An EY study of Fortune 100 proxy materials shows audit committees continue to make incremental additional voluntary disclosures to explain their oversight of the external audit.
Nearly 90 percent of audit committees explicitly said in their 2017 proxies that the audit committee is responsible for the appointment, compensation, and oversight of the external auditor, up from 81 percent in 2016 and nearly double from 2012. More than half, or 56 percent, of audit committees explained the factors they used to assess the external auditor’s qualifications, up from 48 percent in 2016 and 17 percent in 2012.
In the area of perhaps greatest increased disclosure, three-fourths of audit committees in 2017 explain the audit committee’s role in selecting the lead audit partner, up from 69 percent in 2016 and only 1 percent in 2012. More audit committees in 2017 also explained that the audit committee is independent of management and that the audit committee considers work the auditor is doing outside the audit when considering the auditor’s independence.
In a few hot-button areas, however, audit committees are still saying little or nothing. Only one-third of audit committees in 2017 explain the committee’s role with respect to negotiating audit fees, although that’s incrementally higher than in 2016 and a gain over no such disclosure whatsoever in 2012. The study also found audit committees are increasing their disclosure around changes in audit fees, although they’re more likely to explain increased in audit fees than decreases.
Audit committees also are virtually mum on any topics they may have discussed with auditors. The EY survey finds in 2017, only 3 percent to 4 percent of companies include anything at all in the proxy about their interactions with external auditors, and that number hasn’t changed since 2012.
“Audit committees continue to enhance their overall disclosure, particularly over the appointment, compensation and oversight of external auditors,” says Stephen Klemash, Americas leader for the EY Center for Board Matters. “We view that all as extremely positive.”
The Securities and Exchange Commission has not established any significant disclosure requirements for audit committees for nearly 20 years, despite some major changes in the audit committee agenda over that time period, especially under Sarbanes-Oxley. Investors with heightened expectations of audit committees are calling for more information, says Klemash.
“Audit committees are doing a good job in their oversight of external auditors, but the investor community and other stakeholders are saying how do we know that?” says Klemash. “That’s why we’ve seen this journey of enhanced disclosure. The more disclosure that can be made, the better.”