Disclosure oversight is one of the key responsibilities of audit committees. This responsibility is becoming more challenging because of the volume of new disclosure requirements, the expanding scope of nontraditional disclosures outside the financial statements, and the increase in unregulated, voluntary disclosures. According to a recent publication of the Deloitte Center for Board Effectiveness, one tool that audit committees can use to leverage their oversight of the disclosure landscape is the company’s disclosure committee. Aligning the disclosure committee in the era of disclosure, part of the Center’s On the audit committee’s agenda series, offers some suggestions for how disclosure committees can help to make audit committee disclosure oversight more effective.
What is the disclosure committee?
There is no requirement that a company have a disclosure committee, although the SEC has recommended that companies establish a management-level committee responsible for “considering the materiality of information and determining disclosure obligations” and that the committee report to the CEO and CFO since those officers are responsible for the company’s disclosure controls and procedures. In practice, most large public companies have disclosure committees. Deloitte states that typical disclosure committee objectives are to:
Review draft SEC filings, recommend edits and provide comments, and confirm that edits have been incorporated before submitting the filing.
Provide integrity and completeness relating to internal controls over financial reporting (ICFR).
Support the certification requirements of Sections 302, 404, and 906 of the SOX Act. [These sections require the CEO and CFO to certify, among other things, to the accuracy of company financial reports, and require management to report on the effectiveness of the company’s ICFR.]
Considerations for disclosure committee refresh
Deloitte recommends three steps to formalize and enhance the work of the disclosure committee.
1. Maintain and update a formal disclosure committee charter. Charter topics may include the committee’s purpose or mission statement; the committee’s responsibilities (e.g., reviewing and monitoring disclosure controls and public filings); factors that inform the disclosure committee’s assessment of controls; committee membership and chair; and how often the committee meets and its procedures. The disclosure committee’s charter should align with the audit committee charter, and, as the breadth of audit committee disclosure responsibilities grows in response to regulatory developments, the scope of the disclosure committee’s remit should also expand.
2. Reassess disclosure committee owner(s) and membership. Suggestions relating to disclosure committee leadership and membership include:
The disclosure committee charter should designate a chair (or co-chairs), often from the finance or legal departments.
As disclosure requirements broaden, disclosure committees should consider expanding their membership to include additional subject-matter experts (e.g., executives/managers in sustainability, cyber, technology, and human resource roles). Committee leadership may want to inventory the disclosures the committee is responsible for and assess whether all relevant data is within the purview of current committee members.
Consider onboarding procedures so that new committee members understand its functions.
3. Enhance disclosure committee procedures, particularly those pertaining to memorialization of committee operations. Deloitte suggests that disclosure committees revisit their procedures with a focus on ensuring that each committee meeting agenda includes all relevant topics and adequate documentation of the committee reviews.
Documentation
Documentation of the work of the disclosure committee is important, especially in situations where the adequacy of disclosure controls is questioned. Formal meeting minutes are one tool. Others include:
Maintaining records of agendas and calendar appointments to evidence that meetings occurred.
Maintaining records of financial report drafts marked up for the committee meeting to illustrate the nature of the review.
Maintaining records of checklists utilized by the disclosure committee to demonstrate the scope of review.
Memorializing in audit committee minutes that the disclosure committee provided a report and any relevant details presented.
Deloitte recommends that disclosure committee leadership consult with counsel to determine the best approach to documentation considering the company’s specific risks.
Questions for Audit Committees
Deloitte suggests seven questions audit committees may want to ask to assess the disclosure committee’s “readiness for a changing disclosure landscape.”
If we do not have a disclosure committee, should we consider establishing one?
Does the disclosure committee have a charter, and if so, does it accurately reflect the breadth and depth of disclosures the committee is currently responsible for?
Is the disclosure committee composed of representatives from all relevant business functions so that all disclosure data is reviewed by an expert?
Are all disclosure committee members, whether new or experienced, adequately familiar with the committee’s role and their responsibility as a member?
Does the disclosure committee agenda reflect all relevant topics?
Is the disclosure committee effectively documenting the completion and quality of its disclosure reviews?
How does the disclosure committee coordinate with the risk management committee (if applicable) and/or the sustainability committee (if applicable)?
Comment: Audit committees have at least two reasons to pay attention to the effectiveness of the company’s disclosure committee. First, as described in Deloitte’s paper, both mandatory and voluntary disclosures are increasing, and the “increased demand for disclosure from regulators, investors, and stakeholders is likely to continue, as will the complexity of the data reported, regulatory expectations, and legal risk.” Audit committees may find it challenging to stay abreast of this disclosure revolution, and a well-functioning disclosure committee can make the audit committee’s job easier.
Second, SEC enforcement is focusing on the adequacy of company disclosure controls. See The SEC is Zeroing in on Disclosure Controls, April 2023 Update and ESG Meets Disclosure Controls in an SEC Enforcement Action, February-March 2023 Update. This underscores the need for the audit committee to monitor the disclosure committee’s evaluation of the design and effective operation of the company’s disclosure controls.
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