80 FR 38995 - Possible Revisions To Audit Committee Disclosures
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 130 (July 8, 2015)
Federal Register Volume 80, Issue 130 (July 8, 2015)
| Page Range | 38995-39010 | |
| FR Document | 2015-16639 |
[Federal Register Volume 80, Number 130 (Wednesday, July 8, 2015)] [Proposed Rules] [Pages 38995-39010] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-16639] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 33-9862; 34-75344 File No. S7-13-15] RIN 3235-AL70 Possible Revisions To Audit Committee Disclosures AGENCY: Securities and Exchange Commission. ACTION: Concept release; request for comments. ----------------------------------------------------------------------- SUMMARY: The Commission is publishing this concept release to seek public comment regarding audit committee reporting requirements, with a focus on the audit committee's reporting of its responsibilities with respect to its oversight of the independent auditor. Some have expressed a view that the Commission's disclosure rules for this area may not result in disclosures about audit committees and their activities that are sufficient to help investors understand and evaluate audit committee performance, which may in turn inform those investors' investment or voting decisions. The majority of these disclosure requirements, which exist in their current form principally in Item 407 of Regulation S-K, were adopted in 1999. Since then, there have been significant changes in the role and responsibilities of audit committees arising out of, among other things, the Sarbanes-Oxley Act of 2002, enhanced listing requirements for audit committees, enhanced requirements for auditor communications with the audit committee arising out of the rules of the Public Company Accounting Oversight Board, and changes in practice, both domestically and internationally. DATES: Comments should be received on or before September 8, 2015. ADDRESSES: Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/concept.shtml); or [[Page 38996]] Send an email to [email protected]. Please include File Number S7-13-15 on the subject line; or Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-13-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Web site (http://www.sec.gov/rules/concept.shtml). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. FOR FURTHER INFORMATION CONTACT: Duc Dang, Special Counsel at (202) 551-3386; Jennifer McGowan, Professional Accounting Fellow, at (202) 551-8736; Kevin Stout, Senior Associate Chief Accountant, at (202) 551- 5930, Office of the Chief Accountant; or Lindsay McCord, Associate Chief Accountant, at (202) 551-3417, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. Table of Contents I. Introduction II. Background A. The Importance of Audit Committees B. The Impact of the Sarbanes-Oxley Act of 2002 and SRO Listing Standards on Audit Committees III. Current Audit Committee Disclosure Requirements A. Audit Committee Report and Other Disclosures About the Audit Committee B. Disclosure Requirements Regarding Preapproval of Services and Auditor Fees C. Disclosure Requirements Regarding Proposal To Ratify Selection of Independent Auditors IV. Reasons To Seek Comment on the Audit Committee Reporting Requirements A. Public Discussion of the Need for Updated Audit Committee Reporting B. Divergence in Current Audit Committee Reporting Practice C. PCAOB Standard-Setting Projects D. Initiatives in Other Jurisdictions To Enhance Audit Committee Reporting E. References to PCAOB Auditing Standards V. Focus on Audit Committee Oversight of the Auditor VI. Potential Changes to Disclosures A. Audit Committee's Oversight of the Auditor 1. Additional Information Regarding the Communications Between the Audit Committee and the Auditor 2. The Frequency With Which the Audit Committee Met With the Auditor 3. Review of and Discussion About the Auditor's Internal Quality Review and Most Recent PCAOB Inspection Report 4. Whether and How the Audit Committee Assesses, Promotes and Reinforces the Auditor's Objectivity and Professional Skepticism B. Audit Committee's Process for Appointing or Retaining the Auditor 1. How the Audit Committee Assessed the Auditor, Including the Auditor's Independence, Objectivity and Audit Quality, and the Audit Committee's Rationale for Selecting or Retaining the Auditor 2. If the Audit Committee Sought Requests for Proposal for the Independent Audit, the Process the Committee Undertook To Seek Such Proposals and the Factors They Considered in Selecting the Auditor 3. The Board of Directors' Policy, if any, for an Annual Shareholder Vote on the Selection of the Auditor, and the Audit Committee's Consideration of the Voting Results in its Evaluation and Selection of the Audit Firm C. Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit Committee 1. Disclosures of Certain Individuals on the Engagement Team 2. Audit Committee Input in Selecting the Engagement Partner 3. The Number of Years the Auditor has Audited the Company 4. Other Firms Involved in the Audit D. Location of Audit Committee Disclosures in Commission Filings E. Smaller Reporting Companies and Emerging Growth Companies VII. Additional Request for Comment Regarding Audit Committee Disclosures I. Introduction The Commission has a long history of promoting effective and independent audit committees. The role and responsibilities of audit committees related to oversight of the independent auditor have evolved due to changes in both the securities laws and the national securities exchanges' listing requirements related to audit committees. Today, the audit committee of a listed issuer is directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer, and the independent auditor reports directly to the audit committee.\1\ In addition, in connection with these oversight responsibilities, the audit committee has ultimate authority to approve all audit engagement fees and terms \2\ and is responsible for resolving disagreements between management and the auditor regarding financial reporting.\3\ --------------------------------------------------------------------------- \1\ See Section 10A(m) of the Securities Exchange Act of 1934 (the ``Exchange Act'') [15 U.S.C. 78j-1(m)]. As noted in Section II.B., audit committees of listed issuers also have responsibilities with respect to the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters. \2\ See Release No. 34-47654, Standards Relating to Listed Company Audit Committees (Apr. 9, 2003) [68 FR 18788]. \3\ See Section 10A(m)(2) of the Exchange Act. --------------------------------------------------------------------------- Requirements for the audit committee's reporting to shareholders are principally contained in Item 407 of Regulation S-K,\4\ which have not changed substantively since 1999. As a result, some have expressed a view that the Commission's disclosure rules do not provide investors with sufficient useful information regarding the role of and responsibilities carried out by the audit committee in public companies.\5\ The audit committee has a vital role in oversight of auditors, and the independent audits performed by those auditors have long been recognized as important to credible and reliable financial reporting and the functioning of our capital markets.\6\ The reporting of additional information by the audit committee with respect to its oversight of the auditor may provide useful information to investors as they evaluate the audit committee's performance in [[Page 38997]] connection with, among other things, their vote for or against directors who are members of the audit committee, the ratification of the auditor, or their investment decisions. --------------------------------------------------------------------------- \4\ 17 CFR 229.407 \5\ See Audit Committee Collaboration, ``Enhancing the Audit Committee Report, A Call to Action,'' (Nov. 20, 2013), available at http://www.thecaq.org/reports-and-publications/enhancing-the-audit-committee-report-a-call-to-action (``A Call to Action''). This collaboration consisted of the following organizations: The National Association of Corporate Directors, Corporate Board Member/NYSE Euronext, Tapestry Networks, the Directors' Council, the Association of Audit Committee Members, Inc., and the Center for Audit Quality (``CAQ''). \6\ See Release No. 33-8177, Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 (Jan. 23, 2003) [68 FR 5110] (acknowledging the audit committee's vital role in financial reporting, public disclosure, and corporate governance); and Release No. 34-14970, Proposed Rules Relating to Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, (Jul. 18, 1978) [43FR 31945] (citing Report to Congress on the Accounting Profession and the Commission's Oversight Role, Jul. 5, 1978). --------------------------------------------------------------------------- Through this Concept Release, the Commission seeks public comment regarding the audit committee's reporting requirements, with a focus on the audit committee's reporting of its responsibilities and activities with respect to its oversight of the independent auditor. This concept release is focused on the audit committee and auditor relationship, but commenters may also provide views on other aspects of audit committee disclosures, such as those related to roles and responsibilities, audit committee qualifications, oversight of financial reporting, or oversight of internal control over financial reporting. II. Background A. The Importance of Audit Committees The audit committee plays an important role in protecting the interests of investors by assisting the board of directors in fulfilling its responsibility to oversee the integrity of a company's accounting and financial reporting processes and both internal and external audits. Since as early as 1940, the Commission, along with the auditing and corporate communities, has had a continuing interest in promoting effective and independent audit committees.\7\ Largely with the Commission's encouragement,\8\ the national securities exchanges and national securities associations (self-regulatory organizations or ``SROs'') first adopted audit committee requirements in the 1970s.\9\ Since that time, there has been support for strong, independent audit committees, including from the National Commission on Fraudulent Financial Reporting, also known as the Treadway Commission,\10\ the General Accounting Office,\11\ and others.\12\ --------------------------------------------------------------------------- \7\ In 1940, the Commission investigated the auditing practices followed by the auditors of McKesson & Robbins, Inc., and the Commission's ensuing report prompted action on auditing procedures by the auditing community. In the Matter of McKesson & Robbins, Accounting Series Release (ASR) No. 19, Exchange Act Release No. 2707 (Dec. 5, 1940). \8\ For example, in 1972, the Commission recommended that companies establish audit committees composed of outside directors. See ASR No. 123 (Mar. 23, 1972). In 1974 and 1978, the Commission adopted rules requiring disclosures about audit committees. See Release No. 34-11147, Notice of Amendments to Require Increased Disclosure of Relationships Between Registrants and Their Independent Public Accountants (Dec. 20, 1974) and Release No. 34- 15384, Shareholder Communications, Shareholder Participation in Corporate Electoral Process and Corporate Governance Generally (Dec. 6, 1978). \9\ See, e.g., Release No. 34-13346, In the Matter of New York Stock Exchange, Inc. (Mar. 9, 1977) [42 FR 14793] (Commission order approving NYSE rule change related to the audit committee). \10\ The Treadway Commission was sponsored by the American Institute of Certified Public Accountants, the American Accounting Association, the Financial Executives Institute (now Financial Executives International), the Institute of Internal Auditors and the National Association of Accountants (now Institute of Management Accountants). Collectively, these groups were known as the Committee of Sponsoring Organizations, or COSO. The Treadway Commission's report, the Report of the National Commission on Fraudulent Financial Reporting (October 1987), is available at www.coso.org. \11\ See e.g., U.S. General Accounting Office (now Government Accountability Office), ``CPA Audit Quality: Status of Actions Taken to Improve Auditing and Financial Reporting of Public Companies,'' at 5 (GAO/AFMD-89-38, March 1989). The report is available at http://www.gao.gov/products/AFMD-89-38. \12\ See, e.g., Preliminary Report of the American Bar Association Task Force on Corporate Responsibility (July 16, 2002) reprinted in 58 Bus. Law. 189 (2002). --------------------------------------------------------------------------- In 1998, the New York Stock Exchange (the ``NYSE'') and the National Association of Securities Dealers (the ``NASD'') sponsored the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (the ``Blue Ribbon Committee''). In its 1999 report, the Blue Ribbon Committee recognized the importance of audit committees and issued ten recommendations to improve their effectiveness.\13\ In response to these recommendations, the NYSE and the NASD, among others, revised their listing standards relating to audit committees,\14\ and the Commission adopted new rules requiring disclosure relating to the functioning, governance and independence of corporate audit committees.\15\ --------------------------------------------------------------------------- \13\ See Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, 54 The Business Lawyer, 1067 (1999). \14\ See, e.g., Release No. 34-42231, Order Approving Proposed Rule Change by the National Association of Securities Dealers, Inc. Amending Its Audit Committee Requirements (Dec. 14, 1999) [64 FR 71523]; Release No. 34-42233, Order Approving Proposed Rule Change by the New York Stock Exchange, Inc. Amending the Exchange's Audit Committee Requirements (Dec. 14, 1999) [64 FR 71529]; Release No. 34-42232, Order Approving Proposed Rule Change by the American Stock Exchange LLC Amending the Exchange's Audit Committee Requirements (Dec. 14, 1999) [64 FR 71518]; and Release No. 34-43941, Order Approving a Proposed Rule Change by the Pacific Exchange, Inc. Relating to Audit Committee Requirements for Listed Companies (Feb. 7, 2001) [66 FR 10545]. \15\ See Release No. 34-42266, Audit Committee Disclosure (Dec. 22, 1999) [64 FR 73389]. --------------------------------------------------------------------------- Academic literature suggests that strong corporate governance, including the composition and actions of the audit committee, has a positive effect on the quality of the audit.\16\ For example, some studies note that audit committee independence is associated with lower incidences of earnings management \17\ and internal control problems at those issuers benefitting from independent audit committees,\18\ while also shielding the external auditor from management's influence.\19\ --------------------------------------------------------------------------- \16\ Goh, B.W., Audit Committees, Boards of Directors, and Remediation of Material Weaknesses in Internal Control, 26 Contemporary Accounting Research 549 (2009); and Hoitash and Hoitash, The Role of Audit Committees in Managing Relationships with External Auditors After SOX: Evidence from the USA, 24 Managerial Auditing Journal 368 (2009). The positive effects of audit committee oversight are also illustrated in studies using data taken prior to the enactment of the Sarbanes-Oxley Act of 2002 when important characteristics such as the composition and actions of the audit committee were less uniform among companies. See Klein, A., Audit Committee, Board of Director Characteristics, and Earnings Management, 33 Journal of Accounting and Economics, 375 (2002); Krishnan, J., Audit Committee Quality and Internal Control: An Empirical Analysis, 80 The Accounting Review, 649 (2005); and Carcello, J and Neal. T., Audit Committee Composition and Auditor Reporting, 75 The Accounting Review, 453 (2000). \17\ Klein, A., Audit Committee, Board of Director Characteristics, and Earnings Management. \18\ Krishnan, J., Audit Committee Quality and Internal Control: An Empirical Analysis. \19\ Carcello, J. and Neal, T., Audit Committee Composition and Auditor Reporting. --------------------------------------------------------------------------- B. The Impact of the Sarbanes-Oxley Act of 2002 and SRO Listing Standards on Audit Committees In the early 2000's, multiple incidences of serious misconduct by corporate executives and independent auditors occurred in the financial markets raising concerns about the integrity and reliability of financial disclosures, and the adequacy of regulation and oversight of the accounting profession. This highlighted the need for strong, competent, and vigilant audit committees. In response, the Sarbanes- Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') was enacted.\20\ Among other things, the Sarbanes-Oxley Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures, and combat corporate and accounting fraud. The Sarbanes-Oxley Act also created a new regulatory and oversight regime for auditors of public companies, including the creation of the Public Company Accounting Oversight Board (the ``PCAOB''), a nonprofit corporation, to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit [[Page 38998]] reports.\21\ During this time, the Commission also adopted significant corporate disclosure and financial reporting rules designed to improve the oversight and review processes of public companies related to their financial and other disclosures.\22\ --------------------------------------------------------------------------- \20\ Pub. L. 107-204, 116 Stat. 745 (2002); 15 U.S.C. 7201 et seq. \21\ Section 101 of the Sarbanes-Oxley Act. \22\ See, e.g., Release No. 33-8124, Certification of Disclosure in Companies' Quarterly and Annual Reports (Aug. 28, 2002) [67 FR 57276]; Release No. 34-47890, Improper Influence on Conduct of Audits (May, 20, 2003) [68 FR 31820]; Release No. 33-8177, Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 (Jan. 23, 2003) [68 FR 5110]; Release No. 33-8182, Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations (Jan. 28, 2003) [68 FR 5982]; Release No. 33-8183, Strengthening the Commission's Requirements Regarding Auditor Independence (Jan. 28, 2003) [68 FR 6006]; and Release No. 33-8212, Certification of Disclosure in Certain Exchange Act Reports (Mar. 21, 2003) [68 FR 15600]. --------------------------------------------------------------------------- The Sarbanes-Oxley Act amended the Exchange Act to define an audit committee as ``(A) a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and (B) if no such committee exists with respect to an issuer, the entire board of directors of the issuer.'' \23\ The Sarbanes-Oxley Act and the Commission's related implementation rules strengthened and expanded the role of the audit committee in overseeing a company's financial reporting process and independent auditor. --------------------------------------------------------------------------- \23\ See Section 3(a)(58) of the Exchange Act [15 U.S.C. 78c(a)(58)]. --------------------------------------------------------------------------- For example, Exchange Act Rule 10A-3,\24\ which implemented Section 10A(m) of the Exchange Act, mandated that SROs prohibit the listing of any security of an issuer that does not comply with certain requirements, including: --------------------------------------------------------------------------- \24\ 17 CFR 240.10A-3. --------------------------------------------------------------------------- Each member of the audit committee of the issuer must be independent according to specified criteria; the audit committee of each issuer must be directly responsible for the appointment, compensation, retention, and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services for the issuer, and each such registered public accounting firm must report directly to the audit committee; each audit committee must establish procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters; each audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties; and each issuer must provide appropriate funding for the audit committee. The SROs also adopted additional listing requirements related to audit committees and strengthened the independence requirements for audit committee members.\25\ --------------------------------------------------------------------------- \25\ See Release No. 34-48745, NASD and NYSE Rulemaking: Relating to Corporate Governance (Nov. 4, 2003); NYSE Listed Company Manual, Sections 303A.02 and 303A.07(a); and NASDAQ Listing Rules 5605(a)(2) and 5605(c)(2). For example, the NYSE requires audit committees to, among other things: (i) At least annually obtain a report from the independent auditor discussing certain quality control issues and relationships with its client, (ii) meet with management and the independent auditor, as applicable, to discuss the company's annual audited and quarterly unaudited financial statements, its press releases and public earnings guidance, and its risk assessment and management policies, (iii) meet separately, periodically, with management, the internal auditors, and the independent auditors, and (iv) review with the independent auditor any audit problems or difficulties and management's response. See NYSE Listed Company Manual, Section 303A.07. --------------------------------------------------------------------------- Also, Item 407(d)(5) of Regulation S-K, which was adopted to implement Section 407 of the Sarbanes-Oxley Act, defines the term ``audit committee financial expert.'' This item requires issuers to disclose whether they have at least one audit committee member that satisfies that definition. The Commission defines an audit committee financial expert as a person who has: An understanding of generally accepted accounting principles and financial statements; the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; an understanding of internal control over financial reporting; and an understanding of audit committee functions.\26\ --------------------------------------------------------------------------- \26\ Item 407(d)(5)(ii) of Regulation S-K. Neither the NYSE nor NASDAQ use the term audit committee financial expert. However, both amended their listing standards to clarify that a member that satisfies the definition of an audit committee financial expert would also satisfy their respective listing standards that require at least one audit committee member with accounting or related financial management expertise. See Release No. 34-48745. --------------------------------------------------------------------------- In addition to the listing requirements related to audit committees, Rule 2-07 of Regulation S-X was adopted to identify specific matters that auditors are required to report to audit committees.\27\ Rule 2-07 requires public company auditors to report all critical accounting policies and practices, all alternative accounting treatments that have been discussed with management, and any other material written communications between the auditor and management.\28\ --------------------------------------------------------------------------- \27\ See Release No. 34-47265, Strengthening the Commission's Requirements Regarding Auditor Independence (Jan. 28, 2003) [68 FR 6005]; 17 CFR 210.2-07. \28\ PCAOB standards also require certain auditor communications with audit committees, as discussed in Section IV.E of this Release. --------------------------------------------------------------------------- In the adopting release for Rule 2-07, the Commission referred to cautionary advice it issued in December 2001 regarding the disclosure of those accounting policies that management believes are most critical to the preparation of the issuer's financial statements.\29\ These are often a subset of the accounting policies described in the issuer's financial statements. The cautionary advice indicated that ``critical'' accounting policies are those that are both most important to the portrayal of the issuer's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.\30\ As part of that release, the Commission also advised: --------------------------------------------------------------------------- \29\ See Release No. 34-47265. \30\ See Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies (Dec. 12, 2001) [66 FR 65013]. See, also, Release No. 33-8350, Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations (Dec. 19, 2003) [68 FR 75056]. Prior to finalizing and filing annual reports, audit committees should review the selection, application and disclosure of critical accounting policies. Consistent with auditing standards, audit committees should be apprised of the evaluative criteria used by management in their selection of the accounting principles and methods. Proactive discussions between the audit committee and the company's senior [[Page 38999]] management and auditor about critical accounting policies are appropriate.\31\ --------------------------------------------------------------------------- \31\ Release No. 33-8040. The way audit committees execute their oversight of auditors has evolved since the Sarbanes-Oxley Act. For instance, while the PCAOB does not have jurisdiction over audit committees, it collects information through its inspection program that could be useful for audit committees in overseeing their companies' auditors. Among other responsibilities, the PCAOB is required to inspect registered public accounting firms annually (for firms that regularly provide audit reports for more than 100 issuers) or triennially (for firms that regularly provide audit reports for 100 or fewer issuers).\32\ Consistent with the limitations of the Sarbanes-Oxley Act, the PCAOB makes certain information available publicly, such as public portions of inspection reports, disciplinary sanctions, and information in annual and special reports filed by audit firms. In addition, in part in response to audit committee members' requests, the PCAOB provides information to help audit committees better understand the PCAOB inspection process, including questions they may wish to ask their audit firms to better understand and assess the firm's inspection results and evaluate audit quality.