by Cydney Posner

The Center for Audit Quality and Audit Analytics have jointly released their second-year analysis, Audit Committee Transparency Barometer.  The analysis, which studied proxy statements of companies in the S&P Composite 1500, showed “double-digit growth in the percentage of S&P 500 companies disclosing information in several key areas of external auditor oversight, including external auditor appointment, engagement partner selection, engagement partner rotation, and evaluation criteria of the external audit firm.” In addition, they found that audit committees “are tailoring these enhanced disclosures specifically to the company, and not using a one-size-fits-all approach.” They also observe that the identified trends are consistent with findings from the EY Center for Board Matters. (See this PubCo post.) 

More specifically, compared to last year, the study found:

  • “One-quarter of S&P 500 companies show enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13 percent in 2014.

  • Sixteen percent of S&P 500 companies explicitly stated the role audit committees play in determining the audit firm’s compensation, doubling from 8 percent in 2014.

  • Disclosure of the criteria considered when evaluating the audit firm more than tripled among S&P MidCap 400 companies, rising from 7 percent to 25 percent. Disclosure of this criteria among S&P SmallCap 600 companies increased from 15 percent to 22 percent.”

With regard to appointment of the audit firm, the study showed enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm as well as the length of time an audit firm has been engaged. Discussion of the committee’s role and responsibility in the determination of the audit firm’s compensation doubled from the prior year among S&P 500 companies, and there were increases in this disclosure among S&P MidCap and S&P SmallCap companies as well. There was also more discussion of the role of the committee in  selecting the engagement partner, as well as a statement that the engagement partner rotates every five years. The discussion of the selection or evaluation of the audit firm might refer to factors such as the performance of the lead audit partner and the rest of the audit team, the team’s level of understanding of and capabilities to address the company’s business, professional resolution of matters with the national office, the quality of discussions between the committee and the lead partner, firm reputation and professional qualifications of the team, efficiency of services provided, the potential impact of changing firms, the results of the most recent PCAOB inspection of the firm, and auditor independence, including the level of fees for non-audit services.

The analysis showed that there was also “a pronounced consolidation of disclosures related to external auditor oversight within the proxy statement, minimizing the inefficiency of having these disclosures in multiple locations outside of the proxy. For S&P 500 companies, this consolidation is evidenced by movement of certain disclosures related to external auditor oversight to a single, dedicated section of the proxy or the audit committee report.” For example, sometimes the additional disclosure was included in the proposal to ratify the selection of the audit firm. The reported analysis did not distinguish between disclosures in the audit committee report as compared with the proxy statement as a whole, as most of the amounts for audit committee report percentages “are not material.” The report notes, however, that one category “did have meaningful results in the audit committee report—a discussion of how non-audit services may impact independence (included in 49% of S&P 500, 43% of S&P MidCap, and 39% of S&P Small Cap audit committee reports).”

The authors conclude that “audit committees are responding to an increasing interest by investors, regulators, and other stakeholders in the roles and responsibilities of audit committees by providing the marketplace with meaningful information about their role in external auditor oversight.”  In particular, the study attributes some of these developments to encouragement from SEC staff speeches, as well as the staff’s “signaling the issuance of the SEC’s July 2015 concept release on audit committee disclosures.” (See this PubCo post.) Other contributing factors cited in the study were requests from several investment groups and pension funds for additional information, such as letters sent to some S&P 500 companies from the United Brotherhood of Carpenters Pension Fund “seeking additional disclosures around the audit committee’s role in appointment, compensation, and retention of the external auditor.”

Posted by Cydney Posner