Understanding the Latest Regulatory Frameworks in Auditing

Several major accounting scandals in the late 1990s and early 2000s highlighted the need for regulatory frameworks to ensure financial transparency and accountability. When companies such as Enron and WorldCom engaged in accounting fraud, they deceived their investors and other stakeholders. Shareholders lost millions of dollars and the very public collapses eroded public trust and damaged economic markets.¹

As a result, Congress passed regulations designed to prevent fraudulent accounting practices by creating strict oversight. They instituted standards designed to improve the reliability of financial reporting by companies.²

In recent years, the auditing industry has faced new challenges, most notably in implementing technology and automation. In response, regulatory bodies have passed new standards that require auditors to address the risks in auditing and using technology.³

Key Auditing Regulations and Compliance Requirements

Auditors check the financial records that company accountants produce to be sure they are accurate, complete and compliant with financial reporting standards. Auditing regulations enforce independence, integrity and transparency in financial audits.⁴

The Sarbanes-Oxley Act (SOX) was passed in 2002 and represented a significant change in requirements for publicly traded companies and public accounting firms. It established the Public Company Accounting Oversight Board (PCAOB) to oversee compliance with specific requirements.⁴

SOX requires audits by independent auditors without conflicts of interest. It also mandates that senior executives personally assert that the company’s financial reports are accurate and complete. SOX also grants the U.S. Securities and Exchange Commission (SEC) additional authority over professional brokers, advisors and dealers.⁴

International Auditing Standards

If companies in different countries use different reporting standards, it can be difficult to compare them and draw effective conclusions. To promote easy comparison and trustworthiness among companies in different countries, the International Auditing and Assurance Standards Board (IAASB) sets global international auditing standards for corporations with reporting obligations in multiple countries. These international standards are referred to as International Financial Reporting Standards (IFRS), although not all countries follow them.⁵

The U.S. follows a different system—Generally Accepted Accounting Principles (GAAP). GAAP was developed by the Financial Standards Accounting Board (FSAB) and the Governmental Accounting Standards Board (GASB). However, the SEC is reviewing a proposal to allow IFRS to be used in financial filings for U.S.-based companies.⁵

There are some significant differences between the two standards. GAAP is only used in the U.S. while IFRS is used by over 110 countries. Another important difference is that GAAP is primarily based on rules while IFRS is primarily based on principles, though the standards have become more similar in recent years. The differences between the two can be an issue when U.S. businesses are negotiating with or acquiring companies that follow IFRS.⁶

Compliance in the Financial Sector

There are multiple agencies that oversee compliance in the financial sector, including the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the SEC and the Financial Industry Regulatory Authority (FINRA).⁷

Financial institutions have to have both regulatory and general compliance audits. Regulatory compliance audits are performed by external auditors and ensure that an organization is complying with applicable laws that govern the industry. If an organization fails a regulatory compliance audit, it can face financial and legal penalties, up to being delisted for public stock exchanges.⁷

General compliance audits are often performed by internal auditors who work for the company. Internal auditors ensure that the organization is following its internal controls, standards and best practices that align with the company’s values and mission, including environmental, social and governance (ESG) policies.⁷

The Evolving Role of Auditors in Regulatory Compliance

As technology rapidly advances and the regulatory environment grows more complex, auditors are playing a larger role in ensuring regulatory and general compliance. More audit firms are taking a risk-based approach to auditing and implementing AI and automation in compliance practices.⁸

Risk-Based Auditing

Risk-based internal audits allow companies to address the most severe risks first. These audits focus on the company’s highest-risk areas and are determined based on a comprehensive strategic and operational assessment. In contrast to regulatory compliance audits, which are narrower in scope, risk-based audits test internal controls to uncover and mitigate business risks.⁸

AI and Automation in Compliance

Technology is changing how organizations do business, and the financial sector is no exception. Auditors are switching to accounting practices and oversight driven by automation, data analytics and artificial intelligence (AI).⁹

Automation is eliminating much of the tedious and repetitive work of auditing. Robotic process automation (RPA) handles functions such as data extraction, transaction testing and reconciliation so auditors are freed up to focus on more high-value tasks.⁹

Advanced data analytics and AI can help auditors uncover hidden trends and patterns in an organization’s data. Auditors can use these tools to identify potential fraud and generate preliminary audit reports.⁹

Future Regulatory Trends

As governing bodies attempt to keep up with technological changes, the regulatory landscape is becoming more complex. The SEC approved the PCAOB’s recommendation to implement stricter standards for firms that audit publicly traded companies. The new rules include new ethical quality control standards that are designed to ensure the competence, objectivity and independence of auditors.¹⁰

The SEC has also approved measures to increase the PCAOB’s oversight through increased inspection frequency and stronger enforcement powers. To remain compliant with these new regulations, audit firms will need to focus on quality controls over processes to ensure their audits are of the highest quality. AI-driven solutions will play a larger role in audits by performing tasks such as reconciling data across different platforms and identifying anomalies in real time.¹⁰

Foster Trust in Financial Reports With DePaul's MSA Program

Do you want to learn more about the critical role auditors play in building public trust in corporations and markets? DePaul University’s online Master of Science in Accountancy program will prepare you with the skills and knowledge you need to navigate financial auditing regulations and craft compliance strategies. Our curriculum, taught by industry experts, combines theoretical foundations and practical applications that focus on helping you advance your career. If you are ready to take the next step in your accounting journey, explore the admissions process for DePaul’s MSA.