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SEC Audit Disclosure Proposal Not a Hit in Many Boardrooms

Nov 2nd 2015
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BDO USA LLP's new survey of public company directors hits many of the hot-button regulatory and taxation issues that corporate boardrooms are discussing. Key among those concern disclosure of communications between the audit committee and external auditors, and cybersecurity.

A big majority (87 percent) of the 150 corporate directors who were polled for the 2015 BDO Board Survey said that disclosing communications between the audit committee and the external auditor, as per the concept release from the US Securities and Exchange Commission (SEC), would negatively affect that relationship.

The concept release, which was issued by the SEC on July 1, asked investors for their thoughts on whether audit committees should disclose more information about their work, including in areas like the process and criteria they 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 Center for Audit Quality, say audit committees are increasing transparency by providing more information voluntarily on how they oversee outside auditors and additional mandated disclosures are not necessary.

“This is consistent with the comment letters the SEC has received on this proposal, as boards are sensitive to how such disclosures may have the unintended consequence of chilling communications between their audit committees and the external auditors,” Amy Rojik, partner in BDO USA's Corporate Governance Practice, said in a written statement.

Cybersecurity presents a mix of progress in this year's survey. While most directors (69 percent) say their boards are more involved with cybersecurity than last year, and 70 percent say they have increased protections against breaches, only 34 percent report they have developed protection of their company's most important digital assets. Likewise, 45 percent have a response plan, and 35 percent have protective requirements in place for third-party vendors.

On the brighter side, 87 percent of directors say they now are briefed on cybersecurity at least annually – and about a third of those directors are briefed at least quarterly. Last year, 71 percent reported annual briefings. Only 13 percent reported no briefings at all this year, compared to 29 percent last year.

Here are quick highlights of seven other survey issues.

Clawbacks. The SEC's proposal to require public companies to recoup or claw back incentives for top executives if there are material errors in financial statements got 72 percent of directors' support. But 78 percent say boards should be allowed to decide if clawbacks will be used.

‘Cadillac tax.' Employers that pay health-benefit costs of more than $10,200 for individuals and $27,500 for families will face a 40 percent excise tax, called the “Cadillac tax,” starting in 2018 under the Affordable Care Act. Forty percent of directors say their companies will be affected by the tax, and 65 percent of those affected expect to make changes to avoid the levy. Most (95 percent) say they expect to shift to higher-deductible health plans that require employees to pay more for medical expenses out of pocket, and 86 percent expect to drop high-cost plans.

Tax extenders. Seventy-seven percent of directors say the 50 or so tax provisions, such as the research and development credit and bonus depreciation, that Congress usually votes to extend at the last minute should be made permanent.

Consumption tax. Nearly half (49 percent) of directors favor replacing the corporate and personal income tax with a tax on consumption. That's up from last year's 40 percent in favor of the switch.

Pay for performance. The SEC proposes that public companies must report how their senior executives' pay for the past five years compares to total shareholder return during the same period. Half (51 percent) of directors say total shareholder return is an appropriate performance gauge. However, 52 percent say they don't intend to add total shareholder return as a gauge. About a third (31 percent) already use total shareholder return.

CEO-median employee pay ratio. Beginning in 2018, public companies will have to disclose the ratio of median employee pay to the CEO's pay, based on 2017 compensation. Less than half (43 percent) of directors say they are familiar with the new requirement but have yet to take any action, while 39 percent already are calculating pay ratios. The majority of directors (74 percent) don't think the ratio is helpful or meaningful to investors. A majority (58 percent) also believe the ratio could prompt outsourcing low-wage work to outside contractors.

Political contributions. Slightly more than half (53 percent) of directors believe the SEC should develop mandatory disclosure rules for corporate political contributions.

Related article:

EY Sees Boost in Voluntary Audit Committee Disclosures


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