In three previous posts about audit committee evolution we explored:
A bit of history about how audit committee responsibilities have changed over time,
Situations where independence issues have resulted in enforcement involving auditors and companies, and
How some issues, such as auditor independence, are not just matters for the auditor to monitor, but also may require audit committee involvement.
As history demonstrates, audit committees play a crucial role in oversight of the financial reporting process. An effective audit committee is a crucial part of assuring the reliability and reasonableness of financial information. Unfortunately, history also shows us that audit committees don’t always successfully fulfill their responsibilities.
Chair White expanded on these issues in a June 2014 speech to the Stanford University Rock Center for Corporate Governance Twentieth Annual Stanford Directors’ College. In that speech, after reviewing two enforcement cases which involved audit committee members she said:
I mention these cases because audit committees, in particular, have an extraordinarily important role in creating a culture of compliance through their oversight of financial reporting. As you know, under the Sarbanes-Oxley Act, audit committees are required to establish procedures for handling complaints regarding accounting, internal controls, and auditing matters, as well as whistleblower tips concerning questionable accounting or auditing practices. Audit committees also play a critical role in the selection and oversight of the company’s auditors. These responsibilities are critical ones and we want to support you. Service as a director is not for the faint of heart, but nor should it be a role where you fear a game of “gotcha” is being played by the SEC.
Clearly Ms. White is emphasizing the responsibility audit committees have as gatekeepers in the financial reporting process.
(You can read the whole speech at: www.sec.gov/News/Speech/Detail/Speech/1370542148863 )
All of this leads us to the SEC’s July 1, 2015 Concept Release “POSSIBLE REVISIONS TO AUDIT COMMITTEE DISCLOSURES”. Attempting to perhaps incentivize audit committees to perform effectively, and even more importantly shed light on audit committee performance to help investors and other stakeholders understand whether audit committees are effectively fulfilling their oversight responsibilities are not simple issues, and this concept release begins a significant discussion.
What sorts of disclosures does the concept release propose to deal with these issues? The principle areas of focus are:
Audit Committee’s Oversight of the Auditor
Audit Committee’s Process for Appointing or Retaining the Auditor
Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit
In the summary of the concept release the commission makes their objective clear, stating:
Some have expressed a view that the Commission’s disclosure rules for this area may not result in disclosures about audit committees and their activities that are sufficient to help investors understand and evaluate audit committee performance, which may in turn inform those investors’ investment or voting decisions.
The reporting of additional information by the audit committee with respect to its oversight of the auditor may provide useful information to investors as they evaluate the audit committee’s performance in connection with, among other things, their vote for or against directors who are members of the audit committee, the ratification of the auditor, or their investment decisions.
Here is a quick outline of the areas addressed in the Concept Release:
- Auditor Committee’s Oversight of the Auditor
- Additional Information Regarding the Communications Between the Audit Committee and the Auditor
- The Frequency with which the Audit Committee Met with the Auditor
- Review of and Discussion About the Auditor’s Internal Quality Review and Most Recent PCAOB Inspection Report
- Whether and How the Audit Committee Assesses, Promotes and Reinforces the Auditor’s Objectivity and Professional Skepticism
- Audit Committee’s Process for Appointing or Retaining the Auditor
- How the Audit Committee Assessed the Auditor, Including the Auditor’s Independence, Objectivity and Audit Quality, and the Audit Committee’s Rationale for Selecting or Retaining the Auditor
- If the Audit Committee Sought Requests for Proposal for the Independent Audit, the Process the Committee Undertook to Seek Such Proposals and the Factors They Considered in Selecting the Auditor
- The Board of Directors’ Policy, if any, for an Annual Shareholder Vote on the Selection of the Auditor, and the Audit Committee’s Consideration of the Voting Results in its Evaluation and Selection of the Audit Firm
- Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit Committee
- Disclosures of Certain Individuals on the Engagement Team
- Audit Committee Input in Selecting the Engagement Partner
- The Number of Years the Auditor has Audited the Company
- Other Firms Involved in the Audit
As you can see, the areas the SEC is considering for disclosure are significant and would represent a major change in how much of the audit committee’s work is in the sunshine of disclosure. Along this evolutionary path it is important to remember that a Concept Release is essentially a discussion document. If the SEC does pursue rulemaking, the content of a proposed rule will be based on input received in response to the concept release. The SEC is always responsive to substantive comments, so if a rule is eventually proposed, it will differ from the proposed rule based on comments from constituents. This means we are early on in this process, and we can provide input to the process.
As a concluding thought, if you do want to comment on the Concept Release, here is where to do that:
As always, your thoughts and comments are welcome!