Posts Tagged ‘audit committee’

FAQs on Two Recent Concept Releases on Audit Committee Matters

September 18th, 2015 | By

1. On July 1, 2015, the Securities and Exchange Commission (SEC) issued a Concept Release on Possible Revisions to Audit Committee Disclosures. What does it say?

The release asserts that current  disclosure rules may not mandate enough disclosures about activities of audit committees  in the reports they make in annual proxy statements and explores possible disclosure mandates in several areas—most of them pertaining to the external auditor. The areas outlined are as follows:

  • Audit Committee’s Oversight of the Auditor
  • Audit Committee’s Process for Appointing or Retaining the Auditor
  • Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected by the Audit Committee
  • Location of Audit Committee Disclosures in Commission Filings
  • Smaller Reporting Companies and Emerging Growth Companies

In addition to these areas, the SEC asks for comment on the possible need for disclosures on accounting and financial reporting process or internal audits and invites comment on the scope of audit committee work.

Throughout the 55-page release, the SEC asks questions—74 in all—seeking the views of interested parties, such as audit committee members and investors, on what disclosures would be valuable. All but two of these questions pertain to oversight of the independent auditor.

2. What exactly is a concept release?

A concept release is an early indication that an agency is thinking about a matter and may issue new rules or standards on it. Any agency may issue a concept release. This current SEC concept release is the only one issued so far in 2015, and it is the first SEC concept release issued since 2011. (There were no SEC concept releases at all from 2012–2014.) While there are no recent studies showing the correlation between concept releases and rulemaking, we can assume that new rulemaking may follow. In this sense, concept releases are not the same as interpretive releases, which interpret new laws or court decisions, or policy statements, which clarify the SEC’s positions on particular matters.

3. How does this SEC concept release fit into the SEC’s overall “disclosure effectiveness initiative”?

The release is aimed at improving audit committee disclosures in concert with the stated goal of the SEC’s ongoing disclosure effectiveness initiative, described in a recent NACD Directorship article. Under this initiative, the SEC’s Division of Corporation Finance is reviewing the disclosure requirements under Regulation S-K (regarding company disclosures generally) and Regulation S-X (regarding company disclosures in financial statements) to “facilitate timely, material disclosure by companies….” So far the SEC has focused on the forms 10-K (annual report), 10-Q (quarterly report), and 8-K (updates). Later phases of the project will cover the compensation and governance information in proxy statements.

If the SEC’s new concept release on audit committee disclosures leads to rules mandating additional disclosures that are not material to investors, it would operate against the goals of the initiative. As SEC Chair Mary Jo White said in her keynote speech at NACD’s fall conference two years ago, “[w]e must continuously consider whether information overload is occurring as rules proliferate and as we contemplate what should and should not be required to be disclosed going forward.”

4. Has NACD commented on the SEC’s concept release?

Yes. On Sept. 8, 2015, the NACD submitted a comment letter affirming the importance of improved disclosures. However, the letter also argues that the choice of what to disclose should be up to audit committees themselves because they are in the best position to describe how they are fulfilling those duties. The NACD letter cautions that information should only be included in a proxy statement (or any other disclosure for that matter) if it would be useful to investors.

In the letter, NACD proposes that audit committees take voluntary action by finding new ways of disclosing the broad scope of their work. NACD has also offered to convene a meeting between the SEC and audit committee leaders in order to accomplish this.

The NACD letter followed a more detailed comment submitted to the SEC on Aug. 3, 2015, by Dennis Beresford, a member of the NACD board of directors, an experienced director and audit committee leader, and the former chair of the Financial Accounting Standards Board (FASB).

In his letter, Mr. Beresford states that the concept release focuses too heavily on the audit committee’s relationship with the auditor, which he says is important but should not dominate the committee’s work. He notes that of the 74 questions asked in the release, all but the last two focus on this topic.

Based on his experience, Mr. Beresford suggests that audit committee reports need to cover a wider range of topics, as suggested by the Audit Committee Collaboration, a group that includes NACD. In order of priority, these topics include:

  • Scope of duties (as referenced in the audit committee charter).
  • Committee composition (especially information on qualifications of the “audit committee financial expert”).
  • Oversight of financial reporting (highlighting how the committee is assessing the quality of financial reporting).
  • Oversight of independent audit (selection of the audit firm and lead engagement partner, and compensation, oversight, and evaluation of the audit firm). Mr. Beresford argues that the disclosure of the lead engagement partner’s name is unnecessary. [This is the subject of a separate Public Company Accounting Oversight Board (PCAOB) release on Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form.]
  • Risk assessment and risk management (which is often assigned to the audit committee).
  • Information technology (such as cybersecurity, which is also often assigned to the committee).
  • Internal audit (namely, internal audit plan review and results).
  • Legal and compliance (such as any discussions with legal counsel).

This list of possible topics for voluntary audit committee disclosures accords with NACD’s own publications on audit committee work. These subjects are frequently discussed in meetings of our Audit Committee Chair Advisory Council and in the webcasts and gatherings we produce with KPMG’s Audit Committee Institute.

Notably, Mr. Beresford warns against turning these subjects into mandatory “check-the-box” disclosures. Because audit committee reports are still in an early stage of development, he hopes “that the SEC allows them to continue to develop largely as ‘best practices’ without becoming overly prescriptive [emphasis added].” Regarding disclosure of the name of the lead engagement partner, he says that this should be left to the discretion of audit committees: “If they felt it would be useful to investors, they could include it in their reports in the proxy statement.”