\33\ The PCAOB also includes an executive summary for its general inspection reports and provides insights within Staff Audit Practice Alerts to further assist audit committee oversight of the auditor.\34\ --------------------------------------------------------------------------- \32\ Section 104 of the Sarbanes-Oxley Act. \33\ See http://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf. \34\ See, e.g. http://pcaobus.org/Inspections/Documents/Executive_Summary_02252013_Release_2013_001.pdf, http://pcaobus.org/Standards/QandA/10-24-2013_SAPA_11.pdf at 36 and http://pcaobus.org/Standards/QandA/9-9-14_SAPA_12.pdf at page 33. --------------------------------------------------------------------------- III. Current Audit Committee Disclosure Requirements A. Audit Committee Report and Other Disclosures About the Audit Committee In 1999, following the recommendations from the Blue Ribbon Committee's report, the Commission adopted new rules to improve disclosure relating to the functioning, governance and independence of audit committees and to enhance the credibility of financial statements of public companies.\35\ These reporting requirements for audit committees \36\ predate the Sarbanes-Oxley Act and the SRO listing standards, which expanded the role of the audit committee in the financial reporting process. --------------------------------------------------------------------------- \35\ See, e.g., Release No. 34-42266 (stating that additional disclosures about a company's audit committee and its interaction with the company's auditors and management will promote investor confidence in the integrity of the financial reporting process). \36\ Audit committee reports are currently reported by issuers pursuant to the disclosure requirements of Regulation S-K and closed-end investment companies through the proxy statement requirements of Item 22(b)(16) of Schedule 14A. --------------------------------------------------------------------------- Disclosure requirements for the audit committee report are contained in Item 407 of Regulation S-K. The disclosure is only required in the proxy or information statement relating to a registrant's annual meeting where directors are elected or chosen by written consents.\37\ An audit committee is required to make certain statements related to its responsibilities for overseeing financial reporting, internal control, and the audit. These statements include that the audit committee has: --------------------------------------------------------------------------- \37\ See Instruction 3 to Item 407(d) of Regulation S-K. --------------------------------------------------------------------------- Reviewed and discussed the audited financial statements with management; discussed with the independent auditor the matters required by AU sec. 380, Communication with Audit Committees; received the required written communications from the independent accountant concerning independence, as required by the rules of the PCAOB, and has discussed with the independent accountant his or her independence; and recommended to the board of directors that the audited financial statements be included in the company's annual report on Form 10-K (or other form of annual report) for the last fiscal year for filing with the Commission.\38\ --------------------------------------------------------------------------- \38\ See Item 407(d)(3) of Regulation S-K. --------------------------------------------------------------------------- The name of each member of the company's audit committee must appear below these required disclosures. Item 407 also requires disclosure of whether the audit committee members are independent, the number of meetings held, and certain information about member attendance at these meetings, in addition to the following: Whether or not the audit committee has a charter; \39\ --------------------------------------------------------------------------- \39\ See Item 407(d)(1) of Regulation S-K. --------------------------------------------------------------------------- The circumstances surrounding any appointment of a director to the audit committee who is not independent; \40\ --------------------------------------------------------------------------- \40\ See Item 407(d)(2) of Regulation S-K. --------------------------------------------------------------------------- Whether there is a separately-designated standing audit committee or a committee performing similar functions, and the identity of each member of such committee; \41\ and --------------------------------------------------------------------------- \41\ See Item 407(d)(4) of Regulation S-K. --------------------------------------------------------------------------- Whether or not the registrant has at least one audit committee financial expert serving on its audit committee.\42\ --------------------------------------------------------------------------- \42\ See Item 407(d)(5) of Regulation S-K. --------------------------------------------------------------------------- If the audit committee has a charter, the registrant should either disclose where security holders may access a current copy of the audit committee's charter or include a copy of the charter in an appendix to the registrant's proxy or information statement that is provided to security holders at least once every three fiscal years, or sooner if the charter has been materially amended since the beginning of the registrant's last fiscal year.\43\ --------------------------------------------------------------------------- \43\ See Item 407(d)(1) of Regulation S-K. --------------------------------------------------------------------------- B. Disclosure Requirements Regarding Preapproval of Services and Auditor Fees The Sarbanes-Oxley Act also enhanced the ability of audit committees to promote auditor independence. Section 202 of the Sarbanes-Oxley Act added Section 10A(i) of the Exchange Act, which gave the audit committee responsibility to preapprove all audit and permissible non-audit services provided by the independent auditor.\44\ In 2003, the Commission finalized its rules to implement Section 10A(i) of the Exchange Act.\45\ Under the rules, the audit committee is required to preapprove all permissible non-audit services and all audit, review, or attest engagements required under the securities laws. Additionally, the issuer must provide disclosure of the audit committee's preapproval policies and procedures in proxy statements related to the election of directors or the ratification of the independent public accountant.\46\ --------------------------------------------------------------------------- \44\ Section 202 of the Sarbanes-Oxley Act; 15 U.S.C. 78j- 1(i)(1)(A). \45\ See Release No. 34-47265. \46\ See Item 9(e)(5) of Schedule 14A [17 CFR 240.14a-101]. --------------------------------------------------------------------------- Concurrently, the Commission adopted rules that changed both the types of fees paid to the independent auditor that must be described and the number of years for which the disclosures must be provided.\47\ As a result, an issuer is required to disclose the fees paid to its independent auditor for each of the two most recent fiscal years, separated into the following four categories: (1) Audit Fees, (2) Audit-Related Fees, (3) Tax Fees, and (4) All Other Fees.\48\ Additionally, registrants are required to describe the nature of the services provided that are categorized as Audit-Related Fees and All Other Fees. The registrant is also required to [[Page 39000]] disclose the percentage of services in the Audit-Related Fees, Tax Fees, and All Other Fees captions that were approved by the audit committee pursuant to its preapproval policies and procedures.\49\ --------------------------------------------------------------------------- \47\ See Release No. 34-47265. \48\ See Item 9(e) of Schedule 14A. \49\ Id. --------------------------------------------------------------------------- C. Disclosure Requirements Regarding Proposal To Ratify Selection of Independent Auditors While the audit committees of listed issuers are required to appoint the issuer's auditors, many issuers solicit the approval or ratification of the independent auditors from shareholders.\50\ If such a proposal is solicited, the issuer must provide the information required by Item 9 of Schedule 14A. Specifically, in addition to the fee information and preapproval policies noted above, shareholders of listed issuers must receive disclosure of the following: --------------------------------------------------------------------------- \50\ See Ernst & Young, ``Audit Committee Reporting to Shareholders: Going Beyond the Minimum,'' (Feb. 2013), available at http://www.ey.com/Publication/vwLUAssets/Audit_committee_reporting_to_shareholders%3A_going_beyond_the_minimum/%24FILE/Audit_committee_reporting_CF0039.pdf (noting that more than 90 percent of Fortune 100 companies seek annual shareholder ratification of the auditor chosen by the audit committee); Ernst & Young, ``Let's Talk: Governance--Audit Committee Reporting to Shareholders 2014 Proxy Season Update,'' (Aug. 2014), available at http://www.ey.com/Publication/vwLUAssets/ey-lets-talk-governance- august-2014/$FILE/ey-lets-talk-governance-august-2014.pdf. --------------------------------------------------------------------------- The name of the auditor selected or being recommended for the current year; the auditor for the most recently completed fiscal year, if different from the one subject to the ratification; whether a representative from the auditor's firm will be present at the meeting, will have the opportunity to make a statement, and be available to respond to questions; and information regarding dismissed or resigned auditors as required by Item 304(a) of Regulation S-K.\51\ --------------------------------------------------------------------------- \51\ Item 9 of Schedule 14A (referring to Item 304(a) of Regulation S-K [17 CFR 229.304(a)]). --------------------------------------------------------------------------- The rules do not require issuers to provide information about the audit committee's process and reasons that lead to the selection of the independent auditor subject to the ratification solicitation. IV. Reasons To Seek Comment on the Audit Committee Reporting Requirements While current audit committee reporting requirements provide information about the role of the audit committee with respect to its oversight of the auditor, these disclosures do not describe how the audit committee executes its responsibilities. The ways in which an audit committee discharges its responsibilities can be influenced by its composition and the environment in which it operates. As discussed below, the fact that a significant number of audit committees voluntarily provide information beyond the disclosures required by our current rules raises a question of whether there may be market demand for such information.\52\ Similarly, during a series of roundtables attended by audit committee members from various jurisdictions, participants stated that investors and other stakeholders have requested greater transparency about audit committee activities.\53\ However, there appears to be limited research as to why some companies provide voluntary disclosure regarding audit committee activities and whether and how such additional information impacts investors' investment or voting decisions. For instance, variability in the nature and extent of current voluntary disclosures could, to some extent, be the result of tailoring the disclosures to a company's facts and circumstances. --------------------------------------------------------------------------- \52\ See CAQ and Audit Analytics, ``2014 Audit Committee Transparency Barometer,'' (Dec. 2, 2014), available at http://www.thecaq.org/docs/reports-and-publications/2014-audit-committee-transparency-barometer.pdf?sfvrsn=2 (``Audit Committee Transparency Barometer''). In addition, a report based on a 2014 review of proxy disclosures of Fortune 100 companies noted an upward trend in voluntary disclosures by audit committees since 2012. See also Ernst & Young, ``Let's Talk: Governance--Audit Committee Reporting to Shareholders 2014 Proxy Season Update,'' (Aug. 2014). \53\ See Federation of European Accountants, the Institute of Chartered Accountants Australia and the CAQ, ``Global Observations on the Role of the Audit Committee,'' (May 13, 2013), available at http://www.thecaq.org/docs/reports-and-publications/globalobservationsontheroleoftheauditcommittee.pdf?sfvrsn=2 (``Global Observations''). --------------------------------------------------------------------------- Providing additional disclosure about the audit committee's oversight of the independent auditor could further inform investors about the oversight process and provide them with useful context for audit committee decisions. It may also enable investors to differentiate between companies based on the quality of audit committee oversight, and determine whether such differences in quality of oversight may contribute to differences in performance or quality of financial reporting among companies. Therefore, the Commission is seeking feedback to better understand whether additional audit committee reporting requirements related to oversight of the auditor would be useful to investors and if so, what information would be useful.\54\ --------------------------------------------------------------------------- \54\ For example, an academic paper indicates that events that negatively impact the image of a company, such as a reporting failure, have a direct impact on turnover of audit committee members, while negative disclosures alone about audit committee members appear to have limited or mixed impact on member turnover. See Kachelmeier, S. et al., Why Do Ineffective Audit Committee Members Experience Turnover? (September 18, 2013), available at http://ssrn.com/abstract=1920850. --------------------------------------------------------------------------- A. Public Discussion of the Need for Updated Audit Committee Reporting Investors, organizations representing audit committee members, and auditors are among those that have expressed the need for audit committees to evaluate their disclosures and consider whether improvements can be made to provide investors with relevant information that more transparently conveys the oversight responsibilities performed by the audit committee relative to an issuer's auditor. For example, a group of corporate governance and policy organizations has expressed the view that public company audit committee reporting can and should be strengthened.\55\ At a meeting in June of 2013, several delegates from the Audit Committee Chair Advisory Council acknowledged that ``[f]rankly, we don't do a good job of communicating what we do. The public doesn't see all the work we do, quarter after quarter.'' \56\ --------------------------------------------------------------------------- \55\ See A Call to Action supra note 2. \56\ Id. at 7, (quoting National Association of Corporate Directors (``NACD'') Summary of Proceedings, Audit Committee Chair Advisory Council, at 6 (June 19, 2013), available at http://www.nacdonline.org/Resources/Article.cfm?ItemNumber=7284). The Audit Committee Chair Advisory Council is a group of audit committee chairs, shareholder representatives, regulators and other stakeholders that discuss ways to improve communications between corporations and stakeholders, improve audit committee practices, and give voice to audit committee members. --------------------------------------------------------------------------- Investors have also increased their focus on the activities and transparency of audit committees, including those activities related to enhancing audit quality through oversight of the independent auditor. Some investors have sought greater disclosure from audit committees of a number of public companies about matters such as the responsibility of the audit committee for the appointment, compensation, and oversight of the external auditor; audit firm tenure; audit firm fee determinations; and audit committee involvement in the selection of the audit engagement partner.\57\ Institutional investor groups have called for additional audit committee disclosures as part of their published ``good corporate governance policies.'' \58\ --------------------------------------------------------------------------- \57\ See A Call to Action at 6 (describing investors' increasing interest and focus on the audit committee). \58\ See, e.g., Council of Institutional Investors, Policies on Corporate Governance, Section 2.13 (updated Sept. 27, 2013), available at http://www.cii.org/corp_gov_policies#BOD. --------------------------------------------------------------------------- [[Page 39001]] Internationally, there appears to be interest in improving the communication coming from audit committees. For example, one of the themes that emerged at a 2013 summit hosted by the members of the Audit Committee Leadership Networks in North America and Europe was the recognition that ``[r]egulators, policy-makers, and many investors would benefit from a more robust understanding of what the public company audit committee does and how it oversees the external audit firm and performs its other responsibilities.'' \59\ --------------------------------------------------------------------------- \59\ See A Call to Action at 7, (citing Tapestry Networks, ViewPoints, Issue 22, p.1 (May 2, 2013), available at http://www.tapestrynetworks.com/initiatives/corporate-governance/global-audit-committee-leadership-networks/upload/Tapestry_EY_ACLS_Summit_View22-May13.pdf). --------------------------------------------------------------------------- Some audit committee members, however, see additional reporting as possibly contributing to a state of ``disclosure overload.'' \60\ Some are also skeptical whether additional reporting would be helpful to ``stakeholders,'' ``in light of a lack of interest in audit committee reporting currently required.'' \61\ Others have suggested the need for principles-based reporting to allow for flexibility and to avoid a ``one size fits all'' approach.\62\ Given these varied views on the usefulness and relevance of audit committee disclosures, the Commission is seeking input on whether and how additional reporting may be useful to investors. --------------------------------------------------------------------------- \60\ See Global Observations at 7; See also Center for Capital Markets Competitiveness, Corporate Disclosure Effectiveness: Ensuring a Balanced System that Informs and Protects Investors and Facilitates Capital Formation, (Jul. 28, 2014), available at http://www.centerforcapitalmarkets.com/wp-content/uploads/2014/07/CCMC_Disclosure_Reform_Final_7-28-20141.pdf. \61\ Id. \62\ Id. --------------------------------------------------------------------------- B. Divergence in Current Audit Committee Reporting Practice Some issuers, including their audit committees, already provide disclosures that go beyond the required disclosures.\63\ For example, a report by the CAQ and Audit Analytics reviewing the 2014 proxy disclosures of 1,500 Standard & Poor's (``S&P'') composite companies, including the S&P 500 (``S&P 500'') companies, the S&P MidCap 400 (``S&P MidCap'') companies, and the S&P SmallCap 600 (``S&P SmallCap'') companies noted the following: --------------------------------------------------------------------------- \63\ See, e.g., A Call to Action at 7. --------------------------------------------------------------------------- 83% of S&P 500, 69% of S&P MidCap, and 58% of S&P SmallCap companies discussed how non-audit services may impact auditor independence; 47% of S&P 500, 42% of S&P MidCap, and 50% of S&P SmallCap companies disclosed the length of time an auditor has been engaged; 13% of S&P 500, 10% of S&P MidCap, and 8% of S&P SmallCap companies discussed the audit committee's considerations of qualifications, geographic reach, and firm expertise when appointing the auditor; 8% of S&P 500, 7% of S&P MidCap, and 15% of S&P SmallCap companies discussed the criteria considered when evaluating the audit firm; 3% of S&P 500, 2% of S&P MidCap, and 1% of S&P SmallCap companies disclosed the significant areas addressed with the auditor; 13% of S&P 500 and 1% of both S&P MidCap and S&P SmallCap companies included an explicit statement that the audit committee is involved in the selection of the audit engagement partner; and 13% of S&P 500, 4% of S&P MidCap and 1% of S&P SmallCap companies discussed audit fees and their connection to audit quality.\64\ --------------------------------------------------------------------------- \64\ See Audit Committee Transparency Barometer. --------------------------------------------------------------------------- These additional disclosures are voluntary, not consistently provided and may vary among registrants, depending on company characteristics.\65\ Some audit committees may disclose only what is specifically required, for a variety of reasons, for instance, to avoid legal exposure,\66\ to avoid incremental associated efforts of the disclosure process, or because they do not believe such additional information would be useful to investors. --------------------------------------------------------------------------- \65\ According to the observations of an accounting firm, variability in reporting may also be the result of, among other things, differences in regulatory and listing requirements across jurisdictions and interest by investors and others for disclosures that go beyond the minimum. See Ernst & Young, ``Enhancing audit committee transparency: Themes in audit committee disclosures in Australia, Canada, Singapore, the UK and the US'' (Mar. 2015), available at http://www.ey.com/Publication/vwLUAssets/EY-Enhanced- audit-committee-transparency-themes-in-audit-committee-disclosures/ $FILE/EY-Enhanced-audit-committee-transparency-themes-in-audit- committee-disclosures.pdf. \66\ See NACD Summary of Proceedings, Audit Committee Chair Advisory Council, (June 19, 2013). --------------------------------------------------------------------------- C. PCAOB Standard-Setting Projects The PCAOB is engaged in standard-setting initiatives that could result in additional information being disclosed related to the auditor and its work. One project has been exploring a requirement that the auditor disclose, in the auditor's report, the name of the engagement partner as well as the names, locations, and extent of participation of other independent public accounting firms that took part in the audit and the locations and extent of participation of other persons not employed by the auditor that took part in the audit.\67\ --------------------------------------------------------------------------- \67\ See PCAOB Release No. 2013-009, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits (Dec. 4, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx. Similar requirements exist in other jurisdictions, including but not limited to, the European Union, United Kingdom, Australia, Sweden, China, and Taiwan. Academic research has supported that, in at least these particular jurisdictions, information about individual audit partners, over and above information about the audit firm, is relevant to financial statement users for both public and private firms. See Carcello, J. and C. Li., Cost and Benefits of Requiring an Engagement Partner Signature: Recent Experience in the United Kingdom, 88 The Accounting Review, 1511 (2013); Aobdia, D. et al., Capital Market Consequences of Individual Audit Partners, The Accounting Review, (forthcoming) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2321333 (discussing Taiwan's mandate regarding disclosure of individual audit partners); Knechel, R. et al., Does the Identity of Engagement Partners Matter? An Analysis of Audit Partner Reporting Decisions, Contemporary Accounting Research, (forthcoming) available at https://www.caaa.ca/_files/file.php?fileid=filerSDAxJgThx&filename=file_Knechel__Vanstraelen__Zerni__Does_the_Identity_of_Engagement_Partners_Matter.pdf (discussing Sweden's disclosure requirement); Gul, F.A. et al., Do Individual Auditors Affect Audit Quality? Evidence From Archival Data, 88 The Accounting Review, 1993 (2013) (discussing China's disclosure requirement); and The Association of Chartered Certified Accountants and Macquarie University, The Drivers of Audit Quality: Views From Australian CFOs, (2014), available at http://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-tp-daq1(cfo)-drivers-audit-quality.pdf. --------------------------------------------------------------------------- Some investors have indicated that the engagement partner's track record compiled from the disclosure of the partner's name would be relevant in ``overseeing the audit committees and determining how to cast votes on more than two thousand proposals that are presented annually to shareholders on whether to ratify the board's choice of outside auditor.'' \68\ Audit firms and other commenters questioned whether the auditor's report is the most appropriate place to provide this information, for example, due to potential liability concerns.\69\ As a [[Page 39002]] result, the PCAOB is seeking further comment on whether these concerns would be sufficiently addressed by providing the information in an alternative location, outside of the auditor's report and outside of the issuer's filing.\70\ --------------------------------------------------------------------------- \68\ See, Reproposed Rule Comment Letter of the Council of Institutional Investors (Aug. 15, 2014), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx. \69\ Some commenters voiced the concern, for example, that the PCAOB's December 2013 reproposal on disclosure of the engagement partner and other participants in the audit may lead to the engagement partner and other participants (other independent public accounting firms and other persons not employed by the auditor) being deemed experts for purposes of liability under Section 11 of the Securities Act of 1933 (``Securities Act''). See, e.g., Reproposed Rule Comment Letters of Deloitte & Touche LLP (Feb. 3, 2014), PricewaterhouseCoopers LLP (Feb 4, 2014), Ernst & Young LLP (Feb 12, 2014), Society of Corporate Secretaries & Governance Professionals (Mar. 12, 2014), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx. \70\ PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form (June 30, 2015), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx. --------------------------------------------------------------------------- Commenters on the PCAOB's proposal have also suggested that it may be more appropriate for any requirement for proposed disclosures to be considered by the Commission, rather than the PCAOB, because having these disclosures made by the issuer, in the audit committee report or proxy statement, appears aligned with the responsibilities outlined in Section 10A(m) of the Exchange Act.