Possible Revisions To Audit Committee Disclosures, 38995-39010 [2015-16639]

Download as PDF Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules paragraph (l)(2) of this AD: Before further flight, replace the affected (RH or LH) MLG fixed fairing forward attachment assembly, in accordance with the Accomplishment Instructions of Airbus Service Bulletin A320– 52–1163, dated February 4, 2014; or Airbus Service Bulletin A320–52–1165, dated November 3, 2014. (n) Terminating Action (1) Replacement of parts on an airplane, as required by paragraph (g), (k), or (l)(1) of this AD, does not constitute terminating action for the repetitive inspections required by paragraph (i) of this AD, except as specified in paragraph (n)(3) of this AD. (2) The repetitive replacements required by paragraph (g) of this AD may be terminated by modification of the airplane to postmodification 27716 configuration, including a resonance frequency inspection for debonding of the composite insert and delamination of the honeycomb area around the insert, and all applicable corrective actions, in accordance with the Accomplishment Instructions of Airbus Service Bulletin A320–52–1100, Revision 01, dated March 12, 1999, provided all applicable corrective actions are done before further flight. Thereafter, refer to paragraph (i) of this AD to determine the compliance time for the next detailed inspection required by this AD. (3) Modification of an airplane, in accordance with the Accomplishment Instructions of Airbus Service Bulletin A320– 52–1165, dated November 3, 2014, constitutes terminating action for actions required by paragraphs (g) through (m) of this AD for the airplane on which the modification is done. srobinson on DSK5SPTVN1PROD with PROPOSALS (o) Exception to Certain AD Actions An airplane on which Airbus Modification 155648 has been embodied in production is not affected by the requirements of paragraphs (g) and (i) of this AD, provided that no affected component, identified by part number as listed paragraphs (g)(1) through (g)(5) and (i)(1) through (i)(3) of this AD, has been installed on that airplane since first flight of the airplane. (p) Parts Installation Prohibition (1) For airplanes in pre-AirbusModification 27716 and pre-Airbus-ServiceBulletin A320–52–1100 configuration: No person may install a component identified in paragraphs (g)(1) through (g)(5) of this AD on any airplane after doing the actions provided in paragraph (n)(2) of this AD. (2) For airplanes in post-AirbusModification 27716 and post Airbus Service Bulletin A320–52–1100 configuration: As of the effective date of this AD, no person may install a component identified in paragraphs (g)(1) through (g)(5) of this AD on any airplane. (3) For airplanes in pre-AirbusModification 155648 and pre-Airbus-ServiceBulletin A320–52–1165 configuration: No person may install a component identified in paragraphs (g)(1) through (g)(5) and (i)(1) through (i)(3) of this AD on any airplane after doing the actions provided in paragraph (n)(3) of this AD. VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 38995 (4) For airplanes in post-AirbusModification 155648 and post-AirbusService-Bulletin A320–52–1165 configuration: As of the effective date of this AD, no person may install a component identified in (g)(1) through (g)(5) and (i)(1) through (i)(3) of this AD on any airplane. Issued in Renton, Washington, on June 30, 2015. Jeffrey E. Duven, Manager, Transport Airplane Directorate, Aircraft Certification Service. (q) Credit for Previous Actions This paragraph provides credit for optional actions provided by paragraph (n)(2) of this AD, if those actions were performed before the effective date of this AD using Airbus Service Bulletin A320–52–1100, dated December 7, 1998, which is not incorporated by reference in this AD. BILLING CODE 4910–13–P (r) Other FAA AD Provisions The following provisions also apply to this AD: (1) Alternative Methods of Compliance (AMOCs): The Manager, International Branch, ANM–116, Transport Airplane Directorate, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the International Branch, send it to ATTN: Sanjay Ralhan, Aerospace Engineer, International Branch, ANM–116, Transport Airplane Directorate, FAA, 1601 Lind Avenue SW., Renton, WA 98057–3356; telephone 425–227–1405; fax 425–227–1149. Information may be emailed to: 9-ANM-116AMOC-REQUESTS@faa.gov. Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office. The AMOC approval letter must specifically reference this AD. (2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, International Branch, ANM– 116, Transport Airplane Directorate, FAA; or the European Aviation Safety Agency (EASA); or Airbus’s EASA Design Organization Approval (DOA). If approved by the DOA, the approval must include the DOA-authorized signature. (s) Related Information (1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA Airworthiness Directive 2015–0001R1, dated January 15, 2015, for related information. This MCAI may be found in the AD docket on the Internet at https://www.regulations.gov by searching for and locating Docket No. FAA–2015–2458. (2) For service information identified in this AD, contact Airbus, Airworthiness Office—EIAS, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44 51; email account.airworth-eas@ airbus.com; Internet https://www.airbus.com. You may view this service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, WA. For information on the availability of this material at the FAA, call 425–227–1221. PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 [FR Doc. 2015–16583 Filed 7–7–15; 8:45 am] 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 Securities and Exchange Commission. ACTION: Concept release; request for comments. AGENCY: 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: SUMMARY: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/concept.shtml); or E:\FR\FM\08JYP1.SGM 08JYP1 38996 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules • Send an email to rule-comments@ sec.gov. Please include File Number S7– 13–15 on the subject line; or • Use the Federal eRulemaking Portal (https://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 (https:// 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. srobinson on DSK5SPTVN1PROD with PROPOSALS 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 VerDate Sep<11>2014 19:43 Jul 07, 2015 Jkt 235001 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 PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 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 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 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. 4 17 CFR 229.407 5 See Audit Committee Collaboration, ‘‘Enhancing the Audit Committee Report, A Call to Action,’’ (Nov. 20, 2013), available at https://www.thecaq.org/ reports-and-publications/enhancing-the-auditcommittee-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). E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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. 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 srobinson on DSK5SPTVN1PROD with PROPOSALS 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 (selfregulatory 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 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). VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 Financial Reporting, also known as the Treadway Commission,10 the General Accounting Office,11 and others.12 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 Academic literature suggests that strong corporate governance, including the composition and actions of the audit committee, has a positive effect on the 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 https:// 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). 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]. PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 38997 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 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 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. 20 Pub. L. 107–204, 116 Stat. 745 (2002); 15 U.S.C. 7201 et seq. E:\FR\FM\08JYP1.SGM 08JYP1 38998 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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 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 SarbanesOxley 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. 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: • 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 21 Section 101 of the Sarbanes-Oxley Act. 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 OffBalance 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]. 23 See Section 3(a)(58) of the Exchange Act [15 U.S.C. 78c(a)(58)]. 24 17 CFR 240.10A–3. srobinson on DSK5SPTVN1PROD with PROPOSALS 22 See, VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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 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 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. PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 • an understanding of audit committee functions.26 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 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: 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 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. 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. 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]. E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules management and auditor about critical accounting policies are appropriate.31 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 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 31 Release No. 33–8040. 104 of the Sarbanes-Oxley Act. 33 See https://pcaobus.org/Inspections/ Documents/Inspection_Information_for_Audit_ Committees.pdf. 34 See, e.g. https://pcaobus.org/Inspections/ Documents/Executive_Summary_02252013_ Release_2013_001.pdf, https://pcaobus.org/ Standards/QandA/10-24-2013_SAPA_11.pdf at 36 and https://pcaobus.org/Standards/QandA/9-9-14_ SAPA_12.pdf at page 33. 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). srobinson on DSK5SPTVN1PROD with PROPOSALS 32 Section VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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. 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: • 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 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 • The circumstances surrounding any appointment of a director to the audit committee who is not independent; 40 • Whether there is a separatelydesignated standing audit committee or a committee performing similar functions, and the identity of each member of such committee; 41 and 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. 37 See Instruction 3 to Item 407(d) of Regulation S–K. 38 See Item 407(d)(3) of Regulation S–K. 39 See Item 407(d)(1) of Regulation S–K. 40 See Item 407(d)(2) of Regulation S–K. 41 See Item 407(d)(4) of Regulation S–K. PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 38999 • Whether or not the registrant has at least one audit committee financial expert serving on its audit committee.42 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 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 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) AuditRelated 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 42 See Item 407(d)(5) of Regulation S–K. Item 407(d)(1) of Regulation S–K. 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]. 47 See Release No. 34–47265. 48 See Item 9(e) of Schedule 14A. 43 See E:\FR\FM\08JYP1.SGM 08JYP1 39000 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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 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: • 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 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 srobinson on DSK5SPTVN1PROD with PROPOSALS 49 Id. 50 See Ernst & Young, ‘‘Audit Committee Reporting to Shareholders: Going Beyond the Minimum,’’ (Feb. 2013), available at https:// 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 https://www.ey.com/Publication/ vwLUAssets/ey-lets-talk-governance-august-2014/ $FILE/ey-lets-talk-governance-august-2014.pdf. 51 Item 9 of Schedule 14A (referring to Item 304(a) of Regulation S–K [17 CFR 229.304(a)]). VerDate Sep<11>2014 19:43 Jul 07, 2015 Jkt 235001 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. 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 52 See CAQ and Audit Analytics, ‘‘2014 Audit Committee Transparency Barometer,’’ (Dec. 2, 2014), available at https://www.thecaq.org/docs/ reports-and-publications/2014-audit-committeetransparency-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 https://www.thecaq.org/docs/reports-andpublications/globalobservationsontheroleofthe auditcommittee.pdf?sfvrsn=2 (‘‘Global Observations’’). 54 For example, an academic paper indicates that events that negatively impact the image of a PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 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 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 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 https://ssrn.com/ abstract=1920850. 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 https:// 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. 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 https:// www.cii.org/corp_gov_policies#BOD. E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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, policymakers, 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 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. srobinson on DSK5SPTVN1PROD with PROPOSALS 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: • 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; 59 See A Call to Action at 7, (citing Tapestry Networks, ViewPoints, Issue 22, p.1 (May 2, 2013), available at https://www.tapestrynetworks.com/ initiatives/corporate-governance/global-auditcommittee-leadership-networks/upload/Tapestry_ EY_ACLS_Summit_View22-May13.pdf). 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 https:// www.centerforcapitalmarkets.com/wp-content/ uploads/2014/07/CCMC_Disclosure_Reform_Final_ 7-28-20141.pdf. 61 Id. 62 Id. 63 See, e.g., A Call to Action at 7. VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 • 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 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. C. PCAOB Standard-Setting Projects The PCAOB is engaged in standardsetting 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 Audit Committee Transparency Barometer. 