For the sixth consecutive year, the EY Center for Board Matters reviewed audit committee-related proxy disclosures by Fortune 100 companies to examine trends in voluntary reporting and finds a continued increase in voluntary audit committee disclosures to shareholders. Year-over-year growth in voluntary audit-related disclosures in 2017 filings was similar to that seen in 2015 and 2016, indicating that companies and.
Here we examine key audit-related proxy disclosures from 2012-2017 in order to promote discussion regarding audit committee communications with stakeholders. Due to investor interest in board composition and activities, it also provides a snapshot of how certain characteristics of audit committees have changed from 2012 to today.
Understanding the context of these regulations
When SOX was signed into law 15 years ago, it expanded audit committee authority and responsibilities over financial reporting and the external auditor relationship at US-listed companies. SOX required the boards of companies listed on US stock exchanges to establish audit committees made up solely of board members that are independent from management. It also made audit committees, rather than management, directly responsible for the appointment, compensation and oversight of the work of external auditors.
In recent years, regulators, investors and other stakeholders in the US and abroad have focused attention on audit committees in light of their important role. Some have noted the limited nature of disclosure requirements regarding audit committee activities. Under US laws and regulations, while annual proxy materials must include an audit committee report, the required content of this report is quite limited. Additional information about the audit committee and auditor often can be found elsewhere in the proxy materials, annual reports and other materials, although these are not disclosures that audit committees are required to make.
Reconsideration of disclosure requirements
In recent years, regulators have sought public input about public company-related disclosures generally and specifically about audit committees and audits. Recent and ongoing activity at the PCAOB and SEC continue to be relevant to audit committee disclosure considerations.
The PCAOB is taking steps to require greater disclosures by the auditor, expanding publicly-available information relating to the audit.
- Since January 2017, audit firms have had to file Form AP to disclose the name of the lead engagement partner for each public company audit.
- Starting in July 2017, audit firms also must disclose the names, locations, and extent of participation of other accounting firms that took part in public company audits, if their work contributed 5% or more of the total audit hours.
- The PCAOB also approved a final standard to expand the auditor’s report to include items, such as the length of the auditor’s tenure and a statement that auditors are required to be independent. If approved by the SEC, this new information will be required for auditor’s reports relating to financial reporting periods ending on or after December 15, 2017. The standard will also phase in requirements for auditors to disclose critical audit matters (CAMs), starting with certain audits carried out in 2019. CAMs are matters that auditors communicated or were required to communicate to the audit committee that relate to material accounts or disclosures and involved especially challenging, subjective or complex auditor judgment.
These new PCAOB-required disclosures will not be located in the proxy materials, which is the focus of this research and where many investors seek audit-related information to make decisions about whether to ratify a company’s auditor.
Newly-appointed SEC Chairman Jay Clayton gave a speech in July indicating that improving disclosures for investors is on the SEC’s agenda and that the SEC has several current projects in this area. SEC disclosure-related actions in the past several years include:
- Starting in 2013, the SEC has engaged in a review of the overall effectiveness of current disclosure requirements. In addition to considering changes to disclosure requirements, the SEC staff has encouraged issuers to voluntarily review their disclosures to consider whether and how they can better provide investors with better information. This SEC initiative is ongoing.
- In 2015, the SEC issued a concept release, Possible Revisions to Audit Committee Disclosures, to solicit views on whether there would be a benefit from greater transparency around the work of audit committees, and if so, how best to achieve it. This action arose in part due to interest from investors in seeking greater disclosures by audit committees about their work. Although no regulatory action has been taken to date to change required audit committee-related disclosures, the SEC staff has continued to encourage audit committees to consider expanding disclosures voluntarily.
Our research into 2017 proxy materials showed similar increases in voluntary audit-related disclosure as in the past several years, with steady growth in certain areas. We conducted this analysis by looking at the proxy materials of 75 companies on the 2017 Fortune 100 list that filed proxy statements each year from 2012 to 2017 for annual meetings through August 15, 2017 (companies that have not yet held their 2017 annual meeting are excluded). Highlights from our findings include:
Disclosure of audit oversight responsibilities
- The percentage of companies that explicitly stated that the audit committee is responsible for the appointment, compensation and oversight of the external auditor has nearly doubled since 2012, increasing to 87% in 2017, up from 81% in 2016 and 45% in 2012.
