Corporate Finance

Voluntary Audit Committee Disclosures Surge

Even though they’re not required to do so, corporations are disclosing much more about their audit committees to their shareholders.
David KatzAugust 18, 2017

Despite a lack of new audit committee disclosure requirements since the Sarbanes-Oxley Act of 2002, companies have been voluntarily disclosing more and more about their audit committees and their relationships with auditors, an Ernst & Young study issued earlier this month finds.

For instance, the percentage of companies that explicitly state that the audit committee is responsible for the appointment, compensation, and oversight of the external auditor has nearly doubled since 2012, increasing to 87% in 2017. That’s up from 45% in 2012 and 81% in 2016.

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Further, the percentage of companies disclosing the factors used in their audit committees’ assessment of the auditor’s qualifications and work quality increased from to 56% in 2017 from 17% in 2012, according to the study. Forty-eight percent of companies made such disclosures in 2016.

None of those disclosures were required by the Securities and Exchange Commission’s audit committee disclosure rule, which became effective in 2000, or the Sarbanes-Oxley law. (Among other disclosures it required of corporations, Sarbox required public companies to disclose whether their audit committees had at least one “financial expert” on them.)

“Under U.S. laws and regulations, while annual proxy materials must include an audit committee report, the required content of this report is quite limited,” the report said. “Additional information about the audit committee and auditor often can be found elsewhere in the proxy materials, annual reports, and other materials, although these are not disclosures that audit committees are required to make.”

For its study, EY looked at the proxy materials of 75 companies on the 2017 Fortune 100 list that filed proxy statements each year from 2012 to 2017 for annual meetings through August 15, 2017. (Companies that have not yet held their 2017 annual meeting are excluded.)

While the SEC’s audit committee rule and Sarbox didn’t have much to say about disclosure, they did trigger a great deal more audit-committee scrutiny of their companies’ relationships with auditors, according to Stephen Klemash, leader of the EY Americas Center for Board Matters. Knowing that, investors and regulators increasingly asked, “Why isn’t this being disclosed if they’re doing all that great work?” he said.

Companies have responded to investor requests that audit committees disclose more about their explorations of the work of auditors and their role in auditing financial statements, Klemash added.

In other study results, EY found that audit committees have boosted their number of total members and the number of women members (see chart below).  

Characteristics of audit committees (1)