United States: SEC Considering Possible Revisions To Audit Committee Disclosure Requirements

The Securities and Exchange Commission (SEC) recently issued its long-promised concept release (Release) seeking comment on possible revisions to disclosure requirements regarding audit committees of boards of directors, especially as to audit committees' oversight of independent auditors and their performance of audits1. Concept releases can be harbingers of new rulemaking, as was the case with respect to a September 2004 concept release that preceded the adoption of the XBRL disclosure rules. Comments on the possible revisions to disclosure requirements discussed in the Release, which could influence future SEC rulemaking, are due by September 8, 2015.

Impetus for the Release

For years, members of the investment community have been calling for enhanced audit committee disclosures. For example, in November 2013, a group calling itself the "Audit Committee Collaboration," which included the National Association of Corporate Directors and the Center for Audit Quality, issued a report titled "Enhancing the Audit Committee Report: A Call to Action."2 That report encouraged public company audit committees "to thoughtfully reassess their reporting and communication with stakeholders and, if need be, to strengthen them in the future." In addition, the compliance and corporate governance media have continued to discuss the possibility of expanded audit committee disclosure requirements.3 Some issuers have responded to the calls for more disclosure by voluntarily including enhanced audit committee disclosures in their proxy statements. Moreover, the Public Company Accounting Oversight Board (PCAOB) has been considering proposals to mandate additional disclosures in audit reports and elsewhere, including the identification of the engagement partner on each audit in the audit report.

Against this background, the SEC issued the Release. In the Release, the SEC points to numerous benefits that could accrue to investors from enhanced audit committee disclosures, not the least of which, it believes, would be a narrowing of the "expectations gap" between investors and audit committees regarding the role of the audit committee.

Potential New and Revised Audit Committee Disclosure Requirements

The SEC states the purpose of the potential new disclosure requirements is "to address the audit committee's responsibilities with respect to the appointment, compensation, retention, and oversight of the work of the registered public accounting firm and [to] better inform investors about how the audit committee executes those responsibilities."4 The most important of the potential new disclosure requirements (Potential Disclosure Requirements) are lumped into the three somewhat overlapping categories summarized below. In addition to seeking comments on the following categories, the SEC has requested comments on other, less significant matters, including the proper location of audit committee disclosure in SEC filings.

Audit committee's oversight of the auditor. This category includes potential disclosures relating to:

  • how the audit committee assesses, promotes and reinforces the auditor's objectivity and professional skepticism, which are areas of increased focus among numerous groups concerned with audit quality;
  • communications between the audit committee and the auditor, including disclosure relating to the nature of communications and the subjects discussed, among which could be overall audit strategy, significant risks identified, the basis for determining that the auditor could act as principal auditor and the results of the audit;
  • whether and how the audit committee considered all the matters addressed in those communications, including how the auditor planned and performed the most recent audit; and
  • details about the audit committee/auditor communications, including matters such as the frequency, nature and forums of such communications.

The SEC claims that heightened audit committee oversight of auditor objectivity and professional skepticism should promote improved audit quality. If so, the onus of ensuring auditor objectivity and skepticism would be squarely on the audit committee even though reinforcement of the objectivity and skepticism of audit firm personnel is seemingly a matter more inherently within the responsibility of the audit firms and the PCAOB. Boards of directors and audit committees should be concerned that the Potential Disclosure Requirement regarding this matter could raise investor expectations that audit committees will be guarantors of auditor objectivity and skepticism, placing the committee members in the cross-hairs of irate investors if an audit failure occurs as a result of a perceived lack of auditor objectivity or professional skepticism.

Moreover, some of the Potential Disclosure Requirements described above appear to be based on an assumption that audit committees delve deeply into the specifics of the planning and conduct of each particular audit.

The Potential Disclosure Requirements in this category also include potential disclosures regarding:

  • the audit committee's review and assessment of information such as reports prepared by the audit firm regarding certain matters and PCAOB inspection reports and discussions of those reports with the auditor;
  • how the audit committee considered deficiencies identified in the PCAOB inspection reports; and
  • the nature of the audit committee's review of such materials and whether it discussed those matters with the audit firm.

The SEC has also requested comments on whether disclosures regarding the review of such materials by the audit committee and the audit committee/auditor discussions would be useful without disclosure of the specific review and inspection results. In this regard, the SEC must proceed with care as the prospect of the disclosure of such matters has, as the SEC recognizes, the potential for chilling communications between audit committees and auditors.

