A financial analyst told Tapestry: “Companies are putting more and more [performance] information out there – more dots, if you will. But not all are good at helping us connect the dots.” Financial reporting has undergone significant changes since the passage of the Sarbanes-Oxley Act of 2002, and it continues to evolve in the wake of the financial crisis and new disclosure requirements. Nevertheless, much remains to be done to improve the quality, relevance, and comparability of financial and non-financial communications that companies provide to the market.
Recognizing their increased responsibility in overseeing this information, audit chairs participating in Tapestry’s networks say audit committees:
Simultaneously, the G-20 has spurred global efforts to establish a single set of high-quality global accounting standards and audit chairs are monitoring progress by international standards-setters to converge standards such as IFRS and US GAAP.
While audit chairs understand the goal of improving quality and comparability, they have expressed considerable concern about the convergence process itself, saying the process has thus far exacerbated the reporting problem by lengthening financial reports (leading to less transparency and usability), and caused uncertainty in the use of accounting standards. Regarding the corporate disclosure regime more generally, audit chairs welcome SEC chair Mary Jo White's plans to review the usefulness and relevance of current requirements, including the question of "information overload."
Dialogue with the IASB
EACLN members met with Hans Hoogervorst, chair of the International Accounting Standards Board (IASB). They discussed the IASB’s structure and process, including the challenging task of assessing the costs and benefits of new standards. They also discussed the IASB’s current focus on making financial communications more effective and meaningful, even as these communications seek to describe an increasingly complex reality. Finally, they addressed the issue of non-GAAP metrics and non-financial reporting, touching on the role of audit committees versus the IASB in overseeing these kinds of reporting.
Corporate tax reform and non-GAAP financial measures
The prospect of comprehensive tax reform – with lower corporate rates, major changes to the rules for deductions, and a potential border adjustment tax – creates both opportunity and uncertainty for companies and their audit committees. At the same time, the rising popularity of non–generally accepted accounting principles (non-GAAP) metrics is forcing directors to refocus their efforts on controls and procedures to ensure comfort with their companies’ financial and operational disclosures.
Dialogue with Russell Golden of the Financial Accounting Standards Board
Russell Golden, chair of the Financial Accounting Standards Board (FASB), joined ACLN members for a discussion of the FASB’s operations and agenda. Mr. Golden explained how the FASB works and its relationship with the Securities and Exchange Commission. He reviewed current standard-setting efforts and the FASB’s collaboration with overseas standards setters. The discussion also touched on the expanding use of non-GAAP reporting. Mr. Golden encouraged audit chairs to get more involved in the FASB’s standard-setting process and to consider joining its advisory council.
Navigating through uncertainty: anticipating the political and regulatory landscape, overseeing complex investigations, leading in a slow-growth economy
Joined by EY America’s Deputy Vice Chair for Public Policy, members of the Central Audit Committee Network discussed current regulatory activity around financial reporting, specifically the PCAOB’s proposed revision to standards governing the auditor’s reporting model and the SEC’s recent increased scrutiny of the use of non-GAAP measures in earnings releases. EY Partner Jon Feig, of its Forensic Investigations and Dispute Services, and Bob Stauffer, Partner at Jenner & Block, led members in a discussion of board oversight of special investigations, which can emerge unexpectedly and require extensive planning, careful judgment, and nuanced communication. Members were joined for dinner by Parthenon-EY Chief Economist Nigel Gault, who led a discussion on the current macroeconomic outlook, which is characterized by the prospect slow growth and low interest rates for the foreseeable future.
Improving public company disclosures
A panel of institutional investors joined the audit chairs to explain investors’ perspectives and needs regarding public company disclosures, especially disclosures about the audit committee and the board. The group also discussed how engagement between boards and investors can supplement disclosures. In a separate session, representatives of General Electric joined the group for a discussion of how GE revamped its proxy statement and 10-K, overcoming both internal and external challenges.
Audit chairs support rev rec delay and more dialogue with Washington
On March 10–11, 2015, members of the Audit Committee Leadership Network (ACLN) met in New York to discuss key accounting issues such as the revenue recognition standard, Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) audit committee-related matters; share ideas among themselves for improving enterprise risk management; and conduct a deep dive into the opportunities and risks resulting from oil price volatility.
Integrated reporting is still in its nascent stages but is becoming the communication vehicle of choice for companies and their stakeholders as a means of reporting value beyond just financials. Internal reporting leaders and a representative from the International Integrated Reporting Council joined European and North American audit chairs to discuss the value and risks of integrated reporting. Oversight of the endeavor, the role of the audit committee, and the level of assurance needed on non-financial information is still up for debate.
Analyst and investor perspectives on financial reporting
Financial disclosures are becoming increasingly important to the analyst and investor communities. Audit committee chairs met with Dan Fletcher, managing director for Neuberger Berman and representative for the buy-side, and Don Young, former FASB board member, managing director at TomCat Investments, and sell-side representative, to discuss the role they have to play in determining what is shared about their company's performance and how that story can be enhanced.
Enhancing audit committee reporting
Audit committee chairs believe there is an incomplete understanding of how audit committees actually operate, based on discussions with policymakers on both sides of the Atlantic. Current reporting practices vary significantly from company to company. Could enhanced reporting from the audit committee become a vehicle for communicating more effectively about the work of the committee with policymakers and shareholders?
A dialogue with SEC chief accountant James Kroeker
Jim Kroeker, then chief accountant for the SEC, joined members for a discussion of current issues in accounting, auditing, and financial reporting. Topics included a discussion on the SEC staff final report on the IFRS work plan, a potential role for the SEC to strengthen audit committees, and proposed changes to disclosure rules on contingent liabilities and going concern.
Analyst and investor perspectives on financial communication
On May 29, 2012, Midwest Audit Committee Network members convened in Chicago for a discussion on financial communication with Heather Brilliant, vice president of global equity and credit research for Morningstar; Nathan Partain, president and chief investment officer at Duff & Phelps Investment Management Company; and Ralph Schackart, partner and digital media and Internet analyst for William Blair & Company.
Investors’ perspectives on financial reporting
In a complex economic environment, the types of information investors need in order to value companies is continually evolving. Analysts told audit chairs that companies can do a better job at providing a consistent story to investors and enhance their reporting of important information such as cash flows, how revenue is generated, and on key performance indicators.
Internal controls over financial reporting
Sarbanes-Oxley created a high standard for public companies and boards. Audit committees have developed practices to ensure effective oversight. These practices could be extended to controls over non-financial reporting and unaudited financial communications.