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More Details Emerge on Oversight of External Auditors

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Nov 10th 2015
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The second annual Audit Committee Transparency Barometer by the Center for Audit Quality (CAQ) and research firm Audit Analytics indicates that public company audit committees continue to increase voluntary disclosures around external auditor oversight.

Specifically, audit committee disclosures grew significantly in key areas such as external auditor appointment, engagement partner selection, engagement partner rotation, and evaluation criteria of the external audit firm.

“These efforts by audit committees to enhance their disclosures are encouraging, given the importance of meaningful, tailored information for investors and other stakeholders,” CAQ Executive Director Cindy Fornelli said in a prepared statement.

In July, the US Securities and Exchange Commission issued a concept release that asked investors for their thoughts on whether audit committees should disclose more information about their work. Specific areas include the process and criteria audit committees use in selecting an external auditor, how often they meet with the auditor, and how they review the auditor's performance.

But many industry groups, including the CAQ, say audit committees are increasing transparency by providing more information voluntarily on how they oversee outside auditors and additional mandated disclosures are not necessary.

The Barometer gauged how public company audit committees communicate their oversight by measuring proxy disclosures in Standard & Poor's Composite 1500, which includes the S&P 500 large-cap companies, S&P MidCap 400, and S&P SmallCap 600.

The analysis addressed 11 key questions in four sections: audit firm selection, audit firm compensation, audit firm evaluation and supervision, and selection of audit partner.

In year-over-year results, the study found disclosures increased the most in the following areas:

  • External auditor appointment: 25 percent in 2015, compared to 13 percent in 2014 (S&P 500); 16 percent, compared to 10 percent (S&P MidCap); 11 percent, compared to 8 percent (S&P SmallCap)
  • Engagement partner selection: 31 percent in 2015, compared to 13 percent in 2014 (S&P 500); 5 percent, compared to 1 percent (S&P MidCap); 3 percent, compared to 1 percent (S&P SmallCap)
  • Engagement partner rotation: 26 percent in 2015, compared to 16 percent in 2014 (S&P 500); 5 percent, compared to 1 percent (S&P MidCap); 5 percent, compared to 4 percent (S&P SmallCap)
  • Evaluation criteria of the external audit firm: 24 percent in 2015, compared to 8 percent in 2014 (S&P 500); 25 percent, compared to 7 percent (S&P MidCap); 22 percent, compared to 15 percent (S&P SmallCap)

However, disclosures of significant areas addressed with the external auditor decreased for S&P 500 (1 percent in 2015, compared to 3 percent in 2014) companies and S&P MidCap (zero percent, compared to 2 percent) companies, while S&P SmallCap companies remained the same (1 percent).

S&P 500 and MidCap companies also decreased disclosures in questions about the connection between audit fees and audit quality, consideration of auditor compensation, how nonaudit services may impact independence, and an explanation for a change in external auditor fees.

Related articles:

EY Sees Boost in Voluntary Audit Committee Disclosures
SEC Audit Disclosure Proposal Not a Hit in Many Boardrooms

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