An SEC review of disclosure effectiveness and a desire by investors and regulators to boost investor confidence are driving the trend
The audit committees of Fortune 100 companies are being increasingly transparent about their activities and processes, going beyond minimally required disclosures, according to a recent report by the EY Center for Board Matters.
EY expects this trend to continue next year and over the long-term as investors will likely maintain or step up engagement with companies on this topic through letter-writing campaigns and direct dialogue.
Some companies are aggregating audit-related disclosures in a consolidated section of their proxy statements or placing them in the audit committee report to make it easier for readers to process all the available information and saving investors the trouble of navigating company websites, according to Let’s talk: governance, Audit committee reporting to shareholders, 2014 proxy season update.
Increased transparency by audit committees is partly the result of an ongoing review by the SEC of disclosure effectiveness that entails a holistic appraisal of disclosures among US companies. Audit committee disclosures have also come under increased scrutiny by US and non-US regulators, investors, and policy organizations, motivated by a desire to bolster investor confidence in audit committees’ oversight work.
Nearly 15 percent of companies provided a direct link to the audit committee charter in the proxy statement this year, making it easier for investors to learn about the committee’s designated duties, up from 6 percent two years ago, the report said. Thirty-one percent of companies explained their reasons for appointing their external auditor, including considerations in assessing the auditor’s quality and qualifications, versus 16 percent of companies that did so in 2012.
Eight percent disclosed topics that the audit committee discussed with the auditor other than matters required to be discussed under regulatory rules.
‘Where they go beyond that is risk controls and compliance, tax strategy, ethics and compliance programs, various risk management initiatives and controls,’ says Allie Rutherford, director of corporate governance at the Center for Board Matters. There were also some presentations and discussions around cyber-security, she adds.
When the Center for Board Matters began this initiative, it was interested in the kinds of disclosure that audit committees were providing beyond those required.
‘For example, the audit committee under Sarbanes-Oxley is responsible for the appointment, compensation and oversight of the auditor. We’re tracking that 65 percent of companies make that statement in the proxy statement,’ says Rutherford. ‘It doesn’t mean that they’re not doing it if they’re not disclosing it.’
Sarbanes-Oxley also stipulates that audit committee consider the non-audit fees and services being provided by an external auditor when assessing auditor independence. At four out of five companies reviewed the audit committee is stating that it is doing that, she adds.
‘Because this initiative really started with a request by investors, I think it’s a sign that companies are hearing calls for increased transparency,’ she says. ‘I think they’re being responsive. This is part of a broader trend of companies enhancing disclosures across a broad range of governance items. Audit committee reporting is one of those things that follows some of the other disclosures that we’ve seen from key committees and board leadership.’
