The SEC recently published a concept release seeking comment on the need for new audit committee disclosures. This follows on the heels of recent PCAOB pronouncements and proposals regarding audit engagement partner disclosures in a new form to be filed with the SEC. (See this Doug’s Note.)
The SEC staff noted that the majority of its audit committee disclosure requirements (currently housed in Item 407 of Regulation S-K) were adopted back in 1999, well before the Sarbanes-Oxley Act arrived three years later. As a result, there is concern that audit committee disclosures are no longer adequate to reflect the committee’s duties and operations.
The concept release focuses on the modern audit committee’s responsibility for the appointment, compensation, retention and oversight of the company’s audit firm and for resolving disagreements between management and the auditor regarding financial reporting. The staff has invited feedback regarding possible changes in the following areas:
- Additional information regarding communications between audit committee and auditor
- Frequency of audit committee meetings with the auditor
- Review and discussion of the auditor’s internal quality review and most recent PCAOB inspection report
- Whether and how the audit committee assesses, promotes and reinforces the auditor’s objectivity and professional skepticism
Auditor appointment and retention
- How the audit committee assessed the auditor (including auditor independence, objectivity and audit quality) and the committee’s rationale for selecting or retaining the auditor
- If the audit committee sought RFPs for the audit, the process the committee undertook to seek such proposals and the factors considered in selecting the auditor
- The board’s policy, if any, for an annual shareholder vote on the selection of the auditor and the audit committee’s consideration of the voting results in its evaluation and selection of the audit firm
Audit firm and engagement team qualifications
- Disclosures of certain individuals on the engagement team
- Audit committee input in selecting the engagement partner
- The number of years the auditor has audited the company
- Other firms involved in the audit
Location of audit committee disclosures within SEC filings
Smaller reporting companies and emerging growth companies
With all of this discussion going on, it’s fair to assume that some disclosure revisions are in the offing, though what they might be is anyone’s guess at this point. Some audit firms and companies will begin to discuss such matters more seriously in anticipation of eventual rulemaking and as disclosure best practices evolve in this area prior to any rulemaking.
It’s a good idea, therefore, to keep the audit committee informed as the SEC’s and PCAOB’s processes move forward.