\71\ Requiring any such disclosure by the audit committee would require Commission action because the PCAOB does not have authority over issuer disclosures. --------------------------------------------------------------------------- \71\ See Reproposed Rule Comment Letters of Dennis R. Beresford (Jan 6, 2014), Institute of Management Accountants (Jan 21, 2014), Charles Noski (Jan 13, 2014), James L. Fuehrmeyer, Jr. (Jan 22, 2014), Audit and Assurance Services Committee of the Illinois CPA Society (Feb 3, 2014), Professional Standards Committee of the Texas Society of Certified Public Accountants (Feb 3, 2014), CAQ (Feb 3, 2014), Auditing Standards and SEC Committees of the New York State Society of Certified Public Accountants (Feb 4, 2014), PricewaterhouseCoopers LLP (Feb 4, 2014), Ernst & Young LLP (Feb 12, 2014), Crowe Horwath (Feb 12, 2014), G. Lawrence Buhl, CPA (Mar 5, 2014), U.S. Chamber of Commerce, Center for Capital Market Competitiveness (Mar 10, 2014), KPMG LLP (Mar 13, 2014), Financial Management and Assurance, U.S. Government Accountability Office (Mar 17, 2014), Robert N. Waxman, CPA (Mar 17, 2014), and CohnReznik LLP (Mar 17, 2014), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx. --------------------------------------------------------------------------- Another PCAOB initiative could result in disclosure of additional information about the audit and the auditor, including the auditor's tenure, in the auditor's report.\72\ Some commenters believe the disclosure of auditor tenure in the auditor's report would be useful because it could help investors evaluate the audit committee's oversight of the auditor (including its rationale for selecting or retaining the auditor) and develop a basis for shareholders to ratify the audit committee's selection of the auditor, when applicable.\73\ Others raised concerns about the lack of evidence correlating auditor tenure and audit quality and whether the placement of this data in the auditor's report would imply that some correlation exists.\74\ Some believe that issuer filings with the Commission would be a more appropriate location for this disclosure.\75\ --------------------------------------------------------------------------- \72\ See PCAOB Release No. 2013-005, Proposed Auditing Standards on the Auditor's Report and the Auditor's Responsibilities Regarding Other Information and Related Amendments (Aug. 13, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx. \73\ See, e.g., Proposed Rule Comment Letters of Counsel of Institutional Investors (Dec. 16, 2013), CFA Institute (Dec. 30, 2013), and Peter Clapman (Dec. 5, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx. \74\ See, e.g., Proposed Rule Comment Letters of Deloitte and Touche, LLP (Dec. 11, 2013), NAREIT (Dec. 11, 2013), Tyson Foods, Inc. (Dec. 11, 2013), Nucor (Dec. 10, 2013), Williams (Dec. 4, 2013), Acuity Brands (Nov. 26, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx. Despite commenters' views, there is some academic evidence connecting auditor tenure and audit quality, which is discussed in Section VI.C.3. \75\ See, e.g., Proposed Rule Comment Letters of National Association of Corporate Directors (Dec. 11, 2013) (suggesting that the Commission should consider inclusion of tenure information in proxy statements if there is sufficient investor interests), Federation of European Accountants (Dec. 11, 2013) (stating its belief that an auditor could disclose tenure if it is not already disclosed in management's report or annual financial statements), Institute of Management Accountants (Nov. 12, 2013) (objecting to inclusion in the auditor's report and noting that it may be a corporate governance matter included in the proxy statement), and BlackRock, Inc. (Oct. 30, 2013) (not objecting to the inclusion while noting that inclusion in an issuer filing may be preferable), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx. --------------------------------------------------------------------------- D. Initiatives in Other Jurisdictions To Enhance Audit Committee Reporting Other jurisdictions also have been exploring expanded reporting with respect to audit committees. For example, in 2012, the UK Financial Reporting Council adopted amendments to its Corporate Governance Code that require a separate section of the annual report that describes the work of the audit committee in discharging its responsibilities.\76\ The report now includes, among other things, the significant issues considered in relation to the financial statements and how they were addressed; how the audit committee assessed the effectiveness of the audit process; the approach to appointing the auditor and how objectivity and independence are safeguarded relative to non-audit services; as well as information on the length of tenure of the current audit firm and when a tender was last conducted. --------------------------------------------------------------------------- \76\ Section C.3.8 of the UK Corporate Governance Code, available at https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx. --------------------------------------------------------------------------- The International Auditing and Assurance Standards Board (the ``IAASB'') has also acknowledged the merits of enhanced disclosure around the activities of the audit committee. In connection with its efforts to develop a framework for audit quality, it has stated: While users are likely to conclude that the active involvement of a high-quality audit committee will have a positive impact on audit quality, there is considerable variability in the degree to which audit committees communicate to users the way they have fulfilled these responsibilities. There is potential for fuller disclosure of the activities of audit committees to benefit both actual audit quality and user perception of it. Consequently, some countries are actively exploring whether to include more information in annual reports about the activities of audit committees in relation to the external audit.\77\ --------------------------------------------------------------------------- \77\ IAASB, ``A Framework for Audit Quality,'' p. 48 (Jan. 15, 2013), available at http://www.ifac.org/publications-resources/framework-audit-quality. An amendment to the Directive on Statutory Audits adopted by the European Union in April 2014 \78\ included measures to strengthen the independence of statutory auditors, make the audit report more informative, and strengthen audit supervision. The Directive amendment reinforces the role of the audit committee by expanding its responsibilities in ensuring the quality of the audit being performed, giving it responsibility for the auditor appointment process, and enhancing the auditor's reporting requirements to the audit committee.\79\ Specifically, the Directive requires that the audit committee explain to the issuer's board how the auditor contributed to the integrity of the financial statements and how the committee assessed threats to the auditor's independence and implemented appropriate safeguards, and also requires the audit committee obtain a detailed report from the auditor on the results of the audit. --------------------------------------------------------------------------- \78\ See Directive 2014/56/EU of the European Parliament and Council of April 16, 2014, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0056&from=EN. \79\ Id. --------------------------------------------------------------------------- Corporate governance practices, regulations, and enforcement vary across countries.\80\ Therefore, the Commission is interested in understanding whether enhanced audit committee disclosures would result in benefits for U.S. investors. --------------------------------------------------------------------------- \80\ OECD, ``Corporate Governance Factbook,'' (Feb. 2014), available at http://www.oecd.org/daf/ca/CorporateGovernanceFactbook.pdf. --------------------------------------------------------------------------- E. References to PCAOB Auditing Standards With the Commission's approval of PCAOB Auditing Standard No. 16, Communications with Audit Committees (``AS 16'') in 2012, changes [[Page 39003]] to the required audit committee communications by the auditor, among others, were incorporated within PCAOB auditing standards and superseded the prior communication requirements in AU sec. 380.\81\ As a result, Item 407(d) of Regulation S-K is no longer current because it references AU sec. 380. In addition to this outdated reference, there are required communications in other PCAOB standards that are not reflected in current audit committee disclosure requirements.\82\ Moreover, the existing audit committee report does not address the Commission's communication requirements in Rule 2-07 of Regulation S-X. --------------------------------------------------------------------------- \81\ See Release No. 34-68453, Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules on Auditing Standard No. 16, Communications with Audit Committees, and Related and Transitional Amendments to PCAOB Standards (Dec. 17, 2012) [77 FR 75689]. \82\ Appendix B to AS 16 identifies other PCAOB rules and standards that require audit committee communications, such as communications related to an audit of internal control over financial reporting that is integrated with an audit of financial statements, related party transactions, fraud considerations, and illegal acts, among others. --------------------------------------------------------------------------- The change to the communication requirements within the auditing standards without a corresponding change in the audit committee reporting requirements has resulted in divergent practices. For example, some companies' audit committee reports refer to matters required to be communicated under AS 16; others refer to matters required to be communicated under all PCAOB standards. Still others continue to refer to communications under AU sec. 380, even though AU sec. 380 has been superseded. These differences in reporting may result in confusion among readers of the audit committee reports as to whether appropriate auditor and audit committee communications have occurred and therefore, suggest a need to consider updating the audit committee disclosure requirements. V. Focus on Audit Committee Oversight of the Auditor The Commission is interested in understanding whether changes should be made to required disclosures about audit committees regarding oversight of the audit and the auditor relationship. The Commission is also interested in understanding whether this additional information would help inform investment decisions and, where applicable, voting decisions regarding the ratification of auditors and the election of directors who are members of the audit committee. Request for Comment 1. Do the current audit committee reporting requirements result in disclosures that provide investors with useful information? Why or why not? Are there changes to the current audit committee disclosure requirements that the Commission should consider that would better inform investors about the audit committee's oversight of the audit and the independent auditor? 2. Are there existing disclosure requirements in this area that should be revised, reconsidered or removed? If so, which ones? How and why should they be changed? 3. Would investors find additional or different audit committee reporting requirements useful given the committee's strengthened and expanded role in overseeing a company's independent auditor that resulted from the Sarbanes-Oxley Act? For example, to what extent is information regarding how the audit committee discharges its responsibilities useful to investors given the nature of the requirements and likely variability in performance? Also, are there particular audit committee responsibilities for which information would be likely more or less useful and why? 4. What, if any, are potential challenges that issuers or audit committees may face that the Commission should consider as it assesses potential changes to disclosures in this area? 5. Are there other areas where changes to the current audit committee disclosure requirements would be desirable? If so, what are they? 6. Should the audit committee provide disclosure of its work in other areas, for example, its oversight of the financial reporting process or the internal audit function? If so, what types of disclosures would be most useful and why? VI. Potential Changes to Disclosures The Commission is seeking comment on potential changes to required disclosures regarding an audit committee's role and responsibilities relative to the audit and the auditor, and other potential related changes. The Commission is seeking feedback on the disclosure requirements to determine the extent to which adding, removing, or modifying certain audit committee disclosures would enhance the usefulness of such disclosures for investors. The purpose of the disclosures discussed below would be 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 better inform investors about how the audit committee executes those responsibilities. The Commission is seeking feedback on the content and scope of the audit committee disclosures, as well as commenters' views on which of these disclosures, if any, would be most useful in conveying how the audit committee executes its oversight of the auditor and whether such enhanced disclosures would be useful to investors' investment or voting decisions. Such disclosures could provide information that frequently is either not readily available or inconsistently available today to investors. These disclosures could also minimize the ``expectations gap'' that some have expressed exists between investors and the audit committee regarding the role of the audit committee.\83\ In a series of roundtables organized by the CAQ, the Federation of European Accountants, and the Institute of Chartered Accountants Australia in January and February of 2013, participants noted that stakeholders' expectations are not consistent with the audit committee's actual responsibilities and how they are discharged, which results in the current expectations gap.\84\ --------------------------------------------------------------------------- \83\ See Global Observations. \84\ Id. --------------------------------------------------------------------------- For purposes of this concept release, the Commission has categorized the specific audit committee disclosures about which the Commission is interested in receiving comment into three groups: the audit committee's oversight of the auditor, the audit committee's process for selecting the auditor, and the audit committee's consideration of the qualifications of the audit firm and certain members of the engagement team when selecting the audit firm. The Commission is also interested in receiving comments on where the audit committee disclosures should be located and whether there are specific concerns relating to smaller reporting companies \85\ and emerging growth companies.\86\ In Section VII of this release, the Commission also asks more general questions with respect to any potential new disclosures. --------------------------------------------------------------------------- \85\ See Rule 12b-2 of the Exchange Act [17 CFR 240.12b-2]. \86\ See Section 2(a)(19) of the Securities Act [15 U.S.C. 77b(a)(19)] and Section 3(a)(80) of the Exchange Act [15 U.S.C. 78c(a)(80)]. --------------------------------------------------------------------------- [[Page 39004]] A. Audit Committee's Oversight of the Auditor 1. Additional Information Regarding the Communications Between the Audit Committee and the Auditor As noted in Section III.A, the audit committee report today discloses whether certain communications have occurred. Potential additional disclosures about the communications might provide additional information about the actions the audit committee has taken during the most recently completed fiscal year to oversee the auditor and the audit. Also, as previously discussed, current requirements for the audit committee report contain an outdated reference to AU sec. 380, which was superseded by AS 16. In addition to correcting this reference, the Commission is considering whether to require additional qualitative disclosures about the nature and timing of the required communications between the audit committee and the auditor. For instance, the PCAOB has required that the auditor communicate with the audit committee prior to the issuance of the auditor's report.\87\ The disclosure rules could require the audit committee to discuss not just whether and when all of the required communications occurred, but also the audit committee's consideration of the matters discussed. Such communications and related disclosures could address, for instance, the nature of the audit committee's communications with the auditor related to items such as the auditor's overall audit strategy, timing, significant risks identified, nature and extent of specialized skill used in the audit, planned use of other independent public accounting firms or other persons, planned use of internal audit, basis for determining that the auditor can serve as principal auditor, and results of the audit, among others, and how the audit committee considered these items in its oversight of the independent auditor. --------------------------------------------------------------------------- \87\ See paragraph 26 of AS 16. --------------------------------------------------------------------------- Request for Comment 7. Should the Commission consider modifying any of the existing audit committee disclosure requirements regarding communications with the auditor? If so, which disclosure requirements should the Commission consider modifying and what modifications should be made? 8. Should the Commission update the existing disclosure requirements to include all communications required by Commission rules and PCAOB standards rather than only those required by AS 16? Would expanding the requirements to encompass all required communications create difficulties for issuers or audit committees in complying with the disclosure requirements? Why or why not? 9. Should there be disclosure about the audit committee's consideration beyond a statement that they have received and discussed the matters communicated by the auditor as required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence? If so, what should be included in the disclosure? 10. Currently, audit committees are only required to disclose whether the required communications occurred. Are statements confirming that required communications have occurred helpful disclosure? Why or why not? 11. Should there be disclosures regarding the nature or substance of the required communications between the auditor and the audit committee? Are there other types of communications between the audit committee and the auditor about which the Commission should consider mandating disclosure? 12. Should such discussion be required to address all required communication topics or a subset of overarching topics related to how the auditor planned and performed the audit? For instance, should the audit committee disclose information regarding how the audit committee considered the nature of the required communications that were made under paragraphs 9 and 10 of AS 16 as it relates to significant risks identified, nature and extent of specialized skill used in the audit, planned use of the company's internal auditors, involvement by other independent public accounting firms or other persons, and the basis for determining that the auditor can serve as the principal auditor in its oversight of the independent auditor? Should the audit committee disclose how it dealt with disagreements between company management and the auditor? If so, what should be included in the disclosure? Are there other categories of the communications between auditors and the audit committee that should be considered for disclosure? 13. For audits involving multiple locations, should the audit committee report disclose information regarding how the audit committee considered, in its oversight of the auditor, the scope of the audit, locations visited by the auditor, and the relative amount of account balances related to such locations compared to the consolidated financial statements? 14. Communications between the auditor and the audit committee may not be limited to the items required by Commission rules and PCAOB standards. Should the audit committee report be required to disclose any information about the extent to which additional matters were discussed with the auditor? If so, what level of detail should be required? 15. Are there benefits, costs or unintended consequences that could result from requiring disclosure that goes beyond a statement that the required discussions have occurred? How would the disclosures be used by institutional and retail investors, investment advisers, and proxy advisory firms in making voting decisions and recommendations on matters such as director elections, executive compensation, or shareholder proposals, among others? 16. Would the potential disclosures referenced here be decision- useful to investors? If so, would it be sufficient for the disclosure to address the consideration given by the audit committee without necessarily disclosing the underlying substance? Would disclosing the substance of the communications between the audit committee and the auditor be useful to investors? Why or why not? 17. Could these potential disclosures chill communications between the audit committee and the auditor? If so, how? Could they reveal proprietary information about the issuer or the audit methodology? If so, how? 2. The Frequency With Which the Audit Committee Met With the Auditor The audit committee and auditor can determine the timing, frequency and forum (e.g., in-person or telephonically and extent of committee participation) for meetings, provided that required communications are made in accordance with PCAOB standards and Commission rules.\88\ Also, there are listing requirements that the audit committee meet separately and periodically with management, the internal auditor, and the independent auditor.\89\ Recognizing that the number of audit committee meetings is already required to be disclosed,\90\ requiring additional disclosure about the specific meetings with the auditor may provide [[Page 39005]] additional insight into the audit committee's oversight of the auditor. --------------------------------------------------------------------------- \88\ AS 16 and Rule 2-07 of Regulation S-X. \89\ See NYSE Listed Company Manual, Section 303A.07(E) and the Commentary to Section 303A.07(E). \90\ See Item 407(b)(3) of Regulation S-K. --------------------------------------------------------------------------- Request for Comment 18. Should there be additional disclosures required about the meetings the audit committee has had with the auditor? If so, what type of disclosures should be made and why? If not, why not? 19. Should the audit committee report disclose the frequency with which it met privately with the auditor? Would confirmation that private conversations occurred be useful disclosure even if there are no disclosures about the topics discussed? Should there be a requirement to disclose the topics discussed? 3. Review of and Discussion About the Auditor's Internal Quality Review and Most Recent PCAOB Inspection Report Pursuant to certain listing requirements, the audit committee must obtain and review a report by the independent auditor describing the firm's internal quality-control procedures,\91\ any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, with respect to one or more independent audits carried out by the firm.\92\ Audit committees not subject to these listing standards may choose to request or discuss this information with their auditors, but they are not required to do so. --------------------------------------------------------------------------- \91\ Paragraphs .04-.07 of PCAOB QC Section 30, Monitoring a CPA Firms Accounting and Auditing Practice, discuss the requirements related to an audit firm's internal quality-control review. \92\ See NYSE Listed Company Manual, Section 303A.07(b)(iii)(A). --------------------------------------------------------------------------- Information about the results of internal quality reviews, or a PCAOB inspection of a company's audit, as well as more general inspection results, can help an audit committee in carrying out its oversight role. Inspection reports can inform an audit committee about how its auditor performed in high-risk areas across audits. As the PCAOB has stated, ``[t]he [Sarbanes-Oxley] Act does not permit the [PCAOB] to make public, or otherwise to share with an audit committee, all of the information obtained by the PCAOB that could assist an audit committee in carrying out its role. . . . Beyond the public portion of an inspection report, voluntary disclosure by the inspected audit firm is an audit committee's only means of obtaining information concerning a PCAOB inspection.'' \93\ The PCAOB also has provided sample questions an audit committee may wish to ask auditors. Specifically, the PCAOB stated: --------------------------------------------------------------------------- \93\ See PCAOB Release No. 2012-003, Information for Audit Committees about the PCAOB Inspection Process (Aug. 1, 2012), available at http://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf. [W]ithout necessarily framing discussions in terms of an inspection or an inspection report, an audit committee might benefit from having an understanding with its audit firm through which the audit committee receives timely information (both during the conduct of the inspection and when the Board has issued a final inspection report) about-- whether anything has come to the firm's attention suggesting the possibility that an audit opinion on the company's financial statements is not sufficiently supported, or otherwise reflecting negatively on the firm's performance on the audit, and what if anything the firm has done or plans to do about it; whether a question has been raised about the fairness of the financial statements or the adequacy of the disclosures; whether a question has been raised about the auditor's independence relative to the company; whether any of the matters described in the public portion of an inspection report on the firm, whether or not they involve the company's audit, involve issues and audit approaches similar to those that arise or could arise in the audit of the company's financial statements; to the extent any such similarity exists, whether and how the firm has become comfortable that the same or similar deficiencies either did not occur in the audit of the company's financial statements or have been remedied; and how issues described by the Board in general reports summarizing inspection results across groups of firms relate to the firm's practices, and potentially the audit of the company's financial statements, and how the firm is addressing those issues.