On July 1, 2015, the Securities and Exchange Commission published a Concept Release on Possible Revisions to Audit Committee Disclosures. This comes on the heels of a PCAOB request for comments regarding whether public accounting firms are required to release the name of audit engagement partners and certain participants in audits. While not strictly related, these new possible rules highlight regulators’ renewed concern for audit disclosures. At this time, the SEC is seeking comments regarding (1) the idea of revisions to the existing requirements in general, and (2) specific areas of possible disclosure. The SEC cites some shareholders expressing the view that the existing “rules do not provide investors with sufficient useful information regarding the role and responsibilities carried out by the audit committee in public companies.” The SEC is particularly careful to point out that many companies “voluntarily provide information beyond the disclosures required by [the SEC’s] current rules.” The areas of possible disclosure seem to cover a wide array of issues, indicating that the SEC may be strongly influenced by the input from comments.
Below are some of the areas that the SEC is considering for additional disclosures:
- the audit committee’s oversight of the auditor, including: communications between the committee and auditor (which would provide information about actions taken in the most recent fiscal year); meetings between the auditor and audit committee; committee review of the auditing firm’s internal controls; and how the committee reviews the auditor’s objectivity and professional skepticism;
- the audit committee’s process for appointing and retaining the auditor, including assessments, proposals, and shareholder input;
- qualifications of the audit firm, such as the engagement team and number of years the firm has audited the company;
- whether the audit committee disclosures should be included in IPO and other registration statements; and
- requirements for smaller and emerging growth companies.
While some of these disclosures appear to be less difficult than others, such as how long an auditor has audited a company, others appear to be more in depth, such as requiring disclosure of the committee’s review of the auditor’s internal controls, or others that could be hard to explain, such as why ABC Co. chose KPMG over PWC. It is unclear from the SEC’s release how these disclosures will help the average investor make wise investment decisions. Arguably the process would be more transparent, but the flip-side is that it becomes more burdensome on companies to disclose more and more, and may overload investors with information. However, the SEC is seeking comment, and issuers may be able to influence the direction and scope of the rules by submitting comments.
It is clear from the SEC’s broad request for comments that the necessity, demand, and scope of the rules is not yet clear, which is good reason for reporting companies to take advantage of the request for comments. Companies should consider the effect this may have on small versus large companies, as well as the possible disclosures regarding justification – and what burden that might entail. Additionally, there are also forthcoming PCAOB regulations requiring public disclosures that might make some of these rules redundant, and perhaps the SEC rules would be better created after the scope of the PCAOB regulations is determined. If companies wish to submit comments to the SEC, Husch Blackwell LLP is here to help.
Alex Gross, a summer associate at the firm, assisted in the preparation of this post.