On November 6, 2019, the Center for Audit Quality (CAQ) released its sixth annual Audit Committee Transparency Barometer. Compiled and published in partnership with Audit Analytics, the Barometer measures the content of proxy statement disclosures year-over-year in certain key areas across S&P 500, S&P MidCap, and S&P SmallCap companies. These areas include audit committee duties and composition, auditor evaluation/oversight, audit firm and lead partner selection, auditor compensation, and cybersecurity.
The disclosures measured in the Barometer are intended to inform and educate investors and other stakeholders about the audit committee’s critical role, while demonstrating the audit committee’s effectiveness in executing its responsibilities. Although the CAQ’s 2019 Main Street Investor Survey reflects that 81% of US retail investors express confidence that independent audit committees are effective in their investor protection role, the latest edition of the Barometer indicates that audit committees still have significant opportunities to increase transparency.
The sixth edition of the Barometer highlights certain key areas that have shown increased disclosure, as well as areas that are stagnant or provide opportunities for improvement.
Although several disclosure areas have reached significant levels across S&P 1500 companies, the Barometer explains that there are many opportunities to enhance transparency in disclosures that remain at low levels or that are showing slower year-over-year growth. These opportunities include disclosure surrounding:
- significant areas addressed between the audit committee and external auditor,
- how the audit committee considers audit firm compensation, and
- the audit committee’s responsibility for the negotiation of fees paid to the external auditor.
With the implementation of the requirement to disclose critical audit matters (CAMs) in the auditor’s report, audit committees have an opportunity to discuss efforts related to CAMs, as these matters are communicated, or required to be communicated, to the audit committee.
While audit committee disclosures regarding the lead engagement partner appear in about half of proxy statements for S&P 500 companies this year, these types of disclosures are far less frequent in S&P MidCap and SmallCap companies (less than 25% and 15%, respectively). Proxy statements disclosing audit committee considerations in appointing the audit firm follow a similar trend in 2019, with S&P 500 companies at 42% and S&P MidCap and SmallCap companies at 30% and 22%, respectively.
As shown below, Edison International [EIX]‘s proxy statement for the last fiscal year contains disclosure in each of the above areas, including a discussion of lead partner candidate qualifications.
Some other areas of positive developments outlined in the 2019 Barometer include disclosures concerning the performance of non-audit services and its impact on auditor independence, the length of time the auditor has been engaged, the criteria considered in evaluating the audit firm, and the audit committee’s involvement in audit partner selection. Notable development can be seen in these disclosure areas, among others, since the 2015 edition of the Barometer.
For the first time, the Barometer provides an examination of certain cybersecurity disclosures pertaining to audit committees. Since 2016, the number of S&P 500 companies that disclose audit committee responsibility for cybersecurity risk oversight has increased by 23%.
In addition to mentioning that the Board formalized and documented cybersecurity oversight within the audit committee’s charter in recent years, the proxy statement of Fortive Corp [FTV] discusses the audit committee’s responsibility regarding cybersecurity risk oversight.
The progress of audit committee disclosures in proxy statements should reassure investors and other stakeholders of audit committee efforts to increase transparency. However, there are opportunities for audit committees to promote clear, open communication of their responsibilities and activities regarding oversight of the external auditor and other key financial reporting topics.
For additional information on the 2019 Audit Committee Transparency Barometer or to learn more about the database of audit committee disclosures provided by Audit Analytics, please contact us.