TheCorporateCounsel.net

Yesterday, the Center for Audit Quality announced the publication of its 10th annual “Audit Committee Transparency Barometer.” The report is compiled by the CAQ and Audit Analytics to measure disclosures about financial oversight and other audit committee responsibilities. This year’s report also takes a look back at big-picture changes to audit committee disclosures over the past decade. Here’s an excerpt:

After a decade of analyzing audit committee disclosures, we have seen disclosure rates increase across the majority of the questions and topics being tracked. In the current environment of economic uncertainty, geopolitical crises, and new ways of working, it remains as important as ever for audit committees to tell their story through tailored disclosures in the proxy statement. Investors and other stakeholders use these disclosures to understand how the audit committee is exercising oversight to navigate the challenges of this current environment.

This environment provides an opportunity for audit committees to revisit their disclosures to ensure that they are up to date and tailored to the specific events and circumstances that the audit committee currently faces. Providing detailed and relevant disclosures, instead of relying on boilerplate language, provides investors with useful information about the processes, considerations, and decisions made by the audit committee. Every year, each audit committee has a unique story to tell, and detailed disclosures in the proxy statement relay the extent of engagement of the audit committee, which contributes to audit quality.

However, while audit committees & disclosure teams have overall earned a “gold star,” the report notes that there is always room for improvement. To support that effort, the appendices to the report include disclosure examples and questions for consideration. Among other suggestions, the CAQ suggests that companies could consider discussing not just “what they do” but also “how they do it,” and enhancing disclosure about audit fees in the upcoming year:

Another area where we continue to see lower rates of disclosure is the discussion around audit fees, particularly disclosures about the connection between audit fees and audit quality (Q3) and explanation for a change in fees paid to the external auditor (Q6). For audit committees to enhance their disclosures, they should provide more robust disclosures about how the audit committee considers the appropriateness of the audit fee, including key factors affecting changes to the audit fee year over year. For example, it may be helpful for stakeholders to understand efficiencies achieved, such as the auditor’s use of new technologies, or changes in the scope, such as a major transaction during the year, that could lead to changes in the audit fee.

Audit fees can be an indicator of audit quality for stakeholders because abnormally low fees may indicate that not enough time or resources are spent on the audit engagement, which could contribute to low audit quality. On the other hand, abnormally high audit fees could indicate inefficiencies, which may also be a red flag for stakeholders. In selecting, retaining, and evaluating the independent auditor, the audit committee should always be focused, in the first instance, on audit quality. Describing the audit committee’s views on the audit fee’s appropriateness can help stakeholders understand what contributes to the audit fee and can provide stakeholders further insights into how the audit committee considers audit quality throughout its engagement with the external auditor.

The report concludes with this encouragement to keep moving onward & upward:

We applaud audit committees for their efforts to increase disclosures over the past 10 years and continue to encourage audit committees to consider how their disclosures can be enhanced to provide further transparency for investors regarding the critical oversight work that audit committees perform.

– Liz Dunshee