On July 1, 2015, the Securities and Exchange Commission issued a concept release seeking public comment on possible revisions to audit committee disclosure requirements, focused primarily on audit committee oversight of independent auditors. The concept release is available here. Comments are due no later than September 8, 2015.

At the July 1 open meeting, SEC Chair Mary Jo White noted that “effective audit committee oversight is essential to investor protection and the functioning of our capital markets.” The concept release follows this statement and requests public comment on four primary topics: (i) audit committee oversight of independent auditors, (ii) the processes used in the selection and retention of independent auditors, (iii) evaluation of the qualifications of the audit firm and the auditor engagement team, and (iv) other general audit committee disclosure issues.

The concept release emphasized the Commission’s concern that recent public discussion has expressed dissatisfaction that the current disclosure regime may not provide sufficient information for investors to adequately understand and evaluate audit committee performance. The concept release further expressed concern that the majority of relevant disclosure requirements applicable to audit committees flow from Item 407 of Regulation S-K, which was adopted in 1999 and which has not seen substantial modification notwithstanding the significant changes in the roles and responsibilities of audit committees since that time. Given the recent increase in additional voluntary disclosures about audit committees provided by some public companies, including in response to initiatives by various corporate governance organizations, the Commission noted in the concept release that additional disclosure requirements may be appropriate to address both the market demand for enhanced disclosures and the variability of the disclosures currently being provided to investors.

The 75 questions posed in the concept release are focused primarily on potential improvements to the disclosure of the role of the audit committee in the selection and oversight of the independent auditor, separated into the four categories identified above:

1. Oversight of the Independent Auditor

The concept release notes four sub-categories of questions related to possible disclosure in connection with oversight of the independent auditor: (i) information regarding communications between the audit committee and the auditor; (ii) the frequency of meetings between the audit committee and the auditor; (iii) review of, and discussion about, the auditor’s PCAOB inspection report and internal quality review; and (iv) whether and how the audit committee assesses, promotes and reinforces auditor objectivity and professional skepticism. The numbered questions in this category raise specific questions for commenters, such as the appropriateness of the following:

• disclosures concerning the nature or substance of required auditor communications;
• disclosure of the audit committee’s consideration of the matters communicated by the auditor;
• disclosures related to auditor communications that are not required by rule or regulation;
• disclosure of the frequency of private meetings between the committee and the auditor;
• disclosure about audit committee review and discussion of PCAOB and internal auditor inspections and reviews; and
• disclosure about whether and how the audit committee assesses, promotes and reinforces auditor objectivity and professional skepticism.

2. Selection of the Independent Auditor

The concept release notes three sub-categories of questions related to possible disclosures in connection with the selection of the independent auditor: (i) the rationale for selection of the auditor; (ii) whether and how the audit committee sought requests for proposals for the independent audit; and (iii) the policy for annual shareholder votes on selection of the auditor. The numbered questions in this category raise specific questions for commenters, such as the appropriateness of the following:

• disclosure of the process undertaken to evaluate the external audit and the performance and qualifications of the auditor;
• disclosure of the nature of the audit committee’s involvement in approving auditor compensation;
• disclosure of quality indicators used in the evaluation of the auditor;
• disclosure of requests for proposals for the external audit;
• disclosure of the policies applicable to shareholder input into the selection of the auditor;
• disclosure of reasons justifying rejection of shareholder input into the selection of the auditor; and
• whether voting on auditor ratification should continue to be considered a “routine matter” under NYSE Rule 452 (which allows discretionary voting by brokers).

3. Qualifications of the Independent Auditor and Engagement Team

The concept release notes four sub-categories of questions related to the qualifications of the independent auditor: (i) disclosure of the engagement team; (ii) audit committee input in the selection of the engagement partner; (iii) the number of years the auditor has audited the company; and (iv) the involvement of other firms in the audit. The numbered questions in this category raise specific questions for commenters, such as the appropriateness of the following:

• disclosure of the name of the engagement partner;
• disclosure of changes in the engagement partner mid-year;
• disclosure of audit committee input into the assignment of the engagement partner;
• disclosures related to the length of the audit relationship;
• disclosure of whether and how auditor tenure was considered by the committee in retaining the auditor; and
• disclosure of other firms and persons participating in the audit.

The questions raised by this subtopic of the concept release overlap with proposals currently being considered by the Public Company Accounting Oversight Board to require additional disclosures related to a public company’s independent auditor, including a proposal to require disclosure of the name of the engagement partner and information about certain other participants in the audit either in the auditor’s report or in a proposed new form that would be filed with the PCAOB. Accordingly, any rulemaking by the Commission on the matters raised by the numbered questions in this category will likely be impacted by any final rulemaking on the PCAOB’s proposals.

4. General Disclosure Requirements

The concept release also asks about other audit committee disclosure requirements, including:

• whether there are other specific issuer, industry, audit committee member, or auditor characteristics that should be considered in establishing new disclosure requirements;
• whether the issues identified in the release would be useful to investors;
• whether additional disclosure requirements would only be appropriate for certain types of issuers;
• whether disclosures should be updated in the time between annual proxy statement filings;
• whether disclosures related to reporting on oversight of accounting and financial reporting process or internal audits are appropriate; and
• whether additional disclosure requirements would have an adverse economic impact on market participants.

The concept release is a first step towards possible future rulemaking by the Commission on the topics raised in the concept release. Because the concept release raises the possibility of impactful rule changes to audit committee disclosure requirements, we encourage companies to review the release and to consider submission of responses to the Commission’s request for comments.

The full and original memorandum was initially published by O’Melveny & Myers on July 30, 2015 and is available here.