Auditor Group Eyes Audit Committee Disclosures

“Is there a way to provide more robust disclosure that doesn’t interfere with management’s responsibility to be the original source of information?”
Kathleen Hoffelder

Along with the CFOs and chief executive officers who must sign off on public-company financials, the audit committee is an essential part of financial reporting. After all, it hires and oversees external auditors. But audit committees are often a missing link in the chain of corporate financial reporting that extends to shareholders, says one auditors’ group that’s looking to change all that.

Indeed, one of the 2013 priorities of the Center for Audit Quality (CAQ), an organization of about 600 public-company auditing firms that aims to boost investor confidence, is to improve audit-committee relationships with shareholders, according to Cindy Fornelli, executive director of the CAQ.

“Is there a way to provide more robust disclosure that doesn’t interfere with management’s responsibility to be the original source of information?” Fornelli asks. She tells CFO that the CAQ will hold meetings over the next couple of weeks to discuss the issue.

Typically, investors only hear audit-committee updates at annual shareholder meetings. More timely reports and more discussion about the audit process would help foster better communication between companies and shareholders, shareholder advocates suggest.

The information contained in an audit-committee report also varies greatly by company, investor advocates say. If guidelines were created (since none exist currently) for having more effective communication between shareholders and a company’s audit committee, shareholders could more effectively benchmark one company’s audit practices against another’s, and they would have more assurances about the companies’ use of one auditor over another.

Any guidelines or approaches to better shareholder communication that come out of the CAQ talks should particularly help small-to-medium-sized businesses (SMBs), Fornelli suggests. Such firms don’t always have the auditing resources other firms have or “the breadth of experience on audit committees as a larger company might enjoy,” she points out, noting that previous CAQ auditing educational guides and webcasts have been welcomed by SMBs.

The increased emphasis on shareholders makes sense to Peter Bible, the chief risk officer at EisnerAmper, an accounting and consulting firm. Specifically, he suggests additional disclosures could be included in the audit-committee report that forms part of a company’s proxy statement and is usually presented before shareholder meetings. Contending that not enough information about a firm’s audit is included in the proxy statement, he says this is one area that could be enhanced.

Audit committees should provide condensed versions of what external auditors already communicate to the committees in assessment reports, he believes. Such reports could go into detail about such things as the use of unusual accounting methods and significant estimates used by the auditors.

Ernst & Young partners agree with the need for better audit-committee/shareholder relations. In an auditing report in November, they recommended having the audit committee periodically prepare a report to shareholders assuring them how effective and how independent it thinks the external auditor is. They also suggested that audit committees should explain the extent of nonaudit service provided by the external auditor, as well as outline the fees paid to the external auditor and determine whether they are appropriate.

That way, the Ernst & Young partners said, shareholders would have more knowledge about the auditor so that they can make their own assessments at shareholders’ meetings over whether to retain or change auditors. They even suggested that shareholders have a vote on the quality of the assessment reports given by external auditors.

Salvatore Collemi, quality control senior manager at accounting firm Rothstein, Kass & Co., agrees that audit committees “need to show stakeholders and shareholders of a company: this is what they are doing.” That’s particularly important now, he says, since auditors and corporations are still divided over the best way to achieve the most effective audit. Even having a more detailed annual report that explains audit-committee actions or more clarity on a company’s website should help shareholders.

The CAQ, along with other industry groups like the Independent Directors Council and the Mutual Fund Directors Forum, have labored to improve relations between audit committees and external auditors. Last fall they were part of a group that developed a list of questions that audit committees should pose to auditors to get the most effective audit.

The Public Company Accounting Oversight Board also devised a set of requirements that auditors need to adhere to so they can better communicate with audit committees (Auditing Standard No. 16), which was approved by the Securities and Exchange Commission last December.

Providing more information about the audit committees’ responsibilities should ultimately provide a better-quality audit for the company, Fornelli believes. “All financial-reporting stakeholders, including CFOs, should be invested in audit-committee communications to shareholders,” she says. “More proactive communication will lead to better disclosures and increased investor confidence in the company.”