\94\ --------------------------------------------------------------------------- \94\ Id. at p. 10-11. Disclosure could be required as to whether this type of discussion has occurred. There also could be disclosure required about the nature of any discussions held with the auditor about the results of the firm's internal quality review and most recent PCAOB inspection. These disclosures may provide transparency with respect to the extent of the audit committee's oversight of the auditor. Request for Comment 20. Would disclosure about the audit committee's review and discussion of the audit firm's internal quality-control review and most recent PCAOB inspection report be useful to investors? If so, what types of disclosures should be made in this regard? Would disclosures about the nature and extent of such discussions be useful without disclosure of the specific review or inspection results? Should the disclosures include information about how the audit committee considered any deficiencies described in the PCAOB inspection report on the audit process? If not, why not? 21. Is there a risk that the confidentiality of the nonpublic PCAOB inspection results could be undermined (e.g., if this information is sought and provided through the audit committee)? If so, what type of information could be presented that might be problematic? 22. Should we require disclosure about how the audit committee considered the results described in PCAOB inspection reports in its oversight of the auditor? Why or why not? 23. Are there particular issues or challenges in this area that should be considered? If so, please describe and provide data. 4. Whether and How the Audit Committee Assesses, Promotes and Reinforces the Auditor's Objectivity and Professional Skepticism Through its interactions with the auditor, the audit committee may be in a position to assess, promote, and reinforce the auditor's objectivity and professional skepticism. Heightened oversight by the audit committee of the auditor's objectivity and professional skepticism should promote greater audit quality. The audit committee could disclose whether, and if so how, as part of its oversight of the auditor, it assesses, promotes, or reinforces the auditor's objectivity and professional skepticism. Additionally, the audit committee could disclose the results of its evaluation of the auditor's objectivity and professional skepticism. Request for Comment 24. Would investors find disclosure about whether, and if so how, the audit committee assesses, promotes, and reinforces the auditor's objectivity and professional skepticism useful? Why or why not? 25. What specific types of disclosures could the audit committee make in this regard? For example, should the audit committee disclose whether, and if so how, it evaluated the auditor's objectivity and professional skepticism, as well as the results of such an evaluation? Commenters are encouraged to provide examples of such disclosures. [[Page 39006]] B. Audit Committee's Process for Appointing or Retaining the Auditor For listed issuers, the audit committee is responsible for appointing the auditor and deciding whether to retain an auditor.\95\ However, satisfying this requirement can involve a wide range of activities. In fulfilling this responsibility, the audit committee may conduct an assessment of the current auditor. It may also decide to seek requests for proposals from other auditors. Potential disclosures could provide information about the actions the audit committee took in reaching a decision about which auditor to select for the upcoming fiscal year's audit. --------------------------------------------------------------------------- \95\ Even for non-listed issuers, the audit committee may have a role in the selection of the auditor. See, e.g., paragraphs 4-7 of AS 16. --------------------------------------------------------------------------- 1. How the Audit Committee Assessed the Auditor, Including the Auditor's Independence, Objectivity and Audit Quality, and the Audit Committee's Rationale for Selecting or Retaining the Auditor Disclosure about the process the audit committee undertook and the criteria used to assess the auditor and the audit committee's rationale for selecting or retaining the auditor could provide transparency into how the audit committee oversees the auditor and the rigor with which the audit committee exercises its responsibility to appoint a new, or retain an existing, auditor. In addition to the steps involved in the process to assess the auditor, disclosure also could be provided regarding the specific elements or criteria the audit committee considered during the process. Disclosures could, for example, include a description of the nature of the audit committee's involvement in evaluating and approving the auditor's compensation. There are also numerous ongoing efforts to identify ways to assess audit quality (``audit quality indicators'') and these efforts may result in published metrics and criteria that could be used for providing insight into audit quality.\96\ Audit committees may choose to use the output from these efforts to guide discussion with the auditor about audit quality. To the extent the audit committee uses such indicators or metrics in assessing the quality of the auditor and the audit, disclosure about the use and consideration of such metrics may provide useful information about the audit committee's process for assessing the auditor and determining whether to select or retain the auditor. --------------------------------------------------------------------------- \96\ Organizations such as the PCAOB, IAASB, and CAQ have discussed projects related to audit quality frameworks or indicators. The CAQ has published, ``The CAQ Approach to Audit Quality Indicators'' available at http://www.thecaq.org/docs/reports-and-publications/caq-approach-to-audit-quality-indicators-april-2014.pdf?sfvrsn=2. --------------------------------------------------------------------------- Request for Comment 26. What types of disclosures could be made regarding the process the audit committee undertook to evaluate the external audit and performance and qualifications of the auditor, including the rationale for selecting or retaining the auditor? 27. Should the disclosures include a description of the nature of the audit committee's involvement in approving the auditor's compensation, including how compensation is determined and evaluated? Should the disclosures include the criteria or elements the audit committee considered? Should the audit committee provide additional disclosure about the nature and extent of non-audit services and its evaluation on how such services relate to its assessment of independence and objectivity? 28. If audit quality indicators are used in the evaluation of the auditor, should there be disclosure about the indicators used, including the nature, timing, and extent of audit quality indicators considered by the audit committee? \97\ If audit quality indicators are not used in the evaluation of the auditor, what, if any, disclosures regarding the assessment of audit quality should be provided? --------------------------------------------------------------------------- \97\ See PCAOB Release No. 2015-005, Concept Release on Audit Quality Indicators (June 30, 2015). --------------------------------------------------------------------------- 2. If the Audit Committee Sought Requests for Proposal for the Independent Audit, the Process the Committee Undertook To Seek Such Proposals and the Factors They Considered in Selecting the Auditor The audit committee may periodically seek requests for proposals for the independent audit. Disclosures about the process the audit committee undertook, including the number of auditors that were asked to propose, information on how those auditors were selected, and the information that the audit committee used in its decision, may provide information about the audit committee's process in selecting or retaining an auditor and about the quality and qualifications of the auditor selected. Additionally, academic research is mixed as to whether companies engage in ``opinion-shopping.'' \98\ The Commission is interested in knowing whether relevant disclosures of the audit committee's process in selecting the auditor might be useful to investors. --------------------------------------------------------------------------- \98\ See Lennox, C., Do Companies Successfully Engage in Opinion-Shopping? Evidence from the UK, 29 Journal of Accounting and Economics, 321 (2000); and Chan, H.K. et al., A Political-Economic Analysis of Auditor Reporting and Auditor Switches, 11 Review of Accounting Studies, 21 (2006), both of which provide evidence that opinion shopping may occur. In contrast, in the United States, a study of auditor changes from the four largest U.S. accounting firms to small, not mid-market, audit firms found market reactions that support the notion of auditor changes in the post-Sarbanes-Oxley Act and PCAOB inspection era as being driven by better services. These results refute a notion of opinion shopping or shopping for lower audit fees. These authors also note that academic research in the 1980s and 1990s indicated that opinion shopping is generally unsuccessful. Chang, H. et al., Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms, 29 Auditing: A Journal of Practice and Theory, 85 (2010). --------------------------------------------------------------------------- Request for Comment 29. What types of disclosures could be made about requests for proposals for the audit, including the process undertaken and the factors considered in selecting the audit firm? 30. Should there be disclosure as to whether the audit committee sought proposals for the audit (including the reason the request for proposal was made), or whether the audit committee has a policy in this regard? 3. The Board of Directors' Policy, if any, for an Annual Shareholder Vote on the Selection of the Auditor, and the Audit Committee's Consideration of the Voting Results in its Evaluation and Selection of the Audit Firm In those cases where a company voluntarily seeks ratification of its auditor, requiring additional disclosure may be useful to promote informed voting decisions. The Commission is interested in feedback on potential disclosure about the board of directors' policy, if any, for annual shareholder vote on the selection of the auditor, and the audit committee's consideration of the voting results in evaluating and selecting the audit firm, including situations where the audit firm fails to achieve majority support. Such disclosure could provide useful information to shareholders as to how and why the board is seeking ratification of the auditor, as well as the implication of the shareholder vote being solicited. Request for Comment 31. Would additional disclosures in this area provide meaningful additional information with respect to the selection of the auditor? If so, what types of disclosures should the Commission require to be made in this regard? For example, in addition to disclosure of whether there is a policy about shareholder ratification, should there [[Page 39007]] also be disclosure of the factors the board considered in establishing the policy? 32. If there are a significant number of votes against the ratification, and the board nevertheless proceeds with the auditor in question, should the audit committee report provide the reasons why the board determined to go forward with that auditor? If not in the audit committee report, where should this information be provided and when should it be provided? 33. If it is determined that additional disclosure is required in this area, should voting on ratifications of independent auditors continue to be considered a ``routine matter'' allowing for discretionary voting by brokers on such ratifications pursuant to NYSE Rule 452? \99\ --------------------------------------------------------------------------- \99\ NYSE General Rules, Operation of Member Organizations, Rule 452 available at http://nyserules.nyse.com/nysetools/PlatformViewer.asp?SelectedNode=chp_1_2&manual=/nyse/rules/nyse-rules/. --------------------------------------------------------------------------- C. Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit Committee In the course of carrying out its responsibilities related to auditor oversight, an audit committee is likely to gain an understanding of the key participants in the audit, their experience, and their qualifications to perform a high-quality audit. The key participants in the audit can vary, but at a minimum include the engagement partner and engagement quality reviewer. Given this knowledge, the audit committee is in a position to evaluate the independence and qualifications of both the audit firm and key members of the engagement team, including the engagement partner, and determine whether to select or retain the auditor. Disclosures could convey the factors the audit committee considered most relevant in selecting or retaining the auditor and provide information about the auditor selected by the audit committee for the upcoming fiscal year's audit. 1. Disclosures of Certain Individuals on the Engagement Team Disclosure could be provided with the name of the engagement partner, alone or with the name(s) of other key members of the audit engagement team (e.g., the engagement quality reviewer), the length of time such individual(s) have served in that role and any relevant experience.\100\ Regarding experience, information could be provided about the number of prior audit engagements performed and whether they were in the same industry. To the extent it is known that the individual(s) disclosed will be changing for the upcoming year's audit, that information could also be disclosed. --------------------------------------------------------------------------- \100\ Both the PCAOB and the IAASB have been pursuing projects that would require naming the engagement partner in the audit report. See PCAOB Release No. 2013-009; PCAOB Release No. 2015-004; and the IAASB final rule International Standard on Auditing (ISA) 700 (Revised), Forming an Opinion and Reporting on Financial Statements), including paragraph 45 of ISA 700, available at http://www.ifac.org/publications-resources/international-standard-auditing-isa-700-revised-forming-opinion-and-reporting. --------------------------------------------------------------------------- Request for Comment 34. Would disclosure of the name of the engagement partner be useful to investors? Would disclosure of any additional members of the engagement team be useful and, if so, which? (For example, should the names of all partners who are required to rotate under SEC independence rules be disclosed? Why or why not?) Should there be other disclosures about the engagement team or others involved in the audit? If so, what additional information should be disclosed? Are there any costs to such disclosure? 35. Are there incremental benefits to disclosing the name (such as increased accountability)? Is disclosure of the name helpful in promoting audit quality? Are current risks of potential legal liability, regulatory sanction and significant reputational costs strong enough incentives to develop a team that is capable of executing the audit in accordance with professional standards? Why or why not? In addition to disclosure of the name, there could be disclosure regarding other qualifications, such as the length of time the individual has served in that role, professional licenses, or his or her experience. What, if any, additional information should be disclosed? Why? 36. Is the audit committee the appropriate party to provide such disclosure? If not, what other party or parties should provide the disclosure and why? 37. Would such disclosure be more appropriately disclosed in the auditor's report? Why or why not? Would it be better disclosed in a separate filing with the PCAOB? Why or why not? If the disclosure is provided in a separate filing with the PCAOB, what information should the disclosure include? 38. If the name of the engagement partner is available elsewhere (e.g., included in the auditor's report or a supplemental filing with the PCAOB), would investors benefit from having it also reported as part of the audit committee's disclosures? Why or why not? Also, if the name of the engagement partner is available elsewhere, should the audit committee's report refer to where the disclosure is otherwise located? 39. If the name of the engagement partner is reported in the audit committee report, would investors benefit from this information also being available in one location for all audits? 40. If disclosures are required and it is known that the person(s) disclosed will change for the next audit, should there be disclosure of this fact including who will, or is expected to, take on the role for the next audit? Why or why not? 41. If there is a change in the engagement partner during the year, should this be disclosed sooner than in the next annual update? If other named individuals change during the year, should this be disclosed as well? 42. Are there any liability implications (e.g., for engagement partners, audit committee members, the company or other participants) with respect to disclosure of participants in the audit? If so, what are these implications? Do the implications change based on where or how the disclosure is made? 2. Audit Committee Input in Selecting the Engagement Partner The audit committee may provide input into an audit firm's assignment of the individual who will serve as the engagement partner for the upcoming audit. Disclosures about the involvement of the audit committee in this selection, and any input the audit committee had in the decision, may provide transparency and insight into the exercise of the audit committee's responsibilities in overseeing the auditor. Request for Comment 43. Should the audit committee be required to disclose what it considered in providing input to the firm's assignment of the engagement partner? If so, what information should such disclosures contain? 44. Should the disclosures be limited to whether the audit committee participated in the selection of the engagement partner, or should there be more detail regarding the audit committee's input? 3. The Number of Years the Auditor Has Audited the Company The number of years the auditor, or its predecessor(s) in the case of merged audit firms, has audited the company may be a relevant consideration to the audit committee's determination of [[Page 39008]] whether or not to engage or retain the auditor. The role of auditor tenure in audit quality has attracted significant attention over the past few years.\101\ Most academic research indicates that engagements with short-term tenure are relatively riskier or that audit quality is improved when auditors have time to gain expertise in the company under audit and in the related industry.\102\ However, some academic research suggests that both short and long tenure can have detrimental effects on audit quality.\103\ Audit committees may view auditor tenure as a positive or negative influence on audit quality, depending on the length of such tenure. In light of the public interest in the subject of auditor tenure, disclosure of this data could provide insight into the audit committee's overall decision to engage or retain the auditor. --------------------------------------------------------------------------- \101\ See, e.g., PCAOB Release No. 2011-006, Concept Release on Auditor Independence and Audit Firm Rotation (Aug. 16, 2011), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx; and PCAOB Release No. 2013-005, Proposed Auditing Standards on the Auditor's Report and the Auditor's Responsibilities Regarding Other Information and Related Amendments (Aug. 13, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx. \102\ See Myers, J. et al., Exploring the Term of the Auditor- Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation? 78 The Accounting Review, 779 (2003); and Carcello, J. and Nagy, A., Audit Firm Tenure and Fraudulent Financial Reporting, 23 Auditing: A Journal of Practice and Theory, 55 (2004). \103\ See, e.g., Davis, L. et al., Auditor Tenure and the Ability to Meet or Beat Earnings Forecasts, 26 Contemporary Accounting Research, 517 (2009). --------------------------------------------------------------------------- Request for Comment 45. Should the audit committee's report include information about the length of the audit relationship? What types of disclosures could the audit committee make in this regard? Should it be just the years of auditor tenure? 46. Should there also be disclosure as to whether and, if so, how auditor tenure was considered by the audit committee in retaining the auditor? Should there be disclosure of how tenure was considered in evaluating the auditor's independence and objectivity? Why or why not? 47. Would disclosure of auditor tenure be more appropriately disclosed in the auditor's report? Why or why not? Would it be better disclosed somewhere else (such as in a form filed with the PCAOB)? Why or why not? 4. Other Firms Involved in the Audit In many audits, especially audits of companies with multiple locations and international operations, the firm signing the auditor's report involves other affiliated accounting firms, non-affiliated accounting firms, and other third-party participants, such as tax advisors or actuaries, in the conduct of a portion of the audit work. The auditor is required to communicate to the audit committee the names, locations, and planned responsibilities of other independent public accounting firms or other persons, who are not employed by the auditor, that perform audit procedures in the current period audit. Specifically, paragraph 10 of AS 16 requires: As part of communicating the overall audit strategy, the auditor should communicate the following matters to the audit committee, if applicable: The nature and extent of specialized skill or knowledge needed to perform the planned audit procedures or evaluate the audit results related to significant risks; the extent to which the auditor plans to use the work of the company's internal auditors in an audit of financial statements; the extent to which the auditor plans to use the work of internal auditors, company personnel (in addition to internal auditors), and third parties working under the direction of management or the audit committee when performing an audit of internal control over financial reporting; the names, locations, and planned responsibilities of other independent public accounting firms or other persons, who are not employed by the auditor, that perform audit procedures in the current period audit; and Note: The term ``other independent public accounting firms'' in the context of this communication includes firms that perform audit procedures in the current period audit regardless of whether they otherwise have any relationship with the auditor. the basis for the auditor's determination that the auditor can serve as principal auditor, if significant parts of the audit are to be performed by other auditors.\104\ --------------------------------------------------------------------------- \104\ AS 16. --------------------------------------------------------------------------- After receiving the above information from the auditor, the audit committee may choose to meet with and discuss with the auditor, the other firms, or other persons who will be performing work on the audit. The audit committee is not required to disclose these communications with the auditor to investors. Request for Comment 48. Should the Commission require any additional disclosures in this regard? For example, should the names of the other independent public accounting firms and other persons involved in the audit be disclosed? Should the extent of involvement by these other participants be disclosed? Why or why not? 49. Should the names of other participants be included in the required disclosure instead of in the auditor's report? Should the names be disclosed elsewhere? If so, why? Would investors benefit from having all of the information located in the audit committee report? D. Location of Audit Committee Disclosures in Commission Filings As noted in Section III, current audit committee disclosures can appear in different places. None of the disclosures are specifically listed in the registration statement forms used for public offerings. As such, audit committee disclosures are not generally included in the prospectus delivered to investors for initial public offerings. Some of the audit committee disclosures are required in an issuer's annual report on Form 10-K filed with the Commission.\105\ These disclosures would be considered part of the prospectus when the registration statements incorporate an issuer's annual report by reference.