While board members seem dissatisfied with the state of financial statement disclosure today, many seem to place greatest value on disclosures that are not explicitly required.
A recent survey by audit firm BDO USA shows 70 percent of board members who participated in the poll believe financial statement disclosures are so voluminous, it’s difficult to decide which information is most important. At the same time, when asked to identify disclosures that are most meaningful for investors, half identified critical audit matters that involve complex judgments on material issues, which are not currently required but likely will be required in the future by Public Company Accounting Oversight Board.
The PCAOB issued a proposal in 2013 and a reproposal in 2016 that would require auditors to identify critical audit matters in their audit reports. The newest proposal identifies CAMs as any matter communicated or required to be communicated to the audit committee that relates to accounts or disclosures material to the financial statements and that involved “especially challenging, subjective, or complex auditor judgment” during the course of the audit. The PCAOB accepted comments on the proposal through late summer, but has no stated time line for finalizing the rule, nor when it might take effect.
More than two-thirds of board members in BDO’s survey said they believe investors benefit from disclosures that explain the audit committee’s oversight of the external auditor, an area of disclosure that is being provided to investors largely on a voluntary basis where it exists today. The Securities and Exchange Commission published a concept release in 2015 exploring the potential for a long list of audit committee disclosures, but the SEC has taken no further action toward requiring them. EY studies voluntary disclosures by audit committees annually and has tracked a steady increase over the past few years.
Back to BDO’s survey, nearly one-third of board members said investors benefit from non-GAAP financial measures that supplement information on a company’s performance. That’s an area of disclosure that’s not only not required, but is subject to limitations and intense scrutiny in the current regulatory environment.
The SEC has put a great deal of effort throughout 2016 into cautioning companies against getting carried away with disclosing non-GAAP financial information, reminding companies of the limitations contained in SEC rules meant to assure non-GAAP information is not used to mislead investors.
“The 2016 BDO board survey reveals frustration among boards with the growing number of disclosures in financial statements today, though they clearly see use for non-GAAP metrics, especially with regard to executive compensation calculations,” said Amy Rojik, partner in the corporate governance practice at the firm.