Public companies continue to increase the overall level of audit committee disclosures in proxy statements, though there is room to improve quality by providing more tailored disclosures and transparency, according to the latest annual report jointly issued by the Center for Audit Quality (CAQ) and Audit Analytics.
The 2022 Audit Committee Transparency Barometer is in its ninth year of reporting the S&P 1500’s disclosures related to audit committee oversight of auditors and matters related to public company audits. The report includes categories of proxy disclosures filed during the period July 1, 2021, through June 30, 2022, and examples of effective disclosures companies and their audit committees can consider for future proxy statements.
“We know audit committee disclosures are correlated with enhanced audit quality and auditor independence, and we’re pleased to observe a continued positive trend of these disclosures in proxy statements,” said Julie Bell Lindsay, chief executive officer of the CAQ. “We encourage audit committees to consider how they can provide even more detailed disclosures in areas such as the execution of oversight responsibility to give investors insight into the processes, considerations, and decisions made by the audit committee.”
This was the first year the report tracked disclosure of audit committee oversight regarding environmental, social, and governance (ESG) initiatives.
Steps to enhance disclosures
The Center for Audit Quality in a new report highlighted steps audit committees can take to improve their proxy disclosures:
- Define goals for proxy disclosures based on the type of investors the company has and their needs for qualitative and/or quantitative information.
- Actively seek out disclosure examples from peer organizations and avoid falling behind.
- Advocate for disclosures with general counsel and perform substantive oversight activities worth disclosing.
- Regularly revisit disclosures to address changes in circumstances and business risks.
Disclosures about audit committee responsibility for ESG oversight was only 18 percent, while whether the board of directors has an ESG or sustainability expert was 39 percent. The report compared these statistics with the equivalent statistics for cybersecurity because ESG is a multifaceted and emerging risk like the former.
The report noted audit committees will likely continue to have an increased role in ESG oversight based on their responsibility for overseeing internal controls, financial reporting, and the risks and increasing disclosure requirements in this area.
Disclosures about audit committee responsibility for cybersecurity risk oversight increased this year to 54 percent, continuing the trend of annual increases of 5 percent or more in every year since 2017. The report noted this trend is consistent with increases in voluntary disclosures about cybersecurity, along with increases in cyber threats that result in greater public interest in company vulnerabilities.
The CAQ expects this disclosure trend will continue.
Another disclosure area is whether the board has a cybersecurity expert (39 percent, up from 34 percent in 2021). The percentage total has increased every year since 2016. The report noted the importance of audit committee members having the needed skill set to address cybersecurity risks as the environment continues to evolve and more boards delegate cybersecurity oversight to the audit committee.
Oversight of auditors
The highest rates of disclosure in 2022 related to nonaudit services that might impact independence (84 percent of the S&P 500, 1 percent higher than 2014); the length of time the auditor was engaged (71 percent, up from 47 percent in 2014); and audit committee involvement in selecting the audit engagement partner (51 percent, up from 13 percent in 2014) and appointing the auditor (46 percent, up from 13 percent in 2014). Other disclosures in this area related to audit fees.
The report indicated although the length of audit tenure is disclosed by most audit committees, only 9 percent disclose how audit tenure is considered when reappointing the auditor. Additionally, although many disclose involvement in selecting engagement partners, only 15 percent disclose what that involvement entails.
Improved disclosures that could be made in this area include how many members of the audit committee interviewed potential firm candidates and the final candidate.