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New Mandate for Audit Committees: Upgrade Reports

Tammy Whitehouse | November 21, 2013

A group of governance organizations has teamed up to offer some advice to audit committees: Take a fresh look at your audit committee reporting and consider some upgrades.

In a report produced by the Center for Audit Quality, the National Association of Corporate Directors, Corporate Board Member and three other groups, audit committees are told that investors and others with a stake in capital markets need to understand and have confidence in audit committees. Beyond the audit committee charter, the only time investors hear directly from audit committees is through the committee's annual report that is included with the proxy statement, the report says.

“Public disclosures are the primary channel through which audit committees can educate investors and other stakeholders about their critical responsibilities, and demonstrate their effectiveness in executing those responsibilities,” says the report, titled Enhancing the Audit Committee Report: A Call to Action. “We encourage all public company audit committees to thoughtfully reassess their reporting and communication with stakeholders and, if need be, to strengthen them in the future.”

The groups, known together as the Audit Committee Collaboration, take note that a growing number of audit committees voluntarily enhance their reporting to improve communication and bolster confidence. In a Big 4 firm review of proxy statements by the Fortune 100, half included an affirmative statement that the audit committee is responsible for the appointment, compensation, and oversight of the external auditor, the report says. Only 31 percent included disclosure of how long the company has used the same audit firm, and only 17 percent indicated the audit committee had a hand in selecting the lead engagement partner.

The report includes examples of disclosure language that such committees have included in 2013 proxy statements to illustrate their point. The examples show how an audit committees can clarify the scope of the its duties, define the committee's composition, and provide other information about factors considered in hiring or reappointing an external auditor, selection of a lead engagement partner, factors considered in deciding compensation, an evaluation of the external auditor, and some description of how the audit committee oversees the external auditor.

Michele Hooper, president and CEO of the Directors' Council, which collaborated on the report, says the intent is not to call on audit committees to do more work. “Audit committee responsibilities are strenuous,” she says. “We're not asking audit committees to do anything new, but to talk about more about what they do.” The intent is not to produce new boilerplate disclosures, she says. “We're looking for more color around the areas that might be important to audit committees. For example, there's a lot we could talk about in terms of what we do to evaluate the external audit firm.” Committees could also explain more about the company's risk profile and the process by which the company assesses its risks, she says.

Additional participants in the Audit Committee Collaboration include Tapestry Network and NYSE Governance Services. Hooper says the group formed in 2012 to develop tools and materials that would help strengthen audit committee performance and transparency. The latest report is the second published by the Collaboration. The first was a tool to help audit committees evaluate their external auditors.