Audit Committee Disclosure Trends in Proxy Statements

Deborah DeHaas is vice chairman, chief inclusion officer and national managing partner at the Center for Board Effectiveness, Deloitte US; Henry Phillips is vice chairman and national managing partner at the Center for Board Effectiveness, Deloitte & Touche LLP; Consuelo Hitchcock is principal, Regulatory Affairs, at Deloitte & Touche LLP. This post is baed on a Deloitte publication by Ms. DeHaas; Mr. Phillips; Ms. Hitchcock; Bob Lamm, independent senior advisor at the Center for Board Effectiveness, Deloitte LLP; and Debbie McCormack, managing director at the Center for Board Effectiveness, Deloitte LLP.

Over the past several years, investors and other governance groups have sought expanded disclosures on how audit committees execute their duties. The Securities and Exchange Commission (SEC) also weighed in on the discussion when it issued a request for public comment in a July 2015 concept release titled Possible Revisions to Audit Committee Disclosures.

The SEC has not yet changed audit committee disclosure requirements in response to these efforts, and there is no indication that rule changes are likely any time soon. However, over the past several years, companies have generally increased voluntary disclosures about the role and activities of audit committees.

Deloitte’s analysis of the 2017 proxies of S&P 100 companies [1] indicates that disclosures on 50% of the topics included in the analysis increased as compared to 2016. Thirty-seven percent of the topics reflected reduced disclosures.

Deloitte’s 2016 analysis revealed that disclosures in three areas increased by 10% or more over 2015: the number of financial experts on the audit committee; the audit committee’s role in reviewing earnings or annual report press releases with management and the independent auditor; and the audit committee’s role in approving audit engagement fees.

In contrast, the 2017 analysis indicates that disclosures in no area reviewed increased by more than 10% and that changes in disclosure increased or decreased by no more than 4%. However, the analysis revealed that, across all areas, the number of increases in disclosure outpaced decreases by twelve percentage points.

These statistics may be affected by a number of factors, including that as more companies have increased their audit committee disclosures over time, the year-over-year increases have diminished. It is also possible that companies have reduced the amount of “routine but not required” audit committee disclosures in favor of more substantive disclosures.

Deloitte’s analysis indicates that S&P 100 companies uniformly comply with disclosure requirements related to the audit committee, which are summarized in the appendix of the full report. Following are findings from the Deloitte analysis on disclosures that either expanded on or went beyond the required elements.

Oversight of the Independent Auditor

The Sarbanes-Oxley Act of 2002 recognized the importance of independent audit committees to the audit process by mandating that the audit committee be directly responsible for the appointment, compensation and oversight of the independent auditor. As a result, many audit committee-related proxy statement disclosures focus on these key responsibilities. Consistent with Deloitte’s 2016 analysis, all the companies in the 2017 analysis disclosed information about their audit committees’ oversight of the independent auditor. However, not all companies disclosed the same types of information.

Appointment and evaluation of the independent auditor. Sixty-one percent of the companies explicitly disclosed that the audit committee evaluates the independent auditor. This represents a 2% increase over 2016 and a return to the 2015 level. Factors considered in those evaluations included the independent auditor’s qualifications, performance, independence and tenure. The analysis indicated very little change in the number of companies that disclosed the reasons for retaining the incumbent independent auditor.

Compensation of the independent auditor. Only 20% of audit committees disclosed that they are responsible for negotiating fees, a 3% decrease from 2016. Most companies (63%) provided general disclosures around the audit committee’s role in reviewing and approving the audit engagement fees, a slight (2%) decrease as compared to 2016.

Discussions around the auditor’s responsibilities. Sixty-five percent of the companies in the analysis provided disclosures regarding the responsibilities of the independent auditor, a 4% decrease as compared to 2016. Responsibilities mentioned frequently included performing an audit of, and expressing an opinion on, the company’s financial statements and its internal control over financial reporting, as well as discussing with the audit committee any matters deemed appropriate.

Oversight of the Financial Reporting Process

Deloitte’s 2017 analysis found that 91% of the S&P 100 companies discussed the audit committee’s role in overseeing the financial reporting process, compared to 88% in 2016. While some companies simply noted that one of the audit committee’s responsibilities was to oversee the financial reporting process, many others provided additional details. Continuing the trend observed in the 2016 analysis, more companies noted that their audit committees review the earnings/annual report press releases with management and the independent auditor prior to their release. Disclosure in this area increased to 32% from 30%, which in turn was up significantly from the 20% reported in 2015, and it may increase further given the SEC’s recent focus on non-GAAP measures.

Other Oversight Responsibilities

In addition to their responsibility for overseeing the independent auditor and financial reporting process, many audit committees discussed other oversight responsibilities. In 2017, the analysis continued to focus on disclosures about the audit committee’s oversight of areas such as risk and internal audit.

Role of the audit committee in overseeing risk. The role of the board and its committees in overseeing risk continues to be a hot topic. Ninety-nine percent of the S&P 100 companies disclosed the role of the audit committee in overseeing risk. The level of responsibility assigned to the audit committee, however, differed from company to company. Companies disclosed that the audit committee was responsible for overseeing risks associated with traditional areas such as financial reporting, internal controls and compliance, and some noted that the audit committee’s role in risk oversight extended beyond these areas.

Role of the audit committee in overseeing internal audit. For 2017, 89% of companies discussed the audit committee’s role in overseeing the internal audit function, an increase over 85% in 2016. Disclosures often noted the audit committee’s role in areas such as assisting the board in fulfilling its oversight responsibility with respect to the qualifications and performance of the internal audit function and internal auditors, as well as overseeing the appointment, removal, performance, and compensation of the chief audit executive.

Other topics discussed by the audit committee. All the S&P 100 companies disclosed at least some topics of discussion between the audit committee and management, the independent auditor, internal audit or others. Most companies limited this disclosure to the five items required by Item 407 of the SEC’s Regulation S-K [2]. Those companies that identified additional topics of discussion generally limited their disclosures to the topics covered and did not include details of the discussion. The topics listed most commonly included the audited financial statements, results and/or performance; the evaluation of the company’s internal controls and overall quality of the company’s financial reporting; and the policies and procedures with respect to the company’s risk assessment and risk management.

Voluntary Disclosures and Investor Confidence

Based on the analysis of the S&P 100’s audit committee-related proxy disclosures, calls for transparency seem to be leading companies to continue expanding disclosures beyond what is required, as disclosures increased with respect to half of the topics reviewed from 2016 to 2017.

And even though just over a third of the disclosures reviewed decreased in number, investors can be encouraged by the positive 12 percentage point difference for the companies that enhanced their disclosures compared to those who decreased the disclosures. Voluntary expansion of audit committee disclosures in several areas has the potential to enhance investor confidence in the committee’s oversight role and reduce the need for additional disclosure regulation. These areas include the direct reporting relationship between the committee and the auditor; the committee’s assessment of audit quality and auditor independence; the extent of communications between the committee and the auditor, beyond what is required by regulation and listing requirements; the committee’s process and rationale for appointing the auditor; and the committee’s activities and actions during the year.


1The 2017 analysis included all sections of the most recent annual proxy statements filed as of June 15, 2017, for the companies included in the S&P 100 index as of April 15, 2017. Because the composition of the S&P 100 changes annually, the companies analyzed in 2017 differed from those covered by the 2016 analysis; five of the companies in the 2017 analysis were not included 2016 analysis.(go back)

2See a list of these required disclosures in the appendix.(go back)

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