Effective Audit Committee Disclosures - NACD BoardVision
As SEC regulations and activist investors’ demands grow, the effort required to craft concise, informative audit committee disclosure reports increases in importance and complexity. Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), and Betsy D. Holden, senior advisor, McKinsey, discuss the real benefits that audit committee disclosures can have for shareholders.
Henry Stoever: Welcome to NACD BoardVision. My name is Henry Stoever, and I'm a CMO at NACD. On this episode of BoardVision, we're going to be discussing disclosures, specifically audit committee disclosures as they relate to their oversight responsibilities of the external audit firm. Joining me today on this episode of BoardVision is Cindy Fornelli, the Executive Director of the CAQ, and Betsy Holden, a Senior Advisor at McKinsey. Betsy formerly was the CEO of Kraft Foods, and also currently serves on three public company boards: Western Union, Time Inc., and Diageo. Cindy, the CAQ recently completed its second annual audit committee transparency barometer report. Can you give us a little insights about why your firm has undertaken this report, what you're trying to accomplish, and really some linkages to the SEC from what's going on at a macroenvironment perspective?
Cindy Fornelli: Sure, I'm happy to, and it's great to be here. What we've seen, both in the United States and globally, frankly, is more and more of a focus on the work of the audit committee, and we looked across small, mid, and large companies, 1,500, and gave a comparison over the last two years of the disclosures, and we've seen, in some instances, real significant increase in those disclosures, and this does coincide with some of the work that the SEC has been doing. They came out over the summer with their concept release on disclosures, asking questions, should audit committees be required to make enhanced disclosure? You've seen the PCOB come out with their dialogue, giving a list of questions that audit committees might want to ask of their auditor, so there's this real focus on the work of their audit committee, as well as how audit committees communicate with investors, and we wanted to make sure that audit committees that have the tools, as they sat down to think about some of these things, to see what their peers are doing and maybe give them ideas for best practices.
Henry Stoever: Betsy, throughout your career, you've really been focused on communications with large companies and a lot of different products and services. Can you give us your perspective, share your thoughts from what you have heard, what your boards are hearing, from investors, on what they're looking more for? Or looking -- what they're not getting so that we can try to understand what we're -- what the problem is we're trying to solve for.
Betsy Holden: I guess if I step back, I would say I am a strong advocate of clear, simple, balanced transparent communication with shareholders, where you're explaining what you're doing and why you're doing it. As it relates to audit, I know the SEC, I know some of the pension funds are concerned about it. But we are not hearing a lot from shareholders of concern about this.
Henry Stoever: Have you seen anything change over the last 5 to 8 years or more since you've been sitting on boards?
Betsy Holden: In addition to the boards that I serve on, I also do board evaluations, so I've seen a lot of different boards over the years, and I would say, number one, audit committee members that I see really take their role very seriously. So that, to me, has been a given. What I am seeing is I am seeing people being much more aggressive about benchmarking fees to ensure that they're getting value for the dollar. I am seeing more willingness to tender the audit, playing a very assertive role in ensuring that the lead auditor is the right person with the right qualifications, and if not, taking action to make changes there. So I am seeing those things. I'm just seeing a little bit more focus, and a little bit more aggressiveness on some of the areas than in the past.
Cindy Fornelli: I've heard a lot of audit committee members say that they feel that investors are more interested in having the dialogue with the board, because of activist investors. So, you know, activist investors a lot of times go in and say, you know, we want to meet with the board, and I think the non-activist investors say, well, wait a minute, we'd like to talk to the board too. And so, again, because disclosure is the foundation for interaction, a board of directors can't meet with every investor.
Betsy Holden: And I do think, you know, it could be an opportunity for audit committees, as part of their normal engagement with shareholders, to really identify what is on their mind. And then make sure that their disclosure appropriately addresses it.
Cindy Fornelli: You have to trust that the audit committee is going to make the disclosures that makes sense at that point in time. And...
Betsy Holden: Can I build on that?
Cindy Fornelli: Please.
Betsy Holden: I mean, if I look at the people who are on audit committees, a lot of them are CEO's of major, you know, major organizations, CFO's of major organizations, they're incredibly experienced, very knowledgeable, and they spend a huge amount of time and effort on oversight of the external auditor, that is a key responsibility as an audit committee member, and I really want investors to be assured that audit committee members are spending a lot of time on that.
Henry Stoever: As we wrap up this episode, I'd like to hear from both of you, what are the real benefits to this? I mean, from an SEC's perspective, they're trying to drive investor confidence. Got it. Is this really helping drive investor confidence?
Cindy Fornelli: I think if it's balanced, I do think that these types of communications and these types of disclosures do benefit investors, they get a real sense of what's going on in the company. So I think there's a benefit there, I think that does give investors confidence, and I would say, and I'm curious to know if you agree with this, it -- there is a discipline to it. It's harder to do concise, crisp, clear disclosure than it is to put everything in there. And so, so long as it doesn't overburden the audit committee, I think that there is a discipline there. What is most important to our investors at this point in time about the oversight of the audit process?
Betsy Holden: Cindy, when I looked at some of the examples that you had in the barometer, I think those sorts of disclosures are really not onerous for companies, and if that's what investors are looking for, I think, you know, audit committees would be fine on doing that.
Cindy Fornelli: Well that's good to hear. Because I do think that's what we're hearing investors want. As one investor told me, I don't need to know how the sausage is getting made, I just want to know that the sausage is being made.
Henry Stoever: Betsy, thank you so much for your time. Cindy, thank you again. For more information on the CAQ barometer, please visit the CAQ website. On behalf of NACD, I'm Henry Stoever, thank you for joining BoardVision today.
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