More transparency sought from audit committees

A consortium of U.S. governance organizations is calling on public company audit committees to enhance reporting about their activities.

Increasing transparency about the audit committee’s roles and responsibilities could increase investor confidence, according to the organizations’ new Enhancing the Audit Committee Report: A Call to Action.

The Center for Audit Quality (CAQ), which is affiliated with the AICPA, is an author of the report. The other partners on the project were the National Association of Corporate Directors; NYSE Governance Services, Corporate Board Member; Tapestry Networks; The Directors’ Council; and the Association of Audit Committee Members.

Audit committees’ responsibilities have been expanded in recent years as a result of legislative and regulatory actions. And a growing number of leading audit committees are voluntarily enhancing their reporting to strengthen confidence, according to the report. The report lists 19 companies, including Apple, Caterpillar, Citigroup, Coca-Cola, General Electric, McDonald’s, Morgan Stanley, and Safeway, as companies whose proxy statements may contain “useful examples of enhanced audit committee disclosures.”

The report suggests that audit committees can use reporting to clarify the scope of their duties and clearly define the audit committee’s composition. In addition, the report says, audit committees can provide relevant information about:

• Factors considered when selecting or reappointing an audit firm.
• Selection of the lead engagement partner.
• Factors considered when determining auditor compensation.
• How the audit committee oversees the external auditor.
• The evaluation of the external auditor.

“We believe audit committees should critically evaluate their disclosures and carefully consider whether improvements can be made to provide investors with more relevant information that conveys that an informed, actively engaged and independent audit committee is carrying out its duties,” the report says.

Many public company audit committees provide information beyond what disclosure laws and rules require. A recent EY study of 78 Fortune 100 companies found that in their proxy statements:

• 50% of audit committees disclosed that the audit committee is responsible for appointment, compensation, and oversight of the external auditor.
• 21% of audit committees disclosed the factors used in the audit committee’s assessment of the external auditor’s qualifications and work quality.
• 17% of audit committees disclosed that the audit committee was involved in selecting the lead partner.

The Call to Action report provided examples from proxy statements to show audit committees examples of how to provide more information in reports.

“The effective communication of high-quality information among the key players in our financial markets promotes investor confidence—the engine that drives capital formation and the efficiency of markets,” the report says. “Therefore, we strongly encourage audit committees to respond … by exploring ways to continually improve the information they provide to the marketplace.”

The consortium previously produced a tool to assist audit committees in their evaluation of the external auditor.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.