Audit committees need more transparency: report
Audit committees should provide far more disclosure about how they are interacting with their auditing firms, according to a new report from the Center for Audit Quality and Audit Analytics.
The 2019 Audit Committee Transparency Barometer found signs of a slowdown in disclosure efforts among S&P 500 and SAP 1500 companies, despite the recent requirement for audit firms to disclose critical audit matters, or CAMs, in their audit reports. The CAQ and Audit Analytics annual report found that disclosure levels in some areas remain low. Audit committees need to improve their transparency with disclosures about significant areas of discussion between the audit committee and audit firms, auditor evaluation and engagement partner selection, and compensation.
There have been some areas of improvement since last year, including discussion of non-audit services (84 percent of S&P 500 companies) and length of auditor tenure (71 percent of S&P 500 companies). There has also been greater discussion of cybersecurity, with double-digit increases since 2016 in the amount of information available on cybersecurity risk oversight and other topics, such as whether the board has a cybersecurity expert.
However, for S&P 500 companies, excluding new cyber disclosures, only two categories have increased by more than 2 percent since 2018, with the biggest increase of 4 percent for discussing criteria considered when evaluating the audit firm. In 2018, seven categories increased by over 2 percent. The trends for smaller companies are similar. Areas where there was either no or minimal disclosure include significant areas addressed with the auditor (0 percent for S&P 500), how the audit committee considers auditor compensation (2 percent for S&P 500), and discussion of audit fees and its connection to audit quality (4 percent for S&P 500). For example, the percentage of S&P 500 companies that provided an explanation of a change in fees paid to the audit firm declined from 28 percent to 23 percent this year.
"Audit committees play an essential role in audit oversight and quality, and as a whole they are providing the marketplace with more and more clarity about their activities," said CAQ executive director Julie Bell Lindsay in a statement. "We urge audit committees to consider the opportunities to enhance transparency."
Along with statistics on disclosure trends, the report includes examples to show how audit committees at companies such as CVS Health, JetBlue and Visa are improving their disclosure information for investors and others.