The Future of Audit Regulation: A Call for Adaptive Oversight

Audit regulation is entering a new era, one shaped by disruption, innovation, and evolving expectations. For audit committees, this moment presents both challenges and opportunities to influence the trajectory of financial oversight and support the continued integrity of capital markets.

Oversight: A Key Pillar of Trust in Capital Markets

The United States is home to the world’s largest and most trusted capital markets. That should not be taken for granted. That trust is earned through transparent financial reporting, independent audits, and credible oversight. When you break that apart, audit committees have a key role in and responsibility related to:

• Transparent reporting: Oversight of financial reporting
• Independent audits: Oversight of the external auditor
• Credible oversight: The critical link between management, auditors, and investors

Strong oversight of management and the external auditor foster consistent, high-quality financial reporting and audits that underpin investor confidence.

We are in a period of shifting regulatory priorities. Existing rules and practices are being reevaluated.

The responsibilities of the Public Company Accounting Oversight Board (PCAOB) were unsuccessfully proposed to be folded into the Securities and Exchange Commission (SEC) earlier this year.

What is the future? While many government agencies are experiencing significant change and SEC Chair Paul Atkins has expressed frustration with the PCAOB in the past, effective oversight will stay in place because of its importance to the health of our capital markets.

Effective oversight is not necessarily about more regulation. It is about maintaining systems and frameworks that continue to advance corporate reporting, audit quality, transparency, and accountability. Should we expect change in the future of regulation? Yes. Does this mean that we should expect to go back to a pre–Sarbanes–Oxley Act (SOX) self-regulatory state? Certainly not. And let’s not forget: We have a history of change.

A History of Adaptation: Regulation That Evolves with the Market

Oversight of corporate reporting in the United States has evolved to meet new realities over the decades. The Securities Acts of the 1930s established disclosure-based markets; the move to quarterly reporting in 1970 reflected investor demand for more timely information; and SOX recognized that no single role in the financial reporting ecosystem can achieve high-quality financial reporting and audits. Rather, it takes the roles of public company management, the audit committee, external auditors, and regulators, all working in concert with one another, to protect investors and instill trust in the capital markets. Several elements of SOX have improved audit quality, including management certifications, enhanced audit committee oversight, and changes to auditor independence rules.

In addition, SOX created the PCAOB, establishing a new benchmark for independent regulation of public company audits. Over the past two decades, PCAOB inspections have contributed to measurable improvements in the quality and consistency of public company audits. That record of progress shows the value of structured, expert oversight.

But markets do not stand still. Innovation, globalization, and technology, from AI and data analytics to cybersecurity and sustainability reporting, continue to reshape how companies operate and disclose information. Regulation must evolve with these changes while maintaining the predictability and stability that markets rely on.

How can directors expect regulation to evolve?

• Improved balance of rigor and relevance
• Regulation that keeps pace with innovation.
• Oversight as a source of value

Improved Balance of Rigor and Relevance

Every new administration has its own policy emphasis, but one principle remains constant: strong, stable oversight that delivers value to investors and issuers alike.

Effective oversight of auditors requires:

• Expertise in the standard-setting process to ensure rules are practical and relevant
• Stakeholder engagement so that policymaking reflects the realities faced by investors, preparers, and auditors 
• Proportionality, emphasizing the most significant risks and avoiding unnecessary burdens 
• Proportionate regulation that serves investors best: rigorous where needed, balanced in scope, and mindful of real-world application, as noted by PCAOB Board Member Christina Ho

Equally important is the tone of the oversight. A collaborative regulatory approach can strengthen the financial reporting ecosystem, fostering innovation and continuous improvement rather than compliance fatigue.

This does not mean a light touch in regulation. Rather, it means a focus on significant issues that face auditing firms and trickle down to issuers and investors. It means deploying deep expertise to strengthen auditing standards while practicing robust engagement with stakeholders. And it means enforcement against bad actors.

Regulation That Keeps Pace with Innovation

Audit firms are integrating advanced analytics, automation, and artificial intelligence (AI) into their audits. Oversight should encourage these developments while maintaining independence and accountability. A regulatory system that meets the profession where it is, supporting the responsible use of technology and data, can help audits remain relevant and robust in a changing economy.

At the same time, the expansion of nonfinancial reporting underscores the need for adaptable assurance frameworks. Regulatory guidance that clarifies expectations in these areas can enhance consistency and trust for investors.

How can regulation keep pace with innovation? It requires a collaborative approach with audit firms and preparers alike. Such collaboration does not suggest a lack of independence or strong oversight. However, if regulation does not keep pace with innovation, especially with AI, all other efforts may be for naught. AI is more significant than any other innovation the profession has been faced with in recent years.

Oversight as a Source of Value

In an environment flooded with data and competing narratives, reliable information has never been more valuable. Strong oversight provides a foundation of confidence that enables capital to flow efficiently and fairly.

The challenge for regulators, the auditors being regulated, and the stakeholders being served by regulations is to preserve that confidence by aligning regulatory priorities with the needs of a dynamic market. When oversight promotes relevance, transparency, and predictability, the entire system benefits.

What This Means for Audit Committees

1. Be a voice for regulatory prudence.

• Monitor developments at regulators and standard-setters such as the SEC, Financial Accounting Standards Board, and PCAOB.
• When asked to participate in roundtables or other events on regulatory topics affecting the audit committee, consider saying yes.
• Consider writing comment letters to the SEC and PCAOB about matters affecting issuers and auditors. Directors’ perspectives help support standard-setters and regulators in adopting rules that are workable and effective.
• Demand regulation that is useful to you and that is balanced and constructive. Demand regulation that is adaptive and that moves as quickly as business and markets do.

2. Focus on materiality and systemic insight.

• When overseeing auditors and audits, prioritize material risks and systemic challenges rather than isolated “foot faults.”
• Challenge current disclosures and determine whether they are effective for investors in identifying significant risks to the business.
• Recognize that small errors should be addressed, but broader trends deserve greater attention for their potential impact on investor confidence.

3. Foster continuous improvement.

• View inspection and quality review data as learning opportunities, not merely compliance exercises.
• Dig deep into root causes of internal and external audit and compliance findings. Support the chief audit executive and chief compliance officer while expecting value.
• Encourage your auditor to share how regulatory feedback informs enhancements in quality controls and professional training.

The strength of the US capital markets depends on the credibility of the information they run on. Maintaining that credibility requires a regulatory system that is both strong and steady—one that protects investors while enabling progress. Standards for auditors, audits, and audit committees form an important part of that system.

Audit committees, through their oversight and engagement, are instrumental in keeping that system balanced. By remaining informed, proactive, and collaborative, audit committees can help ensure that US audit regulation continues to deliver what the markets need most: trust built on quality, independence, and accountability.