Cultivating audit committee disclosure – sunny days or frost warning in effect?
May 31, 2012
Some argue that Canadian audit committees should be more transparent about how they have discharged their responsibilities for oversight of financial statement preparation and the audit process. But does the need for such disclosure outweigh the risks?
Users of financial statements are calling for more information, for example, about an entity’s key areas of sensitivity or risk, including its choice of accounting policies. To address this issue, the U.K. Financial Reporting Council (FRC) is proposing that the audit committee be required to provide more information on how it has discharged its responsibilities for oversight of the financial reporting process. The audit committee report would cover topics such as issues the audit committee considered in relation to the financial statements and how those issues were addressed, including any key judgments that the audit committee made, and the audit committee’s basis for its conclusion that the annual report is fair and balanced. The FRC’s consultation paper proposes that the audit committee report be included in the entity’s annual report.
The FRC solution has appeal to many Canadian observers because such reports could be fertile ground for valuable information relevant to investor decision making. On the other hand, some argue that audit committee reports would quickly become sterile and rife with boilerplate wording.
In Canada, where there is no requirement to do so, few audit committees issue reports of their activities and in most cases the reports hardly change from year to year. Moreover, many audit committees don’t have the horsepower for such a fundamental change in their reporting responsibilities. There are several potentially significant implications for audit committees in providing this disclosure. These include:
- possible gaps in competencies, training or resources to identify and report publicly;
- the need to spend more meeting time developing their reports and discussing them with management, the auditors and others;
- potential for public reporting to have a chilling effect on the open dialogue audit committees require with auditors and management; and
- difficulties recruiting members because of perceived or actual legal liability concerns.
Keep the conversation going…I would like to hear from you what you think about the FRC proposals and whether they could benefit Canada. In particular, should Canadian best practices for audit committees include public reporting? Email me directly.
Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.
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