Audit Committee Reporting To Shareholders: 2014 Proxy Season Update

The following post comes to us from Ernst & Young, and is based on an Ernst & Young study by Allie M. Rutherford and Ruby Sharma. The complete publication is available here.

The 2014 proxy season saw significant growth in audit committee transparency. Continuing the trend of the past several years, an increased number of Fortune 100 companies are going beyond the minimum disclosures required.

These disclosures are also more robust—providing valuable perspectives on the activities of audit committees, including their oversight of external auditors.

The recent movement toward increased audit committee transparency has been encouraged by a variety of factors and entities. In addition to the ongoing disclosure effectiveness review by the US Securities and Exchange Commission (SEC) involving a holistic review of the US corporate disclosure regime, audit committee disclosures are receiving significant attention from a variety of stakeholders. These stakeholders include US and non-US regulators, investors, and policy organizations.

Reasons for supporting greater audit committee transparency include enhancing investor confidence in the important oversight work performed by audit committees; improving communication with investors about audit committee responsibilities, including their oversight of the external auditor; and better informing shareholders in their consideration of auditor ratification proposals.

2014 Proxy Statement Highlights

Beginning with the 2012 proxy season and comparing year-over-year disclosures, 2014 saw audit committee reporting remain a significant area of change for companies and their audit committees. Several companies expanded their disclosures in key ways. Audit committees are continuing to go beyond basic requirements to provide more relevant, useful information.

  • Some audit committees are centralizing their disclosures as part of efforts to communicate more effectively: Reducing the dispersion of audit-related disclosures throughout the proxy statement can make it easier for readers to synthesize all available information.
  • Some companies are improving the accessibility of the audit committee charter: By providing investors with a direct link to the charter, companies make it easier for investors to quickly learn about the committee’s designated responsibilities. Nearly 15% of companies provided a direct link to the audit committee charter in the proxy statement this year, more than twice the 6% level of two years ago.
  • Audit committees are increasingly open about how they oversee their external auditors: As investors seek further clarity on the audit committee oversight and decision-making process, a growing number of companies are responding by providing additional information.
  • Disclosures related to the audit committee’s review and evaluation of external auditors:
    • 65% of companies specified that the audit committee is responsible for the appointment, compensation and oversight of the auditor, compared to 40% in 2012.
    • 46% of companies explicitly state their belief that their selection of the external auditor is in the best interest of the company and/or shareholders, up from 4% in 2012.
    • 44% of companies disclosed that the audit committee was involved in the selection of the audit firm’s lead engagement partner. In comparison, only 1% of companies did this in 2012.
    • 31% of companies explained the rationale for appointing their auditor, including the factors used in assessing the auditor’s quality and qualifications. Only 16% percent of companies did this in 2012.
    • 8% of companies disclosed the topics that the audit committee discussed with the auditor—beyond matters required to be discussed under regulatory rules.
  • Disclosures related to the audit committee’s authority to approve all audit engagement fees and terms:
    • 80% of companies noted that they consider non-audit services and fees when assessing the independence of the external auditor.
    • 19% of companies disclosed that the audit committee was involved in the auditor’s fee negotiations, up significantly from just 1% in 2012.
    • 8% of companies acknowledged a change in fees to the external auditor and explained the circumstance for the change, doubling the percentage of companies that did so in 2012.
  • Disclosures related to the tenure of their external auditors:
    • Auditor tenure was disclosed by half of reviewed companies, an increase from 26% in 2012.
    • 28% of companies disclosed that the audit committee considers what would be the impact of rotating their external auditor, up from 3% in 2012.

The complete publication is available here.

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