Audit committee reporting to shareholders in 2021

For 10 years, EY has reviewed voluntary proxy statement disclosures by Fortune 100 companies relating to audit committees.

For the 10th consecutive year, the EY Center for Board Matters has reviewed voluntary proxy statement disclosures by Fortune 100 companies relating to audit committees, including their oversight of the audit.

Audit committees of listed companies have the critical role in the US capital markets in promoting high-quality and reliable financial reporting, which includes overseeing external and internal audit. Investors and other stakeholders can gain valuable insight into these important audit committee governance activities through disclosures provided by companies in proxy statements. The role of the audit committee (as well as transparency around that role) helps strengthen investor confidence in financial reporting and US capital markets. 

The EY Center for Board Matters (CBM) has tracked audit committee-related disclosures over 10 years to provide a spotlight on the information available about audit committees’ critical duties. Our research shows that companies recognize the value of this reporting to investors and other stakeholders. Since 2013, many companies have significantly enhanced voluntary communications about how audit committees are executing their core responsibilities. This publication presents data on the types of audit committee-related disclosures that some of the largest public companies are providing, as well as examples of disclosures.

The establishment of independent audit committees as overseers of the audit was one of the key features of the Sarbanes-Oxley Act of 2002 (SOX) — now approaching its 20th anniversary — to help restore confidence in the US capital market after a series of corporate financial reporting scandals.

Understanding the context

The role of audit committees

Audit committee oversight of financial reporting is a vital element of the US capital market regulatory framework. Audit committees of listed companies are responsible for overseeing financial reporting, including the external audit. US securities laws state that audit committees are “directly responsible for the appointment, compensation, retention and oversight” of the external auditor. These audit committee members must also be independent, meaning they may not be affiliated with the company or any subsidiaries, and they cannot directly or indirectly receive any compensation from the company other than in their capacity as members of the board. Audit committees have responsibilities around auditor independence. These include preapproving all audit and non-audit services provided by the external auditor and resolving disagreements between the auditor and management about financial reporting. This positions audit committees to be objective overseers of the external audit and financial reporting on behalf of shareholders a key pillar supporting the integrity of financial reporting.

Audit committee disclosures 

Our examination of proxy disclosure data for 2021 demonstrates that companies continue to provide voluntary disclosures in audit-related areas of interest to investors and other stakeholders, typically going beyond the specific areas of required disclosures. These required disclosures include information about the functions, policies and procedures of audit committees. In response to investor and other stakeholder interests, many companies add on to these mandatory disclosures to help shed more light on the type and degree of oversight exercised by audit committees. Examples of voluntary disclosures include the factors audit committees use when assessing the external auditor and identification of financial experts on the committee.  

Voluntary audit committee-related disclosures have grown significantly over the past 10 years that EY has been tracking them, although the pace of change has slowed in recent years. While the COVID-19 pandemic has had a great deal of impact on publicly traded companies, it does not appear to have altered the upward trend in voluntary disclosures about audit committees, albeit incremental. 2021 disclosures also indicate that some audit committees are expanding their remits to include issues increasingly relevant to today’s investors, such as environmental, social and governance (ESG) matters, cybersecurity and more.

What we see in 2021

While the year-over-year change in the percentage of companies included in our review that provide these voluntary disclosures is relatively minor, there has been a dramatic increase in disclosures in most categories since we began examining these disclosures in 2012. For example:

• This year, 71% of reviewed companies disclosed factors used in the audit committee’s assessment of the external auditor qualifications and work quality, up from 64% last year. Only 15% of these companies made that disclosure in 2012.
• Nearly 92% of reviewed companies disclosed that the audit committee considers non-audit fees and services when assessing auditor independence, vs. just 16% in 2012.
• Nearly 70% of reviewed companies stated that they consider the impact of changing auditors when assessing whether to retain the current external auditor, and 79% disclose the tenure of the current auditor. That’s up from just 3% and 23%, respectively, in 2012.

Additional observations

Expansion of audit committee role

Consistent with the trends of voluntary audit committee disclosures, we continue to see companies bolster their description of audit committee oversight and the roles and responsibilities of the committee. This year, we reviewed the key committee responsibility-related disclosures to assess if there were disclosures around additional risks or issues falling under the audit committee’s purview beyond financial reporting, compliance and legal matters. We noted that approximately 76% of reviewed companies included additional disclosures around risks beyond financial reporting that were being overseen by the audit committee. Some of these top risks being overseen by audit committees include cybersecurity, data privacy, enterprise risk management and ESG. Leading companies are also adding additional specificity by highlighting changes to oversight activities and key focus areas for the audit committee for the year.

• Nearly 70% of reviewed companies disclosed that the audit committee oversees cybersecurity matters.
• Notably, 10% of reviewed companies discussed the audit committee’s role in ESG matters, up from 6% last year. These matters include oversight of climate change risks as they relate to financial and operational risk exposures and other environmental, health and safety-related matters.

Critical audit matters (CAMs)

We specifically tracked whether any of the audit committee disclosures this year referenced critical audit matters, which are matters communicated or required to be communicated by the external auditor to the audit committee relating to material accounts or disclosures and involving especially challenging, subjective or complex auditor judgment. We noted 16 examples of company disclosures (out of 72 companies) regarding CAMs.

• These disclosures noted that the audit committee reviewed and discussed with the external auditor CAMs that arose during the current period audit. Only one company noted the number of CAMs identified.
  

Auditor ratification support

In terms of voting results for proposals to ratify the external auditor, support is still very strong. As of Q2 2021, average support is 99% for the Russell 3000, 98% for the S&P 1500 and 97% for the S&P 500, which is in line with recent years. Fewer than 1% of the auditor ratification proposals voted so far this year have received less than 90%.

Trends in audit committee disclosures

Disclosure observations and sample language from 2021 Fortune 100 proxy statements

Questions for audit committees to consider:

• Does the company’s proxy statement effectively communicate how the audit committee is overseeing and engaging with the independent auditor? Does it address areas of investor interest, such as the independence and performance of the auditor and the audit committee’s key areas of focus?
• How has the role of the audit committee evolved in recent years (e.g., oversight of enterprise risk management, cybersecurity risk), and to what extent are these changes being communicated to stakeholders?
• In light of the changing environment, what additional voluntary disclosures might be useful to shareholders related to the audit committee’s time spent on certain activities, such as cybersecurity, data privacy, business continuity, corporate culture and financial statement reporting developments?
• Has the audit committee considered how changes in the auditor reporting requirements may impact audit committee disclosures?
• How do director qualifications and board composition-related disclosures highlight the diversity considerations, expertise, experiences and backgrounds of audit committee members?