Academic journal article Accounting Horizons

Disclosures in Audit Committee Charters and Reports

Academic journal article Accounting Horizons

Disclosures in Audit Committee Charters and Reports

Article excerpt

SYNOPSIS: In response to recent criticisms of audit committee performance, new SEC and stock exchange rules require companies to prepare an audit committee charter and to publish the charter in their proxy statement at feast once every three years. Audit committees also must disclose how they discharged their responsibilities during the year.

We study the disclosures in audit committee charters and reports by examining a random sample of 150 proxy statements filed in Spring 2001. The primary purposes of this analysis are to understand audit committee activities and to identify possible areas for further audit committee reform.

We find that what audit committees say they are doing in their reports differs from what their charters say the committee should be doing. There is a generally high level of compliance with mandated audit committee disclosures, such as disclosures related to reviewing and discussing the financial statements with management. However, voluntary disclosure of audit committee activities was more common for depository institutions, larger companies, NYSE-listed companies, and companies with more independent audit committees. These results indicate either more active audit committees in such companies, or a greater commitment to audit committee disclosure in such companies. In addition, some of the disclosure levels suggest the need for additional reforms regarding audit committee oversight of interim reports, number of audit committee meetings, and audit committee oversight of internal audit. We also suggest directions for future research.

Data Availability: The data used in this study are available to other researchers upon request. Please contact the third author.

INTRODUCTION

Audit committee performance received much attention and criticism over the past few years. For example, at the urging of Arthur Levitt, former chair of the Securities and Exchange Commission (SEC), a Blue Ribbon Committee (BRO) was established to make recommendations for improving the effectiveness of audit committees. The Report of the BRO (BRO 1999) offers ten recommendations, most of which were adopted by the SEC, the securities exchanges, and the Auditing Standards Board.

One of the BRC's recommendations calls for each listed company to have an audit committee charter (BRC 1999, 13). Companies listed on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers' automated quotation system (NASDAQ) now are required to include the audit committee charter in their proxy statement at least once every three years (SEC 1999b, 1999c, 1999d).

The BRC also recommended that audit committees be required to disclose in the proxy statement whether they had fulfilled their responsibilities as specified in the charter (BRO 1999, 13). The SEC now requires companies to include an audit committee report in their proxy statement to communicate whether the audit committee fulfilled its responsibilities (SEC 1999a). According to the SEC, such enhanced audit committee disclosures should: (1) improve the transparency of the committee's oversight of the financial-reporting process, (2) provide additional motivation for committee members to effectively discharge their duties, and (3) promote investor confidence.

This paper represents a first attempt to examine the disclosures contained in audit committee charters and reports after imposition of the new disclosure requirements by the SEC and the securities exchanges. Given the audit committee's critical role in financial oversight, we believe that an analysis of audit committee charters and reports is important for several reasons:

* Future efforts to improve audit committee performance will depend in part on understanding what audit committees currently are doing. By analyzing audit committee disclosures, the present study contributes to this understanding. …

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