Audit committee's process for appointing or retaining the auditor. This category includes potential disclosures relating to:

  • the process and the criteria, including indicia of audit quality, used by the audit committee to assess audit firms, including those firms' independence and objectivity;
  • the audit committee'srationale for selecting a new auditor or retaining an existing auditor;
  • the audit committee'sassessment of audit quality and the means and metrics used to assess the quality of an audit of an issuer's financial statements;
  • the audit committee's involvement in setting auditor compensation;
  • whether and how the audit committee makes requests for proposals (RFP) from audit firms to perform independent audits and the details of any RFP process; and
  • the board of director's policy regarding having an annual shareholder vote to approve or ratify the auditor selection and the audit committee's consideration of any voting results in its auditor selection process.

These disclosures could result in scrutiny of an audit committee's vetting of audit firms in connection with the engagement or retention of an auditor, the process and criteria the committee uses for auditor selection and how well an audit committee evaluates an audit. Such scrutiny would most likely occur when an issuer's audited financial statements have been the subject to an audit failure and the auditor had prior audit failures.

Qualifications of the audit firm and certain members of the engagement team selected by the audit committee. This category includes potential disclosures of or relating to:

  • the factors the audit committee considered most relevant in selecting or retaining any auditor and information about the auditor that will perform the issuer's next audit;
  • the engagement partner's name and, perhaps, the names of other key members of the audit team;5
  • the experience the auditor and those individuals brings to the audit;
  • whether the audit committee was involved in the selection of the audit engagement partner and what it considers in providing input on that selection; and
  • the number of years an existing auditor has been engaged by the issuer.

The qualifications and independence of an audit firm and the audit team's members are core matters for consideration in an audit committee's selection of an auditor. The Potential Disclosure Requirements described above are based on a belief that audit committees are well positioned to, and must be able to, evaluate effectively the independence and qualifications of audit firms and the engagement and review partners and other personnel that may be on the audit. How the audit committee assesses those matters in its selection of an auditor could ultimately be the subject of expanded audit committee-related disclosure.

Concerns with Expanded Audit Committee Disclosure

The advocates of expanded audit committee disclosure may believe that the salutary effects of greater transparency regarding audit committees and their activities relating to auditors can be attained without significant cost to issuers and will be an unalloyed benefit to the investment community. In truth, that transparency may come at a very real, and possibly a high, cost—a greater reluctance on the part of highly qualified individuals to serve on audit committees. Certainly no one doubts that audit committees play, and should play, an important role in corporate governance and oversight. In our experience, audit committee members take their responsibilities in that role very seriously and are conscientious in discharging those responsibilities. A decision to serve on such a committee already is a difficult one. That decision may well be even more difficult for highly-qualified prospects as they consider the potential exposure and additional demands on their time that would follow in the wake of mandated additional disclosure and related expansion of their roles.

The SEC's view that the expectations gap will be narrowed by the disclosures that result from the mandate of the Potential Disclosure Requirements is, in our view, most likely unrealistic. The expanded disclosures are more likely to provide shareholder activists with a more advantageous starting point for their next round of demands for more extensive disclosure regarding audit committees and their actions. Even if overwhelming evidence exists that the costs of the additional requirements outweigh any real benefit to be gained, issuers and audit committees will likely find enhanced disclosure in their futures.


1 See Possible Revisions to Audit Committee Disclosures, Securities Act Release No. 33-9862; Exchange Act Release No. 34-75344 (July 1, 2015), available at http://www.sec.gov/rules/concept/2015/33-9862.pdf, 80 Fed. Reg. 38995 (July 8, 2015), available at http://www.gpo.gov/fdsys/pkg/FR-2015-07-08/pdf/2015-16639.pdf.

2 You can find a copy of the report here.

3 See Tammy Whitehouse, "More Hints at More Audit Committee Disclosure," Compliance Week, July 2015 ed., at p. 1.

4 Release at 39003.

5 The PCAOB has previously raised the possibility of the disclosure of the names of engagement partners in audit reports and encountered significant resistance to that possibility from accountants dismayed by the specter of going from being named in the audit reports to being named in professional liability law suits. Audit partners in registered public accounting firms probably view the Release's discussion of this Potential Disclosure Requirement with the same kind of alarm as they did the possibility that their names would appear in audit reports.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions