Coping with Disruption: Lessons from the PCAOB

by Cindy Fornelli

Worried about disruption? Take a cue from the PCAOB, which is proceeding strategically and deliberately in a financial reporting system poised for transformative change.

Leaders in accounting and auditing don't tend to downplay the potential for emerging technology and other disruptive forces to shape the profession and the financial reporting system at large. In the words of Cathy Engelbert, CEO at Deloitte and Chair of the Center for Audit Quality's Governing Board: "The proliferation of advanced technology can fundamentally change how we do audits, conduct accounting, and serve the capital markets.” 

Naturally, that group of leaders pondering transformative change also includes the profession's regulators, including leadership at the Public Company Accounting Oversight Board (PCAOB). In its long-range planning, the Board is directly addressing the potential for rapid disruption in financial reporting, and its approach is commendable and instructive.

Coping with Disruption: Strategic Thinking Is Key

Let's face it—while the prospect of radical change can be exciting, it can also be scary, even for those at the top. In 2016, for example, PwC Global surveyed 268 CEOs and found that "most executives worry about disruption."

How can one deal with this disruption anxiety? What's the right mindset? Glen Hodgson, a Senior Fellow at the Conference Board of Canada, provided a simple formula in a commentary for the Globe and Mail. He wrote:

"Strategic thinking, innovation, and adaptation will become even more important qualities for business leaders, policymakers, and the public in a world where disruption is a frequent, widespread, and recurring reality."

Hodgson's formula, with strategic thinking front and center, echoes a 2017 PwC article on coping with disruption. "Proactive measures are often needed," its authors write, "but they should be well thought out and center around those advantages that you already have and that you already control: your own strategy and strengths."

The PCAOB Adapts Its Strategic Thinking—with Input from Outside

Recently, the PCAOB experienced a transformation of its own. From January to April 2018, five new PCAOB Board Members were sworn into office, including the Board's Chairman, William D. Duhnke III. 

Along with these changes, the PCAOB has retooled how it develops strategy. In the foreword to the Board's draft Strategic Plan for 2018-2022, Chairman Duhnke acknowledged that the PCAOB has always given plenty of thought to its overarching strategy. However, he writes, "as a Board we elected to take a markedly different approach this year."

The key to this shift in approach was switching from an inward-facing process to one that reached "far beyond our own walls for input." Accordingly, the PCAOB initiated its strategic planning in 2018 by consulting with stakeholders through both individuals interviews and a broader online survey. 

From this extensive information gathering, the PCAOB was able to discern three overarching considerations that would suffuse its strategic thinking:

  1. The quality of audit services has improved substantially since the formation of the PCAOB, but more remains to be done. 
  2. Advancements in technology and data collection and analytics are rapidly disrupting the broader financial reporting system. 
  3. Substantial opportunities exist for the PCAOB to engage more effectively with investors, audit committees, and other stakeholders.

In turn, those high-level considerations helped the Board fashion five strategic goals. Thus organized, the plan was submitted to the public for even more comment and input. For our part, the Center for Audit Quality was grateful for the chance to provide our views on the plan in a comment letter.

Continuing the Conversation

As we all monitor the success the PCAOB has with its new approach to developing strategy, the Board is making good on its goal of proactive stakeholder engagement. Along those lines, I am delighted to have the opportunity to sit down with Board Members Duane DesParte and James Kaiser at Financial Executive International's 2018 Current Financial Reporting Issues Conference next month. We'll talk about their goals and priorities, as well as what companies can expect as the PCAOB heads into the future of auditing and financial reporting—a future in which disruption is highly likely, if not a certainty. 

Cindy Fornelli is the Executive Director of The Center for Audit Quality (CAQ).