Public companies continue to increase the level of audit committee disclosures in proxy statements but lag in other areas, according to an annual report jointly issued by the Center for Audit Quality (CAQ) and Audit Analytics. New in this year’s study are disclosure trends related to the coronavirus pandemic and critical audit matters (CAMs).
Now in its seventh year, the 2020 Audit Committee Transparency Barometer tracks proxy disclosures among the S&P 1500 related to audit committee transparency. Particularly useful for other audit committees are the specific examples cited by the CAQ and Audit Analytics regarding robust, best practice disclosures in each of the areas assessed.
“Transparency around audit committee oversight contributes to the orderly operations of capital markets,” said CAQ Executive Director Julie Bell Lindsay. “We urge public companies and their audit committees to accelerate the trend towards increasing transparency and provide an appropriate level of detail in audit committee disclosures to give investors additional confidence in the key oversight role these committees play in company-reported financial information.”
According to the CAQ and Audit Analytics, the biggest increase in audit committee disclosures this year concerned cyber-security. “Disclosures related to the audit committees responsible for cyber-security risk oversight increased nearly four-fold in five years, from 11 percent of S&P 500 companies in 2016 to 39 percent of S&P 500 companies in 2020,” the report said.
COVID-19, CAMs in the spotlight
New disclosure trends assessed in the 2020 report that were not included in 2019 concern disclosures related to the coronavirus pandemic and CAMs. Relevant to the pandemic, for example, the analysis found that “some companies provided transparency into the board’s approach to navigating the virus and its impact.” The report cited the disclosures of Electronic Arts and Momenta Pharmaceuticals as best practice examples related to coronavirus pandemic risk disclosures.
As Electronic Arts explained in its proxy statement, for example, “While its committees are addressing COVID-19 risks specific to their delegated duties, the board of directors has reviewed, overseen and continues to monitor the identification of COVID-19 risks and mitigation strategies related to the company’s return-to-work procedures, business strategy, business continuity, and the impact on the company’s financial planning.”
The second new trend regards CAM-specific proxy disclosures. Now that auditors of public companies must communicate CAMs in their auditor’s reports, as required by the Public Company Accounting Oversight Board, such disclosures are becoming more commonplace. “Over 6 percent of companies mention CAMs within their audit committee disclosures, stating that the audit committee has discussed CAMs with the auditor,” the report said.
“As more auditor reports include CAMs, more audit committee disclosures related to CAMs may begin to appear in proxy statements,” the CAQ and Audit Analytics added. Their analysis cited the disclosures of United Airlines Holdings and Exelon as best practice examples in this particular area.
According to the report, other robust disclosure areas in 2020 included discussions about non-audit services (84 percent of S&P 500 companies) and discussions of the criteria considered when evaluating the audit firm (51 percent).