How audit committees can improve disclosure

By Ken Tysiac

The percentage of audit committees providing public disclosure on many key metrics has increased in recent years, but opportunities for greater transparency remain, according to a yearly report published Wednesday by Audit Analytics and the Center for Audit Quality (CAQ), which is affiliated with the AICPA.

An examination of public company proxy disclosures demonstrates that increasing numbers of companies in the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 have increased the information they provide to the public since 2015 in a number of areas.

The 2019 Audit Committee Transparency Barometer report shows that from 2015 to 2019:

  • The percentage of audit committees disclosing what they consider in appointing the audit firm grew for S&P 500 companies (from 25% to 42%), S&P MidCap companies (16% to 30%), and S&P SmallCap companies (11% to 22%).
  • More audit committees disclosed the length of audit firm engagement, with percentages growing from 54% to 71% for S&P 500 companies, 44% to 54% for S&P MidCap companies, and 46% to 55% for S&P SmallCap companies.

Meanwhile, disclosures that the audit committee is responsible for cybersecurity risk oversight have at least tripled for all three S&P groups since 2016. Disclosures revealing whether the board has a cybersecurity expert and explaining the committee assignments of the board’s cybersecurity expert also have grown rapidly as this area has become a huge focus in corporate governance.

But other areas of disclosure have been stagnant during the years that the CAQ has presented the survey. Disclosures surrounding audit firm compensation have decreased from 2015 levels in some cases, and no S&P 500 companies disclosed significant areas addressed with the auditor from 2016 to 2019.

CAQ Executive Director Julie Bell Lindsay said in a news release that as a whole audit committees are supplying the marketplace with more clarity about their activities, but she added, “We urge audit committees to consider the opportunities to enhance transparency.”

Those opportunities, according to the report, include:

  • Significant areas addressed with the auditor. As auditors are starting to disclose critical audit matters in compliance with a new PCAOB standard, audit committees can provide their perspective on these matters and others, if appropriate.
  • Disclosures around firm evaluation and audit partner selection. These may include discussion of how often the audit firm is evaluated, the mechanism and key considerations for evaluation, and the process for selecting the audit partner.
  • Transparency about audit firm compensation. Disclosures may include the level of detail related to fees that is provided to the audit committee; how the audit committee considers the number of hours in balancing the need for an effective, efficient audit; and what causes changes in fees when they occur.

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

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