[Federal Register Volume 80, Number 130 (Wednesday, July 8, 2015)]
[Proposed Rules]
[Pages 38995-39010]
[FR Doc No: 2015-16639]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 33-9862; 34-75344 File No. S7-13-15]
RIN 3235-AL70

Possible Revisions To Audit Committee Disclosures

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comments.

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SUMMARY: The Commission is publishing this concept release to seek
public comment regarding audit committee reporting requirements, with a
focus on the audit committee's reporting of its responsibilities with
respect to its oversight of the independent auditor. Some have
expressed a view that the Commission's disclosure rules for this area
may not result in disclosures about audit committees and their
activities that are sufficient to help investors understand and
evaluate audit committee performance, which may in turn inform those
investors' investment or voting decisions. The majority of these
disclosure requirements, which exist in their current form principally
in Item 407 of Regulation S-K, were adopted in 1999. Since then, 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.

DATES: Comments should be received on or before September 8, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/concept.shtml); or

     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-13-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-13-15. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's Web
site (http://www.sec.gov/rules/concept.shtml). Comments also are
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Duc Dang, Special Counsel at (202)
551-3386; Jennifer McGowan, Professional Accounting Fellow, at (202)
551-8736; Kevin Stout, Senior Associate Chief Accountant, at (202) 551-
5930, Office of the Chief Accountant; or Lindsay McCord, Associate
Chief Accountant, at<PHONE_NUMBER>, Division of Corporation Finance,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549.

Table of Contents

I. Introduction
II. Background
    A. The Importance of Audit Committees
    B. The Impact of the Sarbanes-Oxley Act of 2002 and SRO Listing
Standards on Audit Committees
III. Current Audit Committee Disclosure Requirements
    A. Audit Committee Report and Other Disclosures About the Audit
Committee
    B. Disclosure Requirements Regarding Preapproval of Services and
Auditor Fees
    C. Disclosure Requirements Regarding Proposal To Ratify
Selection of Independent Auditors
IV. Reasons To Seek Comment on the Audit Committee Reporting
Requirements
    A. Public Discussion of the Need for Updated Audit Committee
Reporting
    B. Divergence in Current Audit Committee Reporting Practice
    C. PCAOB Standard-Setting Projects
    D. Initiatives in Other Jurisdictions To Enhance Audit Committee
Reporting
    E. References to PCAOB Auditing Standards
V. Focus on Audit Committee Oversight of the Auditor
VI. Potential Changes to Disclosures
    A. Audit Committee's Oversight of the Auditor
    1. Additional Information Regarding the Communications Between
the Audit Committee and the Auditor
    2. The Frequency With Which the Audit Committee Met With the
Auditor
    3. Review of and Discussion About the Auditor's Internal Quality
Review and Most Recent PCAOB Inspection Report
    4. Whether and How the Audit Committee Assesses, Promotes and
Reinforces the Auditor's Objectivity and Professional Skepticism
    B. Audit Committee's Process for Appointing or Retaining the
Auditor
    1. How the Audit Committee Assessed the Auditor, Including the
Auditor's Independence, Objectivity and Audit Quality, and the Audit
Committee's Rationale for Selecting or Retaining the Auditor
    2. If the Audit Committee Sought Requests for Proposal for the
Independent Audit, the Process the Committee Undertook To Seek Such
Proposals and the Factors They Considered in Selecting the Auditor
    3. The Board of Directors' Policy, if any, for an Annual
Shareholder Vote on the Selection of the Auditor, and the Audit
Committee's Consideration of the Voting Results in its Evaluation
and Selection of the Audit Firm
    C. Qualifications of the Audit Firm and Certain Members of the
Engagement Team Selected By the Audit Committee
    1. Disclosures of Certain Individuals on the Engagement Team
    2. Audit Committee Input in Selecting the Engagement Partner
    3. The Number of Years the Auditor has Audited the Company
    4. Other Firms Involved in the Audit
    D. Location of Audit Committee Disclosures in Commission Filings
    E. Smaller Reporting Companies and Emerging Growth Companies
VII. Additional Request for Comment Regarding Audit Committee
Disclosures

