SEC Proposal on Audit Committee Disclosures: Will Investors Care?

By Mike Gullette

As if audit committees (ACs) don’t have enough to worry about in the post Sarbanes-Oxley (SOX) era, the SEC is inviting comments on a concept release paper that proposes various additional disclosures for them.

The proposal appears to be well-intended. Disclosures made by SEC registrants regarding the activities of their audit committees are all over the board: many companies stick only to those mandated by SOX; others go into great detail on how the auditor is selected and managed. The paper thus proposes a best-practices menu of disclosures ranging from how the AC reviews and assesses the external auditor (including discussions related to the auditor’s recent PCAOB inspection report) to what processes were performed by the AC to request and evaluate other auditors.

Good intentions aside, it seems many communications from the AC will be complicated to craft without being misinterpreted. For example, unless an enormous amount of detail is applied, how credible will any explanation be when retaining the auditor if the auditor’s firm-level PCAOB inspection results are criticized? How will an AC satisfactorily defend a decision to not start an RFP process or to retain a long-time auditor? The discussions might become unbearably long and many explanations will just lead to more questions.

In any event, the real question is whether the investors will really care. Will such disclosure change investment decisions? Will an investor invest less if, say, the same auditor has been retained for fifteen years? If you have any questions, please contact Mike Gullette.