Only a day after audit regulators have proposed a new method for extracting from audit firms the names of engagement partners on each public company audit, the Securities and Exchange Commission has blown open the discussion with a long list of its own questions about whether audit committees should provide that and many more new disclosures.
The SEC has published a 55-page concept release proposing a number of topics for discussion around how audit committee disclosure should be updated and enhanced, especially focusing on the audit committee’s oversight of external auditors. “Effective audit committee oversight is essential to investor protection and the functioning of our capital markets,” said SEC Chair Mary Jo White in a statement. “The way audit committees exercise their oversight of independent auditors has evolved, and it is important to evaluate whether investors have the information they need to make informed decisions.”
The concept release says current practices among audit committees vary, one of several reasons to update disclosure requirements. Another important reason: the Public Company Accounting Oversight Board is considering requirements for auditors to disclose things that some have suggested audit committees should disclose instead. The PCAOB has just proposed a new form for audit firms to file after each audit engagement to disclose the name of engagement partners, a disclosure requirement the board has long pursued and had difficulty securing.
The concept release lists questions exploring 74 separate areas for discussion. Among them: Should audit committees say more about their communication with and oversight of auditors? Should they disclose what auditors tell them about PCAOB inspection reports? Should they address the objectivity and skepticism of the auditor? The performance and qualifications of the auditor? The compensation? The reasons for selecting the auditor? The ratification process?
In terms of identifying auditors, the SEC asks if audit committees should be required to disclose the name of the engagement partner, the engagement quality reviewer, the entire engagement team, or perhaps only those required under SEC rules to rotate. Should audit committees discuss the engagement partner’s qualifications, tenure on the audit, professional license, other experience? Should the audit committee disclose whether it influenced the appointment of the engagement partner? Should audit committees disclose the auditor’s tenure on the engagement? Was it considered in retaining the auditor? And should any of these disclosures be reported to the PCAOB instead of the SEC?
The list goes on. Cindy Fornelli, executive director of the Center for Audit Quality, says investors deserve an understanding and confidence in the audit committee’s role in overseeing the financial reporting process. “We look forward to reviewing the SEC’s concept release and to providing analysis and views from the public company auditing profession,” she said in a statement.
The PCAOB is accepting comments on its rule proposal through Aug. 31. The SEC is asking for comments on its concept release within 60 days after it is published in the Federal Register, which has not yet occurred.