Auditor assessment disclosures
- The percentage of companies disclosing the factors used in the audit committee’s assessment of the external auditor’s qualifications and work quality increased from 48% in 2016 to 56% in 2017. In 2012, 17% of companies made such disclosures.
Disclosure of interactions with auditor
- The level of disclosure about the topics discussed by the auditor and audit committee continues to be low, with only 3%-4% of companies providing such information between 2012 and 2017. It will be interesting to observe whether these numbers change in the years ahead following the adoption of the PCAOB’s new auditor reporting standard (assuming the SEC adopts the standard), which will require auditor disclosures regarding critical audit matters discussed with the audit committee.
Disclosure regarding lead audit partner selection
- While in 2012, only 1% of companies disclosed that the audit committee was involved in the selection of the lead audit partner, this rose to 75% in 2017. In 2016, it was 69%.
- The percentage of audit committees that explicitly stated in the audit committee report that they are independent from management rose from 59% in 2016 to 64% in 2017.
- Since 2012, the percentage of companies that state that the audit committee considers non-audit fees and services when assessing auditor independence rose dramatically, from 15% in 2012 to 84% in 2017.
- Disclosures relating to audit fees have changed substantially since 2012, when none of the Fortune 100 companies disclosed that the audit committee is responsible for fee negotiations with the auditor. In 2017, 32% of the companies did so, compared to 27% in 2016.
- In 2017, 43% of companies provided an explanation for a change in fees paid to the external auditor (including audit, audit-related, tax and other fees), while 31% did so in 2016 and 11% in 2012. Breaking this figure down further:
- Our research shows that companies tend to provide explanatory disclosures more frequently when audit fees rise and are less inclined to do so when they decline. In 2017, of the companies that paid audit fees that were more than 5% higher than in 2016, 29% provided an explanation for the fee increase. For companies that paid audit fees that were more than 5% lower than in 2016, only 9% provided explanatory disclosures.
Trends in audit committee disclosures
Note: Click the colored segments below to access disclosure observations and sample language from Fortune 100 proxy statements.
|Category||Topic||2017 % |
|2016 % |
|2015 % |
|2014 % |
|2013 % |
|2012 % |
|Disclosures in the audit committee report||Statement that the audit committee is independent||64%||59%||60%||56%||52%||55%|
|Name of the audit firm is included in the audit committee report||77%||76%||75%||75%||76%||76%|
|Audit committee composition||Audit committee with one financial expert (FE)||17%||28%||27%||32%||29%||29%|
|Audit committee with two FEs||35%||21%||27%||29%||51%||37%|
|Audit committee with three or more FEs||48%||51%||47%||39%||20%||33%|
|Audit committee responsibilities re: external auditor||Explicit statement that the audit committee is responsible for appointment, compensation and oversight of external auditor||87%||81%||80%||69%||56%||45%|
|Identification of topics discussed|| |
Topics discussed by the audit committee and external auditor
|Fees paid to the external auditor||Statement that the audit committee considers non-audit fees/services when assessing auditor independence||84%||81%||81%||77%||77%||15%|
|Statement that the audit committee is responsible for fee negotiations||32%||27%||24%||15%||7%||0%|
Explanation provided for change in fees paid to external auditor
|Assessment of the external auditor|| |
Disclosure of factors used in the audit committee's assessment of the external auditor qualifications and work quality
|Statement that audit committee involved in lead partner selection||75%||69%||65%||48%||15%||1%|
|Disclosure of the year the lead audit partner was appointed||16%||12%||11%||8%||3%||3%|
|Statement that choice of external auditor is in best interest of company and/or shareholders||73%||72%||63%||47%||20%||3%|
|Tenure of the external auditor||Disclosure of the length of the external auditor tenure||67%||65%||64%||56%||32%||27%|
Statement that the audit committee considers the impact of changing auditors when assessing whether to retain the current external auditor
|Accessibility of audit committee charters from proxy statements (link in proxy statement goes directly to)||Audit committee and/or all committee charters||12%||12%||16%||16%||11%||8%|
|Company main website||39%||37%||39%||40%||41%||44%|
|Company site for investor relations||24%||24%||24%||27%||27%||25%|
|Company site for corporate governance||25%||27%||21%||17%||21%||23%|
Notes: Percentages based on total disclosures for audit committees each year. Data based on the 75 companies on the 2017 Fortune 100 list that filed proxy statements each year during 2012-2017 and held annual meetings through 15 August 2017.
