More on Enhanced Audit Committee Reporting

News Brief

By Cydney Posner

Jumping on the bandwagon urging more expansive disclosure in audit committee reports are the two authors of "Time to Consider a More Thoughtful Audit Committee Report," posted in Compliance Week.  (See my articles dated 11/21/13, 8/13/13, 8/14/13, 8/19/13, and 8/28/13.)

The article discusses two recent reports that the authors believe provide "a roadmap for improved reporting." First, EY has issued a report analyzing this year's audit committee disclosures in proxy statements. The EY report indicates that more audit reports are providing increased transparency and highlights various types disclosures that are appearing more frequently, such as stating that the committee is responsible for the appointment, oversight and compensation of the auditor. That disclosure appeared in half of the large company reports studied, compared to 37% in the prior year. Similarly, 31% of companies disclosed the length of time the auditor has been engaged as the auditor, compared to 27% last year. Other disclosures that that were increasingly prevalent included the factors that the committee considered in evaluating the external auditor, statements regarding the audit committee's involvement in the selection of the lead audit partner, and statements that the audit committee was responsible for audit fee negotiations. In addition, more companies explained material changes in audit fees and disclosed the topics the committee discussed with the auditor over the previous audit cycle.

The second report, "Enhancing the Audit Committee Report: A Call to Action," was prepared by a coalition of governance leaders, including The Center for Audit Quality, the National Associate of Corporate Directors, Corporate Board Member/NYSE Euronext, Tapestry Networks, The Director's Network, and the Association of Audit Committee Members. This report also advocates a "serious rethink" of the audit committee report in light of increasing committee responsibilities, recent regulatory and legislative changes, intensified investor pressure and peer practices.

The "Call to Action" suggests "leading disclosure examples provide benchmarks that other audit committees can use to evaluate how effectively their own disclosures:

  • Clarify the scope of the audit committee's duties
  • Clearly define the audit committee's composition
  • Provide relevant information about:
    • Factors considered when selecting or reappointing an audit firm
    • Selection of the lead audit engagement partner
    • Factors considered when determining auditor compensation
    • How the committee oversees the external auditor
    • The evaluation of the external auditor"

The report provides excerpts of disclosures the coalition viewed as exemplary, which should be helpful for companies that want to enhance transparency:

  • Mondelez: the audit committee's responsibilities for the appointment and oversight of the independent auditors;
  • Old National Bancorp: monitoring of the whistleblower system; 
  • Legg Mason: composition of the committee, including the members' financial literacy and expertise;
  • Prudential Financial and GE: factors considered by the committee in deciding whether to retain the auditors;
  • Pfizer: process for selection of the company's lead audit partner;
  • Safeway and Citigroup: factors considered when determining auditor compensation, including an explanation of why fees increased;
  • McDonald's and Comcast: discussion of the auditor oversight process; and
  • Coca Cola: practices for assessing the effectiveness of the auditor.

The authors of the article suggest that companies also take investors' views into consideration by reading the section entitled "audit committee responsibilities" in the Council of Institutional Investors' report, "Policies on Corporate Governance", which expanded its advice to audit committees in April, makes some additional recommendations, including that issuers "disclose if there are any former partners or employees of the audit firm who now work for the company, and whether directors have any relationship with the auditor, including indirect relationships through the director's employer or through service on other audit committees. CII also calls on audit committees to disclose the committee's opinion about the quality and frequency of communications from the audit firm to the committee; the clarity, utility, and insights provided in the audit report and in the auditor's letter to management; and a host of other issues."

The authors suggest that it's time to improve the disclosure in audit committee reports: "That doesn't always mean adding; the idea is to make reporting better by being more specific, not to make it more voluminous by adding legalese and boilerplate. As the ‘Call to Action' report states, ‘Each public company is unique in size and complexity, and operates within a constantly changing and distinct set of circumstances.' While that may be a reason to be wary of one-size-fits-all disclosure mandates, it also puts the onus on each company to make sure its disclosures are specific, timely, relevant, and robust."

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