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EY Sees Boost in Voluntary Audit Committee Disclosures

Sep 10th 2015
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Audit committees for Fortune 100 companies are continuing to go beyond minimum disclosure requirements by providing more information voluntarily on how they oversee their external auditors, according to a new report from the Ernst & Young (EY) Center for Board Matters.

Several factors appear to have contributed to this trend, including requests from investors to companies to provide additional information. Policymakers and other stakeholders are also “calling attention to the important role of audit committees and promoting consideration of greater transparency around how audit committees carry out their responsibilities,” the report states.

Based on a review of 76 Fortune 100 companies that filed proxy statements for four consecutive years as of Aug. 15, 2015, the EY Center for Board Matters found that 71 percent specified that the audit committee is responsible for the appointment, compensation, and oversight of the auditor, up from 65 percent in 2014 and 41 percent in 2012 – the first year EY began reviewing voluntary audit-related disclosures.

In addition, 61 percent disclosed that the audit committee was involved in the selection of the audit firm's lead engagement partner, up from 44 percent in 2014. In 2012, none of the Fortune 100 companies disclosed this information.

“While current required disclosures about the work that audit committees do to oversee the financial reporting process are limited in nature, this has not deterred a continuation of enhanced audit committee transparency,” the EY Center for Board Matters states in the report.

Other key highlights of the report include:

  • Eighty percent of companies noted they consider nonaudit services and fees when assessing the independence of the external auditor, compared to 11 percent in 2012.
  • Twenty-one percent of companies disclosed that the audit committee was responsible for the auditor's fee negotiations. In 2012, none of the companies provided this disclosure.
  • Nine percent of companies provided explanatory disclosures of the reason for year-over-year changes in fees paid to the external auditor, doubling the percentage of companies that did so in 2012.
  • Auditor tenure was disclosed by 59 percent of reviewed companies, up from 25 percent of companies that did so in 2012. Median disclosed tenure was 18 years.
  • Forty-one percent of companies disclosed that the audit committee considers the potential impact of rotating their external auditor, up from 3 percent in 2012.

On July 1, the US Securities and Exchange Commission (SEC) issued a “concept release” asking investors for feedback on whether audit committees should disclose more information about their work, including in areas like the process and criteria they use in selecting an outside auditor, how often they meet with the auditor, and how they review the auditor's performance, according to a Wall Street Journalarticle.

Requirements for the audit committee's reporting to shareholders are principally contained in Item 407 of Regulation S-K, which have not changed substantively since 1999, according to the SEC.

“Since then, there have been significant changes in the role and responsibilities of audit committees arising out of, among other things, the Sarbanes-Oxley Act of 2002, enhanced listing requirements for audit committees, enhanced requirements for auditor communications with the audit committee arising out of the rules of the Public Company Accounting Oversight Board, and changes in practice, both domestically and internationally,” the concept release states.

In a Sept. 8 comment letter to the SEC, Cindy Fornelli, executive director of the Center for Audit Quality, wrote that the best route to promote informative and relevant audit committee disclosures is through a voluntary, market-driven approach rather than by mandating additional prescriptive disclosures.

“The continuing positive trend of enhanced audit committee disclosures informs our belief that a market-driven approach is most effective, and we are concerned that adding prescriptive requirements could discourage this positive trend and stifle innovation,” she wrote. “If the SEC does pursue rulemaking, we believe it should be a principles-based framework that allows audit committees the flexibility to adapt disclosures to their individual circumstances. However, we believe audit committees already are enhancing their disclosures beyond what is currently required, and we have not seen evidence of market demand for mandated, prescriptive disclosures.”

Related article:

Study: Audit Committee Transparency On the Rise at Fortune 100 Firms

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