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. Disclosures allow companies to broadly disseminate information showing that AC oversight conforms with or even exceeds regulatory and investor expectations by discussing features such as independence, workload, qualifications, and monitoring frequency. However, AC disclosures have substantially lagged other types of governance disclosures over the past two decades. We use semi-structured interviews with 30 AC members, five disclosure preparers, and 14 members of the investment community to learn how companies determine the level of detail to disclose about AC oversight and how disclosures meet investor needs. We find the current disclosure process creates a disproportionate focus on standardized language that fails to provide investors with the ability to distinguish AC oversight quality across companies. We further observe that certain ACs are willing to expand disclosures to highlight their oversight activities when they receive direct investor feedback about the usefulness of these disclosures. However, because channels for direct investor-to-company feedback are limited and investors feel like current disclosures do not provide enough information to engage, investors’ silence leads many companies to incorrectly assume that investors are satisfied with current disclosures. We conclude with suggestions for moving forward, along with examples of potential disclosure enhancements.

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

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