Audit Committee Disclosure Evolution: Evidence from the Field

Abstract

Audit committee (AC) oversight is critical for maintaining investors’ confidence in high-quality financial reporting and other areas of expanded responsibility. Despite general improvements to governance disclosures, AC-specific disclosures have not evolved in the same manner. We use semi-structured interviews with 30 AC members, 5 disclosure preparers, and 14 members of the investment community to learn how companies decide what information to disclose about AC oversight and whether these disclosures meet stakeholder needs. We find that the current disclosure process creates a focus on isomorphic standardized language that fails to provide investors with the ability to distinguish AC oversight quality across companies. We further observe that high-quality ACs are willing to expand disclosures to signal their oversight activities when they receive investor feedback about the usefulness of these disclosures. Because direct investor feedback is costly—and thus infrequent—this environment leads many companies to believe that investors are satisfied with current disclosures while investors are left feeling frustrated that most companies provide insufficient information about AC activities. We conclude with suggestions for moving forward, along with examples of potential disclosure enhancements.

Keywords: audit committee, disclosure, proxy statement, signaling, isomorphism

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