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.
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