5 minute read 11 Sep 2018
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Audit committee reporting to shareholders in 2018

By

US Americas

Multidisciplinary professional services organization

5 minute read 11 Sep 2018

Proxy disclosures in 2018 continue to show a year-over-year trend of increasing voluntary audit-related disclosures.

Voluntary proxy statement disclosures by Fortune 100 companies relating to audit committees and the audit offer incalculable value in informing investors about the important role audit committees play in investor protection through their independent oversight of the external audit. This oversight, in turn, enhances investor confidence in financial reporting. Proxy disclosures in 2018 continue to show a year-over-year trend of increasing voluntary audit-related disclosures.

Understanding the context

The Sarbanes-Oxley Act of 2002 created a strong regulatory framework to protect the integrity of financial reporting. One of the primary ways the Act accomplished this was by requiring listed companies to have fully independent audit committees that are responsible for the appointment, compensation and oversight of the external auditor. U.S. Securities and Exchange Commission (SEC) regulations do not require disclosure regarding the full range of an audit committee’s activities, which means that company disclosures often do not provide investors and other stakeholders with a full picture of this important work.

In recent years, investor groups and regulators have encouraged more audit-related disclosure to address this gap. Companies in response have been voluntarily augmenting the information they provide in their annual proxy statements.

  • The EY Center for Board Matters has examined and tracked voluntary proxy statement disclosures by Fortune 100 companies relating to audit committees and the audit since 2012.

What disclosures show in 2018

Although the change in percentage of companies providing these voluntary disclosures is smaller in 2018 than in recent years, there has been a dramatic increase in disclosures in most categories since we began examining these disclosures in 2012. For example:

  • In 2018, 71% of companies disclosed the length of auditor tenure. In 2017, the percentage was 64%, and in 2012 it was 25%.
  • Sixty-two percent of companies disclosed the factors used in the audit committee’s assessment of the external auditor qualifications and work quality, while in 2017 and 2012 the percentage was 58% and 18%, respectively.
  • In 2018, the percentage of companies disclosing that the audit committee considers non-audit fees and services when assessing auditor independence increased to 89% from 86% in 2017. In 2012, 12% of companies disclosed this information.
  • The percentage of companies providing an explanation for a change in all fees paid to the external auditor decreased slightly from 45% in 2017 to 44% in 2018, while just 10% of companies made these disclosures in 2012. However, in 2018 only 16% provide an explanation for a change in the audit fee itself.

In the table below, we provide further data on these disclosures by Fortune 100 companies.

Trends in audit committee disclosures

Category Topic 2018 2017 2016 2015 2014 2013 2012
Disclosures in the audit committee report Statement that the audit committee is independent 68%

67%

61%

61%

57%

53%

56%

 

Name of the audit firm is included in the audit committee report

79%

75%

73%

72%

72%

73%

73%

 

Audit committee with one financial expert (FE)

14%

17%

28%

27%

32%

29%

31%

Audit committee composition

Audit committee with two FEs

33%

29%

16%

21%

24%

45%

32%

 

Audit committee with three or more FEs

53%

53%

56%

52%

44%

25%

37%

Audit committee responsibilities re: external auditor

Explicit statement that the audit committee is responsible for appointment, compensation and oversight of external auditor

88%

88%

82%

81%

68%

56%

44%

Identification of topics discussed

Topics discussed by the audit committee and external auditor

4%

4%

4%

5%

5%

5%

5%

 

Statement that the audit committee considers non-audit fees/services when assessing auditor independence

89%

86%

84%

79%

75%

75%

12%

Fees paid to the external auditor

Statement that the audit committee is responsible for fee negotiations

37%

34%

29%

26%

16%

8%

1%

 

Explanation provided for change in fees paid to external auditor

44%

45%

37%

25%

21%

15%

10%

 

Explanation provided for change in audit fees paid to external auditor

16%

19%

15%

10%

12%

10%

7%

 

Disclosure of factors used in the audit committee's assessment of the external auditor qualifications and work quality

62%

58%

48%

41%

33%

22%

18%

Assessment of the external auditor

Statement that audit committee involved in lead partner selection

78%

75%

70%

66%

48%

15%

0%

 

Disclosure of the year the lead audit partner was appointed

16%

16%

12%

11%

7%

3%

3%

 

Statement that choice of external auditor is in best interest of company and/or shareholders

74%

73%

73%

64%

46%

23%

4%

 

Disclosure of the length of the external auditor tenure

71%

64%

63%

62%

53%

30%

25%

Tenure of the external auditor

Statement that the audit committee considers the impact of changing auditors when assessing whether to retain the current external auditor

63%

60%

53%

49%

33%

16%

3%

 

Audit committee and/or all committee charters

12%

12%

12%

16%

16%

11%

8%

Accessibility of audit committee charters from proxy statements (link in proxy statement goes directly to)

Company main website

38%

38%

36%

38%

40%

41%

44%

 

Company site for investor relations

25%

25%

25%

25%

27%

27%

26%

 

Company site for corporate governance

25%

25%

27%

21%

16%

21%

22%

Notes: Percentages based on total disclosures for audit committees each year. Data based on the 73 companies on the 2018 Fortune 100 list that filed proxy statements each year during 2012–2018 and held annual meetings through 15 August 2018.

Outlook on disclosure requirements

Looking ahead, new auditor disclosure requirements could impact decisions regarding audit committee voluntary disclosures over the next several years, including:

  • Required disclosures by auditors have increased: In 2016 and 2017, the US Public Company Accounting Oversight Board (PCAOB) issued rules to expand certain disclosures by the auditor. This could encourage companies to expand their disclosures. These new auditor disclosures include:

1. Lead audit partner’s name
2. Identification of the names and locations of other accounting firms that participate in an audit, as well as the extent of their participation
3. Length of auditor tenure

  • More auditor disclosures are on the way: The PCAOB also issued a rule to require disclosure of critical audit matters (CAMs) starting in 2019 for some issuers. CAMs are matters communicated or required to be communicated to the audit committee that relate to material accounts or disclosures and involve especially challenging, subjective or complex auditor judgment. Companies may choose to review their disclosures to make certain the same topics are covered as well.

How we see it

A US survey of investors indicates high degrees of confidence in the audited financial information disclosed by public companies. This confidence aligns with improvements in the quality of financial reporting: in 2017 the number of financial restatements was lower than it has been in 17 years. Yet, at the same time, there was a slight increase in average votes against ratifying the external auditor in the 2018 proxy season.

This increase suggests that some investors are taking a stricter approach to reviewing the company-auditor relationship. This could encourage companies to provide additional disclosure around the audit committee’s selection of an auditor.

Enhancing audit committee transparency can increase investors’ confidence in financial reporting and their confidence in the role of the audit committee in overseeing the audit process and promoting audit quality in the interest of investors.

Meaningful disclosure about what audit committees do and how they oversee auditors would provide a window into the important work audit committees perform, as well as the processes in place to protect auditor independence and professional skepticism and further the alignment among auditors, audit committees and investors.

Questions for the audit committee to consider

  • How do director qualifications and board composition-related disclosures highlight the expertise, experiences and backgrounds of audit committee members?
  • 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 via the proxy statement?
  • What impact will new auditor disclosure requirements have on audit committee disclosures?
  • 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?

Summary

There has been an increase in voluntary audit committee disclosures, and new auditor disclosure requirements could impact decisions regarding disclosures over the next several years.

About this article

By

US Americas

Multidisciplinary professional services organization