Companies Shedding More Light on Audit Committee Practices

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Terry Sheridan
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A new report from the Center for Audit Quality (CAQ) and research firm Audit Analytics reveals that public companies are increasingly volunteering more information about their oversight of external auditors.

The results, most notable in the double-digit increase in disclosures by S&P 500 companies, indicate that audit committees are heeding pressure by investors and regulators for more information about their external auditor oversight. Further, the disclosures are increasingly company-specific rather than boilerplate, according to the 2016 Audit Committee Transparency Barometer.

The report focuses on proxy disclosures by companies in Standard & Poor’s Composite 1500 Index, comprised of S&P 500 large-cap companies, S&P MidCap 400, and S&P SmallCap 600.

“Audit committees play important roles in enhancing audit quality and representing investor interests, so it is encouraging to observe how public companies continue to shed more light on audit committee practices,” CAQ Executive Director Cindy Fornelli said in a prepared statement. “With both robust data and specific examples of meaningful disclosure, the Audit Committee Transparency Barometer can be a resource for companies and audit committees looking to enhance how they communicate to investors, regulators, and others.”

Five audit disclosure areas and the percentage of companies making them are explored in the report:

  • Audit firm selection
  • Audit firm engagement
  • Audit firm compensation
  • Audit firm evaluation
  • Audit partner selection

Disclosure of audit committee considerations in appointing an audit firm:

  • S&P 500: 13 percent in 2014; 31 percent in 2016.
  • S&P MidCap 400: 10 percent in 2014; 22 percent in 2016.
  • S&P SmallCap 600: 8 percent in 2014; 17 percent in 2016.

Disclosure of the length of the audit firm engagement:

  • S&P 500: 47 percent in 2014; 59 percent in 2016.
  • S&P MidCap 400: 42 percent in 2014; 45 percent in 2016.
  • S&P SmallCap 600: 50 percent in 2014; 48 percent in 2016.

Disclosure of audit firm compensation:

The report breaks out the following two fee disclosures:

Disclosure of audit committee responsibility for fee negotiations:

  • S&P 500: 8 percent in 2014; 17 percent in 2016.
  • S&P MidCap 400: 1 percent in 2014; 3 percent in 2016.
  • S&P SmallCap 600: 1 percent in 2014; 5 percent in 2016.

Disclosure and explanations of changes in fees paid to audit firms:

  • S&P 500: 28 percent in 2014; 34 percent in 2016.
  • S&P MidCap 400: 30 percent in 2014; 32 percent in 2016.
  • S&P SmallCap 600: 24 percent in 2014; 36 percent in 2016.

Disclosure of audit firm evaluation and supervision:

  • S&P 500: 8 percent in 2014; 34 percent in 2016.
  • S&P MidCap 400: 7 percent in 2014; 26 percent in 2016.
  • S&P SmallCap 600: 15 percent in 2014; 25 percent in 2016.

Disclosure of audit committee involvement in audit partner selection:

  • S&P 500: 13 percent in 2014; 43 percent in 2016.
  • S&P MidCap 400: 1 percent in 2014; 10 percent in 2016.
  • S&P SmallCap 600: 1 percent in 2014; 6 percent in 2016.

Disclosures of audit partner rotation every five years also increased among all companies, most notably among the S&P 500.

EY revealed similar findings in its recent analysis of voluntary audit committee disclosures by Fortune 100 companies.

Related articles:

Voluntary Audit Disclosures Continue to Trend Upward
More Details Emerge on Oversight of External Auditors

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