Imitation without Intention: A Qualitative Analysis of Isomorphic Audit Committee Disclosures

Abstract

Audit committee (AC) oversight is critical for maintaining investors’ confidence in financial reporting as well as other areas of expanded AC responsibility. However, it is unclear to what extent investors can meaningfully evaluate AC oversight quality based on public disclosures. We observe that some companies stay firmly rooted in disclosures that comply with minimal regulatory standards, while others voluntarily expand disclosures to discuss industry-recommended information primarily related to financial reporting and audit oversight. Rarely do we observe companies expanding their disclosures past industry recommendations to provide company-specific context that outlines AC member qualifications, training, and temporal changes in risk oversight. To explore how companies decide on the extent of AC disclosures and how well they address investor needs, we conduct semi-structured interviews with 30 AC members, five disclosure preparers, and 14 members of the investment community. We find the current disclosure process creates a disproportionate focus on standardized language—aligning with coercive and mimetic isomorphism—that fails to provide investors with sufficient information to distinguish AC oversight quality across companies. We further observe that ACs may be willing to expand disclosures to signal their oversight activities if they receive direct investor feedback about the usefulness of such disclosures. However, limited channels for direct investor-to-company feedback, combined with investors’ perception that current disclosures do not provide enough information to engage, often result in investors’ silence. This silence leads companies to incorrectly assume that investors are satisfied with current disclosures. We conclude with suggestions for closing this legitimacy gap, along with examples of potential disclosure enhancements.

Keywords: audit committee, disclosure, proxy statement, isomorphism, legitimacy gap

JEL Classification: G14, G34, K22, M41, M42