We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
17 December 2018
The Center for Audit Quality, working with Audit Analytics, has just released a new edition of its annual Audit Committee Transparency Barometer, which, over the past five years, has measured the robustness of audit committee disclosures in proxy statements among companies in the S&P Composite 1500. The bottom line, according to the CAQ, is that the level of voluntary transparency has continued to steadily increase in most areas. The report includes several useful examples of the types of disclosure discussed.
Among the key findings:
Interestingly, the incidence of one disclosure topic has declined from the prior year across the S&P 1500 indices: an explanation for a change in fees paid to the audit firm. The report indicates that this number has fluctuated from year to year since 2014, with explanations often related to activity such as business combinations or other nonrecurring business activity. In addition, citing Deloitte, the report observes that the "greatest year-over-year percentage increase occurred in disclosures regarding the audit committee's role in the oversight of cybersecurity, which has increased by 13% since 2017."
Although, in 2017, Corp Fin staff indicated that the SEC might take up potential amendments arising out of this 2015 concept release regarding possible revisions to audit committee disclosures (see this PubCo post), in the Fall 2018 Unified Agenda of Regulatory and Deregulatory Actions, consideration of those amendments was relegated to the SEC's long-term agenda. (See this PubCo post.) In the concept release, the SEC had sought comment on the adequacy of existing disclosure requirements as well as on potential changes to required disclosures that would "address the audit committee's responsibilities with respect to the appointment, compensation, retention, and oversight of the work of the registered public accounting firm and better inform investors about how the audit committee executes those responsibilities."
Ironically, additional company transparency may ultimately result from rules adopted by the PCAOB for disclosures by auditors in audit reports. As discussed in this PubCo post, disclosure of auditor tenure in the audit report has become mandatory for audits of fiscal years ended on or after December 15, 2017. In addition, at later phase-in dates, most audit reports will need to include disclosure of "critical audit matters," that is, "matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment." Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard's criteria. The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although not to emerging growth companies).
The selection of and disclosure regarding CAMs will certainly present a challenge for both audit committees and auditors. The prospect of the auditors' providing those disclosures is leading many audit committees to consider the impact of CAM disclosures on companies' own disclosures. Why? Because, generally, audit committees much prefer that the company get a jump on the disclosure so that the auditors will not need to resort to the creation of original material and the company can best frame the discussion from its own perspective. To be sure, no audit committee would be enthusiastic about the prospect of the auditor's sharing with the investing public the concerns that arose in performing the audit or the struggles involved in reaching conclusions about the financials. Although the adopting release suggested that the process would be an iterative one between management and the auditors, time will tell whether, once the auditors have crafted a CAM disclosure, they might just be a bit reluctant to allow much input by audit committees or managements. To best position the company, a former Director of Corp Fin cited in this article from Compliance Week advised that audit committee members should be revisiting the company's own disclosures now, as soon as they have an inkling of which CAMs the auditor plans to identify: the "best CAM disclosure…will be one that cross references a disclosure in the financial statements." (See this PubCo post.)
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (email@example.com). The Cooley LLP website can be accessed at www.cooley.com.
This article has been reproduced in its original format from Lexology – www.Lexology.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.