Governance Leaders Issue “Call to Action” for Enhancing the Audit Committee Report
from the Center for Audit Quality
November 20, 2013
A group of nationally recognized U.S. corporate governance and policy organizations is jointly calling on audit committees of public companies of all sizes and industries to proactively consider strengthening their public disclosures to more effectively convey key elements of their critical work to investors and stakeholders. The Call to Action is built on the premise that those with a stake in our financial markets should understand and have confidence in the audit committee’s work. It is through its public disclosures that an audit committee has the opportunity to educate others about its critical responsibilities.
The organizations behind the effort are: the National Association of Corporate Directors; the Association of Audit Committee Members, Inc.; The Directors’ Council; Tapestry Networks; NYSE Governance Services, Corporate Board Member; and the Center for Audit Quality. These organizations first came together in 2012 to collaborate on projects intended to leverage their individual efforts to expand audit committee member access to useful tools and materials across the spectrum of public companies in order to strengthen audit committee performance and transparency.
In a paper released today, these organizations issued the following Call to Action:
“We believe that greater transparency about the audit committee’s roles and responsibilities is one way of increasing investor confidence, and an opportunity to communicate more clearly to shareholders about audit committee-related activities. To this end, we believe that public company audit committee reporting can and should be strengthened, and we encourage all public company audit committees to renew their focus on this important issue.”
These organizations believe that audit committees play a critical role in the governance of public companies and in the integrity of the overall external financial reporting system. Audit committees of public companies are broadly charged with overseeing a company’s financial reporting process and for hiring, compensating, and overseeing the work of the external auditor.
“The Call to Action shows how some entities have successfully enhanced their audit committee disclosures without the need for new regulation or an expansion of the committee’s scope of work,” said Holly Gregory, Partner in the corporate governance and financial regulatory practice at Weil, Gotshal & Manges LLP.
“I applaud the approach in the Call to Action as it is all about effective disclosure rather than just more disclosure that may not be truly beneficial to investors,” added Charles Elson, Director, Center for Corporate Governance, University of Delaware.
The paper includes examples of emerging, voluntary practices of strengthened audit committee disclosures and it cites studies that have examined recent trends in these practices. The recommendations do not require audit committees to take on additional responsibilities; rather they are focused on encouraging audit committee members to provide greater transparency to investors and others about the important work they are already doing.
Some of the recommendations include:
o Clarify the scope of the audit committee’s duties.
o Clearly define the audit committee’s composition.
o Disclose relevant factors considered when selecting an audit firm.
o Provide relevant information about the audit committee’s involvement in the selection of the lead audit engagement partner.
o Disclose key factors considered when compensating the external auditor.
o Provide relevant information about how the audit committee oversees the external auditor.
o Provide relevant information about the evaluation of the external auditor.
The organizations behind this effort believe meaningful information and communication among the key players in our financial markets promotes investor confidence, which is the engine that drives capital allocation and efficiency in the U.S. capital markets. Therefore, it is critical for audit committees to explore ways, such as those suggested in the paper, to improve the meaningfulness of the information they provide to the marketplace.
Individuals or organizations that want to officially indicate their support for the “Call to Action” in principle, can do so by signing on at www.auditcommitteecollaboration.org.