Now in its seventh year of publication, the Audit Committee Transparency Barometer, released by the Center for Audit Quality (CAQ), continues to provide investors with unique insight into the disclosures made by audit committees in proxy statements each year since 2014.
Compiled and published in partnership with Audit Analytics, the Barometer measures year-over-year comparison of disclosures for S&P 500, S&P MidCap, and S&P SmallCap companies in certain key areas, including audit committee duties and composition, auditor evaluation/oversight, audit firm and lead partner selection, auditor compensation, and cybersecurity.
Throughout the past seven years, the Audit Committee Transparency Barometer has displayed some continuous upward trends. Areas involving positive long-term trends in voluntary disclosures, especially among S&P 500 companies, include:
In recent years, however, some of the disclosure areas have faltered. We have noticed some disclosure areas dipping, particularly those involving auditor compensation, such as explanations regarding a change in fees paid to the external auditor. Although, explanations of this type are often based on event-driven circumstances, such as mergers and acquisitions.
The 2020 edition of the Barometer, released on October 12, 2020, highlights three main disclosure trends for investors related to long-term voluntary disclosure: COVID-19, Critical Audit Matters (CAMs), and cybersecurity, as described below.
COVID-19
On January 30, 2020, the World Health Organization (WHO) declared the outbreak of a new coronavirus – COVID-19 – a Public Health Emergency of International Concern (PHEIC). Since then, COVID-19 has continued to affect nearly everyone worldwide, causing widespread economic disruption and dominating the global discussion in 2020.
As the unprecedented pandemic creates many new uncertainties for public companies, the topic has shown up in proxy statements for S&P 1500 companies, as audit committees consider the impacts and risks of the pandemic and the Board’s oversight role related to the coronavirus.
As shown below, Electronic Arts Inc.’s [EA] proxy statement, filed on June 19, 2020, contains a disclosure regarding risks from the COVID-19 pandemic:
Critical Audit Matters (CAMs)
We are also beginning to see examples of audit committee disclosures regarding their oversight related to the CAMs auditing requirement. As discussed in a previous post, over 6% of companies in the S&P 1500 mentioned CAMs within their audit committee disclosures.
CAMs are matters which arise during the audit that are communicated or required to be communicated with the audit committee, are material to the financial statements, and involve especially challenging, subjective or complex auditor judgment. Though these matters are required to be communicated with the audit committee, the audit committee has no role in determining or approving CAMs.
Disclosures in these proxy statements often identify the audit committee’s role as either reviewing the CAMs, discussing the CAMs with the independent auditor, or both.
An example, taken from United Airlines Holdings Inc.’s [UAL] proxy statement, is shown below:
Cybersecurity
Over the past ten years, cybersecurity has become increasingly important for public companies, as both business and commerce have become dependent on technology. Cyber threats from social engineering schemes to sophisticated software can put customer data, financial accounts, and even proprietary information at risk to third-party access.
Since 2016, the number of cybersecurity breach disclosures has more than doubled. As more business processes are moved online for efficiency and automation purposes, there is an increased risk of systems being compromised. Due to this enhanced risk, there has been a significant increase in the number of companies disclosing the audit committee’s oversight as it specifically relates to cybersecurity risk, including discussion of a dedicated cybersecurity expert on the Board.
The progress of audit committee disclosures in proxy statements should reassure investors and other stakeholders of audit committee efforts to increase transparency. Overall, the 2020 Audit Committee Transparency Barometer demonstrates continuing growth in the quality of audit committee proxies, as companies in all three S&P indices are providing greater communication and transparency.
For additional information on the 2020 Audit Committee Transparency Barometer, or to learn more about the database of audit committee disclosures provided by Audit Analytics, please contact us.
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