AUDIT PARTNERS SEE SIGNS THAT INFLATION WILL PERSIST

Three out of four public company audit partners believe that inflationary concerns could persist well into 2023 and possibly beyond, according to a new survey by the Center for Audit Quality (CAQ).

The CAQ's inaugural Audit Partner Pulse Survey found that 75% of the 700 auditors surveyed anticipate that the current inflation cycle will impact their primary industry sector for more than 12 months. Seventy-seven percent believe that because of inflation, their primary sector will raise prices beyond historical trends, including 95% of those focused on consumer products and retail.

The audit partners also offered insights on the top areas of risk that companies face in the current economic environment and the actions that companies are most commonly taking to mitigate those risks.

Beyond the current economy, the auditors answered questions about environmental, social, and corporate governance (ESG), sharing firsthand observations on topics related to human capital scarcity, emerging technologies, and climate change.

The CAQ is affiliated with the AICPA.

Economic outlook and top economic risks

Forty percent of the audit partners said they were pessimistic — and another 4% were very pessimistic —about the U.S. economy in general over the next 12 months. Another 40% were neutral, while just 16% were optimistic. The highest level of pessimism was among auditors listing financial services as their primary sector (53%).

The audit partners participated in the survey in May. Asked to compare the future of financial prospects in their primary industry sector to the prior three months, 27% were pessimistic but 24% were optimistic. Forty-six percent were neutral. The highest level of optimism came from auditors that listed oil, gas, and chemicals as their primary sector (58%).

The audit partners were asked to select up to three economic risks facing companies over the next 12 months. The respondents most often selected inflation (62%), followed by labor shortages (52%) and supply shortages and supply chain disruptions (50%).

The top four company priorities for 2022 in the auditors' primary sector were talent/labor (53%) and other areas closely tied to finances (growth, cost management, and financial performance).

Concern about resource scarcity

The survey asked the audit partners to what extent companies in their primary industry sector were considering nine ESG-related issues when developing their corporate strategies.

The auditors cited resource scarcity as the most common issue, with 88% saying companies were addressing it "a great deal" or "somewhat." Sixty-six percent said the same about emerging technologies, followed by climate change (63%):

• Resource scarcity: The top company actions cited by audit partners related to human capital were an increasing flexibility in workplace location (75%) and increasing compensation (73%).
• Emerging technologies: Cybersecurity was the fourth-most cited economic risk facing companies over the next 12 months. Ninety-one percent of respondents said companies are at least moderately prepared for a cyberattack, but less than 50% thought significant progress had been made in addressing five of six specific areas mentioned in the survey.
• Climate change: While 63% of audit partners said companies are incorporating climate change into their corporate strategies, just 4% listed climate change as a top-three economic risk over the next 12 months — last among the eight choices presented.