\106\ --------------------------------------------------------------------------- \105\ Item 10 of Form 10-K references the disclosure requirements in Items 407(d)(4) and (5) of Regulation S-K. A similar requirement is also included in Item 7(b) of Schedule 14A. \106\ In practice, many registrants provide the Items 407(d)(4) and (5) disclosures in their definitive proxy statements in reliance on General Instruction G(3) of Form 10-K. Once the definitive proxy statements are filed, the information is incorporated by reference into their Form 10-K, which is then incorporated by reference into any currently effective Form S-3 or other registration statement subsequently filed, as applicable. --------------------------------------------------------------------------- The audit committee report \107\ and the disclosure of the function and number of meetings held by the audit committee \108\ is not generally considered part of the prospectus in a registered offering, since it is not required by the Securities Act registration forms or the annual report on Form 10-K.\109\ As the audit committee disclosures may inform investors' investment decisions, the Commission solicits feedback regarding the placement of current and potential additional audit committee disclosures, including the audit committee report. --------------------------------------------------------------------------- \107\ Item 407(d)(3) of Regulation S-K. \108\ Item 407(b)(3) of Regulation S-K. \109\ Pursuant to Instruction 1 to Item 407(d) of Regulation S- K, the information required by Items 407(d)(1), (2), and (3) is not deemed to be soliciting material or filed with the Commission, except to the extent that a registrant specifically requests such information be treated as soliciting material or is incorporated by reference into a Securities Act registration statement. --------------------------------------------------------------------------- [[Page 39009]] Request for Comment 50. Would investors benefit from the audit committee disclosures being presented in one location? If so, where should the disclosures appear and how would investors benefit? If not, why is the existing location of the various audit committee disclosures appropriate? 51. Should all or any of the audit committee disclosures, including the audit committee report, be included in registration statements filed pursuant to the Securities Act? If not, why not? If so, why and should the disclosure requirements be included within Securities Act registration statement forms or as a Form 10-K disclosure requirement that may then be incorporated by reference into Securities Act registration statements? 52. With respect to the additional disclosures discussed in this release, where should they be made? If required, should they be in the audit committee report, a separate section of the proxy statement, the annual report, on the company's Web site, or elsewhere? Please provide an explanation as to why the disclosure should be made in a suggested location. If required, should the disclosure be furnished but not filed? Why or why not? E. Smaller Reporting Companies and Emerging Growth Companies Item 407(g) of Regulation S-K provides the only audit committee disclosure accommodation within Item 407 that is specific to smaller reporting companies.\110\ The Jumpstart Our Business Start-Ups Act (the ``JOBS Act'') \111\ did not change the audit committee disclosure requirements for emerging growth companies. As such, the Commission is soliciting feedback regarding the application of the current and potential audit committee disclosure requirements to smaller reporting companies and emerging growth companies. --------------------------------------------------------------------------- \110\ 17 CFR 229.407(g). \111\ Public Law 112-106, 126 Stat. 306 (2012). --------------------------------------------------------------------------- Request for Comment 53. Should current audit committee disclosure requirements be changed for smaller reporting companies or emerging growth companies? If so, which requirements and why? Would investors in smaller reporting companies or emerging growth companies find this information any more or less useful than similar disclosure requirements for other issuers? If so, how, and why? 54. With respect to the additional disclosures discussed in this release, should any disclosure requirements, if adopted, apply to smaller reporting companies or emerging growth companies? If so, which requirements and why? If not, why not? Would different disclosure requirements impact the issuers (e.g., secondary market liquidity)? VII. Additional Request for Comment Regarding Audit Committee Disclosures In addition to seeking public comment on the foregoing topics for disclosure, the Commission seeks public comment in response to the following questions about the disclosures as a whole. If views of these questions would differ based on what type of disclosure is being considered, please differentiate and explain why. Request for Comment 55. Should additional disclosures, such as those presented in Section VI, be required, or should they be voluntary as they are today? Should the Commission consider requiring specific disclosures, or requiring certain categories of disclosures? If so, which categories? 56. Are there specific issuer, industry, audit committee member, or auditor characteristics that should be considered in establishing new disclosure requirements? Are there particular disclosures that should always be required and, if so, which? Are there particular disclosures that should only be required if certain conditions or characteristics are present and, if so, which disclosures and under what circumstances? Are there particular disclosures for which specificity in the requirement is important and, if so, for which disclosures and elements of disclosures should the requirements be specific? 57. Would the disclosures prompt the audit committee to change how it oversees the auditor? If so, how? 58. Would such disclosures provide insight into the nature, timing, and extent of the audit committee's oversight of the auditor? 59. Would the disclosures promote audit quality? If so, how? 60. Would the disclosures discussed herein result in boilerplate information? If so, how could the requirements be crafted to avoid boilerplate disclosure? 61. Would any of the additional disclosures discussed in this concept release result in disclosure that is not useful to investors? Why or why not? 62. Would additional information need to be disclosed in order to place any or all of the disclosures discussed above in the appropriate context? If so, what additional disclosures might be needed, and should they be required or discretionary? 63. If the Commission were to proceed with requiring some or all of the disclosures proposed above, should the disclosures be made by all issuers? For example, should the disclosures be required only for those subject to the proxy rules? Should they be required for foreign private issuers? \112\ Why or why not? Should there be accommodations made for certain types of companies or certain circumstances? If so, what should they be? --------------------------------------------------------------------------- \112\ Foreign private issuers are not subject to the proxy rules. See Rule 3a12-3(b) of the Exchange Act [17 CFR 240.3a12- 3(b)]. --------------------------------------------------------------------------- 64. If the Commission proceeds with requiring some or all of the disclosures proposed above, should there be a requirement to update these disclosures for changes between proxy or information statements? If so, what should trigger amended disclosures? Should any such updates be made quarterly or more frequently? 65. If the Commission proceeds with requiring some or all of the disclosures discussed above, should the disclosures be required to be provided in an interactive data format? If so, what elements of disclosure should be provided in that manner and in what format should the information be provided? 66. The audit committee disclosure requirements may reference other documents, such as an audit committee charter. Should such documents be provided along with the required disclosures? If not, should information be provided to help locate the information referenced? Why or why not? Should information be hyperlinked? If so, are there any unintended consequences or implementation challenges that may result from information being presented in this manner? 67. If the Commission proceeds with requiring some or all of the disclosures proposed above, under existing reporting deadlines, would there be sufficient time to prepare these disclosures? Would there be difficulties in making these disclosures? 68. Would the additional disclosures discussed above help minimize information asymmetries that may exist between management and investors? If so, how? What other benefits may accrue from providing this information? 69. Expanded disclosures may have direct and indirect economic impacts on market participants. What direct and indirect economic impacts would these disclosures have on market participants? Are there any unintended [[Page 39010]] consequences that could result from such disclosures with respect to audit firms, individual audit partners, audit committee members, audit committees, issuers, investors, or others? For instance, could potential changes chill or overly formalize audit committee communications with auditors? Are there specific liability implications with respect to additional disclosure made by the audit committee? If so, please describe. 70. Would other categories of disclosures about the audit committee's role relative to the auditor be useful? If so, what other categories? 71. How should the Commission address potential changes in the auditor's report with respect to audit committee oversight of the auditor? 72. If audit committees are required to provide disclosure that relates to information provided by the auditor (and it is not currently required to be communicated by the auditor under existing PCAOB auditing standards), would changes to PCAOB auditing standards be necessary to ensure that additional information beyond existing required communications is provided to the audit committee? 73. Are there improvements that the Commission should consider to the reporting on the audit committee's oversight of the accounting and financial reporting process or internal audits? For instance, should the audit committee disclose how it interacts with the company's management? 74. Should the Commission consider the potential for changes that would affect the role and responsibilities of the audit committee, such as those related to qualifications of members of the audit committee or areas for which audit committees should (or should not) be responsible? Should the audit committee disclose its role, if any, in risk governance? Should the audit committee report on other areas of oversight? For example, audit committees may be charged with overseeing treatment of complaints, cyber risks, information technology risks, or other areas. Would this disclosure distract from the report's focus on oversight of the audit function? In this regard, we note that commentators have recently indicated concern that audit committees are becoming the catch all of board committees by overseeing anything related to risk.\113\ --------------------------------------------------------------------------- \113\ Michael Rapoport & Joann S. Lublin, Meet the Corporate Board's ``Kitchen Junk Drawer,'' Wall St. J. (Feb. 3, 2015). --------------------------------------------------------------------------- In addition to the areas for comment identified above, we are interested in any other issues that commenters may wish to address and the benefits and costs relating to investors, issuers and other market participants of revising disclosure rules pertaining to the audit committee and the audit committee report included in Commission filings. Please be as specific as possible in your discussion and analysis of any additional issues. Where possible, please provide empirical data or observations to support or illustrate your comments. By the Commission. Dated: July 1, 2015. Brent J. Fields, Secretary. [FR Doc. 2015-16639 Filed 7-7-15; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 38995
paragraph (l)(2) of this AD: Before further (4) For airplanes in post-Airbus- Issued in Renton, Washington, on June 30,
flight, replace the affected (RH or LH) MLG Modification 155648 and post-Airbus- 2015.
fixed fairing forward attachment assembly, in Service-Bulletin A320–52–1165 Jeffrey E. Duven,
accordance with the Accomplishment configuration: As of the effective date of this
Manager, Transport Airplane Directorate,
Instructions of Airbus Service Bulletin A320– AD, no person may install a component
Aircraft Certification Service.
52–1163, dated February 4, 2014; or Airbus identified in (g)(1) through (g)(5) and (i)(1)
through (i)(3) of this AD on any airplane. [FR Doc. 2015–16583 Filed 7–7–15; 8:45 am]
Service Bulletin A320–52–1165, dated
November 3, 2014. BILLING CODE 4910–13–P
(q) Credit for Previous Actions
(n) Terminating Action This paragraph provides credit for optional
(1) Replacement of parts on an airplane, as actions provided by paragraph (n)(2) of this
required by paragraph (g), (k), or (l)(1) of this AD, if those actions were performed before SECURITIES AND EXCHANGE
AD, does not constitute terminating action the effective date of this AD using Airbus COMMISSION
for the repetitive inspections required by Service Bulletin A320–52–1100, dated
paragraph (i) of this AD, except as specified December 7, 1998, which is not incorporated 17 CFR Part 240
in paragraph (n)(3) of this AD. by reference in this AD.
(2) The repetitive replacements required by [Release No. 33–9862; 34–75344 File No.
(r) Other FAA AD Provisions S7–13–15]
paragraph (g) of this AD may be terminated
The following provisions also apply to this
by modification of the airplane to post-
AD: RIN 3235–AL70
modification 27716 configuration, including
(1) Alternative Methods of Compliance
a resonance frequency inspection for
debonding of the composite insert and
(AMOCs): The Manager, International Possible Revisions To Audit
Branch, ANM–116, Transport Airplane Committee Disclosures
delamination of the honeycomb area around
Directorate, FAA, has the authority to
the insert, and all applicable corrective AGENCY: Securities and Exchange
approve AMOCs for this AD, if requested
actions, in accordance with the using the procedures found in 14 CFR 39.19.
Accomplishment Instructions of Airbus
Commission.
In accordance with 14 CFR 39.19, send your ACTION: Concept release; request for
Service Bulletin A320–52–1100, Revision 01, request to your principal inspector or local
dated March 12, 1999, provided all Flight Standards District Office, as comments.
applicable corrective actions are done before appropriate. If sending information directly
further flight. Thereafter, refer to paragraph to the International Branch, send it to ATTN:
SUMMARY: The Commission is
(i) of this AD to determine the compliance Sanjay Ralhan, Aerospace Engineer, publishing this concept release to seek
time for the next detailed inspection required International Branch, ANM–116, Transport public comment regarding audit
by this AD. Airplane Directorate, FAA, 1601 Lind committee reporting requirements, with
(3) Modification of an airplane, in Avenue SW., Renton, WA 98057–3356; a focus on the audit committee’s
accordance with the Accomplishment telephone 425–227–1405; fax 425–227–1149. reporting of its responsibilities with
Instructions of Airbus Service Bulletin A320– Information may be emailed to: 9-ANM-116-
52–1165, dated November 3, 2014, respect to its oversight of the
AMOC-REQUESTS@faa.gov. Before using independent auditor. Some have
constitutes terminating action for actions any approved AMOC, notify your appropriate
required by paragraphs (g) through (m) of this principal inspector, or lacking a principal
expressed a view that the Commission’s
AD for the airplane on which the inspector, the manager of the local flight disclosure rules for this area may not
modification is done. standards district office/certificate holding result in disclosures about audit
(o) Exception to Certain AD Actions district office. The AMOC approval letter committees and their activities that are
must specifically reference this AD. sufficient to help investors understand
An airplane on which Airbus Modification (2) Contacting the Manufacturer: For any and evaluate audit committee
155648 has been embodied in production is requirement in this AD to obtain corrective
not affected by the requirements of performance, which may in turn inform
actions from a manufacturer, the action must those investors’ investment or voting
paragraphs (g) and (i) of this AD, provided be accomplished using a method approved
that no affected component, identified by decisions. The majority of these
by the Manager, International Branch, ANM–
part number as listed paragraphs (g)(1) 116, Transport Airplane Directorate, FAA; or disclosure requirements, which exist in
through (g)(5) and (i)(1) through (i)(3) of this the European Aviation Safety Agency their current form principally in Item
AD, has been installed on that airplane since (EASA); or Airbus’s EASA Design 407 of Regulation S–K, were adopted in
first flight of the airplane. Organization Approval (DOA). If approved by 1999. Since then, there have been
(p) Parts Installation Prohibition the DOA, the approval must include the significant changes in the role and
DOA-authorized signature. responsibilities of audit committees
(1) For airplanes in pre-Airbus-
Modification 27716 and pre-Airbus-Service- (s) Related Information arising out of, among other things, the
Bulletin A320–52–1100 configuration: No (1) Refer to Mandatory Continuing Sarbanes-Oxley Act of 2002, enhanced
person may install a component identified in Airworthiness Information (MCAI) EASA listing requirements for audit
paragraphs (g)(1) through (g)(5) of this AD on Airworthiness Directive 2015–0001R1, dated committees, enhanced requirements for
any airplane after doing the actions provided January 15, 2015, for related information. auditor communications with the audit
in paragraph (n)(2) of this AD. This MCAI may be found in the AD docket committee arising out of the rules of the
(2) For airplanes in post-Airbus- on the Internet at http://www.regulations.gov Public Company Accounting Oversight
Modification 27716 and post Airbus Service by searching for and locating Docket No. Board, and changes in practice, both
Bulletin A320–52–1100 configuration: As of FAA–2015–2458.
the effective date of this AD, no person may domestically and internationally.
(2) For service information identified in
install a component identified in paragraphs this AD, contact Airbus, Airworthiness DATES: Comments should be received on
(g)(1) through (g)(5) of this AD on any Office—EIAS, 1 Rond Point Maurice or before September 8, 2015.
srobinson on DSK5SPTVN1PROD with PROPOSALS
airplane. Bellonte, 31707 Blagnac Cedex, France; ADDRESSES: Comments may be
(3) For airplanes in pre-Airbus- telephone +33 5 61 93 36 96; fax +33 5 61 submitted by any of the following
Modification 155648 and pre-Airbus-Service- 93 44 51; email account.airworth-eas@
Bulletin A320–52–1165 configuration: No airbus.com; Internet http://www.airbus.com.
methods:
person may install a component identified in You may view this service information at the Electronic Comments
paragraphs (g)(1) through (g)(5) and (i)(1) FAA, Transport Airplane Directorate, 1601
through (i)(3) of this AD on any airplane after Lind Avenue SW., Renton, WA. For • Use the Commission’s Internet
doing the actions provided in paragraph information on the availability of this comment form (http://www.sec.gov/
(n)(3) of this AD. material at the FAA, call 425–227–1221. rules/concept.shtml); or
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![38996 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules
• Send an email to rule-comments@ D. Initiatives in Other Jurisdictions To issuing an audit report or performing
sec.gov. Please include File Number S7– Enhance Audit Committee Reporting other audit, review or attest services for
13–15 on the subject line; or E. References to PCAOB Auditing the issuer, and the independent auditor
Standards
• Use the Federal eRulemaking Portal V. Focus on Audit Committee Oversight of
reports directly to the audit committee.1
(http://www.regulations.gov). Follow the the Auditor
In addition, in connection with these
instructions for submitting comments. VI. Potential Changes to Disclosures oversight responsibilities, the audit
A. Audit Committee’s Oversight of the committee has ultimate authority to
Paper Comments approve all audit engagement fees and
Auditor
• Send paper comments to Secretary, 1. Additional Information Regarding the terms 2 and is responsible for resolving
Securities and Exchange Commission, Communications Between the Audit disagreements between management
100 F Street NE., Washington, DC Committee and the Auditor and the auditor regarding financial
20549–1090. 2. The Frequency With Which the Audit reporting.3
Committee Met With the Auditor Requirements for the audit
All submissions should refer to File 3. Review of and Discussion About the committee’s reporting to shareholders
Number S7–13–15. This file number Auditor’s Internal Quality Review and are principally contained in Item 407 of
should be included on the subject line Most Recent PCAOB Inspection Report
Regulation S–K,4 which have not
if email is used. To help us process and 4. Whether and How the Audit Committee
Assesses, Promotes and Reinforces the changed substantively since 1999. As a
review your comments more efficiently,
Auditor’s Objectivity and Professional result, some have expressed a view that
please use only one method. The
Skepticism the Commission’s disclosure rules do
Commission will post all comments on
B. Audit Committee’s Process for not provide investors with sufficient
the Commission’s Web site (http://
Appointing or Retaining the Auditor useful information regarding the role of
www.sec.gov/rules/concept.shtml). 1. How the Audit Committee Assessed the and responsibilities carried out by the
Comments also are available for Web Auditor, Including the Auditor’s audit committee in public companies.5
site viewing and printing in the Independence, Objectivity and Audit The audit committee has a vital role in
Commission’s Public Reference Room, Quality, and the Audit Committee’s oversight of auditors, and the
100 F Street NE., Washington, DC Rationale for Selecting or Retaining the
independent audits performed by those
20549, on official business days Auditor
2. If the Audit Committee Sought Requests auditors have long been recognized as
between the hours of 10:00 a.m. and important to credible and reliable
3:00 p.m. All comments received will be for Proposal for the Independent Audit,
the Process the Committee Undertook To financial reporting and the functioning
posted without change; we do not edit of our capital markets.6 The reporting of
Seek Such Proposals and the Factors
personal identifying information from They Considered in Selecting the additional information by the audit
submissions. You should submit only Auditor committee with respect to its oversight
information that you wish to make 3. The Board of Directors’ Policy, if any, for of the auditor may provide useful
publicly available. an Annual Shareholder Vote on the information to investors as they evaluate
FOR FURTHER INFORMATION CONTACT: Duc Selection of the Auditor, and the Audit the audit committee’s performance in
Dang, Special Counsel at (202) 551– Committee’s Consideration of the Voting
Results in its Evaluation and Selection of
3386; Jennifer McGowan, Professional the Audit Firm
1 See Section 10A(m) of the Securities Exchange
Accounting Fellow, at (202) 551–8736; Act of 1934 (the ‘‘Exchange Act’’) [15 U.S.C. 78j–
C. Qualifications of the Audit Firm and 1(m)]. As noted in Section II.B., audit committees
Kevin Stout, Senior Associate Chief Certain Members of the Engagement of listed issuers also have responsibilities with
Accountant, at (202) 551–5930, Office of Team Selected By the Audit Committee respect to the receipt, retention, and treatment of
the Chief Accountant; or Lindsay 1. Disclosures of Certain Individuals on the complaints regarding accounting, internal
McCord, Associate Chief Accountant, at Engagement Team accounting controls, or auditing matters, including
2. Audit Committee Input in Selecting the procedures for the confidential, anonymous
(202) 551–3417, Division of Corporation submission by employees of the issuer of concerns
Finance, Securities and Exchange Engagement Partner
regarding questionable accounting or auditing
Commission, 100 F Street NE., 3. The Number of Years the Auditor has matters.
Audited the Company
Washington, DC 20549. 4. Other Firms Involved in the Audit
2 See Release No. 34–47654, Standards Relating
to Listed Company Audit Committees (Apr. 9, 2003)
Table of Contents D. Location of Audit Committee [68 FR 18788].
Disclosures in Commission Filings 3 See Section 10A(m)(2) of the Exchange Act.
I. Introduction E. Smaller Reporting Companies and 4 17 CFR 229.407
II. Background Emerging Growth Companies 5 See Audit Committee Collaboration, ‘‘Enhancing
A. The Importance of Audit Committees VII. Additional Request for Comment the Audit Committee Report, A Call to Action,’’
B. The Impact of the Sarbanes-Oxley Act of Regarding Audit Committee Disclosures (Nov. 20, 2013), available at http://www.thecaq.org/
2002 and SRO Listing Standards on reports-and-publications/enhancing-the-audit-
Audit Committees I. Introduction committee-report-a-call-to-action (‘‘A Call to
III. Current Audit Committee Disclosure Action’’). This collaboration consisted of the
The Commission has a long history of following organizations: The National Association
Requirements
A. Audit Committee Report and Other promoting effective and independent of Corporate Directors, Corporate Board Member/
Disclosures About the Audit Committee audit committees. The role and NYSE Euronext, Tapestry Networks, the Directors’
responsibilities of audit committees Council, the Association of Audit Committee
B. Disclosure Requirements Regarding Members, Inc., and the Center for Audit Quality
Preapproval of Services and Auditor related to oversight of the independent (‘‘CAQ’’).
