Introducing the NACD Research Top 5: A recap of what has been on our radar this week.

1. Just released: 2011 Nominating/Governance Committee Chair Advisory Council Summary of Proceedings
   
2. On demand: Quarterly Environment Update for Q1 2012
3. Blog post: Yahoo and the Limits of Shareholder Communication
4. New SEC guidance on the proper wording of Say on Pay proposals on the proxy card
5. On demand: NACD Boardroom Excellence webinar on Technology, Innovation, and Strategy

This Tuesday, NACD convened its Audit Advisory Council and brought together audit committee chairs from Fortune 500 companies, shareholder representatives, and government regulators.

The first half of the meeting’s discussion centered on recent activity from the PCAOB and the SEC. Both the regulatory bodies and council members discussed the current and pending regulations with attention to the possible impact these rules may have. In particular, the PCAOB’s concept releases pertaining to a new auditor discussion and analysis and mandatory audit firm rotation created the most debate around the table.

The discussion of transparency and disclosure continued for the remainder of the meeting. The council discussed three methods to help improve the communication of audit committee activities:

1. Make more robust audit committee reports in the proxy describing the steps taken to complete the yearly audit, including the interactions with external auditors.
2. Expand committee charters to include the general process taken to complete oversight responsibilities.
3. Circulate exemplary audit committee reports and charters as models for future reference.

The meeting came to a close with a brief discussion of the challenges facing audit committees. Risks associated with information technology (IT) were on the top of the list. Many participants were concerned with the speed of emerging technologies, and the difficulty of staying up-to-date in this area.

The NACD Audit Advisory Council will produce a summary of proceedings for an overview of the topics discussed. Additionally, the council will meet again next year to continue this important dialogue.

This week, the Public Company Accounting Oversight Board (PCAOB) formally issued proposed rules on audit reporting standards (Docket 029: Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits). Following a concept release originally issued in 2009, the proposed rule would require the engagement partner—along with any additional firms that participated in the audit—to be disclosed in the audit report. The window for public comment is open until January 9, 2012.

The PCAOB also has several outstanding concept releases that have the potential to change the relationship between auditors and the board of directors. The comment period for Docket 034: Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements and Related Amendments to PCAOB Standards closed September 30th, but included the use of an “auditor’s discussion and analysis,” (AD&A) as well as expanded use of emphasis paragraphs. Docket 037: Concept Release on Auditor Independence and Audit Firm Rotation is currently open for comment on whether mandatory audit firm rotation would improve auditor objectivity.

While NACD sees room for improvement in the current auditor’s reporting model, in our comment letter to Docket 034, we urge the PCAOB to carefully examine the proposed changes to ensure the benefits of the additional work outweigh the costs. There is concern that these proposals could upset the role management and auditors play in asserting and attesting to information. Additionally, these additions —especially the proposed AD&A—may create confusion regarding responsibilities for oversight of the financial reporting and external audit processes.

NACD continues to comment on the other developments arising from the PCAOB. We plan to alert our membership as future comment letters are released.

PCAOB Chairman James Doty recently spoke at the 2011 Board Leadership Conference. Read the highlights of his commentary at the NACD Blog.