The intersection of innovation and regulation: The 2018 Hylton Lecture

By Stephanie Skordas, Sr. Associate Director, Communications

“It’s a significant moment in the history of the PCAOB,” said Claudius Modesti, the former director of enforcement at the Public Company Accounting Oversight Board. “In 2018, for the first time since its inception in 2002, the organization has a new chair and four board members all at once. When you consider how technology is affecting public accounting, we’re looking at the intersection of innovation and regulation.”

Modesti (P ’20) and Josh Jones (BS ’95), an EY partner and former fellow of the Securities and Exchange Commission, gave the 2018 Hylton Lecture November 8 in Broyhill Auditorium. The pair regularly interacted when Jones was with the SEC, during Modesti’s 14 years at the PCAOB.

At the PCAOB, Modesti led a team of attorneys, accountants, and other staff which investigated possible violations of rules and securities regulations, taking legal action when necessary. He explained that advancements in technology, data collection, and analytics are rapidly disrupting the broader financial reporting system. That’s one reason why the PCAOB established the data and technology task force to gain insights about the use of new technology in audits.

Modesti said the possibility of real-time assurance could be attributed to improved computing power and our always-on society. “Right now, it’s keyed off quarterly earnings, but investors may soon demand it.”

Technology allows companies to be more efficient and gain more insights. Organizations are turning to auditors to make their process more efficient as well.

“Some of you may need a drone pilot’s license to be in audit,” Modesti said. “There is the move towards using drone technology to get a count, make sure that inventory is actually where it’s reported. The PCAOB recognizes it needs to get its arms around the issue.”

“Technology use the right way can help us evaluate risk,” Jones said. “But we still need to balance the use of the tools. Just because a system was applied doesn’t always make it more reliable.”

At issue is how regulators can minimize impasses while still fulfilling their public interest role. Modesti listed some concerns during the lecture:

• Maintaining professional skepticism and making sound judgments
• Acquisition and nature of data
• Skills of auditors doing data analytical work
• Maintaining principle-based audit standards and risk-based regulatory approach
• Distraction of technological initiatives

“Does the risk of fraud increase with new technologies?” Modesti asked. “Most regulators are under-resourced. It’s important to use and assess data while protecting the public interest.

While artificial intelligence has been mentioned as affecting the accounting industry adversely, Modesti shared information from the U.S. Bureau of Labor Statistics. According to the Occupational Outlook Handbook, the number of accountants and auditors employed in the U.S. is expected to grow by 11 percent from 2014-24, faster than the average from all other occupations.

“All of you in this room will be on the cutting edge and will be involved in implementing and deploying new technology and innovating systems,” Modesti said. “Your familiarity with technology and comfort with data makes you a valuable asset.”