The majority of members of public company boards of directors are opposed to proposals for mandatory audit firm rotation, according to a new survey.

The survey, by auditing firm BDO USA, found that 68 percent of the 72 board members it polled indicated they were opposed to proposals from U.S. and international regulators for implementing mandatory rotation of their external audit relationships.

The survey also found that majorities of public company board members do not agree with the use by proxy advisory firms of total shareholder return as an accurate measurement for determining “say-on-pay” recommendations or with the peer groups that advisory firms assign their company for executive compensation comparison purposes. Seventy-five percent of the directors believe proxy advisory firms that consult to public companies suffer from a conflict of interest and that these firms should be subject to regulatory oversight.  

The 2012 BDO Board Survey examined the opinions of 72 corporate directors of public company boards, with revenues ranging from $250 million to $750 million, regarding financial reporting and corporate governance issues.  

“The 2012 BDO Board Survey reveals broad optimism among boards regarding their ability to stay current on accounting and financial reporting standards, but also concerns with the plethora of disclosure requirements in financial statements and the lack of progress on moving to IFRS,” said Wendy Hambleton, a partner in the corporate governance practice of BDO USA. “The directors cite corruption/bribery as the greatest fraud risk facing their businesses, while also expressing concerns with proxy advisory firms and the power they wield with shareholders.” 

Both the PCAOB and the EU are currently debating the use of mandatory rotation of auditors of public companies as a way to ensure a fresh set of eyes viewing a company’s books after a period of time and to spur competition in the audit field.  However, more than two-thirds (68 percent) of board members are opposed to mandatory rotation of the external audit relationship.

Moreover, of those opposed to rotation, 78 percent are also opposed to mandatory tendering of the external audit.  Of the 32 percent in favor of mandatory rotation, 55 percent suggest the term for rotation should be every five years, compared to smaller percentages that favored seven year (36 percent) and 10-year (5 percent) terms.

While 88 percent of the directors polled indicate they are comfortable with their ability to stay current on changes to accounting and financial reporting standards, 70 percent feel there are so many financial disclosures in financial statements today that it is difficult to decide what information is most important.

When it comes to the long debate about the U.S. moving to International Financial Reporting Standards, 63 percent believe U.S. companies should be allowed to use IFRS in their public reporting.

Board members have clear concerns with proxy advisory firms that advise shareholders on “say-on-pay” recommendations while also consulting to public companies.  Seventy-five percent of the directors polled believe these firms suffer from a conflict of interest and the same proportion said they believe proxy advisory firms should be subject to regulatory oversight.

A 59 percent majority of directors believe that the peer groups used by proxy advisory firms for executive compensation comparison purposes are not an accurate reflection of their company’s peers.  When asked what was the most important criteria in determining a peer company for executive compensation purposes, industry (61 percent) was by far the most cited response. Revenues (15 percent), human capital competitor (13 percent) and market cap (11 percent) were mentioned by a much smaller percentage of the directors.

Proxy advisory firms compare total shareholder return, “TSR,” to executive compensation on a one year and three year basis to help determine their “say-on-pay” recommendations, but 68 percent of directors do not believe TSR is an accurate measurement.  Nevertheless, there was little agreement among board members regarding what to substitute for TSR. Just over one-fifth recommend revenue growth (22 percent) and cash flow (22 percent), while slightly smaller proportions cite profit growth (16 percent) and operational efficiency (16 percent).

A 90 percent majority of directors report that the Dodd-Frank “say-on-pay” disclosure rules implemented in 2011 haven’t helped them manage the compensation of key executives. Forty-six percent of the directors say their boards have increased their communications to shareholders on the topic of executive compensation during the past proxy year.

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