I. Introduction

    The Commission has a long history of promoting effective and
independent audit committees. The role and responsibilities of audit
committees related to oversight of the independent auditor have evolved
due to changes in both the securities laws and the national securities
exchanges' listing requirements related to audit committees. Today, the
audit committee of a listed issuer is directly responsible for the
appointment, compensation, retention and oversight of the work of any
registered public accounting firm engaged for the purpose of preparing
or issuing an audit report or performing other audit, review or attest
services for the issuer, and the independent auditor reports directly
to the audit committee.\1\ In addition, in connection with these
oversight responsibilities, the audit committee has ultimate authority
to approve all audit engagement fees and terms \2\ and is responsible
for resolving disagreements between management and the auditor
regarding financial reporting.\3\
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    \1\ See Section 10A(m) of the Securities Exchange Act of 1934
(the ``Exchange Act'') [15 U.S.C. 78j-1(m)]. As noted in Section
II.B., audit committees of listed issuers also have responsibilities
with respect to the receipt, retention, and treatment of complaints
regarding accounting, internal accounting controls, or auditing
matters, including procedures for the confidential, anonymous
submission by employees of the issuer of concerns regarding
questionable accounting or auditing matters.
    \2\ See Release No. 34-47654, Standards Relating to Listed
Company Audit Committees (Apr. 9, 2003) [68 FR 18788].
    \3\ See Section 10A(m)(2) of the Exchange Act.
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    Requirements for the audit committee's reporting to shareholders
are principally contained in Item 407 of Regulation S-K,\4\ which have
not changed substantively since 1999. As a result, some have expressed
a view that the Commission's disclosure rules do not provide investors
with sufficient useful information regarding the role of and
responsibilities carried out by the audit committee in public
companies.\5\ The audit committee has a vital role in oversight of
auditors, and the independent audits performed by those auditors have
long been recognized as important to credible and reliable financial
reporting and the functioning of our capital markets.\6\ The reporting
of additional information by the audit committee with respect to its
oversight of the auditor may provide useful information to investors as
they evaluate the audit committee's performance in

connection with, among other things, their vote for or against
directors who are members of the audit committee, the ratification of
the auditor, or their investment decisions.
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    \4\ 17 CFR 229.407
    \5\ See Audit Committee Collaboration, ``Enhancing the Audit
Committee Report, A Call to Action,'' (Nov. 20, 2013), available at
http://www.thecaq.org/reports-and-publications/enhancing-the-audit-committee-report-a-call-to-action (``A Call to Action''). This
collaboration consisted of the following organizations: The National
Association of Corporate Directors, Corporate Board Member/NYSE
Euronext, Tapestry Networks, the Directors' Council, the Association
of Audit Committee Members, Inc., and the Center for Audit Quality
(``CAQ'').
    \6\ See Release No. 33-8177, Disclosure Required by Sections 406
and 407 of the Sarbanes-Oxley Act of 2002 (Jan. 23, 2003) [68 FR
5110] (acknowledging the audit committee's vital role in financial
reporting, public disclosure, and corporate governance); and Release
No. 34-14970, Proposed Rules Relating to Shareholder Communications,
Shareholder Participation in the Corporate Electoral Process and
Corporate Governance Generally, (Jul. 18, 1978) [43FR 31945] (citing
Report to Congress on the Accounting Profession and the Commission's
Oversight Role, Jul. 5, 1978).
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    Through this Concept Release, the Commission seeks public comment
regarding the audit committee's reporting requirements, with a focus on
the audit committee's reporting of its responsibilities and activities
with respect to its oversight of the independent auditor. This concept
release is focused on the audit committee and auditor relationship, but
commenters may also provide views on other aspects of audit committee
disclosures, such as those related to roles and responsibilities, audit
committee qualifications, oversight of financial reporting, or
oversight of internal control over financial reporting.

