Risk & Compliance

Audit Committees Boost Disclosure to Shareholders

Investors get more information about the selection and evaluation of large companies' independent auditors.
David McCannSeptember 5, 2019

The audit committees of large public companies are continuing a long trend of voluntarily disclosing to shareholders more and more information about the companies’ independent auditors.

The changes are incremental from year to year. But since EY began studying these disclosures by the Fortune 100 companies in 2012, there has been massive change.

For example, this year nearly 80% of the companies disclosed that their audit committee is involved in selecting the lead audit partner at the external auditing firm. Exactly none of those companies made that disclosure seven years ago.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Also, nearly 90% of the companies this year disclosed that the audit committee considers non-audit fees and services when assessing auditor independence, vs. just 16% in 2012.

And 64% of the companies this year disclosed factors used in the audit committee’s assessment of external auditor qualifications — four times the 16% that did so in 2012.

At a glance, such disclosures may not seem to reveal critically important information for investors. But, EY stresses, that is anything but the truth.

“It’s clear that rigorous oversight of public company audits by independent audit committees helps protect investors, and disclosing information about that oversight process contributes to investor confidence,” the Big Four accounting firm says in a new report.

Of course, in addition to the higher volume of voluntary audit disclosures, auditors of large public companies, starting with fiscal years ending on or after June 30, 2019, are required to report “critical audit matters” (CAMs).

CAMs, mandated by the Public Company Accounting Oversight Board, are defined as “matters communicated or required to be communicated to the audit committee that relate to material accounts or disclosures and involve especially challenging, subjective, or complex auditor judgment.”

A new report from another Big Four firm, Deloitte, assessed the CAM disclosures for the 52 large accelerated filers with fiscal years that ended June 30.

Those companies’ auditors disclosed an average of 1.8 CAMs, most often related to goodwill and intangible assets (35% of reported CAMs), revenue (19%), and income taxes (15%).

Deloitte said that deciding whether an account or disclosure was a CAM required significant judgment and was specific to the circumstances of each audit. Therefore, what might be a CAM on one audit might not be a CAM on another audit.

Also, according to Deloitte, communicating CAMs that are easily understood by a broad readership can be challenging. For example, it can be difficult to convey concisely why a matter is a CAM or to summarize the audit procedures performed in a manner that is informative but not overly technical.

EY, meanwhile, presented a list of questions for audit committees to consider:

  • Does the company’s proxy statement effectively communicate how the audit committee is overseeing and engaging with the independent auditor? Does it address areas of investor interest, such as the independence and performance of the auditor and the audit committee’s key areas of focus?
  • How has the role of the audit committee evolved in recent years (e.g., oversight of enterprise risk management, cybersecurity risk), and to what extent are these changes being communicated to stakeholders?
  • What impact will new auditor reporting requirements have on audit committee disclosures?
  • What additional voluntary disclosures might be useful to shareholders related to the audit committee’s time spent on certain activities, such as cybersecurity, business continuity, mergers and acquisitions, and financial statement reporting developments?
  • How do director qualifications and board composition-related disclosures highlight the expertise, experiences, and backgrounds of audit committee members?