What do public companies disclose about auditor relationships?

By Ken Tysiac

U.S. public company proxy reports often discuss how nonaudit services may affect independence but seldom discuss audit fees and their connection to audit quality and disclose auditor tenure about half the time, a new analysis shows.

These are the findings of a new Audit Committee Transparency Barometer report that measures the content of proxy statement disclosures in areas such as auditor oversight and scope of audit committee duties.

The Center for Audit Quality (CAQ), which is affiliated with the AICPA, partnered with Audit Analytics to perform the analysis of disclosures by 1,500 Standard & Poor’s (S&P) composite companies. The analysis reviewed the most current proxies filed through the end of June 2014 by companies in the S&P 500, S&P 400 (S&P MidCap), and S&P 600 (S&P SmallCap).

The study found that 83% of S&P 500, 69% of S&P MidCap, and 58% of S&P SmallCap companies discussed in their proxy statements how nonaudit services may affect independence.

A discussion from the proxy statement of S&P SmallCap company Allete Inc. that was included in the report said, in part:

“The Audit Committee pre-approves both the type of services to be provided by the independent registered public accounting firm and the estimated fees related to these services. During the pre-approval process, the Audit Committee considers the impact of the types of services and the related fees on the independence of the independent registered public accounting firm.”

Disclosure of the length of time an auditor has been engaged was included in 47% of S&P 500, 42% of S&P MidCap, and 50% of S&P SmallCap company proxy statements.

A discussion of audit fees and their connection to audit quality was included in just 13% of S&P 500, 4% of S&P MidCap, and 1% of S&P SmallCap proxy statements.

The analysis was conducted to provide a baseline reference point for reporting trends in future proxy seasons.

“We think it is important to provide a baseline for audit committee disclosures, with the intent of tracking trends and leading practices on an annual basis moving forward,” CAQ Executive Director Cindy Fornelli said in a news release. “Greater transparency about the audit committee’s roles and responsibilities provides an opportunity to communicate more clearly to shareholders about one of its key responsibilities, auditor oversight, which in turn may enhance audit quality.”

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA editorial director.

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