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SEC Issues Audit Committee Disclosure Concept Release

The SEC issued a concept release last week seeking comment on audit committee disclosures. The announcement noted that the SEC “is interested in receiving information about the audit committee and auditor relationship and whether improvements can be made to enhance the information provided to investors about the audit committee’s responsibilities and activities.” The release cited concerns that current disclosure rules may not be “sufficient to help investors understand and evaluate audit committee performance, which may in turn inform those investors’ investment or voting decisions.” The release refers many times to “listed companies,” but does not specifically exclude open-end investment companies. As a result, it is unclear whether the disclosures would apply to open-end funds in addition to closed-end funds.

Many of the disclosure requirements were implemented in 1999 with amendments to Regulation S-K. The release notes that since that time “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.” However, according to the SEC, the disclosure requirements have not been substantively updated to keep pace.

The release notes that “a significant number of audit committees voluntarily provide information beyond the disclosures required by our current rules,” a fact that “raises a question of whether there may be market demand for such information.” The SEC suggests that updating disclosure rules could provide consistency for investors regarding the information that is available and “minimize the ‘expectations gap’ that some have expressed exists between investors and the audit committee regarding the role of the audit committee.” Additional disclosures may help provide context around audit committee decisions and “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.”

The release focuses on collecting comments in three areas: the audit committee’s oversight of the auditor, the audit committee’s process for appointing or retaining the auditor, and the qualifications of the audit firm and certain members of the engagement team. In many instances, the Commission’s requests for comment ask whether investors would find more substantive disclosures on the aforementioned topics helpful.