Disclosures of audit committee’s role increasing

Public company audit committees are increasing disclosures related to their oversight of external auditors, a Center for Audit Quality (CAQ) study released Tuesday shows.

Compared with 2014, more companies in the Standard & Poor’s (S&P) 1500 included information in their proxy disclosures about the factors they considered in appointing an audit firm, their responsibility for audit firm compensation, and the criteria they discuss when evaluating their audit firm.

The study of proxy disclosures was conducted by the CAQ, which is affiliated with the American Institute of CPAs, and independent research provider Audit Analytics. It appears to show the results of heightened focus on the audit committee’s role in choosing and evaluating the external auditor.

In July, the SEC issued a concept release asking whether the information provided to investors about the audit committee’s responsibilities and activities related to oversight of the independent auditor could be enhanced. In November 2013, a consortium of US governance organisations including the CAQ issued a call to action urging public company audit committees to enhance reporting about their activities.

An increasing interest by investors, regulators, and others in the role of the audit committee appears to be fuelling the increased disclosures, according to the report. Some investment groups and pension funds also are calling for more information about the audit committee’s oversight of the external auditor.

Areas showing a rise in disclosures compared with 2014 included:

• Factors considered in selecting the audit firm: Disclosures increased for companies in the S&P 500 (25% in 2015, up from 13% in 2014), the S&P MidCap 400 (16%, up from 10%), and the S&P SmallCap 600 (11%, up from 8%) indexes.
• Audit firm compensation: Audit committees disclosing their responsibility for determining compensation for the audit firm rose for companies in the S&P 500 (16%, up from 8%), the S&P MidCap 400 (3%, up from 1%), and the S&P SmallCap 600 (5%, up from 1%) indexes.
• Audit firm evaluation and supervision: More audit committees disclosed their criteria considered when evaluating the audit firm at companies in the S&P 500 (24%, up from 8%), the S&P MidCap 400 (25%, up from 7%), and the S&P SmallCap 600 (22%, up from 15%) indexes.

For each of the three index sizes, more companies also included a statement that the audit committee is involved in partner selection and a statement that the audit partner rotates every five years.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine editorial director.