2018 Audit Committee Transparency Barometer

Last week, the Center for Audit Quality released its fifth annual Audit Committee Transparency Barometer. Compiled and published with Audit Analytics, the Barometer provides a year-over-year comparison in key audit committee disclosure areas and assesses the extent of audit committee disclosures for the S&P 1500 composite companies, broken out by Large Cap (S&P 500), MidCap (S&P 400), and SmallCap (S&P 600).

The fifth edition of the Barometer provides encouraging disclosure trends, as companies across all three indices continue to improve existing disclosures to include company-specific activities. Among other findings, the 2018 Barometer shows:

  • 46% of S&P 500 companies disclose criteria considered when evaluating the audit firm, up from 8% in 2014, compared to 36% percent of S&P 400 companies (up from 7% in 2014) and 32% of S&P 600 companies (up from 15% in 2014).
  • 70% of S&P 500 companies disclose the length of an audit firm engagement, rising 23% since 2014.
  • 52% of S&P 500 companies state that their audit committee is involved in audit partner selection, quadrupling from 13% in 2014.

A five-year analysis of the data shows improving trends across all three S&P indices, as companies demonstrated more transparency by adding new disclosures, improving existing disclosures, or consolidating disclosures within proxy statements. Between 2014 and 2015, audit committee-related disclosures were more consolidated within proxies, specifically with the formation of the “Audit Committee Matters” section and sub-sections. This practice continued into 2016, along with an increase in the quantity and quality of audit committee disclosures.

The number of enhanced disclosures continued to increase in 2017 and remains evident among all three indices in 2018, particularly with companies providing company-tailored details relating to the audit firm evaluation and selection.

On June 1, 2017, the PCAOB adopted a new auditing standard to improve the auditor’s report by requiring disclosure of auditor tenure and communicating critical audit matters. The new standard may be the reason for this year’s rising number of disclosures relating to the length of time of an auditor engagement.

Since last year, auditor tenure disclosures rose by 7% for S&P 500 and 5% for both S&P 400 and S&P 600 companies. Disclosure rates citing audit committee considerations in appointing an external auditor increased at a lower rate, 3% for S&P 500 and S&P 400, and 2% for S&P 600 companies. Furthermore, when comparing the rates over the past five years, the disclosure tripled for the S&P 500, rising from 13% in 2014 to 40% in 2018. The S&P 400 rose from 10% in 2014 to 27% in 2018, and the S&P 600 more than doubled from 8% in 2014 to 19% in 2018.

The quality of the context is even more noticeable than the increasing number of disclosures. Companies are creating and enhancing disclosures to provide greater transparency and explanations of the criteria considered when selecting the audit firm.

As seen in the example below, Baxter International Inc. expanded this year’s proxy statement. Its 2018 ratification disclosure includes the benefits of the auditor’s tenure, as well as the audit firm’s capabilities and expertise with the company’s operations relating to the criteria considered in their appointment.

In its 2018 proxy, Avery Dennison Corp. states that the benefit of auditor tenure, as well as the auditor’s prior performance are considered when selecting its audit firm. Other considerations include the auditor’s communication, independence, professional skepticism, and value for fees. The auditor’s self-assessment and regulatory reviews from the PCAOB are also taken into advisement.

Overall, the 2018 Audit Committee Transparency Barometer demonstrates continuing growth in the quality of audit committee proxies. Companies in all three S&P indices are eliminating the boilerplate disclosures used in the past and beginning to evolve to provide greater communication and transparency to investors and other stakeholders.

Be sure to check out Cindy Fornelli’s article, Strengthening Market Integrity, and the video featuring insights from Barbara Duganier, who chairs the audit committees of Buckeye Partners, L.P. and MRC Global Inc. and serves as an audit committee member at Noble Energy, Inc.

For additional information on the 2018 Audit Committee Transparency Barometer, please call 508-476-7007 or e-mail info@auditanaltyics.com.