II. Background

A. The Importance of Audit Committees

    The audit committee plays an important role in protecting the
interests of investors by assisting the board of directors in
fulfilling its responsibility to oversee the integrity of a company's
accounting and financial reporting processes and both internal and
external audits. Since as early as 1940, the Commission, along with the
auditing and corporate communities, has had a continuing interest in
promoting effective and independent audit committees.\7\ Largely with
the Commission's encouragement,\8\ the national securities exchanges
and national securities associations (self-regulatory organizations or
``SROs'') first adopted audit committee requirements in the 1970s.\9\
Since that time, there has been support for strong, independent audit
committees, including from the National Commission on Fraudulent
Financial Reporting, also known as the Treadway Commission,\10\ the
General Accounting Office,\11\ and others.\12\
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    \7\ In 1940, the Commission investigated the auditing practices
followed by the auditors of McKesson & Robbins, Inc., and the
Commission's ensuing report prompted action on auditing procedures
by the auditing community. In the Matter of McKesson & Robbins,
Accounting Series Release (ASR) No. 19, Exchange Act Release No.
2707 (Dec. 5, 1940).
    \8\ For example, in 1972, the Commission recommended that
companies establish audit committees composed of outside directors.
See ASR No. 123 (Mar. 23, 1972). In 1974 and 1978, the Commission
adopted rules requiring disclosures about audit committees. See
Release No. 34-11147, Notice of Amendments to Require Increased
Disclosure of Relationships Between Registrants and Their
Independent Public Accountants (Dec. 20, 1974) and Release No. 34-
15384, Shareholder Communications, Shareholder Participation in
Corporate Electoral Process and Corporate Governance Generally (Dec.
6, 1978).
    \9\ See, e.g., Release No. 34-13346, In the Matter of New York
Stock Exchange, Inc. (Mar. 9, 1977) [42 FR 14793] (Commission order
approving NYSE rule change related to the audit committee).
    \10\ The Treadway Commission was sponsored by the American
Institute of Certified Public Accountants, the American Accounting
Association, the Financial Executives Institute (now Financial
Executives International), the Institute of Internal Auditors and
the National Association of Accountants (now Institute of Management
Accountants). Collectively, these groups were known as the Committee
of Sponsoring Organizations, or COSO. The Treadway Commission's
report, the Report of the National Commission on Fraudulent
Financial Reporting (October 1987), is available at www.coso.org.
    \11\ See e.g., U.S. General Accounting Office (now Government
Accountability Office), ``CPA Audit Quality: Status of Actions Taken
to Improve Auditing and Financial Reporting of Public Companies,''
at 5 (GAO/AFMD-89-38, March 1989). The report is available at http://www.gao.gov/products/AFMD-89-38.
    \12\ See, e.g., Preliminary Report of the American Bar
Association Task Force on Corporate Responsibility (July 16, 2002)
reprinted in 58 Bus. Law. 189 (2002).
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    In 1998, the New York Stock Exchange (the ``NYSE'') and the
National Association of Securities Dealers (the ``NASD'') sponsored the
Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees (the ``Blue Ribbon Committee''). In its 1999 report, the
Blue Ribbon Committee recognized the importance of audit committees and
issued ten recommendations to improve their effectiveness.\13\ In
response to these recommendations, the NYSE and the NASD, among others,
revised their listing standards relating to audit committees,\14\ and
the Commission adopted new rules requiring disclosure relating to the
functioning, governance and independence of corporate audit
committees.\15\
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    \13\ See Blue Ribbon Committee on Improving the Effectiveness of
Corporate Audit Committees, Report and Recommendations of the Blue
Ribbon Committee on Improving the Effectiveness of Corporate Audit
Committees, 54 The Business Lawyer, 1067 (1999).
    \14\ See, e.g., Release No. 34-42231, Order Approving Proposed
Rule Change by the National Association of Securities Dealers, Inc.
Amending Its Audit Committee Requirements (Dec. 14, 1999) [64 FR
71523]; Release No. 34-42233, Order Approving Proposed Rule Change
by the New York Stock Exchange, Inc. Amending the Exchange's Audit
Committee Requirements (Dec. 14, 1999) [64 FR 71529]; Release No.
34-42232, Order Approving Proposed Rule Change by the American Stock
Exchange LLC Amending the Exchange's Audit Committee Requirements
(Dec. 14, 1999) [64 FR 71518]; and Release No. 34-43941, Order
Approving a Proposed Rule Change by the Pacific Exchange, Inc.
Relating to Audit Committee Requirements for Listed Companies (Feb.
7, 2001) [66 FR 10545].
    \15\ See Release No. 34-42266, Audit Committee Disclosure (Dec.
22, 1999) [64 FR 73389].
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    Academic literature suggests that strong corporate governance,
including the composition and actions of the audit committee, has a
positive effect on the quality of the audit.\16\ For example, some
studies note that audit committee independence is associated with lower
incidences of earnings management \17\ and internal control problems at
those issuers benefitting from independent audit committees,\18\ while
also shielding the external auditor from management's influence.\19\
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    \16\ Goh, B.W., Audit Committees, Boards of Directors, and
Remediation of Material Weaknesses in Internal Control, 26
Contemporary Accounting Research 549 (2009); and Hoitash and
Hoitash, The Role of Audit Committees in Managing Relationships with
External Auditors After SOX: Evidence from the USA, 24 Managerial
Auditing Journal 368 (2009). The positive effects of audit committee
oversight are also illustrated in studies using data taken prior to
the enactment of the Sarbanes-Oxley Act of 2002 when important
characteristics such as the composition and actions of the audit
committee were less uniform among companies. See Klein, A., Audit
Committee, Board of Director Characteristics, and Earnings
Management, 33 Journal of Accounting and Economics, 375 (2002);
Krishnan, J., Audit Committee Quality and Internal Control: An
Empirical Analysis, 80 The Accounting Review, 649 (2005); and
Carcello, J and Neal. T., Audit Committee Composition and Auditor
Reporting, 75 The Accounting Review, 453 (2000).
    \17\ Klein, A., Audit Committee, Board of Director
Characteristics, and Earnings Management.
    \18\ Krishnan, J., Audit Committee Quality and Internal Control:
An Empirical Analysis.
    \19\ Carcello, J. and Neal, T., Audit Committee Composition and
Auditor Reporting.
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B. The Impact of the Sarbanes-Oxley Act of 2002 and SRO Listing
Standards on Audit Committees

