Disclosures by audit committees continue to rise

Public company audit committees continue to make more information on their oversight of external auditor activities available to the public, according to a survey report released Thursday.

Forty percent of S&P 500 companies disclosed their considerations in appointing the audit firm in 2018, according to the 2018 Audit Committee Transparency Barometer analysis conducted by the Center for Audit Quality (CAQ) and Audit Analytics. That’s up from 37% the previous year and 13% in 2014.

The report also showed more S&P 500 companies disclosing the length of the audit firm engagement, discussing criteria considered when evaluating the audit firm, and stating audit committee involvement in audit partner selection. The Barometer report is based on an analysis of proxy disclosures among companies in the S&P Composite 1500, which comprises the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600.

This is the fifth year the Barometer has been published. The inaugural report was issued in 2014.

“Over the past five years, audit committees have provided increasingly robust disclosures about their important investor protection role in overseeing the external audit,” CAQ Executive Director Cindy Fornelli said in a news release. “Taking steps to enhance transparency into our extraordinary system of financial reporting, as many audit committees are doing, strengthens both the confidence of investors and their ability to make sound decisions in the capital markets.”

The CAQ is affiliated with the AICPA.

Other findings in the analysis showed that:

• 70% of S&P 500 audit committees disclosed the length of time that the auditor has been engaged. That’s up from 63% in 2017 and 47% in 2014. The percentages of MidCap (52%) and SmallCap (51%) audit committees disclosing auditor tenure also reached record highs.
• 46% of S&P 500 audit committees disclosed the criteria they consider when evaluating the audit firm, up from just 8% in 2014. The MidCap (36%) and SmallCap (32%) numbers reached record highs as well.
• 52% of S&P 500 audit committees explicitly stated that the audit committee is involved in the selection of the audit partner, an increase of three percentage points over 2017 and 39 percentage points over 2014. MidCap (20%) and SmallCap (10%) companies also made these disclosures in record-high numbers.

One area that saw a decrease in disclosure was an explanation provided for a change in fees paid to the audit firm. Audit committees disclosed fee changes at rates of 28% for S&P 500 companies, 26% for MidCap companies, and 30% for SmallCap companies. All those figures dropped from 2017.

— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.