Corporate governance experts discuss trends in audit committee disclosure
8:45 a.m., May 16, 2014--In “Enhancing the Audit Committee Report: A Call to Action” (EACR), a new report issued by a group of nationally recognized U.S. corporate governance and policy organizations known as the Audit Committee Collaboration, the call to action asks audit committees of public companies of all sizes and industries to proactively consider the effectiveness of their public disclosures.
“Given the importance of the audit committee’s responsibilities for broadly overseeing the financial statement process, including the work of the external and internal auditors, it is important for investors and others with a stake in our financial markets to understand and have confidence in the audit committee’s work,” states the report. “The annual audit committee report included in the proxy statement is the principal source of public audit committee-related information other than its committee charter.
New Blue Hens
“Public disclosures are the primary channel through which audit committees can educate investors and other stakeholders about their critical responsibilities, and demonstrate their effectiveness in executing those responsibilities.”
This premise behind the EACR was discussed as part of a program presented by the University of Delaware’s John L. Weinberg Center for Corporate Governance and the Center for Audit Quality to a packed house in late April.
Charles Elson, director of the Weinberg Center and the Edgar S. Woolard, Jr., Chair in Corporate Governance, moderated a panel of experts who discussed the findings and recommendations of the EACR and the changing trends in audit committee reporting.
Panelists included: Martin F. Baumann, chief auditor and director of professional standards, Public Company Accounting Oversight Board; Michelle Edkins, managing director, global head, Corporate Governance and Responsible Investment, BlackRock; Cynthia M. Fornelli, executive director, Center for Audit Quality; Michele J. Hooper, president and CEO, The Directors’ Council, audit committee chair, PPG Industries Inc., and nominating and governance chair, UnitedHealth Group Inc.; Laban P. Jackson, Jr., chairman and CEO, Clear Creek Properties Inc., and audit committee chair, JPMorgan Chase & Co.; Joann S. Lublin, management news editor for The Wall Street Journal; John W. Noble, vice chancellor, Delaware Chancery Court; and James H. Quigley, CEO emeritus, Deloitte LLP, audit committee chair, Hess Corporation, audit and examination committee chair, Wells Fargo and Company, and audit committee member, Merrimack Pharmaceuticals.
Elson noted that it is important for the various constituencies involved in corporate governance, including directors, board advisers, members of the bar and judiciary, to understand the recommendations of the EACR and to focus on potential governance enhancements.
One panelist addressed the purpose of the EACR, noting it was issued because investors want more information about what the audit committee does.
According to the panelist, the EACR is a guidebook and not mandatory; it provides examples of companies that are currently voluntarily disclosing additional information than what is legally required by the Securities and Exchange Commission (SEC) to provide more transparency about the work of the audit committee. The information is only related to what the committee is already doing and not adding any additional responsibilities, said the panelist.
Another panelist noted that the audit committee report is a legal requirement, and that if one looks at most companies’ reports, most follow the legal requirements.
The panelist suggested companies take a fresh look at their audit committee reports and think about what would be helpful to investors to understand the processes and the work that the committee does, and said that if companies were more transparent with regard to what they are doing, they may stave off additional regulatory requirements.
When asked if the EACR’s recommendations make sense, another panelist said they do but mentioned the concern that adding more information could raise more questions. The panelist suggested that companies talk to their shareholders/investors to determine whether the additional information being recommended for the audit committee report would be helpful.
One panelist explained that when they look at an audit committee report, they look to see how robust the audit committee process was and whether it was effective.
The panelist noted that investors don’t necessarily want more disclosure, rather they want better communication of what the audit committee actually does, and suggested it could help with the disconnect between what people think audit committees do and what audit committees actually do.
Many panelists agreed that providing voluntary disclosure is better than regulatory-required disclosure.
One panelist liked the EACR because they believed that practitioner-developed guidance is more useful and more likely to be put into practice versus regulations. However, some panelists believed that some regulation would be needed to bring consistency to the disclosures.
A panelist discussed some collateral consequences and benefits of enhanced disclosure, noting that disclosure is like sunshine and that sunshine is like a disinfectant. The panelist indicated that there has to be a proper balance a mix of information so that shareholders understand their investment, but not too much information, because they otherwise may not read it.
Another panelist said that they are trying to make the audit committee report more of a communication document than a legal document.
While he believes in disclosure and noted that transparency is critical, Elson said that when disclosure is a legal issue versus informational, it becomes tailored by lawyers and begins to serve a different function.
“Investors do not always want extensive information,” said the panelist. “However, when it is reported, it gives them confidence that their interests are protected. Proxy statements are getting longer, but the bottom line is that investors are primarily interested in what audit committees do and how they do it.”
One panelist, commenting on the large amount of information legally required to be disclosed, said, “When companies lose small investors, it will be a mess. Do we really care about small investors if we’re issuing reports that people cannot understand?”
Engaging the audience
Following the panelists’ discussion, the event concluded with a question and answer session with the audience, which included students from Elson’s advanced seminar in corporate governance course; members of the University community; board members and executives; members of the bar and judiciary; and the public.
Attendees posed questions and comments about improving audit reports with clearer, more transparent information to divulging risk assessment.
When an attendee inquired about the voice of the auditor and protection for investors, panelists agreed the audit report can serve a dual purpose.
“The bottom line is the audit report has to suit the SEC so the company can raise capital,” said one panelist, while another panelist explained that reports can meet both legal and shareholder needs.
“Good, clear reports without jargon can be written so that everyone understands the report,” said the panelist.
Photos by Kathy F. Atkinson