    In the early 2000's, multiple incidences of serious misconduct by
corporate executives and independent auditors occurred in the financial
markets raising concerns about the integrity and reliability of
financial disclosures, and the adequacy of regulation and oversight of
the accounting profession. This highlighted the need for strong,
competent, and vigilant audit committees. In response, the Sarbanes-
Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') was enacted.\20\ Among
other things, the Sarbanes-Oxley Act mandated a number of reforms to
enhance corporate responsibility, enhance financial disclosures, and
combat corporate and accounting fraud. The Sarbanes-Oxley Act also
created a new regulatory and oversight regime for auditors of public
companies, including the creation of the Public Company Accounting
Oversight Board (the ``PCAOB''), a nonprofit corporation, to oversee
the audits of public companies in order to protect the interests of
investors and further the public interest in the preparation of
informative, accurate, and independent audit

reports.\21\ During this time, the Commission also adopted significant
corporate disclosure and financial reporting rules designed to improve
the oversight and review processes of public companies related to their
financial and other disclosures.\22\
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    \20\ Pub. L. 107-204, 116 Stat. 745 (2002); 15 U.S.C. 7201 et
seq.
    \21\ Section 101 of the Sarbanes-Oxley Act.
    \22\ See, e.g., Release No. 33-8124, Certification of Disclosure
in Companies' Quarterly and Annual Reports (Aug. 28, 2002) [67 FR
57276]; Release No. 34-47890, Improper Influence on Conduct of
Audits (May, 20, 2003) [68 FR 31820]; Release No. 33-8177,
Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley
Act of 2002 (Jan. 23, 2003) [68 FR 5110]; Release No. 33-8182,
Disclosure in Management's Discussion and Analysis About Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations (Jan. 28,
2003) [68 FR 5982]; Release No. 33-8183, Strengthening the
Commission's Requirements Regarding Auditor Independence (Jan. 28,
2003) [68 FR 6006]; and Release No. 33-8212, Certification of
Disclosure in Certain Exchange Act Reports (Mar. 21, 2003) [68 FR
15600].
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    The Sarbanes-Oxley Act amended the Exchange Act to define an audit
committee as ``(A) a committee (or equivalent body) established by and
amongst the board of directors of an issuer for the purpose of
overseeing the accounting and financial reporting processes of the
issuer and audits of the financial statements of the issuer; and (B) if
no such committee exists with respect to an issuer, the entire board of
directors of the issuer.'' \23\ The Sarbanes-Oxley Act and the
Commission's related implementation rules strengthened and expanded the
role of the audit committee in overseeing a company's financial
reporting process and independent auditor.
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    \23\ See Section 3(a)(58) of the Exchange Act [15 U.S.C.
78c(a)(58)].
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    For example, Exchange Act Rule 10A-3,\24\ which implemented Section
10A(m) of the Exchange Act, mandated that SROs prohibit the listing of
any security of an issuer that does not comply with certain
requirements, including:
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    \24\ 17 CFR 240.10A-3.
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     Each member of the audit committee of the issuer must be
independent according to specified criteria;
     the audit committee of each issuer must be directly
responsible for the appointment, compensation, retention, and oversight
of the work of any registered public accounting firm engaged for the
purpose of preparing or issuing an audit report or performing other
audit, review, or attest services for the issuer, and each such
registered public accounting firm must report directly to the audit
committee;
     each audit committee must establish procedures for the
receipt, retention, and treatment of complaints regarding accounting,
internal accounting controls, or auditing matters, including procedures
for the confidential, anonymous submission by employees of the issuer
of concerns regarding questionable accounting or auditing matters;
     each audit committee must have the authority to engage
independent counsel and other advisors, as it determines necessary to
carry out its duties; and
     each issuer must provide appropriate funding for the audit
