Audit partners skeptical on economy, inflation risks

Most audit partners in the U.S. are not optimistic about the economic outlook over the next 12 months, according to a new survey by the Center for Audit Quality, seeing the top economic risks to businesses as inflation, labor shortages, and supply shortages and supply chain disruptions.

The survey polled over 700 audit partners polled from the eight firms on the CAQ governing board and found that 84% responded pessimistically or neutrally when asked about their views on the economic outlook over the next year, with 75% of the respondents indicating inflation will be a factor for more than the next 12 months. In addition, 77% of the audit partners polled believe companies will raise prices for consumers by more than historical trends to offset the impact of inflation. Consumer and industrial products are the leading industry sectors in this regard, with price increases on consumer products expected by 95% and on industrial products by 94% of the respondents.

Audit partners share the concerns of many Americans about the impact of rising prices as inflation reaches levels not seen in four decades, and inflationary pressure could lead to some audit risks for companies.

“Inflation and the widespread disruptions we’re seeing in supply chains can certainly pose certain audit risks,” said Vanessa Teitelbaum, senior director on the CAQ’s professional practice team. “Inflation can impact future cash flow projections, which may be an input to certain accounting estimates, including goodwill and other long-lived asset impairment analysis. Other auditing procedures related to evaluations of the company’s ability to continue as a going concern or inventory could be heightened audit risks. Auditing accounting estimates in a changing business environment is not new for the audit profession. We are confident that audit quality will continue to remain high as public companies navigate the current economic situation.”

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Courtesy of the Center for Audit Quality

Talent and labor are seen by audit partners as the single most important corporate priority for this year. Increasing workplace flexibility and increasing employee compensation were the top talent and labor priorities identified by audit partners for corporations.

Audit partners also believe more progress is needed in cybersecurity. While more than half (54%) of the respondents see significant progress on communications between management and the board, half or more of the audit partners reported that companies have more work to do on the remaining surveyed cybersecurity areas.

Audit partners reported that climate change is both a short- and long-term priority for public companies, but cited reporting challenges. Nearly two-thirds of the audit partners polled (63%) said businesses take climate change into account when developing their corporate strategy.

“Both cybersecurity and climate change have become significant business risks for public companies,” said Teitelbaum. “Public company auditors identify these risks as part of their risk assessment procedures and determine if they are material to the financial statements. Public company auditors assess controls in place to mitigate certain cybersecurity and climate risks that impact the financial statements.”

Overall, survey responses suggest that a lack of tools supporting the collection, collation and analysis of environmental, social, and governance-related data presents the greatest challenge in terms of climate and other ESG reporting (49%). Rounding out the top three challenges were diversity of standards and frameworks (40%) and the lack of expertise (38%).

Accepting cryptocurrency as a form of payment does not seem to be a priority for public companies, according to 69% of the audit partners surveyed. However, the financial services, technology, telecommunications, media and entertainment industries appear to be early adopters of cryptocurrency according to the survey results, and were slightly more likely to be considering or preparing for accepting crypto as a form of payment compared to other industries.

Investor demand for ESG information has driven increased efforts at fostering diversity, equity and inclusion initiatives at U.S. businesses. The top actions cited by the respondents include addressing board diversity (49%), establishing and tracking DEI effort metrics (42%), and increasing transparency and disclosure around DEI progress (35%). The audit partners surveyed indicated that smaller public companies (with market capitalization less than $700 million) tended to prioritize employee welfare (47%) and building a more diverse board and leadership team (41%).

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Audit CAQ Inflation Economic indicators ESG
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