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 https://www.ey.com/Publication/ vwLUAssets/EY-Enhanced-audit-committeetransparency-themes-in-audit-committeedisclosures/$FILE/EY-Enhanced-audit-committeetransparency-themes-in-audit-committeedisclosures.pdf. 66 See NACD Summary of Proceedings, Audit Committee Chair Advisory Council, (June 19, 2013). PO 00000 64 See 65 According Frm 00012 Fmt 4702 Sfmt 4702 39001 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 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 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 https://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 https://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 https:// www.accaglobal.com/content/dam/acca/global/ PDF-technical/audit-publications/pol-tp-daq1(cfo)drivers-audit-quality.pdf. 68 See, Reproposed Rule Comment Letter of the Council of Institutional Investors (Aug. 15, 2014), available at https://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 & E:\FR\FM\08JYP1.SGM Continued 08JYP1 39002 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules srobinson on DSK5SPTVN1PROD with PROPOSALS 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 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. 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, Young LLP (Feb 12, 2014), Society of Corporate Secretaries & Governance Professionals (Mar. 12, 2014), available at https://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 https:// pcaobus.org/Rules/Rulemaking/Pages/ Docket029.aspx. 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 https://pcaobus.org/Rules/Rulemaking/Pages/ Docket029Comments.aspx. 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 https://pcaobus.org/Rules/ Rulemaking/Pages/Docket034.aspx. VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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 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. The International Auditing and Assurance Standards Board (the ‘‘IAASB’’) has also acknowledged the 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 https://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 https://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 https://pcaobus.org/Rules/ Rulemaking/Pages/Docket034Comments.aspx. 76 Section C.3.8 of the UK Corporate Governance Code, available at https://www.frc.org.uk/OurWork/Codes-Standards/Corporate-governance/UKCorporate-Governance-Code.aspx. PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 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 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. 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. 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 77 IAASB, ‘‘A Framework for Audit Quality,’’ p. 48 (Jan. 15, 2013), available at https://www.ifac.org/ publications-resources/framework-audit-quality. 78 See Directive 2014/56/EU of the European Parliament and Council of April 16, 2014, available at https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32014L0056&from=EN. 79 Id. 80 OECD, ‘‘Corporate Governance Factbook,’’ (Feb. 2014), available at https://www.oecd.org/daf/ca/ CorporateGovernanceFactbook.pdf. E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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. 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 srobinson on DSK5SPTVN1PROD with PROPOSALS 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. 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. VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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, PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 39003 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 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. 83 See Global Observations. 84 Id. 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)]. E:\FR\FM\08JYP1.SGM 08JYP1 39004 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules A. Audit Committee’s Oversight of the Auditor srobinson on DSK5SPTVN1PROD with PROPOSALS 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. 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 87 See paragraph 26 of AS 16. VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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 PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 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 88 AS 16 and Rule 2–07 of Regulation S–X. 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. 89 See E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules PCAOB inspection.’’ 93 The PCAOB also has provided sample questions an audit committee may wish to ask auditors. Specifically, the PCAOB stated: additional insight into the audit committee’s oversight of the auditor. 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? srobinson on DSK5SPTVN1PROD with PROPOSALS 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 qualitycontrol 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. 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 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). VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 [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 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 93 See PCAOB Release No. 2012–003, Information for Audit Committees about the PCAOB Inspection Process (Aug. 1, 2012), available at https:// pcaobus.org/Inspections/Documents/Inspection_ Information_for_Audit_Committees.pdf. 94 Id. at p. 10–11. PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 39005 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. E:\FR\FM\08JYP1.SGM 08JYP1 39006 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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. srobinson on DSK5SPTVN1PROD with PROPOSALS 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 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. 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 https://www.thecaq.org/ docs/reports-and-publications/caq-approach-toaudit-quality-indicators-april-2014.pdf?sfvrsn=2. VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 about the audit committee’s process for assessing the auditor and determining whether to select or retain the auditor. 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? 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 ‘‘opinionshopping.’’ 98 The Commission is 97 See PCAOB Release No. 2015–005, Concept Release on Audit Quality Indicators (June 30, 2015). 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 PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 interested in knowing whether relevant disclosures of the audit committee’s process in selecting the auditor might be useful to investors. 