committee.
    The SROs also adopted additional listing requirements related to
audit committees and strengthened the independence requirements for
audit committee members.\25\
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    \25\ See Release No. 34-48745, NASD and NYSE Rulemaking:
Relating to Corporate Governance (Nov. 4, 2003); NYSE Listed Company
Manual, Sections 303A.02 and 303A.07(a); and NASDAQ Listing Rules
5605(a)(2) and 5605(c)(2). For example, the NYSE requires audit
committees to, among other things: (i) At least annually obtain a
report from the independent auditor discussing certain quality
control issues and relationships with its client, (ii) meet with
management and the independent auditor, as applicable, to discuss
the company's annual audited and quarterly unaudited financial
statements, its press releases and public earnings guidance, and its
risk assessment and management policies, (iii) meet separately,
periodically, with management, the internal auditors, and the
independent auditors, and (iv) review with the independent auditor
any audit problems or difficulties and management's response. See
NYSE Listed Company Manual, Section 303A.07.
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    Also, Item 407(d)(5) of Regulation S-K, which was adopted to
implement Section 407 of the Sarbanes-Oxley Act, defines the term
``audit committee financial expert.'' This item requires issuers to
disclose whether they have at least one audit committee member that
satisfies that definition. The Commission defines an audit committee
financial expert as a person who has:
     An understanding of generally accepted accounting
principles and financial statements;
     the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals
and reserves;
     experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the registrant's financial statements, or experience actively
supervising one or more persons engaged in such activities;
     an understanding of internal control over financial
reporting; and
     an understanding of audit committee functions.\26\
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    \26\ Item 407(d)(5)(ii) of Regulation S-K. Neither the NYSE nor
NASDAQ use the term audit committee financial expert. However, both
amended their listing standards to clarify that a member that
satisfies the definition of an audit committee financial expert
would also satisfy their respective listing standards that require
at least one audit committee member with accounting or related
financial management expertise. See Release No. 34-48745.
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    In addition to the listing requirements related to audit
committees, Rule 2-07 of Regulation S-X was adopted to identify
specific matters that auditors are required to report to audit
committees.\27\ Rule 2-07 requires public company auditors to report
all critical accounting policies and practices, all alternative
accounting treatments that have been discussed with management, and any
other material written communications between the auditor and
management.\28\
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    \27\ See Release No. 34-47265, Strengthening the Commission's
Requirements Regarding Auditor Independence (Jan. 28, 2003) [68 FR
6005]; 17 CFR 210.2-07.
    \28\ PCAOB standards also require certain auditor communications
with audit committees, as discussed in Section IV.E of this Release.
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    In the adopting release for Rule 2-07, the Commission referred to
cautionary advice it issued in December 2001 regarding the disclosure
of those accounting policies that management believes are most critical
to the preparation of the issuer's financial statements.\29\ These are
often a subset of the accounting policies described in the issuer's
financial statements. The cautionary advice indicated that ``critical''
accounting policies are those that are both most important to the
portrayal of the issuer's financial condition and results and require
management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that
are inherently uncertain.\30\ As part of that release, the Commission
also advised:
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    \29\ See Release No. 34-47265.
    \30\ See Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies (Dec. 12, 2001) [66 FR
65013]. See, also, Release No. 33-8350, Commission Guidance
Regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations (Dec. 19, 2003) [68 FR 75056].

