Public companies continue to increase auditor-related disclosures

Facing pressure from investors, U.S. public companies are increasing the amount of information they make public about their dealings with their external auditors, according to a study released on Nov. 1, 2016.

The study from consulting firm Audit Analytics and the Center for Audit Quality (CAQ), an AICPA affiliate, said the findings continue a trend they have observed since they started tracking the disclosures in 2014.

“We’ve seen is a fairly dramatic increase in the transparency of audit committee oversight,” said a CAQ spokesperson.

The latest findings show that 763 public companies, nearly 51 percent of the businesses in the Standard & Poor’s 1500 Composite index of large, small, and mid-sized companies, disclosed the length of service for their outside auditor. Large companies had the highest rate of disclosure, at 59 percent, and the overall rate of companies providing their audit firm tenure rose for the second year in a row. The rate of compliance for the companies in the S&P 400 midcap index was 45 percent, which was only a 1 percent increase from the year before. Some 48 percent of the companies in the S&P 600 small company index revealed their audit firm tenure, which was 2 percent more than in 2015.

For other categories of information, the rate of compliance was significantly lower. More U.S. companies are revealing the audit committee’s responsibility for negotiating the outside auditor’s fee, but this figure is coming off a relatively low base, and the overall increases remain modest. A rising number of companies are also explaining a change in the fees paid to the audit firm, but the rate of compliance is still at only 34 percent for large companies, 32 percent for mid-size businesses, and 36 percent for small public companies.

Audit Analytics and the CAQ attributed the increase to pressure from regulators, investors, and other outsiders. They also said, “Audit committees continue to tailor their disclosures specifically to the company, rather than relying on boilerplate or generic approaches.” An Audit Analytics spokesperson said his firm expects the trend toward expanded disclosures to continue.

The report also notes that the SEC’s July 2015 publication of Release No. 33-9862, Possible Revisions to Audit Committee Disclosures, to solicit public comments about the agency’s long-range plans for updating its disclosure rules represents regulators’ continued interest in focusing on disclosures by audit committees. According to the report, most of the comments submitted backed a voluntary disclosure regime and rules that gave public companies plenty of discretion about what to disclose.

Some 34 percent of the large companies surveyed discussed the criteria they use for picking an outside auditor, a substantial increase from the 8 percent in 2014 that said they provided the criteria to investors. Among mid-size companies, the rate reached 26 percent for the 2016 survey after having been only 7 percent in 2014. For small companies, the rate rose to 25 percent after having been 15 percent two years earlier.

The disparity between large and small companies was even more pronounced when it came to disclosing the audit committee’s role in picking the audit firm partner who would lead the work on their account and a statement that the lead partner rotates off the account every five years. There were 43 percent of the companies in the S&P 500 that said their audit committees were involved in picking the auditor, and 39 percent of the S&P 500 companies said they imposed a five-year rotation for the lead partner. Among the companies in the mid-size index, 10 percent said the audit committee is involved in picking the audit partner and that the lead partner rotates every fifth year. For small companies, 6 percent said their audit committees have a hand in picking the auditor, and 8 percent said the lead partner rotates.

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