On July 1, 2015, the Securities and Exchange Commission published its long-expected concept release seeking public comment on expanded disclosure requirements for audit committees. The Commission noted that, although audit committees play a vital role overseeing a company’s independent auditor, the disclosure requirements relating to audit committees have not changed substantively in over 15 years. While the focus of the concept release is on the audit committee and auditor relationship, the Commission has invited public comment on other aspects of audit committee disclosures, including roles and responsibilities of the committee, committee qualifications, oversight of financial reporting, and oversight of internal control over financial reporting. The concept release can be found here.
The Commission noted that voluntary disclosure of audit committee activity has been increasing in recent years. In addition, some investor groups, such as the Council of Institutional Investors, have called for additional disclosure from audit committees. Further, other jurisdictions outside the United States are looking into expanded audit committee disclosures. The Public Company Accounting Oversight Board (the “PCAOB”) is also considering initiatives regarding additional disclosure requirements related to the auditor, including a requirement that the auditor disclose the auditor’s tenure in the auditor’s report. Another PCAOB proposal would require the auditor to disclose in the audit report (i) the name of the engagement partner; (ii) the names, locations, and extent of participation of other independent public accounting firms that took part in the audit; and (iii) the locations and extent of participation, on an aggregate basis by country, of certain nonaccounting firm participants in the audit. In response to concerns over potential liability, the PCAOB is considering other locations for the proposed disclosure.
The Commission is specifically seeking public comment regarding the following potential changes to audit committee disclosures:
- The audit committee’s oversight of the auditor
- Additional information regarding the communications between the audit committee and the auditor, such as the audit committee’s consideration of the required communications with the auditor; the fact that those communications occurred would no longer be sufficient
- The number of times the audit committee met with the auditor
- Whether the audit committee has reviewed and discussed with the auditor its internal quality review and most recent PCAOB inspection report
- Whether, and if so, how, the audit committee assesses, promotes and reinforces the auditor’s objectivity and professional skepticism
- The audit committee’s process for selecting the auditor
- How the audit committee assessed the auditor, including the auditor’s independence, objectivity and audit quality, as well as its rationale for selecting or retaining the auditor. This could include disclosure of the criteria considered by the audit committee
- If the audit committee sought requests for proposal for the independent audit, the process the audit committee used to seek the proposals and the factors considered in the selection. This could include the number of auditors asked to submit proposals
- The Board of Directors’ policy, if any, for an annual shareholder vote to ratify the selection of the auditor, and whether the audit committee considers the results of the vote in selecting the audit firm
- The audit committee’s consideration of the qualifications of the audit firm and certain members of the engagement team when selecting the audit firm
- Identification of the engagement partner or additional members of the engagement team, the length of time they have served in their respective roles, and descriptions of their experience
- The involvement of the audit committee in selecting the engagement partner
- The number of years the auditor has audited the company
- Identification of other firms, such as affiliated or non-affiliated accounting firms, tax advisors or actuaries, involved in the audit
The Commission is also seeking public comment on (i) whether audit committee disclosures should be part of registration statements and prospectuses in registered offerings, as those disclosures may inform investment decisions, and (ii) the application of audit committee disclosure requirements to smaller reporting companies and emerging growth companies.
Given the increasing interest in audit committee disclosures, we expect significant public response to the concept release and for the Commission to propose rules regarding enhanced audit committee disclosures. Issuers should take this opportunity to discuss with their audit committees the potential expansion of audit committee disclosures. We invite you to reach out to us for any assistance in understanding the potential changes to disclosure outlined in the concept release. Additionally, we intend to submit comments to the Commission in response to the concept release and welcome your input.