Investors who want to know what's going on at a company beyond the quarterly financial results and standard accounting metrics have a growing wealth of sources to consult. That makes the audit committee's task of staying on top of financial reporting integrity more challenging than ever.
Digital analysis is beginning to unearth an explosion of data that companies will need to harness as part of any discussion of performance. And corporate leaders are under increasing scrutiny to use all of the data at their disposal to tell investors and other stakeholders what is happening, beyond just generally accepted accounting principles, or GAAP.
"A core function of the audit committee is to stand in the shoes of investors," says Cindy Fornelli, the executive director of the Center for Audit Quality (CAQ) in Washington, D.C., an audit standards advocacy organization. "And what we've heard from investors is that they want meaningful and relevant disclosures, so the audit committee should not only advocate for this, but should take a leading role in working with company management on how best to provide this information."
As far as technological advances, audit firms have begun to invest in cognitive technologies that will make it possible for the audit process to provide an increasingly broader range of perspectives on a company's performance and risk factors. Investment researchers are starting to use AI, big data and predictive analysis to get a sense of what's going on behind the numbers and where the biggest risks are.
There is a growing industry of analysts who use a number of strategies, including linguistic and psychological judgement, lie detector tools, and the cognitive technologies that enable artificial intelligence to judge whether a company's senior executives are telling investors and other stakeholders everything they really need to know.
One example is Able Markets in New York, which is using big data for all-encompassing analysis of publicly-traded companies.
Investors hire the firm to sit in on management calls with analysts and then use software to assess cues in the executives' speech patterns that indicate how confident they are in their own words, says Irene Aldridge, a managing partner. The firm can also create a multi-dimensional heat map that incorporates the speech pattern analysis with other financial and non-financial data.
Other such analysts on the lower-tech side include Laura Rittenhouse, founder of the 17-year-old...