5. Are there any other agency concept releases that audit committee members should know about?

Yes. On July 1, 2015, the PCAOB issued a concept release on Audit Quality Indicators (AQIs) with a comment deadline of Sept. 29, 2015. The release notes that “[t]aken together with qualitative context, the indicators may inform discussions among…audit committees and audit firms.”

NACD does not plan to comment on this release. However, we note that NACD member J. Michael Cook, chair of Comcast’s audit committee, together with Comcast’s executive vice president and chief accounting officer, Lawrence J. Salva, sent a comment letter advising the PCAOB of their views: “We encourage the PCAOB to be judicious with regard to the number of recommended AQIs, as we believe too many AQIs would lessen their impact. As you have previously noted, audit committees have many responsibilities and a limited amount of time, and as you are aware, audit quality requires more than measurable indicators; skepticism and independence are necessary to turn quantifiable indicators into real audit quality.”

6. What is the key takeaway from the SEC and PCAOB concept releases for audit committees?

The SEC and PCAOB are being proactive on the audit committee front. The SEC wants audit committees to say more about their activities in the proxy statement, and the PCAOB wants audit committees to use specific metrics to judge the quality of audits. Comments from the director community have pointed out the importance of ensuring that disclosures are material and that metrics are useful. In response to these two concept releases, audit committee leaders and members might consider taking two main actions:

  • Review disclosures and their metrics to ensure they are useful.
  • Reach out to the SEC and PCAOB to express views on these matters.

A Final Word

SEC and PCAOB regulators strive to strengthen the U.S. economy through enlightened rulemaking, but they cannot do it alone. They need to hear the voice of the director. NACD members can make a positive difference in this regard.

How Can Companies Improve the Usefulness of Disclosures to the Investor Community?

May 1st, 2014 | By

In March, the National Association of Corporate Directors, KPMG’s Audit Committee Institute, and Sidley Austin co-hosted the latest meeting of the Audit Committee Chair Advisory Council. Delegates were joined by analysts from Moody’s Analytics and Morgan Stanley, as well as leadership from Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB). The group discussed how investors and ratings agencies use financial statements in their assessment of corporate performance, the audit committee’s role in helping to ensure the quality of the company’s financial disclosures, and ongoing FASB and PCAOB projects.

As detailed in the summary of proceedings, the discussion addressed several factors that can diminish the utility of financial disclosures, including high volume as a result of duplication, “boilerplate” disclosures, and the timing of releases. Dialogue yielded the following suggestions for how companies might improve the usefulness of disclosures to the investor community:

  • Expanded reporting at the business unit, segment, or geography level. “We want to see performance data at a more granular level in order to develop a view of the company’s future growth prospects.”
  • Providing data that shows trends over multiple years. “Understanding trends over 2, 3, 5 years tells a fuller story. One of my pet peeves is when a company’s MD&A includes comparative data only from the previous year. Investors want more context.”
  • Using more charts and visuals. “Visuals can deliver a wealth of information using very little real estate in the financial statement.”
  • Including more forward-looking disclosures. “Investors and rating agencies are trying to assess and project future valuations of the company. I’d be in favor of more safe harbors [in this area] if it would encourage companies to offer more forward-looking information.”

For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.

Key Insights From the Audit Committee Chair Advisory Council

August 1st, 2013 | By

On June 19, NACD and partners KPMG’s Audit Committee Institute (ACI) and Sidley Austin LLP co-hosted the most recent meeting of the Audit Committee Chair Advisory Council, bringing together audit committee chairs from major U.S. corporations, key regulators and standard setters from the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and Financial Accounting Standards Board (FASB), and other audit experts for an open dialogue on the key issues and challenges impacting the audit committee agenda.

As detailed in the summary of proceedings, the forum provided timely insights into a number of issues that are top of mind for audit committees. Key insights from the dialogue include:

  • As the PCAOB continues to focus on enhancing auditor independence, skepticism, and objectivity, audit committees are wrestling with how to make the best use of PCAOB inspection reports, with some questioning the timeliness and relevance of the reports and the use of the term “audit failure.”
  • Audit committees continue to discuss the potential value of more robust reporting from the audit committee and external auditors to provide greater insight into their work. Most delegates agreed that the auditor’s statement is the right area of focus.
  • Companies should be preparing for the impact of FASB’s “big four” convergence projects—revenue recognition, leases, financial instruments, and insurance contracts—with a particular focus on the lead time IT departments will need to implement systems changes.
  • Under new leadership, the SEC is refocusing on corporate accounting fraud and the quality of financial disclosures, while moving ahead with its already heavy rule-making agenda resulting from Dodd-Frank mandates and the JOBS Act.
  • The allocation of risk oversight duties among the audit committee, full board, and other board committees is receiving increased attention, as the risk environment becomes more complex and audit committees reassess their risk oversight responsibilities.
  • In their oversight role, directors serve in a part-time capacity, while management is full time, resulting in executives having a much deeper knowledge of the operational aspects and risks of the company. To overcome this inherent imbalance, directors should apply a “healthy” level of skepticism to the information and assumptions management provides.
  • The audit committee’s effectiveness hinges not only on having the right mix of skills and backgrounds, but also having a robust onboarding process and commitment to continuing director education.

For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.