Voluntary Audit Disclosures Continue to Trend Upward

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Companies are increasingly augmenting their mandatory audit-related disclosures with voluntary information in response to growing regulatory interest, a new EY report reveals.

Audit Committee Reporting to Shareholders in 2016 indicates that the US Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have taken action in the last year to consider requiring new disclosures related to audit. While new disclosure requirements aren’t expected soon, regulators are watching.

“The audit committee report serves as a place for engaging with shareholders on important subjects, and the report must continue to meet the needs of investors as their interests and expectations evolve with the marketplace,” SEC Chair Mary Jo White said during a keynote speech at the American Institute of CPAs national conference late last year.

The PCAOB, too, promotes increased transparency about audit for investors and other stakeholders. The board has targeted in particular a revision of the auditor’s report that would require information about critical audit matters involving subjective or complex judgment.

Further, “in recent years a variety of groups have brought attention to the relative lack of information available about the audit committee and the audit, including their view that this area of disclosure may not have kept up with the needs of investors and other proxy statement users,” the EY report states.

Those groups include investors, corporate governance, pension funds, asset managers, and foreign regulators.

The EY report is based on 78 Fortune 100 companies that filed proxy statements each year from 2012 to 2016 for annual meetings through Aug. 15. The report indicates a marked increase in many disclosures since 2012.

A key finding is that the number of companies that disclosed factors considered by the audit committee in assessing the qualifications and work quality of the external auditor rose to 50 percent, an increase of 8 percent over 2015 and 33 percent over 2012.

Similarly, 73 percent of companies disclosed that the choice of the external auditor was in the company’s best interest, up 10 percent from 2015 and 70 percent over 2012.

And 82 percent specified that the audit committee is responsible for the appointment, compensation, and oversight of the external auditor, a 40 percent increase over 2012.

Here’s a snapshot of other key findings:

  • About a third (31 percent) of companies disclosed in 2016 why fees to the external auditor changed, compared to 21 percent in 2015 and 9 percent in 2012. Reasons for the change include one-time events, such as a merger or acquisition. While the SEC requires disclosure about fees paid to external auditors in specific categories (audit, audit-related, tax, and all other fees), it doesn’t require the reasons for fee increases or decreases.
  • During the last year, more disclosures have been made about audit committee accomplishments in such areas as acquisitions, cybersecurity, sustainability, disclosure effectiveness, and committee charter updates.
  • Half (53 percent) of companies reported that the audit committee considered the impact of an auditor change when determining whether to retain the existing auditor. That’s a 6 percent increase over 2015 and a 50 percent increase over 2012.
  • The majority (73 percent) of companies disclosed that the audit committee was involved in choosing the lead audit partner, a 6 percent increase over 2015 and a 72 percent increase over 2012.
  • Half (51 percent) of companies disclosed that they have at least three financial experts on their audit committees, compared to 47 percent in 2015 and 36 percent in 2012.

Related articles:

PCAOB Revamps Proposal to Enhance Auditor’s Report
EY Sees Boost in Voluntary Audit Committee Disclosures

Terry Sheridan
Columnist
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