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Audit committees may need to provide more information.

Summary: The Securities and Exchange Commission (SEC) is trying to gather information from the public about the work of audit committees at public companies.

The SEC’s new ...

The Securities and Exchange Commission (SEC) is trying to gather information from the public about the work of audit committees at public companies.

The SEC's new "concept release" relates to audit committee disclosure requirements, especially the committee's oversight of independent auditors. Among the topics are:

The audit committee and auditor relationship.

Can improvements be made to up the information provided to investors about the audit committee's responsibilities and activities?

Should requirements offer more details on the information used by the audit committee?

What factors were considered by the committee when overseeing the independent auditor? That includes the process in appointing or retaining the auditor and the qualifications of the auditor. The audit committee may also have to provide details on the committee's engagement partner.

"Effective audit committee oversight is essential to investor protection and the functioning of our capital markets," Mary Jo White, the SEC's chair, said in a recent statement. "The way audit committees exercise their oversight of independent auditors has evolved and it is important to evaluate whether investors have the information they need to make informed decisions."



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Comments will be taken for 60 days following publication of the concept release in the Federal Register. A concept release is not the same thing as a mandate, so a formal requirement by the SEC on these topics remains a way off -- if at all.

Concept releases such as these are "very preliminary in nature," Achilles Kintiroglou, an attorney at Day Pitney, said.

Concurrently with the move at the SEC, the Public Company Accounting Oversight Board is also seeking comments on suggestions to improve audit quality, touching on audit quality indicators (AQIs).

The board said its initiative relates to:

The availability, competence and focus of auditors;

The audit firm's tone, and leadership, incentives, independence, investment in infrastructure to support auditing, monitoring and remediation; and

Measures relating to financial statements. These include the number and impact of restatements; measures of financial reporting quality; internal control over financial reporting; and concerns on reporting, communications between auditors and audit committees, and enforcement and litigation.

Marvin Pickholz, an attorney with Duane Morris who formerly was assistant director of the SEC's Division of Enforcement, said there are instances when audit committees have failed to meet. He highlighted such questions as: who is on the audit committee, how often did it meet independent of board sessions, who is present at meetings (such as auditors), if they talked to an external auditor, and what issues came before them. But he adds that audit committees "don't need to disclose everything.... We need to let them function."

"Shareholders need to know they [the committees] are doing their jobs," Pickholz added.

Another concern he raised is the need to change auditors or audit committee members every five years in order to improve objectivity.

It is important also for general counsel to avoid getting too close to the audit committee's members.

"To some degree legal counsel should have a hands-off approach on the audit committee," Pickholz said.

Another suggestion he has for audit committees is that they sometimes have a meeting in an overseas location and ask questions. Their presence in another nation gives a strong message, Pickholz said. It shows, "This is important business. We flew halfway around the world," he added.

Generally, if the audit committee does not understand something presented to them, it may be a good idea for the committee to hold off approving the topic.

It is also important that any interactions between the audit committee and the auditors remain an "open dialogue," Kintiroglou said. "These interactions are valuable."

Day Pitney's Scott Goodman agrees that when considering disclosure requirements it could lead the sides to be "more hesitant to be open with each other" leading to an environment that "could chill the discussion."

Kintiroglou adds that any "heightened disclosure regime would place the audit committee under a microscope and certainly raise concerns regarding potential for increased liability."

In addition, by putting into place more detailed disclosure requirements it could lead to it becoming more difficult to serve on an audit committee.

Since the enactment of the Sarbanes-Oxley law in 2002, audit committees have been given more work. Even pressing issues like cybersecurity now may get the attention of the audit committee.

"Audit committee responsibilities are increasing over time," Kintiroglou said.

"Audit Committee members may not always have enough time to do real in depth oversight and must often rely heavily on management for guidance because they are so overburdened," Goodman said. "Members should be better compensated so they can have fewer outside time commitments to be able to focus fully on their service -- especially in restatement situations."

Also, in recent years a number of larger companies have expanded their level of disclosure to be more transparent, Kintiroglou said.

But sometimes documents can contain too much information. Goodman said there is a risk of "data overload" making documents "more unwieldy and difficult to get through." With more disclosures, documents can become "repetitive and generic, further cluttering up disclosure documents and obscuring more important information."

Meanwhile, Goodman recommends some basic best practices for audit committees. These include:

Holding frequent executive sessions;

Meeting with auditors on overall audit strategy;

Having information flowing up to the audit committee in a timely fashion before issues develop;

Having open communications; and

Making sure they are kept up-to-date with any changes in requirements.

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Publication:Inside Counsel
Date:Jul 15, 2015
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