The Conference Board Governance Center Blog

Oct
20
2014

Celebrating Audit Committees on the Cutting Edge of Communication

By Cindy Fornelli, Executive Director, The Center for Audit Quality

  Editor’s Note: The Center for Audit Quality is a member of The Conference Board Governance Center and the Governance Center is a supporter of the Call to Action.

Across the globe, investors, regulators, and others are more interested than ever in enhancing transparency in corporate reporting. A new study from EY reveals that one group in particular is responding to this desire for greater transparency: audit committees.

“Our research shows a consistent movement by Fortune 100 companies to enhance the depth and scope of audit committee-related disclosures,” reports EY. “Top companies are progressively supplementing mandatory disclosures with additional voluntary information sought by investors.”

This is the third year EY has conducted this study, and the increasing number of audit committees making this types of disclosures is impressive and a development worth calling attention to. If we acknowledge, even celebrate, companies that are leaders in audit committee disclosure, these companies can then light the way ahead for others—to the benefit of investors.

The Key Role of Audit Committees

The audit committee has always been an important part of a company’s board of directors. But that importance reached new heights in 2002, with the passage of the Sarbanes-Oxley Act (SOX).

SOX made audit committees responsible for hiring, overseeing, and compensating the external auditor. The law also established that all members of the audit committee must be independent, and that at least one audit committee member must have financial expertise—or the board must explain why that’s not the case.

With these changes, the audit committee has become a hub for coordinating many financial reporting communications, as it has primary reporting lines from management and the external auditor. It also has a critical relationship with internal auditors. No surprise, the CAQ’s members—public company audit firms—tell us a strong audit committee is a vital element in delivering a high quality audit.

Given this importance, investors are keenly interested in the role, activities, and processes of audit committees. Disclosure is the starting point to satisfy this interest—as the Conference Board notes, public disclosures and broad dissemination of company information to the market forms the base of the “pyramid” of investor engagement.

The Call to Action

Responding to this rising interest from investors and others, the Audit Committee Collaboration in November 2013 published Enhancing the Audit Committee Report: A Call to Action. Included in the Collaboration are organizations such as the National Association of Corporate Directors, the Association of Audit Committee Members, Inc., the Independent Directors’ Council, NYSE Governance Services, the Center for Audit Quality, Mutual Fund Directors Forum, and Tapestry Networks.

The Call to Action flows from the notion that audit committees can benefit in many ways from taking a fresh look at their disclosures, and it highlights examples of meaningful disclosures that can add value for investors. These best practices are intended to provide a broad, clear path of action that other audit committees can follow.

Appearing in the Call to Action are top companies like Coca-Cola, General Electric, Pfizer, and McDonald’s. Of course, the Call to Action is not meant to be an exhaustive list. Companies that are leaders on audit committee disclosure can be found across the globe. Barclays, for example, is a standout in this area.

Since the publication of The Call to Action, we’ve seen other companies enhance their audit committee disclosures and join our Call to Action by supporting the guiding principles outlined in the report.

One in particular is JPMorgan Chase. The New York-based bank does an admirable job of disclosing, for example, the factors considered by its audit committee when reviewing an auditor’s independence and performance in the context of retaining that auditor. Here’s a portion of this disclosure, from JPMorgan Chase’ 2014 Proxy Statement:

“The Audit Committee annually reviews [Independent Auditor]’s independence and performance in connection with the determination to retain [Independent Auditor]. In conducting our review this year, we considered, among other things:

  • [Independent Auditor]’s historical and recent performance on the Firm’s audit, including the extent and quality of [Independent Auditor]’s communications with the Audit Committee
  • an analysis of [Independent Auditor]’s known legal risks and significant proceedings
  • data relating to audit quality and performance, including recent PCAOB reports on [Independent Auditor] and its global network of firms
  • the appropriateness of [Independent Auditor]’s fees, both on an absolute basis and as compared with its peer firms…”

We think the detail of this disclosure provides shareholders and potential investors with useful context for how the audit committee fulfills several of its key responsibilities.

An Ongoing Dialogue on Audit Committee Disclosure

The CAQ will continue to monitor—and celebrate—audit Committees on the cutting edge of communication. We are working on research that broadens the base beyond EY’s research, so that we have a baseline for future study.

Indeed, the Call to Action has sparked what we hope will be an ongoing dialogue on this issue. We are not suggesting that audit committees do more work, but rather that they consider whether they can better communicate about the great work they are doing. Organizations and individuals that want to officially indicate support of the Call to Action in principle should visit www.auditcommitteecollaboration.org.

By becoming a supporter, you are not agreeing to include every idea in the audit committee report. You are simply registering your support for a key concept: audit committee reporting can and should be strengthened.

About the Guest Blogger:

Cindy Fornelli, Executive Director, Center for Audit Quality

Cindy Fornelli, Executive Director, The Center for Audit Quality

Cindy Fornelli is Executive Director of the Center for Audit Quality (CAQ), a position she has held since the CAQ was established in 2007. In 2014, Fornelli was honored for the sixth time by Directorship magazine as one of the 100 most influential people on corporate governance and in the boardroom. Accounting Today has named her one of the 100 most influential people in accounting for eight consecutive years.

Fornelli currently serves on the Financial Accounting Standards Board’s Financial Accounting Standards Advisory Council and the Securities and Exchange Commission Historical Society’s Board of Trustees, Class of 2014. She previously served on the National Association of Corporate Directors’ 2010 Blue Ribbon Commission on the Audit Committee and 2009 Blue Ribbon Commission on Risk Governance.



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