The SEC has issued a concept release to seek public comment regarding audit committee reporting requirements, with a focus on the audit committee’s reporting of its responsibilities with respect to its oversight of the independent auditor. The SEC has categorized the specific audit committee disclosures about which the Commission is interested in receiving comment into three groups:

  • The audit committee’s oversight of the auditor.
  • The audit committee’s process for selecting the auditor.
  • The audit committee’s consideration of the qualifications of the audit firm and certain members of the engagement team when selecting the audit firm.

The Audit Committee’s Oversight of the Auditor

Currently the audit committee report discloses whether certain communications have occurred. The SEC believes potential additional disclosures about the communications might provide additional information about the actions the audit committee has taken during the most recently completed fiscal year to oversee the auditor and the audit.   The Commission is considering whether to require additional qualitative disclosures about the nature and timing of the required communications between the audit committee and the auditor. The concept release suggests:

  • The disclosure rules could require the audit committee to discuss not just whether and when all of the required communications occurred, but also the audit committee’s consideration of the matters discussed.
  • Requiring additional disclosure about the specific meetings with the auditor may provide additional insight into the audit committee’s oversight of the auditor.
  • There could be disclosure required about the nature of any discussions held with the auditor about the results of the firm’s internal quality review and most recent PCAOB inspection.
  • There could be disclosure about whether, and if so how, as part of its oversight of the auditor, the audit committee assesses, promotes, or reinforces the auditor’s objectivity and professional skepticism.

Audit Committee’s Process for Appointing or Retaining the Auditor

Potential topics for additional disclosure include:

  • The process the audit committee undertook and the criteria used to assess the auditor and the audit committee’s rationale for selecting or retaining the auditor.
  • When a new auditor is selected, the process the audit committee undertook, including the number of auditors that were asked to make proposals, information on how those auditors were selected, and the information that the audit committee used in its decision.
  • The board of directors’ policy, if any, for an annual shareholder vote on the selection of the auditor, and the audit committee’s consideration of the voting results in evaluating and selecting the audit firm, including situations where the audit firm fails to achieve majority support.

Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit Committee

Potential topics for additional disclosure include:

  • The name of the engagement partner, alone or with the name(s) of other key members of the audit engagement team (e.g., the engagement quality reviewer), the length of time such individual(s) have served in that role and any relevant experience.
  • The involvement of the audit committee in the selection of the engagement partner, and any input the audit committee had in the decision.
  • Information on the number of years the audit firm has been retained and how auditor tenure was considered by the audit committee in retaining the auditor.