Audit committee transparency – disclosure that exceeds regulatory requirements about the audit committee and its work – has increased during the past decade. See Audit Committee Transparency Continues to Inch Ahead (Audit Update blog post). However, an academic study conducted by the authors of Audit Committee: The Kitchen Sink of the Board (discussed the blog post cited above) raises questions about the utility of this disclosure. The authors’ conclusion is that “the current disclosure process has created a focus on standardized language following existing norms rather than signaling quality by ‘telling the story’ of the AC.”
The findings in Audit Committee Disclosure Evolution: Evidence from the Field are based on interviews with U.S. public company audit committee members, with disclosure preparers (e.g., corporate secretaries, general counsels, and CFOs), and with investors, proxy advisors, and shareholder advocates. The study authors – Lauren M. Cunningham (University of Tennessee, Haslam College of Business), and Sarah E. Stein, Kimberly Walker, and Karneisha Wolfe (all from Virginia Tech’s Pamplin College of Business) – conclude that “[m]any companies fail to develop meaningful disclosures and instead adopt an isomorphic strategy by mimicking one of two types of peers: the set of companies providing the minimal required boilerplate AC disclosures, or the set of companies voluntarily providing standardized language recommended by the CAQ and other large accounting firms.” As a result, most companies fail to tell “a unique oversight ‘story.’”
The authors believe that this mimicking strategy is due to companies not receiving feedback on their audit committee disclosures from investors. “The lack of feedback leaves ACs with a sense that investors are satisfied with current practices and removes incentive to evaluate the potential benefits of signaling through AC disclosure.” This results in “ongoing frustrations for both ACs and investors.” The study concludes with a prediction that interest in environmental, social, and governance disclosure may serve as a catalyst to change this dynamic since “increasing pressure for robust ESG information will likely bring AC disclosures back into the spotlight.”