CAQ and Audit Analytics Gauge Audit Committee Transparency

The Center for Audit Quality and Audit Analytics teamed up on an analysis of 2014 audit committee disclosures in proxy statements to assess the effectiveness of the disclosures by public companies of their relationships with auditors and found that many public companies are suffering from disclosure overload.

The CAQ and Audit Analytics are applying a “barometer” for the first time to measure the robustness of disclosures among 1,500 Standard & Poor’s composite companies. Public disclosures are the primary channel through which audit committees can inform and educate investors and other stakeholders about their critical responsibilities, and demonstrate their effectiveness in executing those responsibilities, the CAQ and Audit Analytics noted.

The report found that across the small-cap to large-cap spectrum, many companies are disclosing more than what is required, and many of the required disclosures are either consolidated in the audit committee report or found within dedicated, labeled sections of the proxy, minimizing the hunt for these disclosures.

The Audit Committee Transparency Barometer measures the content of proxy statement disclosures in certain key areas, including auditor oversight and audit committee scope of duties. The information will serve as a baseline reference point measurement for reporting by companies in these indices in future proxy seasons.

The report found that 83 percent of S&P 500, 69 percent of S&P MidCap and 58 percent of S&P SmallCap companies discussed in their proxy statements how non-audit services may have an impact on auditor independence. Moreover, 47 percent of S&P 500, 42 percent of S&P MidCap and 50 percent of S&P SmallCap companies disclosed in their proxy statements the length of time an auditor has been engaged.

The CAQ and Audit Analytics analysis also found that 13 percent of S&P 500, 10 percent of S&P MidCap and 8 percent of S&P SmallCap companies discussed in their proxy statements the audit committee’s considerations in appointing the auditor in terms of qualifications, geographic reach and firm expertise.

In addition,13 percent of S&P 500, 4 percent of S&P MidCap and 1 percent of S&P SmallCap companies discussed audit fees in their proxy statements and their connection to audit quality.

“We think it is important to provide a baseline for audit committee disclosures, with the intent of tracking trends and leading practices on an annual basis moving forward,” said CAQ executive director Cindy Fornelli in a statement. “Greater transparency about the audit committee’s roles and responsibilities provides an opportunity to communicate more clearly to shareholders about one of its key responsibilities, auditor oversight, which in turn may enhance audit quality.”

In their research effort, the CAQ and Audit Analytics reviewed the most current proxies (filed through the end of June 2014) of 1,500 S&P composite companies, including companies in the S&P 500, S&P MidCap 400 (S&P MidCap), and S&P SmallCap 600 (S&P SmallCap) indices.

“We are excited to be working with the CAQ on this market assessment project,” said Audit Analytics CEO Mark Cheffers. “The new Audit Committee Transparency Barometer will provide deeper insight into proxy disclosure trends and inform audit committees and shareholders alike.”

The CAQ and Audit Analytics plan to release future readings of the Audit Committee Transparency Barometer to gauge further enhancement in audit committee disclosures and provide fresh perspective to companies as they assess their approach to these disclosures.

The Barometer is available here.

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