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 (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 midmarket, audit firms found market reactions that support the notion of auditor changes in the postSarbanes-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). E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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 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. srobinson on DSK5SPTVN1PROD with PROPOSALS 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 99 NYSE General Rules, Operation of Member Organizations, Rule 452 available at https:// nyserules.nyse.com/nysetools/ PlatformViewer.asp?SelectedNode=chp_1_ 2&manual=/nyse/rules/nyse-rules/. 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– VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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. 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 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 https://www.ifac.org/publicationsresources/international-standard-auditing-isa-700revised-forming-opinion-and-reporting. PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 39007 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 E:\FR\FM\08JYP1.SGM 08JYP1 39008 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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. 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? srobinson on DSK5SPTVN1PROD with PROPOSALS 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, nonaffiliated accounting firms, and other 101 See, e.g., PCAOB Release No. 2011–006, Concept Release on Auditor Independence and Audit Firm Rotation (Aug. 16, 2011), available at https://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 https://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). VerDate Sep<11>2014 19:43 Jul 07, 2015 Jkt 235001 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 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 PO 00000 104 AS 16. Frm 00019 Fmt 4702 Sfmt 4702 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 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. 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. 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. E:\FR\FM\08JYP1.SGM 08JYP1 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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? srobinson on DSK5SPTVN1PROD with PROPOSALS 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. 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 110 17 CFR 229.407(g). 111 Public Law 112–106, 126 Stat. 306 (2012). VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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 PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 39009 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? 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 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)]. E:\FR\FM\08JYP1.SGM 08JYP1 srobinson on DSK5SPTVN1PROD with PROPOSALS 39010 Federal Register / Vol. 80, No. 130 / Wednesday, July 8, 2015 / Proposed Rules 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 In addition to the areas for comment identified above, we are interested in 113 Michael Rapoport & Joann S. Lublin, Meet the Corporate Board’s ‘‘Kitchen Junk Drawer,’’ Wall St. J. (Feb. 3, 2015). VerDate Sep<11>2014 15:15 Jul 07, 2015 Jkt 235001 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 DEPARTMENT OF ENERGY Federal Energy Regulatory Commission 18 CFR Part 342 [Docket No. RM15–20–000] Five-Year Review of the Oil Pipeline Index Federal Energy Regulatory Commission. ACTION: Notice of inquiry. AGENCY: The Federal Energy Regulatory Commission (Commission) invites comments on its proposed fiveyear review of the index level used to determine annual changes to oil pipeline rate ceilings. The Commission proposes an index level between the Producer Price Index for Finished Goods (PPI–FG)+2.0 percent and PPI– FG+2.4 percent for the five-year period commencing July 1, 2016. The Commission invites interested persons to submit comments regarding this proposal and any alternative methodologies for calculating the index level. DATES: Initial Comments are due August 24, 2015, and Reply Comments are due September 21, 2015. ADDRESSES: You may submit comments, identified by docket number by any of the following methods: • Agency Web site: https:// www.ferc.gov. Documents created electronically using word processing software should be filed in native applications or print-to-PDF format and not in a scanned format. All supporting workpapers must be submitted with formulas and in a spreadsheet format acceptable under the Commission’s eFiling rules. SUMMARY: PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 • Mail/Hand Delivery: Commenters unable to file comments electronically must mail or hand deliver an original to: Federal Energy Regulatory Commission, Office of the Secretary, 888 First Street NE., Washington, DC 20426. FOR FURTHER INFORMATION CONTACT: Monil Patel (Technical Information); Office of Energy Market Regulation; Federal Energy Regulatory Commission; 888 First Street NE.; Washington, DC 20426; (202) 502–8296; Andrew Knudsen (Legal Information); Office of the General Counsel; Federal Energy Regulatory Commission; 888 First Street NE.; Washington, DC 20426; (202) 502– 6527. SUPPLEMENTARY INFORMATION: 1. The Commission annually applies an index to existing oil pipeline transportation rate ceilings to establish new rate ceiling levels. The Commission reexamines this index every five years.1 In this notice of inquiry (NOI), the Commission invites comments on its proposal to use an index level between the Producer Price Index for Finished Goods 2 (PPI–FG)+2.0 percent and PPI– FG+2.4 percent for the next five years beginning July 1, 2016.3 This proposal is based upon the Kahn Methodology established in Order No. 561 and applied in subsequent five-year review proceedings.4 The Commission proposes a range because not all pipelines have filed Form No. 6 data for 2014. The Commission will select a final index level at the conclusion of this proceeding. Commenters are invited to submit comments on, and justify alternatives to, the proposed index level. In addition to inviting comments, the Commission plans to hold a conference on July 30, 2015, to discuss the issues raised by this notice. A subsequent notice will provide 1 The five-year review process was established in Order No. 561. See Revisions to Oil Pipeline Regulations Pursuant to the Energy Policy Act, Order No. 561, FERC Stats. & Regs. ¶ 30,985 (1993), order on reh’g, Order No. 561–A, FERC Stats. & Regs. ¶ 31,000 (1994), aff’d, Assoc. of Oil Pipelines v. FERC, 83 F.3d 1424 (D.C. Cir. 1996). 2 The PPI–FG represents the Producer Price Index for Finished Goods. The PPI–FG is determined and issued by the Bureau of Labor Statistics, U.S. Department of Labor. 3 As provided by 18 CFR 342.3(d)(2) (2014), ‘‘The index will be calculated by dividing the PPI–FG for the calendar year immediately preceding the index year by the previous calendar year’s PPI–FG.’’ Multiplying the rate ceiling on June 30 of the index year by the resulting number gives the rate ceiling for the year beginning the next day, July 1. 4 Five-Year Review of Oil Pipeline Index, 133 FERC ¶ 61,228, at PP 5–9, 60–63 (2010), order on reh’g, 135 FERC ¶ 61,172 (2011). See also Five-Year Review of Oil Pipeline Index, 102 FERC ¶ 61,195 (2003), aff’d, Flying J Inc., et al., v. FERC, 363 F.3d 495 (D.C. Cir. 2004); Five-Year Review of Oil Pipeline Index, 114 FERC ¶ 61,293 (2006). E:\FR\FM\08JYP1.SGM 08JYP1

