Audit Committee Bulletin: October 2013
Demand for enhanced audit committee reporting
Regulators, policy-makers, and many investors are encouraging listed companies to report more information about what their audit committees do.
At recent discussion events, investors urged companies to go beyond mandatory reporting requirements — which are often very brief — to give a richer picture of their audit committee's activities and performance.3
Regulators and policy-makers have argued that better communication about the role of the audit committee could help ensure that any proposals for reform improve rather than undermine audit quality. Fuller reporting could also help investors to understand the audit committee's role — for example, in terms of mitigating risk and working with the external auditor.
Current requirements in Europe and the US tend to say little about audit committee reporting, while corporate governance best practice codes are often vague on the issue.
Typically, regulators and stock exchanges identify a minimum set of disclosures about the audit committee and its activities. These might include the names and basic qualifications of committee members, a summary of the committee’s role, and whether the committee has reviewed the financial statements.
But this is changing. In September 2012, the UK Financial Reporting Council issued enhanced guidelines for audit committee reporting. Some companies — and not just in the UK — are already going well beyond the minimum disclosure requirements for their jurisdiction.
These reporting pioneers are providing details on areas such as audit committee meeting agendas, the committee’s interaction with internal audit and evaluations of the external auditor and the audit committee itself.
Audit chairs are concerned about the potential downsides to disclosing more information. These include exposing the company to legal liabilities, impinging on management’s responsibilities, and creating lengthy reports that investors might not read. Some audit committee chairs have expressed their intent to move forward, hoping that a spirit of transparency and goodwill will earn them credit among investors, policy-makers, and the public, whereas others plan to reflect more carefully on their options.
3. Views expressed in this article are of participants at the Audit Committee Leadership Summit (ACLS), March 2013. The ACLS is a joint meeting of the North American and European audit committee leadership networks. The networks are led and organized by Tapestry Networks and supported by EY as part of its continuing commitment to board effectiveness and good governance.
Questions for the audit committee:
- What role might enhanced audit committee reporting play in educating legislators and regulators about the audit committee's role in public company auditing? Could an improved audit committee report help strengthen that role?
- In what ways would increased transparency help investors understand what the audit committee does?
- What does your company include in its audit committee report? What other kinds of content could be included?
- What kind of judgments about the content will be necessary?