Report: Investor confidence in audit committees high; more transparency needed

The Barometer, published in November, evaluates how public company audit committees communicate their oversight activities over their external auditors to the public. It also measures the percentage of certain categories of proxy disclosures by companies in the S&P Composite 1500 (S&P 1500) and provides examples of effective proxy disclosures based on filings from July 1, 2018, through June 30, 2019. It includes results for S&P 500, MidCap, and SmallCap companies.

What follows is a summary of the results of the 2019 report: 

Positive findings: Improvements in disclosures

Audit committees are providing the following disclosures most frequently: non-audit services and independence; how long auditors have been engaged; criteria used to evaluate the audit firm; and involvement in selecting the audit partner.

There are significantly more disclosures than in prior years about cyber-security. These include the audit committee’s responsibility and process for cyber-security risk oversight and controls, how the audit committee works with management to monitor risk exposures, whether there is a cyber-security expert on the board, and on which committee.

Notably, 34 percent of S&P 500 companies disclosed the audit committee was responsible for cyber-security risk oversight, a jump of 15 percentage points over last year and more than triple the percentage from 2016.

Areas of concern

There are many categories of disclosures that are at the same level or have decreased as a percentage from 2018. The Barometer encourages audit committees to continue to increase disclosures and transparency into their role and process to increase investor confidence.

The Barometer notes there is little or no disclosure about how the audit committee addressed significant areas with the auditor, considered auditor compensation, or discussed the connection of audit fees to audit quality.

Opportunities for more transparency

Audit committees are encouraged to consider the following opportunities for future additional disclosures:

• Significant areas under the auditing standards are those areas the auditor considers to be most significant and relevant to the responsibilities of those charged with overseeing the financial reporting process. Disclosures about how the audit committee addresses these areas with the auditors, along with the determination of Critical Audit Matters (CAMs) that are beginning to be required disclosures in audit reports, can provide useful information about a company’s financial statements and internal controls.
• How the audit committee evaluates its auditors (how often, who is involved, and key criteria) and its process for selecting engagement partners upon partner rotation are critical to understanding each company’s specific policies and procedures around audit quality. Disclosures about auditor evaluation criteria can include the firm’s expertise in the industry, knowledge of the company, resources and capabilities, historical performance, length of time as auditors, independence, quality of communications with the committee and management, and any legal proceedings or PCAOB inspection reports.
• Disclosures about the audit committee’s role in evaluating audit firm compensation may include how the committee evaluates the appropriateness of and negotiates the audit fee. Their evaluation could include the number of hours spent, dollar amount, comparison of fees to peers, and reasons for changes in fees year over year (such as new accounting standards, company-specific changes, technology, and fees for non-audit services).
• Another important related disclosure area is how the audit committee balances the fee and budgeted hours assessment with the need for a quality audit. Their assessment of audit quality may be based on the auditor’s tenure with the company and its institutional knowledge of the company’s business, accounting, and internal controls over financial reporting. They may also have considered external data relating to audit quality and performance, including any PCAOB reports issued on the auditor or its peer firms.