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?