larger capital market, instead of just focusing narrowly on accounting.
As for the PCAOB, the board could do more to highlight and emphasize the important role of accounting and auditing more generally.
“Sometimes the impression people have when they think about the PCAOB is all about enforcement and inspection and negative outcomes, and do you want to go to a profession that has all of this extra oversight, which of course we all know, is unfortunately necessary; we can’t get rid of it. But maybe there’s a way to also emphasize the positives,” Choudhary said. “What are some of the benefits of the good auditing outcomes or of good auditing that you’ve seen in your inspection process.”
This article originally appeared in the July 12, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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