Fortune 100 Companies Disclosing More about Auditors

By Jason Bramwell
 
Most Fortune 100 companies disclosed more information about their audit committees and external auditors than was required during the 2013 proxy season, according to a new report by Big Four firm EY.
 
The report, Audit Committee Reporting to Shareholders, examines how companies are enhancing audit committee-related disclosures and highlights year-over-year changes in practice.
 
"Our review shows many Fortune 100 companies are moving toward greater disclosure about audit committee-related matters and are often doing so with the encouragement of investors," Allie Rutherford, director of the EY Corporate Governance Center, said in a written statement.
 
EY examined seventy-eight Fortune 100 companies that filed proxy statements for 2012 and 2013 and had an annual meeting by June 30, 2013.
 
The greatest changes occurred in areas where investors are asking companies to provide more information. Areas where the number of companies providing certain disclosures increased include the following: 
  • The selection of the auditor is in the best interest of the company (4 percent of reviewed companies disclosed this in 2012; 23 percent of reviewed companies disclosed this in 2013).
  • The audit committee was involved in the selection of the lead audit partner (1 percent of reviewed companies disclosed this in 2012; 17 percent of reviewed companies disclosed this in 2013).
  • The audit committee is responsible for audit fee negotiations (1 percent of reviewed companies disclosed this in 2012; 9 percent of reviewed companies disclosed this in 2013).
  • The audit committee is responsible for the appointment, oversight, and compensation of the external auditor (37 percent of reviewed companies disclosed this in 2012; 50 percent of reviewed companies disclosed this in 2013).
  • The audit committee considers the impact of changing auditors when assessing whether to retain the current external auditor (3 percent of reviewed companies disclosed this in 2012; 15 percent of reviewed companies disclosed this in 2013).

Additional Key Findings

  • The seventy-eight Fortune 100 companies reviewed had an average of 2.7 financial experts on their audit committees in 2012 and 2013.
  • In 2012 and 2013, a statement that the audit committee is responsible for the appointment, compensation, and oversight of the auditor was disclosed by 10 percent of companies in the audit committee report. Twenty-seven percent and 40 percent of companies disclosed this information elsewhere in the proxy statement in 2012 and 2013, respectively.
  • A statement that the audit committee considers nonaudit fees and services when assessing the independence of the auditor was disclosed by 47 percent of companies in the audit committee report, while 32 percent made it elsewhere in the proxy.
  • Reviewed companies' audit committees that disclosed information about their assessment of the external auditor stated that the assessments were based on such criteria as the independence and integrity of the external auditor, expertise of the external auditor, performance and qualifications of the auditor, and the quality of the external auditor's personnel and communications.
  • The average tenure of the external auditor was twenty-seven years in 2012 and 2013 for those reviewed companies that disclosed this information.
 
According to EY, some companies are innovating with respect to audit committee-related information, and these informative disclosures may signal disclosure practices that could become more widespread.
 
For example, more companies are providing information about changes in audit fees. In 2013, four companies provided an explanation of why audit fees changed from 2012 to 2013. In 2012, only one company provided such a disclosure.
 
Also, six companies disclosed the topics that audit committees discussed with the external auditor in 2013, up from five in 2012. Two companies noted the year in which the current lead audit partner was appointed, rather than disclosing only the general policy that lead partners must rotate every five years. 
 
"An increasing number of audit committee members believe greater audit committee transparency can help increase investor confidence in financial reporting and the work of the audit committee and auditor," said Ruby Sharma, director of the EY Audit Committee Center of Excellence. "Our findings can help facilitate meaningful discussion about enhanced disclosure for investors."
 
EY expects this trend will continue into the 2014 proxy season, as investors will likely continue or increase engagement with companies through letter-writing campaigns and direct dialogue.
 

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