Companies boost transparency of auditor oversight, study finds

Nov 16, 2018
Forty percent of S&P 500 disclose considerations in appointing audit firms, up from 13 percent in 2014

Audit committees at large US companies are offering increased levels of transparency regarding their work in overseeing outside auditors, according to a new study.

Research by the Center for Audit Quality (CAQ) and Audit Analytics finds that 40 percent of S&P 500 companies now disclose considerations in appointing the audit firm, up from 13 percent in 2014, when the organizations first compiled data on the issue. There has been a steady increase in each of the intervening years, including an increase of 3 percentage points from 2017.

In comparison, 27 percent of S&P mid-cap companies disclose considerations in appointing the audit firm, an increase from 10 percent in 2014. Only 19 percent of S&P small-cap companies release this information, up from 8 percent in 2014.

Similarly, almost half (46 percent) of S&P 500 companies now disclose the criteria considered when evaluating the issuer’s audit firm, an increase from just 8 percent five years ago. Smaller companies have seen similar progress, with 36 percent of mid-cap companies revealing the criteria, up from 7 percent in 2014, and 32 percent of small-cap companies doing so, an increase from 15 percent in 2014.

The data is compiled by studying the most current S&P Composite 1500 proxy statements.

The results of the study reveal ‘continued positive trends in audit committees voluntarily providing enhanced disclosure regarding the audit committee’s role in overseeing the external auditor,’ the authors of the report write. ‘The scale of the increased disclosure is remarkable when we look at the increase in the five years since the [report’s] inception.’

According to the report, areas of increased transparency include:

  • 26 percent of S&P 500 companies disclose that the evaluation of the external auditor is at least an annual event, up 5 percentage points from 2017 and 22 percentage points from 2014
  • 70 percent of S&P 500 companies disclose the length of audit firm engagement, up 7 percentage points from 2017 and 23 percentage points from 2014
  • 52 percent of S&P 500 companies state that the audit committee is involved in audit partner selection, up 3 percentage points from 2017 and 39 percentage points from 2014.

But the authors also state: ‘[M]any opportunities remain for enhancement in transparency and clarification of the involvement of the audit committee in the oversight of the external auditor, and these opportunities are well worth exploring. In addition to communicating regulatory requirements to oversee the external auditor, providing insights into how that oversight is executed is useful to investors and other stakeholders.’

For example, just 28 percent of S&P 500 companies explain changes in fees paid to the audit firm. This is down from 31 percent of companies last year, and is the same result as found in 2014. In addition, no S&P 500 companies this year disclose ‘significant areas addressed with the auditor’, while 3 percent did so in 2014.

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