Agencies

[Federal Register Volume 80, Number 130 (Wednesday, July 8, 2015)]
[Proposed Rules]
[Pages 38995-39010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16639]


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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.

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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 Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/concept.shtml); or

[[Page 38996]]

     Send an email to rule-comments@sec.gov. Please include 
File Number S7-13-15 on the subject line; or
     Use the Federal eRulemaking Portal (https://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 (https://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\
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    \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.
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    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.
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    \4\ 17 CFR 229.407
    \5\ See Audit Committee Collaboration, ``Enhancing the Audit 
Committee Report, A Call to Action,'' (Nov. 20, 2013), available at 
https://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).
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    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\
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    \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 https://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).
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    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\
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    \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].
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    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\
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    \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.
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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 https://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf.
    \34\ See, e.g. https://pcaobus.org/Inspections/Documents/Executive_Summary_02252013_Release_2013_001.pdf, https://pcaobus.org/Standards/QandA/10-24-2013_SAPA_11.pdf at 36 and https://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 
https://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 
https://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 https://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 
https://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 
https://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 https://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 https://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 https://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 https://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 https://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).
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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 https://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 https://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 https://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-tp-daq1(cfo)-drivers-audit-quality.pdf.
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    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\
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    \68\ See, Reproposed Rule Comment Letter of the Council of 
Institutional Investors (Aug. 15, 2014), available at https://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 https://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 https://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.
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    \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  https://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx.
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    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\
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    \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 https://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 https://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  https://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 https://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx.
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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.
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    \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.
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    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\
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    \77\ IAASB, ``A Framework for Audit Quality,'' p. 48 (Jan. 15, 
2013), available at https://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 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0056&from=EN.
    \79\ Id.
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    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 https://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.
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    \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.
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    \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)].

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[[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.
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    \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 https://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 https://www.thecaq.org/docs/reports-and-publications/caq-approach-to-audit-quality-indicators-april-2014.pdf?sfvrsn=2.
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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?
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    \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).
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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 https://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 https://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 https://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 https://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.

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[[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
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