Fees auditor have evolved due to changes in 6 See Release No. 33–8177, Disclosure Required
C. Disclosure Requirements Regarding both the securities laws and the national by Sections 406 and 407 of the Sarbanes-Oxley Act
srobinson on DSK5SPTVN1PROD with PROPOSALS
Proposal To Ratify Selection of securities exchanges’ listing of 2002 (Jan. 23, 2003) [68 FR 5110] (acknowledging
Independent Auditors the audit committee’s vital role in financial
requirements related to audit reporting, public disclosure, and corporate
IV. Reasons To Seek Comment on the Audit committees. Today, the audit committee
Committee Reporting Requirements governance); and Release No. 34–14970, Proposed
A. Public Discussion of the Need for
of a listed issuer is directly responsible Rules Relating to Shareholder Communications,
for the appointment, compensation, Shareholder Participation in the Corporate
Updated Audit Committee Reporting Electoral Process and Corporate Governance
B. Divergence in Current Audit Committee retention and oversight of the work of Generally, (Jul. 18, 1978) [43FR 31945] (citing
Reporting Practice any registered public accounting firm Report to Congress on the Accounting Profession
C. PCAOB Standard-Setting Projects engaged for the purpose of preparing or and the Commission’s Oversight Role, Jul. 5, 1978).
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![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 38997
connection with, among other things, Financial Reporting, also known as the quality of the audit.16 For example,
their vote for or against directors who Treadway Commission,10 the General some studies note that audit committee
are members of the audit committee, the Accounting Office,11 and others.12 independence is associated with lower
ratification of the auditor, or their In 1998, the New York Stock incidences of earnings management 17
investment decisions. Exchange (the ‘‘NYSE’’) and the and internal control problems at those
Through this Concept Release, the National Association of Securities issuers benefitting from independent
Commission seeks public comment Dealers (the ‘‘NASD’’) sponsored the audit committees,18 while also shielding
regarding the audit committee’s Blue Ribbon Committee on Improving the external auditor from management’s
reporting requirements, with a focus on the Effectiveness of Corporate Audit influence.19
the audit committee’s reporting of its Committees (the ‘‘Blue Ribbon
responsibilities and activities with Committee’’). In its 1999 report, the B. The Impact of the Sarbanes-Oxley
respect to its oversight of the Blue Ribbon Committee recognized the Act of 2002 and SRO Listing Standards
independent auditor. This concept importance of audit committees and on Audit Committees
release is focused on the audit issued ten recommendations to improve
committee and auditor relationship, but In the early 2000’s, multiple
their effectiveness.13 In response to incidences of serious misconduct by
commenters may also provide views on these recommendations, the NYSE and
other aspects of audit committee corporate executives and independent
the NASD, among others, revised their auditors occurred in the financial
disclosures, such as those related to listing standards relating to audit
roles and responsibilities, audit markets raising concerns about the
committees,14 and the Commission integrity and reliability of financial
committee qualifications, oversight of adopted new rules requiring disclosure
financial reporting, or oversight of disclosures, and the adequacy of
relating to the functioning, governance regulation and oversight of the
internal control over financial reporting. and independence of corporate audit accounting profession. This highlighted
II. Background committees.15 the need for strong, competent, and
Academic literature suggests that vigilant audit committees. In response,
A. The Importance of Audit Committees
strong corporate governance, including the Sarbanes-Oxley Act of 2002 (the
The audit committee plays an the composition and actions of the audit ‘‘Sarbanes-Oxley Act’’) was enacted.20
important role in protecting the interests committee, has a positive effect on the Among other things, the Sarbanes-Oxley
of investors by assisting the board of
Act mandated a number of reforms to
directors in fulfilling its responsibility 10 The Treadway Commission was sponsored by
enhance corporate responsibility,
to oversee the integrity of a company’s the American Institute of Certified Public
accounting and financial reporting Accountants, the American Accounting
enhance financial disclosures, and
processes and both internal and external Association, the Financial Executives Institute (now combat corporate and accounting fraud.
audits. Since as early as 1940, the Financial Executives International), the Institute of The Sarbanes-Oxley Act also created a
Internal Auditors and the National Association of new regulatory and oversight regime for
Commission, along with the auditing Accountants (now Institute of Management
and corporate communities, has had a Accountants). Collectively, these groups were
auditors of public companies, including
continuing interest in promoting known as the Committee of Sponsoring the creation of the Public Company
effective and independent audit Organizations, or COSO. The Treadway Accounting Oversight Board (the
Commission’s report, the Report of the National ‘‘PCAOB’’), a nonprofit corporation, to
committees.7 Largely with the Commission on Fraudulent Financial Reporting
Commission’s encouragement,8 the (October 1987), is available at www.coso.org.
oversee the audits of public companies
national securities exchanges and 11 See e.g., U.S. General Accounting Office (now in order to protect the interests of
national securities associations (self- Government Accountability Office), ‘‘CPA Audit investors and further the public interest
regulatory organizations or ‘‘SROs’’) first
Quality: Status of Actions Taken to Improve in the preparation of informative,
Auditing and Financial Reporting of Public accurate, and independent audit
adopted audit committee requirements Companies,’’ at 5 (GAO/AFMD–89–38, March
in the 1970s.9 Since that time, there has 1989). The report is available at http://
been support for strong, independent www.gao.gov/products/AFMD-89-38. 16 Goh, B.W., Audit Committees, Boards of
12 See, e.g., Preliminary Report of the American Directors, and Remediation of Material Weaknesses
audit committees, including from the Bar Association Task Force on Corporate in Internal Control, 26 Contemporary Accounting
National Commission on Fraudulent Responsibility (July 16, 2002) reprinted in 58 Bus. Research 549 (2009); and Hoitash and Hoitash, The
Law. 189 (2002). Role of Audit Committees in Managing
7 In 1940, the Commission investigated the 13 See Blue Ribbon Committee on Improving the Relationships with External Auditors After SOX:
auditing practices followed by the auditors of Effectiveness of Corporate Audit Committees, Evidence from the USA, 24 Managerial Auditing
McKesson & Robbins, Inc., and the Commission’s Report and Recommendations of the Blue Ribbon Journal 368 (2009). The positive effects of audit
ensuing report prompted action on auditing Committee on Improving the Effectiveness of committee oversight are also illustrated in studies
procedures by the auditing community. In the Corporate Audit Committees, 54 The Business using data taken prior to the enactment of the
Matter of McKesson & Robbins, Accounting Series Lawyer, 1067 (1999). Sarbanes-Oxley Act of 2002 when important
Release (ASR) No. 19, Exchange Act Release No. 14 See, e.g., Release No. 34–42231, Order characteristics such as the composition and actions
2707 (Dec. 5, 1940). Approving Proposed Rule Change by the National of the audit committee were less uniform among
8 For example, in 1972, the Commission Association of Securities Dealers, Inc. Amending Its companies. See Klein, A., Audit Committee, Board
recommended that companies establish audit Audit Committee Requirements (Dec. 14, 1999) [64 of Director Characteristics, and Earnings
committees composed of outside directors. See ASR FR 71523]; Release No. 34–42233, Order Approving Management, 33 Journal of Accounting and
No. 123 (Mar. 23, 1972). In 1974 and 1978, the Proposed Rule Change by the New York Stock Economics, 375 (2002); Krishnan, J., Audit
Commission adopted rules requiring disclosures Exchange, Inc. Amending the Exchange’s Audit Committee Quality and Internal Control: An
about audit committees. See Release No. 34–11147, Committee Requirements (Dec. 14, 1999) [64 FR Empirical Analysis, 80 The Accounting Review, 649
Notice of Amendments to Require Increased 71529]; Release No. 34–42232, Order Approving (2005); and Carcello, J and Neal. T., Audit
srobinson on DSK5SPTVN1PROD with PROPOSALS
Disclosure of Relationships Between Registrants Proposed Rule Change by the American Stock Committee Composition and Auditor Reporting, 75
and Their Independent Public Accountants (Dec. Exchange LLC Amending the Exchange’s Audit The Accounting Review, 453 (2000).
17 Klein, A., Audit Committee, Board of Director
20, 1974) and Release No. 34–15384, Shareholder Committee Requirements (Dec. 14, 1999) [64 FR
Communications, Shareholder Participation in 71518]; and Release No. 34–43941, Order Characteristics, and Earnings Management.
18 Krishnan, J., Audit Committee Quality and
Corporate Electoral Process and Corporate Approving a Proposed Rule Change by the Pacific
Governance Generally (Dec. 6, 1978). Exchange, Inc. Relating to Audit Committee Internal Control: An Empirical Analysis.
9 See, e.g., Release No. 34–13346, In the Matter of Requirements for Listed Companies (Feb. 7, 2001) 19 Carcello, J. and Neal, T., Audit Committee
New York Stock Exchange, Inc. (Mar. 9, 1977) [42 [66 FR 10545]. Composition and Auditor Reporting.
FR 14793] (Commission order approving NYSE rule 15 See Release No. 34–42266, Audit Committee 20 Pub. L. 107–204, 116 Stat. 745 (2002); 15 U.S.C.
change related to the audit committee). Disclosure (Dec. 22, 1999) [64 FR 73389]. 7201 et seq.
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![38998 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules
reports.21 During this time, the regarding accounting, internal • an understanding of audit
Commission also adopted significant accounting controls, or auditing matters, committee functions.26
corporate disclosure and financial including procedures for the In addition to the listing requirements
reporting rules designed to improve the confidential, anonymous submission by related to audit committees, Rule 2–07
oversight and review processes of public employees of the issuer of concerns of Regulation S–X was adopted to
companies related to their financial and regarding questionable accounting or identify specific matters that auditors
other disclosures.22 auditing matters; are required to report to audit
The Sarbanes-Oxley Act amended the • each audit committee must have the committees.27 Rule 2–07 requires public
Exchange Act to define an audit authority to engage independent company auditors to report all critical
committee as ‘‘(A) a committee (or counsel and other advisors, as it accounting policies and practices, all
equivalent body) established by and determines necessary to carry out its alternative accounting treatments that
amongst the board of directors of an duties; and have been discussed with management,
issuer for the purpose of overseeing the • each issuer must provide and any other material written
accounting and financial reporting appropriate funding for the audit communications between the auditor
processes of the issuer and audits of the committee. and management.28
financial statements of the issuer; and The SROs also adopted additional
(B) if no such committee exists with listing requirements related to audit In the adopting release for Rule 2–07,
respect to an issuer, the entire board of committees and strengthened the the Commission referred to cautionary
directors of the issuer.’’ 23 The Sarbanes- independence requirements for audit advice it issued in December 2001
Oxley Act and the Commission’s related committee members.25 regarding the disclosure of those
implementation rules strengthened and Also, Item 407(d)(5) of Regulation S– accounting policies that management
expanded the role of the audit K, which was adopted to implement believes are most critical to the
committee in overseeing a company’s Section 407 of the Sarbanes-Oxley Act, preparation of the issuer’s financial
financial reporting process and defines the term ‘‘audit committee statements.29 These are often a subset of
independent auditor. financial expert.’’ This item requires the accounting policies described in the
For example, Exchange Act Rule 10A– issuers to disclose whether they have at issuer’s financial statements. The
3,24 which implemented Section least one audit committee member that cautionary advice indicated that
10A(m) of the Exchange Act, mandated satisfies that definition. The ‘‘critical’’ accounting policies are those
that SROs prohibit the listing of any Commission defines an audit committee that are both most important to the
security of an issuer that does not financial expert as a person who has: portrayal of the issuer’s financial
comply with certain requirements, • An understanding of generally condition and results and require
including: accepted accounting principles and management’s most difficult, subjective
• Each member of the audit financial statements; or complex judgments, often as a result
committee of the issuer must be • the ability to assess the general of the need to make estimates about the
independent according to specified application of such principles in effect of matters that are inherently
criteria; connection with the accounting for uncertain.30 As part of that release, the
• the audit committee of each issuer estimates, accruals and reserves; Commission also advised:
must be directly responsible for the • experience preparing, auditing, Prior to finalizing and filing annual
appointment, compensation, retention, analyzing or evaluating financial reports, audit committees should review the
and oversight of the work of any statements that present a breadth and selection, application and disclosure of
registered public accounting firm level of complexity of accounting issues critical accounting policies. Consistent with
engaged for the purpose of preparing or that are generally comparable to the auditing standards, audit committees should
issuing an audit report or performing breadth and complexity of issues that be apprised of the evaluative criteria used by
other audit, review, or attest services for management in their selection of the
can reasonably be expected to be raised
the issuer, and each such registered accounting principles and methods.
by the registrant’s financial statements,
Proactive discussions between the audit
public accounting firm must report or experience actively supervising one committee and the company’s senior
directly to the audit committee; or more persons engaged in such
• each audit committee must activities; 26 Item 407(d)(5)(ii) of Regulation S–K. Neither
establish procedures for the receipt, • an understanding of internal control the NYSE nor NASDAQ use the term audit
retention, and treatment of complaints over financial reporting; and committee financial expert. However, both
amended their listing standards to clarify that a
21 Section 101 of the Sarbanes-Oxley Act. 25 See Release No. 34–48745, NASD and NYSE member that satisfies the definition of an audit
22 See,e.g., Release No. 33–8124, Certification of committee financial expert would also satisfy their
Rulemaking: Relating to Corporate Governance
Disclosure in Companies’ Quarterly and Annual respective listing standards that require at least one
(Nov. 4, 2003); NYSE Listed Company Manual,
Reports (Aug. 28, 2002) [67 FR 57276]; Release No. audit committee member with accounting or related
Sections 303A.02 and 303A.07(a); and NASDAQ
34–47890, Improper Influence on Conduct of Audits financial management expertise. See Release No.
Listing Rules 5605(a)(2) and 5605(c)(2). For
(May, 20, 2003) [68 FR 31820]; Release No. 33– 34–48745.
example, the NYSE requires audit committees to, 27 See Release No. 34–47265, Strengthening the
8177, Disclosure Required by Sections 406 and 407 among other things: (i) At least annually obtain a
of the Sarbanes-Oxley Act of 2002 (Jan. 23, 2003) report from the independent auditor discussing Commission’s Requirements Regarding Auditor
[68 FR 5110]; Release No. 33–8182, Disclosure in certain quality control issues and relationships with Independence (Jan. 28, 2003) [68 FR 6005]; 17 CFR
Management’s Discussion and Analysis About Off- its client, (ii) meet with management and the 210.2–07.
Balance Sheet Arrangements and Aggregate independent auditor, as applicable, to discuss the
28 PCAOB standards also require certain auditor
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Contractual Obligations (Jan. 28, 2003) [68 FR company’s annual audited and quarterly unaudited communications with audit committees, as
5982]; Release No. 33–8183, Strengthening the financial statements, its press releases and public discussed in Section IV.E of this Release.
Commission’s Requirements Regarding Auditor earnings guidance, and its risk assessment and 29 See Release No. 34–47265.
Independence (Jan. 28, 2003) [68 FR 6006]; and management policies, (iii) meet separately, 30 See Release No. 33–8040, Cautionary Advice
Release No. 33–8212, Certification of Disclosure in periodically, with management, the internal Regarding Disclosure About Critical Accounting
Certain Exchange Act Reports (Mar. 21, 2003) [68 auditors, and the independent auditors, and (iv) Policies (Dec. 12, 2001) [66 FR 65013]. See, also,
FR 15600]. review with the independent auditor any audit Release No. 33–8350, Commission Guidance
23 See Section 3(a)(58) of the Exchange Act [15
problems or difficulties and management’s Regarding Management’s Discussion and Analysis
U.S.C. 78c(a)(58)]. response. See NYSE Listed Company Manual, of Financial Condition and Results of Operations
24 17 CFR 240.10A–3. Section 303A.07. (Dec. 19, 2003) [68 FR 75056].
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![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 38999
management and auditor about critical requirements for audit committees 36 • Whether or not the registrant has at
accounting policies are appropriate.31 predate the Sarbanes-Oxley Act and the least one audit committee financial
The way audit committees execute SRO listing standards, which expanded expert serving on its audit committee.42
their oversight of auditors has evolved the role of the audit committee in the If the audit committee has a charter,
since the Sarbanes-Oxley Act. For financial reporting process. the registrant should either disclose
instance, while the PCAOB does not Disclosure requirements for the audit where security holders may access a
have jurisdiction over audit committees, committee report are contained in Item current copy of the audit committee’s
it collects information through its 407 of Regulation S–K. The disclosure is charter or include a copy of the charter
inspection program that could be useful only required in the proxy or in an appendix to the registrant’s proxy
for audit committees in overseeing their information statement relating to a or information statement that is
companies’ auditors. Among other registrant’s annual meeting where provided to security holders at least
responsibilities, the PCAOB is required directors are elected or chosen by once every three fiscal years, or sooner
to inspect registered public accounting written consents.37 An audit committee if the charter has been materially
firms annually (for firms that regularly is required to make certain statements amended since the beginning of the
provide audit reports for more than 100 related to its responsibilities for registrant’s last fiscal year.43
issuers) or triennially (for firms that overseeing financial reporting, internal B. Disclosure Requirements Regarding
regularly provide audit reports for 100 control, and the audit. These statements Preapproval of Services and Auditor
or fewer issuers).32 Consistent with the include that the audit committee has: Fees
limitations of the Sarbanes-Oxley Act, • Reviewed and discussed the
the PCAOB makes certain information audited financial statements with The Sarbanes-Oxley Act also
available publicly, such as public management; enhanced the ability of audit
portions of inspection reports, • discussed with the independent committees to promote auditor
disciplinary sanctions, and information auditor the matters required by AU sec. independence. Section 202 of the
in annual and special reports filed by 380, Communication with Audit Sarbanes-Oxley Act added Section
audit firms. In addition, in part in Committees; 10A(i) of the Exchange Act, which gave
response to audit committee members’ • received the required written the audit committee responsibility to
requests, the PCAOB provides communications from the independent preapprove all audit and permissible
information to help audit committees accountant concerning independence, non-audit services provided by the
better understand the PCAOB as required by the rules of the PCAOB, independent auditor.44 In 2003, the
inspection process, including questions and has discussed with the independent Commission finalized its rules to
they may wish to ask their audit firms accountant his or her independence; implement Section 10A(i) of the
to better understand and assess the and Exchange Act.45 Under the rules, the
firm’s inspection results and evaluate • recommended to the board of audit committee is required to
audit quality.33 The PCAOB also directors that the audited financial preapprove all permissible non-audit
includes an executive summary for its statements be included in the services and all audit, review, or attest
general inspection reports and provides company’s annual report on Form 10–K engagements required under the
insights within Staff Audit Practice (or other form of annual report) for the securities laws. Additionally, the issuer
Alerts to further assist audit committee must provide disclosure of the audit
last fiscal year for filing with the
oversight of the auditor.34 committee’s preapproval policies and
Commission.38
procedures in proxy statements related
III. Current Audit Committee The name of each member of the
to the election of directors or the
Disclosure Requirements company’s audit committee must appear
ratification of the independent public
below these required disclosures.
