Institutional Shareholder Services (ISS) has increased its interest in audit committees and auditors should know what it means for them.
In its 2018 Governance Principles Survey, ISS, the most significant proxy advisory firm, included new questions about external auditor approval and the makeup of audit committees. Many audit chairs are curious about ISS’s increased interest in audit-related matters. So in October 2018, Marc Goldstein, head of US research at ISS, met with members of the Audit Committee Leadership Network (ACLN) in Washington, DC, to discuss these developments.
How ISS develops and implements policy
Goldstein began by outlining ISS’s process for developing its guidelines, which are used to evaluate a company’s proxy and make voting recommendations to institutional investors. He explained that the process is expansive and includes consideration of emerging issues, regulatory changes, notable trends, academic research, commentary, surveys and roundtable discussions. Its policies are then posted for review and comment before the firm’s Global Policy Board sets the policies for the following year.
Goldstein noted that ISS recommendations are just that, and many investors conduct their own analysis based on their own views and priorities to determine voting decisions.
ISS recommendations regarding external auditors
To consider how to assess whether to vote for or against audit firm ratification, especially in light of recent high-profile financial reporting issues, the 2018 ISS survey included more focused questions about companies’ external auditors. Institutional investors seemed most interested in issues related to regulatory fines or other penalties for weaknesses or errors in the audit, audit controversies, and the identity and independence of audit partners.
ACLN members responded with caution against the establishment of multiple standards — one set by regulators and the other by proxy advisors. Some also expressed concern over using only quantitative metrics in making recommendations. They explained that many factors are considered when companies assess auditors and audit quality, including public information and sometimes details that may not be available publicly.
ISS recommendations regarding audit committee members
The 2018 ISS survey also included more questions about the audit committee. These included questions about committee members’ skills and the quality of financial reporting. Again, ACLN members urged caution. Members offered examples of value that committee members with a diverse set of skills and experience beyond financial reporting can bring to the audit committee’s work. They also encouraged ISS to consider the unique circumstances of each company — such as size and sector — and how these affect audit committee composition.