An analysis of recent audit committee disclosures in proxy statements shows a significant majority of all S&P Composite 1,500 companies are talking to investors about auditor independence, but fewer are addressing how long the auditor has been engaged or how the audit committee appoints the auditor, and very few attempt to explain how audit fees relate to audit quality.
The Center for Audit Quality and Audit Analytics studied audit committee proxy disclosures among companies on the three major S&P indexes -- the S&P 500, the S&P MidCap, and S&P SmallCap -- to gauge the extent to which audit committees have answered some calls from the market for more voluntary disclosure about how they manage the external audit. The analysis looked only at the most current proxies filed through June 2014, so it establishes a barometer for future evaluation, says the CAQ, but doesn’t provide any comparative data for earlier years.
“We think it is important to provide a baseline for audit committee disclosures, with the intent of tracking trends and leading practices on an annual basis moving forward,” says Cindy Fornelli, executive director of the CAQ, in a statement. “Greater transparency about the audit committee’s roles and responsibilities provides an opportunity to communicate more clearly to shareholders about one of its key responsibilities, auditor oversight, which in turn may enhance audit quality.”
The analysis found 83 percent of S&P 500 companies discussed how non-audit services provided by the external audit firm might affect the independence of the auditor, while 69 percent of mid-cap and 58 percent of small-cap companies discussed auditor independence. In terms of how long the same audit firm has been performing the company’s audit, 47 percent of large-cap companies offered that information, compared with 42 percent of mid-cap and 50 percent of small-cap companies.
Only 13 percent of large-caps volunteered information on the audit committee’s considerations in appointing the auditor in terms of the firm’s qualifications, geographic reach, and expertise. Even fewer mid-caps (10 percent) and small-caps (8 percent) addressed that subject. As for any discussion of audit fees and their connection to audit quality, 13 percent of large-caps addressed it, but only 4 percent of mid-caps and 1 percent of small-caps went that far.
The CAQ and Audit Analytics said in their report they plan to produce future analyses to gauge further enhancements in audit committee disclosures. “We expect continued regulatory focus on improving these proxy disclosures will further support these efforts and encourage companies to look at these disclosures with a fresh perspective,” the report says. The Securities and Exchange Commission is working on a concept release exploring some possible ideas for elevating the work of the audit committee, with a release expected perhaps in early 2015, said SEC Chair Mary White recently.