A. Audit Committee Report and Other accountant.46
Item 407 also requires disclosure of Concurrently, the Commission
Disclosures About the Audit Committee whether the audit committee members adopted rules that changed both the
In 1999, following the are independent, the number of types of fees paid to the independent
recommendations from the Blue Ribbon meetings held, and certain information auditor that must be described and the
Committee’s report, the Commission about member attendance at these number of years for which the
adopted new rules to improve meetings, in addition to the following: disclosures must be provided.47 As a
disclosure relating to the functioning, • Whether or not the audit committee
result, an issuer is required to disclose
governance and independence of audit has a charter; 39
the fees paid to its independent auditor
committees and to enhance the • The circumstances surrounding any
for each of the two most recent fiscal
credibility of financial statements of appointment of a director to the audit
years, separated into the following four
public companies.35 These reporting committee who is not independent; 40
categories: (1) Audit Fees, (2) Audit-
• Whether there is a separately-
Related Fees, (3) Tax Fees, and (4) All
31 Release No. 33–8040. designated standing audit committee or
Other Fees.48 Additionally, registrants
32 Section 104 of the Sarbanes-Oxley Act. a committee performing similar
are required to describe the nature of the
33 See http://pcaobus.org/Inspections/ functions, and the identity of each
Documents/Inspection_Information_for_Audit_ services provided that are categorized as
member of such committee; 41 and
Committees.pdf. Audit-Related Fees and All Other Fees.
34 See, e.g. http://pcaobus.org/Inspections/
36 Audit committee reports are currently reported
The registrant is also required to
Documents/Executive_Summary_02252013_
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by issuers pursuant to the disclosure requirements
Release_2013_001.pdf, http://pcaobus.org/ 42 See Item 407(d)(5) of Regulation S–K.
of Regulation S–K and closed-end investment
Standards/QandA/10-24-2013_SAPA_11.pdf at 36
companies through the proxy statement 43 See Item 407(d)(1) of Regulation S–K.
and http://pcaobus.org/Standards/QandA/9-9-14_
requirements of Item 22(b)(16) of Schedule 14A. 44 Section 202 of the Sarbanes-Oxley Act; 15
SAPA_12.pdf at page 33. 37 See Instruction 3 to Item 407(d) of Regulation
35 See, e.g., Release No. 34–42266 (stating that U.S.C. 78j–1(i)(1)(A).
S–K. 45 See Release No. 34–47265.
additional disclosures about a company’s audit 38 See Item 407(d)(3) of Regulation S–K. 46 See Item 9(e)(5) of Schedule 14A [17 CFR
committee and its interaction with the company’s
39 See Item 407(d)(1) of Regulation S–K. 240.14a–101].
auditors and management will promote investor
40 See Item 407(d)(2) of Regulation S–K. 47 See Release No. 34–47265.
confidence in the integrity of the financial reporting
process). 41 See Item 407(d)(4) of Regulation S–K. 48 See Item 9(e) of Schedule 14A.
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![39000 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules
disclose the percentage of services in executes its responsibilities. The ways A. Public Discussion of the Need for
the Audit-Related Fees, Tax Fees, and in which an audit committee discharges Updated Audit Committee Reporting
All Other Fees captions that were its responsibilities can be influenced by Investors, organizations representing
approved by the audit committee its composition and the environment in audit committee members, and auditors
pursuant to its preapproval policies and which it operates. As discussed below, are among those that have expressed the
procedures.49 the fact that a significant number of need for audit committees to evaluate
audit committees voluntarily provide their disclosures and consider whether
C. Disclosure Requirements Regarding information beyond the disclosures
Proposal To Ratify Selection of improvements can be made to provide
required by our current rules raises a investors with relevant information that
Independent Auditors question of whether there may be more transparently conveys the
While the audit committees of listed market demand for such information.52 oversight responsibilities performed by
issuers are required to appoint the Similarly, during a series of roundtables the audit committee relative to an
issuer’s auditors, many issuers solicit attended by audit committee members issuer’s auditor. For example, a group of
the approval or ratification of the from various jurisdictions, participants corporate governance and policy
independent auditors from stated that investors and other organizations has expressed the view
shareholders.50 If such a proposal is stakeholders have requested greater that public company audit committee
solicited, the issuer must provide the transparency about audit committee reporting can and should be
information required by Item 9 of activities.53 However, there appears to strengthened.55 At a meeting in June of
Schedule 14A. Specifically, in addition be limited research as to why some 2013, several delegates from the Audit
to the fee information and preapproval companies provide voluntary disclosure Committee Chair Advisory Council
policies noted above, shareholders of regarding audit committee activities and acknowledged that ‘‘[f]rankly, we don’t
listed issuers must receive disclosure of whether and how such additional do a good job of communicating what
the following: information impacts investors’ we do. The public doesn’t see all the
• The name of the auditor selected or investment or voting decisions. For work we do, quarter after quarter.’’ 56
being recommended for the current instance, variability in the nature and Investors have also increased their
year; extent of current voluntary disclosures focus on the activities and transparency
• the auditor for the most recently could, to some extent, be the result of of audit committees, including those
completed fiscal year, if different from tailoring the disclosures to a company’s activities related to enhancing audit
the one subject to the ratification; facts and circumstances. quality through oversight of the
• whether a representative from the Providing additional disclosure about independent auditor. Some investors
auditor’s firm will be present at the the audit committee’s oversight of the have sought greater disclosure from
meeting, will have the opportunity to independent auditor could further audit committees of a number of public
make a statement, and be available to inform investors about the oversight companies about matters such as the
respond to questions; and process and provide them with useful responsibility of the audit committee for
• information regarding dismissed or context for audit committee decisions. It the appointment, compensation, and
resigned auditors as required by Item may also enable investors to oversight of the external auditor; audit
304(a) of Regulation S–K.51 differentiate between companies based firm tenure; audit firm fee
The rules do not require issuers to on the quality of audit committee determinations; and audit committee
provide information about the audit oversight, and determine whether such involvement in the selection of the audit
committee’s process and reasons that differences in quality of oversight may engagement partner.57 Institutional
lead to the selection of the independent contribute to differences in performance investor groups have called for
auditor subject to the ratification or quality of financial reporting among additional audit committee disclosures
solicitation. companies. Therefore, the Commission as part of their published ‘‘good
is seeking feedback to better understand corporate governance policies.’’ 58
IV. Reasons To Seek Comment on the whether additional audit committee
Audit Committee Reporting reporting requirements related to
Requirements company, such as a reporting failure, have a direct
oversight of the auditor would be useful impact on turnover of audit committee members,
While current audit committee to investors and if so, what information while negative disclosures alone about audit
reporting requirements provide committee members appear to have limited or
would be useful.54 mixed impact on member turnover. See
information about the role of the audit Kachelmeier, S. et al., Why Do Ineffective Audit
committee with respect to its oversight 52 See CAQ and Audit Analytics, ‘‘2014 Audit
Committee Members Experience Turnover?
of the auditor, these disclosures do not Committee Transparency Barometer,’’ (Dec. 2, (September 18, 2013), available at http://ssrn.com/
2014), available at http://www.thecaq.org/docs/ abstract=1920850.
describe how the audit committee reports-and-publications/2014-audit-committee- 55 See A Call to Action supra note 2.
transparency-barometer.pdf?sfvrsn=2 (‘‘Audit 56 Id. at 7, (quoting National Association of
49 Id. Committee Transparency Barometer’’). In addition, Corporate Directors (‘‘NACD’’) Summary of
50 See Ernst & Young, ‘‘Audit Committee a report based on a 2014 review of proxy Proceedings, Audit Committee Chair Advisory
Reporting to Shareholders: Going Beyond the disclosures of Fortune 100 companies noted an Council, at 6 (June 19, 2013), available at http://
Minimum,’’ (Feb. 2013), available at http:// upward trend in voluntary disclosures by audit www.nacdonline.org/Resources/Article.cfm?
www.ey.com/Publication/vwLUAssets/Audit_ committees since 2012. See also Ernst & Young, ItemNumber=7284). The Audit Committee Chair
committee_reporting_to_shareholders%3A_going_ ‘‘Let’s Talk: Governance—Audit Committee Advisory Council is a group of audit committee
beyond_the_minimum/%24FILE/Audit_committee_ Reporting to Shareholders 2014 Proxy Season chairs, shareholder representatives, regulators and
reporting_CF0039.pdf (noting that more than 90 Update,’’ (Aug. 2014). other stakeholders that discuss ways to improve
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percent of Fortune 100 companies seek annual 53 See Federation of European Accountants, the communications between corporations and
shareholder ratification of the auditor chosen by the Institute of Chartered Accountants Australia and stakeholders, improve audit committee practices,
audit committee); Ernst & Young, ‘‘Let’s Talk: the CAQ, ‘‘Global Observations on the Role of the and give voice to audit committee members.
Governance—Audit Committee Reporting to Audit Committee,’’ (May 13, 2013), available at 57 See A Call to Action at 6 (describing investors’
Shareholders 2014 Proxy Season Update,’’ (Aug. http://www.thecaq.org/docs/reports-and- increasing interest and focus on the audit
2014), available at http://www.ey.com/Publication/ publications/globalobservationsontheroleofthe committee).
vwLUAssets/ey-lets-talk-governance-august-2014/ auditcommittee.pdf?sfvrsn=2 (‘‘Global 58 See, e.g., Council of Institutional Investors,
$FILE/ey-lets-talk-governance-august-2014.pdf. Observations’’). Policies on Corporate Governance, Section 2.13
51 Item 9 of Schedule 14A (referring to Item 304(a) 54 For example, an academic paper indicates that (updated Sept. 27, 2013), available at http://
of Regulation S–K [17 CFR 229.304(a)]). events that negatively impact the image of a www.cii.org/corp_gov_policies#BOD.
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![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 39001
Internationally, there appears to be • 47% of S&P 500, 42% of S&P participation of other independent
interest in improving the MidCap, and 50% of S&P SmallCap public accounting firms that took part in
communication coming from audit companies disclosed the length of time the audit and the locations and extent
committees. For example, one of the an auditor has been engaged; of participation of other persons not
themes that emerged at a 2013 summit • 13% of S&P 500, 10% of S&P employed by the auditor that took part
hosted by the members of the Audit MidCap, and 8% of S&P SmallCap in the audit.67
Committee Leadership Networks in companies discussed the audit Some investors have indicated that
North America and Europe was the committee’s considerations of the engagement partner’s track record
recognition that ‘‘[r]egulators, policy- qualifications, geographic reach, and compiled from the disclosure of the
makers, and many investors would firm expertise when appointing the partner’s name would be relevant in
benefit from a more robust auditor; ‘‘overseeing the audit committees and
understanding of what the public • 8% of S&P 500, 7% of S&P MidCap, determining how to cast votes on more
company audit committee does and how and 15% of S&P SmallCap companies than two thousand proposals that are
it oversees the external audit firm and discussed the criteria considered when presented annually to shareholders on
performs its other responsibilities.’’ 59 evaluating the audit firm; whether to ratify the board’s choice of
Some audit committee members, • 3% of S&P 500, 2% of S&P MidCap, outside auditor.’’ 68 Audit firms and
however, see additional reporting as and 1% of S&P SmallCap companies other commenters questioned whether
possibly contributing to a state of disclosed the significant areas addressed the auditor’s report is the most
‘‘disclosure overload.’’ 60 Some are also with the auditor; appropriate place to provide this
skeptical whether additional reporting • 13% of S&P 500 and 1% of both information, for example, due to
would be helpful to ‘‘stakeholders,’’ ‘‘in S&P MidCap and S&P SmallCap potential liability concerns.69 As a
light of a lack of interest in audit companies included an explicit
committee reporting currently statement that the audit committee is 67 See PCAOB Release No. 2013–009, Improving
required.’’ 61 Others have suggested the involved in the selection of the audit Transparency Through Disclosure of Engagement
Partner and Certain Other Participants in Audits
need for principles-based reporting to engagement partner; and (Dec. 4, 2013), available at http://pcaobus.org/
allow for flexibility and to avoid a ‘‘one • 13% of S&P 500, 4% of S&P Rules/Rulemaking/Pages/Docket029.aspx. Similar
size fits all’’ approach.62 Given these MidCap and 1% of S&P SmallCap requirements exist in other jurisdictions, including
varied views on the usefulness and companies discussed audit fees and but not limited to, the European Union, United
Kingdom, Australia, Sweden, China, and Taiwan.
relevance of audit committee their connection to audit quality.64 Academic research has supported that, in at least
disclosures, the Commission is seeking These additional disclosures are these particular jurisdictions, information about
input on whether and how additional voluntary, not consistently provided individual audit partners, over and above
reporting may be useful to investors. and may vary among registrants, information about the audit firm, is relevant to
financial statement users for both public and
depending on company private firms. See Carcello, J. and C. Li., Cost and
B. Divergence in Current Audit
characteristics.65 Some audit Benefits of Requiring an Engagement Partner
Committee Reporting Practice
committees may disclose only what is Signature: Recent Experience in the United
Some issuers, including their audit specifically required, for a variety of Kingdom, 88 The Accounting Review, 1511 (2013);
committees, already provide disclosures Aobdia, D. et al., Capital Market Consequences of
reasons, for instance, to avoid legal Individual Audit Partners, The Accounting Review,
that go beyond the required exposure,66 to avoid incremental (forthcoming) available at http://papers.ssrn.com/
disclosures.63 For example, a report by associated efforts of the disclosure sol3/papers.cfm?abstract_id=2321333 (discussing
the CAQ and Audit Analytics reviewing process, or because they do not believe Taiwan’s mandate regarding disclosure of
the 2014 proxy disclosures of 1,500 individual audit partners); Knechel, R. et al., Does
such additional information would be the Identity of Engagement Partners Matter? An
Standard & Poor’s (‘‘S&P’’) composite useful to investors. Analysis of Audit Partner Reporting Decisions,
companies, including the S&P 500 Contemporary Accounting Research, (forthcoming)
(‘‘S&P 500’’) companies, the S&P C. PCAOB Standard-Setting Projects available at https://www.caaa.ca/_files/
MidCap 400 (‘‘S&P MidCap’’) file.php?fileid=filerSDAxJgThx&filename=file_
The PCAOB is engaged in standard- Knechel__Vanstraelen__Zerni__Does_the_Identity_
companies, and the S&P SmallCap 600 setting initiatives that could result in of_Engagement_Partners_Matter.pdf (discussing
(‘‘S&P SmallCap’’) companies noted the additional information being disclosed Sweden’s disclosure requirement); Gul, F.A. et al.,
following: related to the auditor and its work. One Do Individual Auditors Affect Audit Quality?
• 83% of S&P 500, 69% of S&P project has been exploring a
Evidence From Archival Data, 88 The Accounting
Review, 1993 (2013) (discussing China’s disclosure
MidCap, and 58% of S&P SmallCap requirement that the auditor disclose, in requirement); and The Association of Chartered
companies discussed how non-audit the auditor’s report, the name of the Certified Accountants and Macquarie University,
services may impact auditor engagement partner as well as the The Drivers of Audit Quality: Views From
independence; Australian CFOs, (2014), available at http://
names, locations, and extent of www.accaglobal.com/content/dam/acca/global/
PDF-technical/audit-publications/pol-tp-daq1(cfo)-
59 See A Call to Action at 7, (citing Tapestry 64 See
Audit Committee Transparency Barometer. drivers-audit-quality.pdf.
Networks, ViewPoints, Issue 22, p.1 (May 2, 2013), 65 Accordingto the observations of an accounting 68 See, Reproposed Rule Comment Letter of the
available at http://www.tapestrynetworks.com/ firm, variability in reporting may also be the result Council of Institutional Investors (Aug. 15, 2014),
initiatives/corporate-governance/global-audit- of, among other things, differences in regulatory available at http://pcaobus.org/Rules/Rulemaking/
committee-leadership-networks/upload/Tapestry_ and listing requirements across jurisdictions and Pages/Docket029Comments.aspx.
EY_ACLS_Summit_View22-May13.pdf). interest by investors and others for disclosures that 69 Some commenters voiced the concern, for
60 See Global Observations at 7; See also Center
go beyond the minimum. See Ernst & Young, example, that the PCAOB’s December 2013
for Capital Markets Competitiveness, Corporate ‘‘Enhancing audit committee transparency: Themes reproposal on disclosure of the engagement partner
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Disclosure Effectiveness: Ensuring a Balanced in audit committee disclosures in Australia, and other participants in the audit may lead to the
System that Informs and Protects Investors and Canada, Singapore, the UK and the US’’ (Mar. engagement partner and other participants (other
Facilitates Capital Formation, (Jul. 28, 2014), 2015), available at http://www.ey.com/Publication/ independent public accounting firms and other
available at http:// vwLUAssets/EY-Enhanced-audit-committee- persons not employed by the auditor) being deemed
www.centerforcapitalmarkets.com/wp-content/ transparency-themes-in-audit-committee- experts for purposes of liability under Section 11
uploads/2014/07/CCMC_Disclosure_Reform_Final_ disclosures/$FILE/EY-Enhanced-audit-committee- of the Securities Act of 1933 (‘‘Securities Act’’). See,
7-28-20141.pdf. transparency-themes-in-audit-committee- e.g., Reproposed Rule Comment Letters of Deloitte
61 Id.
disclosures.pdf. & Touche LLP (Feb. 3, 2014),
62 Id. 66 See NACD Summary of Proceedings, Audit PricewaterhouseCoopers LLP (Feb 4, 2014), Ernst &
63 See, e.g., A Call to Action at 7. Committee Chair Advisory Council, (June 19, 2013). Continued
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![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 39003
to the required audit committee Request for Comment compensation, retention, and oversight
communications by the auditor, among 1. Do the current audit committee of the work of the registered public
others, were incorporated within reporting requirements result in accounting firm and better inform
PCAOB auditing standards and disclosures that provide investors with investors about how the audit
superseded the prior communication useful information? Why or why not? committee executes those
requirements in AU sec. 380.81 As a Are there changes to the current audit responsibilities. The Commission is
result, Item 407(d) of Regulation S–K is committee disclosure requirements that seeking feedback on the content and
no longer current because it references the Commission should consider that scope of the audit committee
AU sec. 380. In addition to this outdated would better inform investors about the disclosures, as well as commenters’
reference, there are required audit committee’s oversight of the audit views on which of these disclosures, if
communications in other PCAOB and the independent auditor? any, would be most useful in conveying
standards that are not reflected in 2. Are there existing disclosure how the audit committee executes its
current audit committee disclosure requirements in this area that should be oversight of the auditor and whether
requirements.82 Moreover, the existing revised, reconsidered or removed? If so, such enhanced disclosures would be
audit committee report does not address which ones? How and why should they
the Commission’s communication useful to investors’ investment or voting
be changed? decisions.
requirements in Rule 2–07 of Regulation 3. Would investors find additional or
S–X. different audit committee reporting Such disclosures could provide
The change to the communication requirements useful given the information that frequently is either not
requirements within the auditing committee’s strengthened and expanded readily available or inconsistently
standards without a corresponding role in overseeing a company’s available today to investors. These
change in the audit committee reporting independent auditor that resulted from disclosures could also minimize the
requirements has resulted in divergent the Sarbanes-Oxley Act? For example, to ‘‘expectations gap’’ that some have
practices. For example, some what extent is information regarding expressed exists between investors and
companies’ audit committee reports how the audit committee discharges its the audit committee regarding the role
refer to matters required to be responsibilities useful to investors given of the audit committee.83 In a series of
communicated under AS 16; others refer the nature of the requirements and roundtables organized by the CAQ, the
to matters required to be communicated likely variability in performance? Also, Federation of European Accountants,
under all PCAOB standards. Still others are there particular audit committee and the Institute of Chartered
continue to refer to communications responsibilities for which information Accountants Australia in January and
under AU sec. 380, even though AU sec. would be likely more or less useful and February of 2013, participants noted
380 has been superseded. These why? that stakeholders’ expectations are not
differences in reporting may result in 4. What, if any, are potential consistent with the audit committee’s
confusion among readers of the audit challenges that issuers or audit actual responsibilities and how they are
committee reports as to whether committees may face that the discharged, which results in the current
appropriate auditor and audit Commission should consider as it expectations gap.84
committee communications have assesses potential changes to disclosures
occurred and therefore, suggest a need in this area? For purposes of this concept release,
to consider updating the audit 5. Are there other areas where the Commission has categorized the
committee disclosure requirements. changes to the current audit committee specific audit committee disclosures
disclosure requirements would be about which the Commission is
V. Focus on Audit Committee Oversight interested in receiving comment into
of the Auditor desirable? If so, what are they?
