The EY Center for Board Matters (EY Center) has released its ninth annual review of Fortune 100 audit committee-related proxy disclosures. In Audit committee reporting to shareholders in 2020, the EY Center finds that, compared to last year, the number of companies providing such voluntary disclosures has changed “only slightly.” However, during the past nine years, there has been a “dramatic increase” in audit committee disclosures. The EY Center began its annual reviews of Fortune 100 audit committee disclosures in 2012. See, e.g., CAQ and EY Center Audit Committee Transparency Reports: Disclosure Continues to Grow Apace. October-November 2018 Update.
This year, the EY Center analyzed the disclosures of the 72 companies on the 2020 Fortune 100 list that filed proxy statements each year since 2012. It found that:
Nearly 80 percent of these companies disclosed that the audit committee is involved in selecting the lead audit partner. None made that disclosure in 2012.
Nearly 90 percent of the 72 companies disclosed that the audit committee considers non-audit fees and services when assessing auditor independence, compared to 19 percent in 2012.
About 40 percent include a statement that the audit committee is responsible for fee negotiations with the auditor, and about 38 percent provide an explanation for fee changes, up from less than 20 percent making such disclosures in 2012.
Seventy-six percent of these companies disclosed the tenure of the current auditor. In 2012, 25 percent disclosed tenure.
Sixty-four percent of companies disclosed factors used in the audit committee’s assessment of the external auditor’s qualifications and work quality. Just 15 percent did so in 2012.
Ninety-one percent disclosed that the audit committee included two or more financial experts, compared to 70 percent in 2012. The EY Center suggests that this increase in the number of financial experts on audit committees “could be indicative of the increasing complexity of risks that audit committees are dealing with, requiring more financial expertise.”
Fifteen companies (21 percent) provided disclosures relating to the critical audit matters (CAMs) discussed in the auditor’s report. These disclosures “generally noted that the audit committee reviewed and discussed with the external auditor CAMs that arose during the current period audit.”
The EY Center’s 2020 review focused on disclosures related to audit committee responsibilities in areas outside of financial reporting, compliance, and legal. The EY Center reports that 64 percent of companies in the study disclosed that the audit committee oversees additional risks, including cybersecurity, data privacy, enterprise risk management, and ESG/health and safety-related matters.
As the EY Center’s annual reports document, voluntary disclosures regarding the work of the audit committee have become routine for many large companies. In that context, the EY Center suggests that audit committees consider the following questions in evaluating their company’s disclosure:
Does the company’s proxy statement effectively communicate how the audit committee is overseeing and engaging with the external auditor? Does it address areas of investor interest, such as the independence and performance of the auditor and the audit committee’s key areas of focus?
How has the role of the audit committee evolved in recent years (e.g., oversight of enterprise risk management, cybersecurity risk) and to what extent are these changes being communicated to stakeholders?
In light of the changing environment, what additional voluntary disclosures might be useful to shareholders related to the audit committee’s time spent on certain activities, such as cybersecurity, data privacy, business continuity, corporate culture and financial statement reporting developments?
Has the audit committee considered how changes in the auditor reporting requirements may impact audit committee disclosures?
How do director qualifications and board composition-related disclosures highlight the diversity considerations, expertise, experiences and backgrounds of audit committee members?
Comment: As recommended in several prior Updates, audit committees should be aware of the types of voluntary disclosures concerning committee responsibilities and activities that their peers are making and compare those disclosures to their own. The kinds of disclosures that the EY Center’s report identifies as common among Fortune 100 companies are generally not controversial and would rarely involve disclosing sensitive information or exposing the audit committee to increased litigation risk. Voluntary disclosure in these areas is becoming a best practice. The EY Center’s suggested questions provide a framework for audit committee consideration of whether their company’s disclosures should be enhanced.