Earlier this month, the Center for Audit Quality together with Audit Analytics posted their annual Audit Committee Transparency Barometer, which measured the quality of proxy disclosures regarding audit committees among companies in the S&P Composite 1500. The report shows continued voluntary enhancements to transparency and broadly increased disclosure around audit committee oversight of the external auditor. The report includes several useful examples of the types of disclosure discussed.

Among the key findings:

  • An increase in the percentage of S&P 500 companies that disclosed in their proxy statements enhanced discussions of their audit committees’ considerations in recommending the appointment of their audit firms from 13% in 2014 to 37% in 2017; among mid-cap companies, 24% included enhanced discussion of these considerations in 2017 (an increase from 10% in 2014), compared to 17% of small-cap companies in 2017 (an increase from 8% in 2014).
  • An increase in the percentage of S&P 500 companies that disclosed audit firm tenure from 47% in 2014 to 63% in 2017; among mid-cap companies, 47% disclosed auditor tenure in 2017 (an increase from 42% in 2014), compared to 46% of small-cap companies in 2017 (a decrease from 50% in 2014).
  • An increase from 8% in 2014 to 20% in 2017 among S&P 500 companies that stated audit committee responsibility for fee negotiations; among both mid-cap and small-cap companies, only 4% included statements to that effect in 2017, an increase from 1% in 2014.
  • An increase from 28% in 2014 to 31% in 2017 in the percentage of S&P 500 companies that included explanations for changes in fees paid to audit firms (although that represented a decrease from 34% in 2016); among mid-cap companies, 32% included explanations of the changes in 2017 (an increase from 30% in 2014, although flat compared with 2016), compared to 35% of small-cap companies in 2017 (an increase from 24% in 2014, but a decline from 36% in 2016).
  • An increase from 8% in 2014 to 38% in 2017 in the percentage of proxy statements for S&P 500 companies that discussed the criteria the audit committee considered when evaluating the audit firm; in 2017, 28% of mid-cap companies disclosed these criteria (an increase from 7% in 2014), compared to 27% of small-cap companies in 2017 (an increase from 15% in 2014).
  • An increase from 4% in 2014 to 21% in 2017 in the percentage of proxy statements for S&P 500 companies that disclosed that audit firm evaluations were conducted at least annually; among mid-cap companies, 11% included that disclosure in 2017 (an increase from 3% in 2014), compared to 8% of small-cap companies in 2017 (an increase from 4% in 2014, but a decline from 9% in 2016).
  • An increase from 13% in 2014 to 49% in 2017 in the percentage of proxy statements for S&P 500 companies that explicitly disclosed that audit committee involvement in the selection of the audit engagement partner; in 2017, 14% of mid-cap companies disclosed that involvement (an increase from 1% in 2014), compared to 7% of small-cap companies in 2017 (an increase from 1% in 2014).
  • An increase from 16% in 2014 to 46% in 2017 in the percentage of proxy statements for S&P 500 companies that disclosed that the audit engagement partner rotated every five years; among mid-cap companies, 14% disclosed the rotation in 2017 (an increase from 3% in 2014), compared to 10% of small-cap companies (an increase from 4% in 2014).

Interestingly, the one area that either decreased or remained flat across the S&P 1500 indices was the inclusion of an explanation for a change in fees paid to the audit firm. The report indicates that this number has fluctuated from year to year since 2014, with the extent of the disclosure turning primarily on the materiality of the change. The explanations often relate to activity such as business combinations or other nonrecurring business activity.

SideBar

As discussed in this PubCo post, at the PLI Securities Regulation Institute earlier this month, Karen Garnett, Corp Fin ‎Associate Director, Disclosure Operations, indicated that the SEC may again take up this 2015 concept release regarding possible revisions to audit committee disclosures. In the concept release, the SEC sought comment on the adequacy of existing disclosure requirements as well as on potential changes to required disclosures that would “address the audit committee’s responsibilities with respect to the appointment, compensation, retention, and oversight of the work of the registered public accounting firm and better inform investors about how the audit committee executes those responsibilities.” (See this PubCo post.)

And, as discussed in this PubCo post, disclosure of auditor tenure in the audit report will be mandatory for audits of fiscal years ending on or after December 15, 2017. In addition, at later phase-in dates, most audit reports will need to include disclosure of “critical audit matters,” that is, “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although not to emerging growth companies).