6. Should the audit committee three groups: the audit committee’s
The Commission is interested in provide disclosure of its work in other oversight of the auditor, the audit
understanding whether changes should areas, for example, its oversight of the committee’s process for selecting the
be made to required disclosures about financial reporting process or the auditor, and the audit committee’s
audit committees regarding oversight of internal audit function? If so, what types consideration of the qualifications of the
the audit and the auditor relationship. of disclosures would be most useful and audit firm and certain members of the
The Commission is also interested in why? engagement team when selecting the
understanding whether this additional VI. Potential Changes to Disclosures audit firm. The Commission is also
information would help inform interested in receiving comments on
investment decisions and, where The Commission is seeking comment where the audit committee disclosures
applicable, voting decisions regarding on potential changes to required should be located and whether there are
the ratification of auditors and the disclosures regarding an audit specific concerns relating to smaller
election of directors who are members committee’s role and responsibilities reporting companies 85 and emerging
of the audit committee. relative to the audit and the auditor, and
growth companies.86 In Section VII of
other potential related changes. The
this release, the Commission also asks
81 See Release No. 34–68453, Public Company Commission is seeking feedback on the
disclosure requirements to determine more general questions with respect to
Accounting Oversight Board; Order Granting
Approval of Proposed Rules on Auditing Standard the extent to which adding, removing, any potential new disclosures.
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No. 16, Communications with Audit Committees, or modifying certain audit committee
and Related and Transitional Amendments to
PCAOB Standards (Dec. 17, 2012) [77 FR 75689]. disclosures would enhance the 83 See Global Observations.
82 Appendix B to AS 16 identifies other PCAOB usefulness of such disclosures for 84 Id.
rules and standards that require audit committee investors. 85 See Rule 12b–2 of the Exchange Act [17 CFR
communications, such as communications related The purpose of the disclosures
to an audit of internal control over financial 240.12b–2].
reporting that is integrated with an audit of
discussed below would be to address 86 See Section 2(a)(19) of the Securities Act [15
financial statements, related party transactions, the audit committee’s responsibilities U.S.C. 77b(a)(19)] and Section 3(a)(80) of the
fraud considerations, and illegal acts, among others. with respect to the appointment, Exchange Act [15 U.S.C. 78c(a)(80)].
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![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 39005
additional insight into the audit PCAOB inspection.’’ 93 The PCAOB also disclosures about the nature and extent
committee’s oversight of the auditor. has provided sample questions an audit of such discussions be useful without
committee may wish to ask auditors. disclosure of the specific review or
Request for Comment
Specifically, the PCAOB stated: inspection results? Should the
18. Should there be additional [W]ithout necessarily framing discussions disclosures include information about
disclosures required about the meetings in terms of an inspection or an inspection how the audit committee considered
the audit committee has had with the report, an audit committee might benefit any deficiencies described in the
auditor? If so, what type of disclosures from having an understanding with its audit PCAOB inspection report on the audit
should be made and why? If not, why firm through which the audit committee process? If not, why not?
receives timely information (both during the
not? conduct of the inspection and when the 21. Is there a risk that the
19. Should the audit committee report Board has issued a final inspection report) confidentiality of the nonpublic PCAOB
disclose the frequency with which it about— inspection results could be undermined
met privately with the auditor? Would • whether anything has come to the firm’s (e.g., if this information is sought and
confirmation that private conversations attention suggesting the possibility that an
audit opinion on the company’s financial
provided through the audit committee)?
occurred be useful disclosure even if If so, what type of information could be
statements is not sufficiently supported, or
there are no disclosures about the topics otherwise reflecting negatively on the firm’s presented that might be problematic?
discussed? Should there be a performance on the audit, and what if
requirement to disclose the topics 22. Should we require disclosure
anything the firm has done or plans to do
discussed? about it;
about how the audit committee
• whether a question has been raised about considered the results described in
3. Review of and Discussion About the the fairness of the financial statements or the PCAOB inspection reports in its
Auditor’s Internal Quality Review and adequacy of the disclosures; oversight of the auditor? Why or why
Most Recent PCAOB Inspection Report • whether a question has been raised about not?
the auditor’s independence relative to the
Pursuant to certain listing company; 23. Are there particular issues or
requirements, the audit committee must • whether any of the matters described in challenges in this area that should be
obtain and review a report by the the public portion of an inspection report on considered? If so, please describe and
independent auditor describing the the firm, whether or not they involve the provide data.
firm’s internal quality-control company’s audit, involve issues and audit
approaches similar to those that arise or 4. Whether and How the Audit
procedures,91 any material issues raised
could arise in the audit of the company’s Committee Assesses, Promotes and
by the most recent internal quality-
control review, or peer review, of the
financial statements; Reinforces the Auditor’s Objectivity and
• to the extent any such similarity exists, Professional Skepticism
firm, or by any inquiry or investigation whether and how the firm has become
by governmental or professional comfortable that the same or similar Through its interactions with the
authorities, within the preceding five deficiencies either did not occur in the audit auditor, the audit committee may be in
years, with respect to one or more of the company’s financial statements or have a position to assess, promote, and
independent audits carried out by the been remedied; and how issues described by
reinforce the auditor’s objectivity and
firm.92 Audit committees not subject to the Board in general reports summarizing
inspection results across groups of firms professional skepticism. Heightened
these listing standards may choose to oversight by the audit committee of the
request or discuss this information with relate to the firm’s practices, and potentially
the audit of the company’s financial auditor’s objectivity and professional
their auditors, but they are not required statements, and how the firm is addressing skepticism should promote greater audit
to do so. those issues.94 quality. The audit committee could
Information about the results of Disclosure could be required as to disclose whether, and if so how, as part
internal quality reviews, or a PCAOB whether this type of discussion has of its oversight of the auditor, it
inspection of a company’s audit, as well occurred. There also could be disclosure assesses, promotes, or reinforces the
as more general inspection results, can required about the nature of any auditor’s objectivity and professional
help an audit committee in carrying out discussions held with the auditor about skepticism. Additionally, the audit
its oversight role. Inspection reports can the results of the firm’s internal quality committee could disclose the results of
inform an audit committee about how review and most recent PCAOB its evaluation of the auditor’s objectivity
its auditor performed in high-risk areas inspection. These disclosures may and professional skepticism.
across audits. As the PCAOB has stated, provide transparency with respect to the
‘‘[t]he [Sarbanes-Oxley] Act does not extent of the audit committee’s Request for Comment
permit the [PCAOB] to make public, or oversight of the auditor.
otherwise to share with an audit 24. Would investors find disclosure
committee, all of the information Request for Comment about whether, and if so how, the audit
obtained by the PCAOB that could assist committee assesses, promotes, and
20. Would disclosure about the audit
an audit committee in carrying out its reinforces the auditor’s objectivity and
committee’s review and discussion of
role. . . . Beyond the public portion of professional skepticism useful? Why or
the audit firm’s internal quality-control
an inspection report, voluntary review and most recent PCAOB why not?
disclosure by the inspected audit firm is inspection report be useful to investors? 25. What specific types of disclosures
srobinson on DSK5SPTVN1PROD with PROPOSALS
an audit committee’s only means of If so, what types of disclosures should could the audit committee make in this
obtaining information concerning a be made in this regard? Would regard? For example, should the audit
committee disclose whether, and if so
91 Paragraphs .04–.07 of PCAOB QC Section 30, 93 See PCAOB Release No. 2012–003, Information how, it evaluated the auditor’s
Monitoring a CPA Firms Accounting and Auditing for Audit Committees about the PCAOB Inspection objectivity and professional skepticism,
Practice, discuss the requirements related to an Process (Aug. 1, 2012), available at http://
audit firm’s internal quality-control review. pcaobus.org/Inspections/Documents/Inspection_ as well as the results of such an
92 See NYSE Listed Company Manual, Section Information_for_Audit_Committees.pdf. evaluation? Commenters are encouraged
303A.07(b)(iii)(A). 94 Id. at p. 10–11. to provide examples of such disclosures.
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![Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 39009
Request for Comment adopted, apply to smaller reporting needed, and should they be required or
50. Would investors benefit from the companies or emerging growth discretionary?
audit committee disclosures being companies? If so, which requirements 63. If the Commission were to proceed
presented in one location? If so, where and why? If not, why not? Would with requiring some or all of the
should the disclosures appear and how different disclosure requirements disclosures proposed above, should the
would investors benefit? If not, why is impact the issuers (e.g., secondary disclosures be made by all issuers? For
the existing location of the various audit market liquidity)? example, should the disclosures be
committee disclosures appropriate? required only for those subject to the
VII. Additional Request for Comment proxy rules? Should they be required for
51. Should all or any of the audit Regarding Audit Committee Disclosures
committee disclosures, including the foreign private issuers? 112 Why or why
audit committee report, be included in In addition to seeking public not? Should there be accommodations
registration statements filed pursuant to comment on the foregoing topics for made for certain types of companies or
the Securities Act? If not, why not? If so, disclosure, the Commission seeks public certain circumstances? If so, what
why and should the disclosure comment in response to the following should they be?
requirements be included within questions about the disclosures as a 64. If the Commission proceeds with
Securities Act registration statement whole. If views of these questions requiring some or all of the disclosures
forms or as a Form 10–K disclosure would differ based on what type of proposed above, should there be a
requirement that may then be disclosure is being considered, please requirement to update these disclosures
incorporated by reference into differentiate and explain why. for changes between proxy or
Securities Act registration statements? information statements? If so, what
Request for Comment
52. With respect to the additional should trigger amended disclosures?
disclosures discussed in this release, 55. Should additional disclosures, Should any such updates be made
where should they be made? If required, such as those presented in Section VI, quarterly or more frequently?
should they be in the audit committee be required, or should they be voluntary 65. If the Commission proceeds with
report, a separate section of the proxy as they are today? Should the requiring some or all of the disclosures
statement, the annual report, on the Commission consider requiring specific discussed above, should the disclosures
company’s Web site, or elsewhere? disclosures, or requiring certain be required to be provided in an
Please provide an explanation as to why categories of disclosures? If so, which interactive data format? If so, what
the disclosure should be made in a categories? elements of disclosure should be
suggested location. If required, should 56. Are there specific issuer, industry, provided in that manner and in what
the disclosure be furnished but not audit committee member, or auditor format should the information be
filed? Why or why not? characteristics that should be provided?
considered in establishing new 66. The audit committee disclosure
E. Smaller Reporting Companies and requirements may reference other
Emerging Growth Companies disclosure requirements? Are there
particular disclosures that should documents, such as an audit committee
Item 407(g) of Regulation S–K always be required and, if so, which? charter. Should such documents be
provides the only audit committee Are there particular disclosures that provided along with the required
disclosure accommodation within Item should only be required if certain disclosures? If not, should information
407 that is specific to smaller reporting conditions or characteristics are present be provided to help locate the
companies.110 The Jumpstart Our and, if so, which disclosures and under information referenced? Why or why
Business Start-Ups Act (the ‘‘JOBS what circumstances? Are there not? Should information be
Act’’) 111 did not change the audit particular disclosures for which hyperlinked? If so, are there any
committee disclosure requirements for specificity in the requirement is unintended consequences or
emerging growth companies. As such, important and, if so, for which implementation challenges that may
the Commission is soliciting feedback disclosures and elements of disclosures result from information being presented
regarding the application of the current should the requirements be specific? in this manner?
and potential audit committee 57. Would the disclosures prompt the 67. If the Commission proceeds with
disclosure requirements to smaller audit committee to change how it requiring some or all of the disclosures
reporting companies and emerging oversees the auditor? If so, how? proposed above, under existing
growth companies. 58. Would such disclosures provide reporting deadlines, would there be
Request for Comment insight into the nature, timing, and sufficient time to prepare these
extent of the audit committee’s disclosures? Would there be difficulties
53. Should current audit committee in making these disclosures?
disclosure requirements be changed for oversight of the auditor?
59. Would the disclosures promote 68. Would the additional disclosures
smaller reporting companies or discussed above help minimize
emerging growth companies? If so, audit quality? If so, how?
60. Would the disclosures discussed information asymmetries that may exist
which requirements and why? Would between management and investors? If
investors in smaller reporting herein result in boilerplate information?
If so, how could the requirements be so, how? What other benefits may
companies or emerging growth accrue from providing this information?
companies find this information any crafted to avoid boilerplate disclosure?
69. Expanded disclosures may have
61. Would any of the additional
srobinson on DSK5SPTVN1PROD with PROPOSALS
more or less useful than similar direct and indirect economic impacts on
disclosure requirements for other disclosures discussed in this concept
market participants. What direct and
issuers? If so, how, and why? release result in disclosure that is not
indirect economic impacts would these
54. With respect to the additional useful to investors? Why or why not?
disclosures have on market
disclosures discussed in this release, 62. Would additional information
participants? Are there any unintended
should any disclosure requirements, if need to be disclosed in order to place
any or all of the disclosures discussed 112 Foreign private issuers are not subject to the
110 17CFR 229.407(g). above in the appropriate context? If so, proxy rules. See Rule 3a12–3(b) of the Exchange Act
111 Public Law 112–106, 126 Stat. 306 (2012). what additional disclosures might be [17 CFR 240.3a12–3(b)].
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![39010 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules
consequences that could result from any other issues that commenters may • Mail/Hand Delivery: Commenters
such disclosures with respect to audit wish to address and the benefits and unable to file comments electronically
firms, individual audit partners, audit costs relating to investors, issuers and must mail or hand deliver an original to:
committee members, audit committees, other market participants of revising Federal Energy Regulatory Commission,
issuers, investors, or others? For disclosure rules pertaining to the audit Office of the Secretary, 888 First Street
instance, could potential changes chill committee and the audit committee NE., Washington, DC 20426.
or overly formalize audit committee report included in Commission filings. FOR FURTHER INFORMATION CONTACT:
communications with auditors? Are Please be as specific as possible in your Monil Patel (Technical Information);
there specific liability implications with discussion and analysis of any Office of Energy Market Regulation;
respect to additional disclosure made by additional issues. Where possible, Federal Energy Regulatory Commission;
the audit committee? If so, please please provide empirical data or 888 First Street NE.; Washington, DC
describe. observations to support or illustrate 20426; (202) 502–8296; Andrew
70. Would other categories of your comments. Knudsen (Legal Information); Office of
disclosures about the audit committee’s By the Commission. the General Counsel; Federal Energy
role relative to the auditor be useful? If Dated: July 1, 2015. Regulatory Commission; 888 First Street
so, what other categories? Brent J. Fields, NE.; Washington, DC 20426; (202) 502–
71. How should the Commission 6527.
Secretary.
address potential changes in the
auditor’s report with respect to audit [FR Doc. 2015–16639 Filed 7–7–15; 8:45 am] SUPPLEMENTARY INFORMATION:
committee oversight of the auditor? BILLING CODE 8011–01–P 1. The Commission annually applies
72. If audit committees are required to an index to existing oil pipeline
provide disclosure that relates to transportation rate ceilings to establish
information provided by the auditor DEPARTMENT OF ENERGY new rate ceiling levels. The Commission
(and it is not currently required to be reexamines this index every five years.1
communicated by the auditor under Federal Energy Regulatory In this notice of inquiry (NOI), the
existing PCAOB auditing standards), Commission Commission invites comments on its
would changes to PCAOB auditing proposal to use an index level between
standards be necessary to ensure that 18 CFR Part 342 the Producer Price Index for Finished
additional information beyond existing [Docket No. RM15–20–000] Goods 2 (PPI–FG)+2.0 percent and PPI–
required communications is provided to FG+2.4 percent for the next five years
the audit committee? Five-Year Review of the Oil Pipeline beginning July 1, 2016.3 This proposal
73. Are there improvements that the Index is based upon the Kahn Methodology
Commission should consider to the established in Order No. 561 and
AGENCY: Federal Energy Regulatory applied in subsequent five-year review
reporting on the audit committee’s
Commission. proceedings.4 The Commission
oversight of the accounting and
ACTION: Notice of inquiry. proposes a range because not all
financial reporting process or internal
audits? For instance, should the audit SUMMARY: The Federal Energy pipelines have filed Form No. 6 data for
committee disclose how it interacts with Regulatory Commission (Commission) 2014. The Commission will select a
the company’s management? invites comments on its proposed five- final index level at the conclusion of
74. Should the Commission consider year review of the index level used to this proceeding. Commenters are invited
the potential for changes that would determine annual changes to oil to submit comments on, and justify
affect the role and responsibilities of the pipeline rate ceilings. The Commission alternatives to, the proposed index
audit committee, such as those related proposes an index level between the level. In addition to inviting comments,
to qualifications of members of the audit Producer Price Index for Finished the Commission plans to hold a
committee or areas for which audit Goods (PPI–FG)+2.0 percent and PPI– conference on July 30, 2015, to discuss
committees should (or should not) be FG+2.4 percent for the five-year period the issues raised by this notice. A
responsible? Should the audit commencing July 1, 2016. The subsequent notice will provide
committee disclose its role, if any, in Commission invites interested persons
risk governance? Should the audit to submit comments regarding this
1 The five-year review process was established in
committee report on other areas of Order No. 561. See Revisions to Oil Pipeline
proposal and any alternative Regulations Pursuant to the Energy Policy Act,
oversight? For example, audit methodologies for calculating the index Order No. 561, FERC Stats. & Regs. ¶ 30,985 (1993),
committees may be charged with level. order on reh’g, Order No. 561–A, FERC Stats. &
overseeing treatment of complaints, DATES: Initial Comments are due August
Regs. ¶ 31,000 (1994), aff’d, Assoc. of Oil Pipelines
cyber risks, information technology v. FERC, 83 F.3d 1424 (D.C. Cir. 1996).
24, 2015, and Reply Comments are due 2 The PPI–FG represents the Producer Price Index
risks, or other areas. Would this September 21, 2015. for Finished Goods. The PPI–FG is determined and
disclosure distract from the report’s issued by the Bureau of Labor Statistics, U.S.
ADDRESSES: You may submit comments,
focus on oversight of the audit function? Department of Labor.
In this regard, we note that identified by docket number by any of 3 As provided by 18 CFR 342.3(d)(2) (2014), ‘‘The
commentators have recently indicated the following methods: index will be calculated by dividing the PPI–FG for
• Agency Web site: http:// the calendar year immediately preceding the index
concern that audit committees are
www.ferc.gov. Documents created year by the previous calendar year’s PPI–FG.’’
srobinson on DSK5SPTVN1PROD with PROPOSALS
becoming the catch all of board Multiplying the rate ceiling on June 30 of the index
electronically using word processing
committees by overseeing anything year by the resulting number gives the rate ceiling
software should be filed in native for the year beginning the next day, July 1.
related to risk.113
applications or print-to-PDF format and 4 Five-Year Review of Oil Pipeline Index, 133
In addition to the areas for comment
not in a scanned format. All supporting FERC ¶ 61,228, at PP 5–9, 60–63 (2010), order on
identified above, we are interested in reh’g, 135 FERC ¶ 61,172 (2011). See also Five-Year
workpapers must be submitted with
Review of Oil Pipeline Index, 102 FERC ¶ 61,195
113 Michael Rapoport & Joann S. Lublin, Meet the formulas and in a spreadsheet format (2003), aff’d, Flying J Inc., et al., v. FERC, 363 F.3d
Corporate Board’s ‘‘Kitchen Junk Drawer,’’ Wall St. acceptable under the Commission’s 495 (D.C. Cir. 2004); Five-Year Review of Oil
J. (Feb. 3, 2015). eFiling rules. Pipeline Index, 114 FERC ¶ 61,293 (2006).
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Document Created: 2018-02-23 09:12:17
Document Modified: 2018-02-23 09:12:17
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Concept release; request for comments. | |
| Dates | Comments should be received on or before September 8, 2015. | |
| Contact | Duc Dang, Special Counsel at (202) 551-3386; Jennifer McGowan, Professional Accounting Fellow, at (202) 551-8736; Kevin Stout, Senior Associate Chief Accountant, at (202) 551- 5930, Office of the Chief Accountant; or Lindsay McCord, Associate Chief Accountant, at (202) 551-3417, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. | |
| FR Citation | 80 FR 38995 | |
| RIN Number | 3235-AL70 |
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