Topics discussed by the audit committee and external auditor
Companies making these disclosures indicated that the audit committee raised certain topics with their external auditors other than those required by regulations.
“Management, the internal auditors and the independent auditors also made presentations to the audit committee throughout the year on specific topics of interest, including the company’s: (i) enterprise risk assessment process; (ii) information technology systems and controls; (iii) income tax strategy and risks; (iv) derivatives policy and usage; (v) benefit plan fund management; (vi) 20XX integrated audit plan; (vii) updates on completion of the audit plan; (viii) critical accounting policies; (ix) assessment of the impact of new accounting guidance; (x) compliance with the internal controls required under Section 404 of SOX; (xi) ethics and compliance program; (xii) risk management initiatives and controls for various acquisitions and business units; (xiii) strategy and management of the implementation of new systems; and (xiv) cyber security.”
Explanation provided for change in fees paid to external auditor
Most companies provide an explanation for the types of services included within each fee category. The companies highlighted in this row explained the circumstances for the change.
"... year-over-year increase largely driven by the ABC acquisition.”
Disclosure of factors used in the audit committee’s assessment of the external auditor qualifications and work quality.
Companies that included this information provided examples of the criteria used in auditor assessments.
“In evaluating and selecting the company’s independent registered public accounting firm, the Audit Committee considers, among other things, historical and recent performance of the current independent audit firm, an analysis of known significant legal or regulatory proceedings related to the firm, external data on audit quality and performance, including PCAOB reports, industry experience, audit fee revenues, firm capabilities and audit approach, and the independence and tenure of the audit firm.”
Statement that the audit committee considers the impact of changing auditors when assessing whether to retain the current external auditor.
These companies indicated that the audit committee considered alternatives to retaining the incumbent external auditor.
“The Committee engages in an annual evaluation of the independent public accounting firm’s qualifications, assessing the firm’s quality of service, the firm’s sufficiency of resources, the quality of the communication and interaction with the firm, and the firm’s independence, objectivity, and professional skepticism. The Committee also considers the advisability and potential impact of selecting a different independent public accounting firm.”
Characteristics of Fortune 100 audit committees: 2017 vs. 2012
The composition of boards is a current area of great interest to many institutional investors. Below is data regarding the composition and activities of audit committees in 2017 as compared to 2012. While the data in several areas did not change, notable exceptions included:
- Increases in the percentage of audit committee members that are identified as financial experts (66% in 2017 vs. 59% in 2012) and those that are women (26% in 2017 vs. 19% in 2012).
- Degree of turnover in audit committee chairs (41%), as well as the percentage of audit committees (85%) that gained new members between 2012 and 2017.
|Fortune 100 audit committees||2017||2012|
|Audit committee characteristics|
|Size (number of committee members)||4||4|
|Women audit committee members||26%||19%|
|Meeting frequency (number of meetings per year)||9||9|
|Board tenure (average number of years on board)||8||7|
|Changes since 2012|
|Audit committees that experienced chair turnover||41%|
|Audit committees that added at least one new member||85%|
|Average percentage of new members on audit committees that added at least one new member||49%|
Questions for audit committees to consider
- To what extent does the audit committee already provide voluntary audit or audit-related disclosures?
- Have investors expressed interest in greater transparency in the audit committee’s work in connection with broader company-investor engagement conversations?
- How has the role of the audit committee evolved in recent years (e.g., oversight of the ERM process, cybersecurity risk) – and to what extent are these changes being communicated to stakeholders via the proxy statement?
- What additional voluntary disclosures might be useful to shareholders related to the audit committee's time spent on certain activities, such as company restructuring or financial statement reporting developments?