On July 1, the Securities and Exchange Commission published a concept release to seek public comment regarding the potential enhancement of audit committee disclosure requirements, particularly as such disclosure relates to an audit committee’s oversight of the independent auditor.
The SEC noted that while the majority of current audit committee disclosure requirements have been in place since 1999, the role and responsibilities of audit committees have significantly changed since then due to, among other things, the enactment of the Sarbanes-Oxley Act of 2002, the creation of the Public Company Accounting Oversight Board (PCAOB) and the adoption of additional listing requirements by the securities exchanges and associations. The SEC issued the concept release and is seeking public comment to better understand whether, (and, if so, what) additional reporting requirements related to an audit committee’s oversight of the auditor would be useful to investors, due primarily to: (1) increased public discussion by investors, organizations representing audit committee members and auditors of the need for updated audit committee reporting that “more transparently conveys the oversight responsibilities performed by the audit committee relative to an issuer’s auditor,” (2) divergence in the current reporting practices by various issuers of the activities of their audit committees, with some issuers already voluntarily providing more extensive disclosures than what is required, (3) the PCAOB’s engagement in certain standard-setting initiatives that could result in additional information being disclosed relating to auditors and their work that may more appropriately be addressed by the SEC through requiring similar disclosure by the issuer, and (4) initiatives being undertaken in other jurisdictions in respect of expanded audit committee reporting.
The concept release clarifies that the SEC is particularly focused on (a) whether changes should be made to required disclosures about audit committees and their oversight of the audit and the auditor relationship and (b) understanding whether such additional information would help inform investment decisions and, where applicable, voting decisions regarding the ratification of auditors and the election of directors who are members of the audit committee. In furtherance of the foregoing, the SEC is requesting comment on various potential changes to required audit committee disclosures, including as to the following:
- communications between the audit committee and the auditor, including, for example, disclosure of the audit committee’s consideration of matters required to be discussed with the auditor (rather than disclosure of solely the fact that those communications occurred) and the nature or substance of those communications between the audit committee and the auditors;
- the frequency with which the audit committee met with the auditor and additional information as to specific meetings;
- whether the audit committee has reviewed and discussed with the auditor its internal quality review and most recent PCAOB inspection report and the nature of any such discussion; and
- whether, and if so, how, the audit committee assesses, promotes and reinforces the auditor’s objectivity and professional skepticism.
In addition, the SEC is soliciting comment on potential audit committee disclosures in respect of the audit committee’s (1) process for selecting the auditor (e.g., how the auditor and its independence, objectivity and audit quality were assessed and the board’s policy, if any, for an annual shareholder vote to ratify the selection of the auditor and whether the audit committee considers the results of any such vote) and (2) consideration of the qualifications of the audit firm and members of the engagement team when selecting the audit firm, including the audit committee’s input in selecting the engagement partner.
The concept release can be found here.