US audit committees have made great strides to improve transparency surrounding their work, though some areas remain stubbornly in the dark, according to a new study.
A report from the Center for Audit Quality into the S&P 500 reveals that while 84% disclose discussion of non-audit services, and 71% chew over the length of time an auditor has been engaged, they seem remarkably shy when it comes to more sensitive topics.
For example, no audit committees in the S&P 500 disclose discussions about having to address “significant areas” with their auditors. Only 4% (5% in 2018) disclose talks about the connection between the audit fee and audit quality. A measly 2% disclose deliberations about the way the audit committee considers auditor compensation, with no change from last year.
Other disclosures also seem to have stagnated. The number of committees disclosing that their audit partner rotates every five years has remained on 49% for two years running. The number involved in audit partner selection has shrunk from 52% to 50%.
Where does that leave the work of audit committees? With room for improvement, not least because there will be suspicions that if work is not disclosed then its hard to assume it is being done.
CAQ executive director Julie Bell Lindsay said: “We urge audit committees to consider the opportunities to enhance transparency.”
One place to improve is “significant areas”. The report said: “Increased disclosure in this area likely would be helpful to investors. As auditors are beginning disclosing critical audit matters… audit committees have an opportunity to provide their perspective on these matters—and others, if appropriate.”
Other elements that could be disclosed, said the report, are the criteria used to evaluate the work of an audit firm, and the audit committee’s participation in picking new audit partners.
Meanwhile, cybersecurity—a burning issue for big corporations switching to digital business models—is one of the areas that have seen improvements. Last year 14% of audit committees divulged whether their board had a cybersecurity expert. That now stands at 23%. And 34% of committees revealed they now hold responsibility for cybersecurity risk oversight, up from 19%, last year.
UK audit reforms
Audit committees have proved contentious in the UK as parliamentarians and independent reviews looked at reforming the regulation and functioning of the audit market following a number of high-profile business failures.
The Kingman review, published almost a year ago, proposed government give regulators the power to recommend the replacement of an audit committee chair if it finds that standards have fallen. The review also called for powers to order a review of the “effectiveness” of an audit committee.
Meanwhile, when the Competition and Markets authority looked at the audit market it called for regulatory powers to place an observer on the committee, or issuing a public reprimand.
The CMA’s report concluded: “Overall while some audit committees are effective in overseeing the activities of auditors, the evidence in section 3 suggests that there is significant variation in the performance of audit committees within the FTSE 350, and that selection and oversight of auditors is not sufficiently focused on quality.”
Parliamentarians were also convinced of the need for new measures affecting audit committees. A report published by the House of Commons business committee agreed with the CMA proposal.
It said: “It is deeply concerning that many audit committees do not appear to be factoring professional scepticism and challenge into their criteria for selecting auditors and are instead using ‘cultural fit’ as a desirable attribute.
“Equally worrying is the finding that many audit committees are spending so little time on auditing matters. This questions whether many audit committees are committed to challenging management and to putting in the necessary time to ensure that auditors are as well.”
So far, none of the recommendations have been implemented, though business secretary Andrea Leadsom has said reform of audit is a priority.