    Prior to finalizing and filing annual reports, audit committees
should review the selection, application and disclosure of critical
accounting policies. Consistent with auditing standards, audit
committees should be apprised of the evaluative criteria used by
management in their selection of the accounting principles and
methods. Proactive discussions between the audit committee and the
company's senior

management and auditor about critical accounting policies are
appropriate.\31\
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    \31\ Release No. 33-8040.

    The way audit committees execute their oversight of auditors has
evolved since the Sarbanes-Oxley Act. For instance, while the PCAOB
does not have jurisdiction over audit committees, it collects
information through its inspection program that could be useful for
audit committees in overseeing their companies' auditors. Among other
responsibilities, the PCAOB is required to inspect registered public
accounting firms annually (for firms that regularly provide audit
reports for more than 100 issuers) or triennially (for firms that
regularly provide audit reports for 100 or fewer issuers).\32\
Consistent with the limitations of the Sarbanes-Oxley Act, the PCAOB
makes certain information available publicly, such as public portions
of inspection reports, disciplinary sanctions, and information in
annual and special reports filed by audit firms. In addition, in part
in response to audit committee members' requests, the PCAOB provides
information to help audit committees better understand the PCAOB
inspection process, including questions they may wish to ask their
audit firms to better understand and assess the firm's inspection
results and evaluate audit quality.\33\ The PCAOB also includes an
executive summary for its general inspection reports and provides
insights within Staff Audit Practice Alerts to further assist audit
committee oversight of the auditor.\34\
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    \32\ Section 104 of the Sarbanes-Oxley Act.
    \33\ See http://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf.
    \34\ See, e.g. http://pcaobus.org/Inspections/Documents/Executive_Summary_02252013_Release_2013_001.pdf, http://pcaobus.org/Standards/QandA/10-24-2013_SAPA_11.pdf at 36 and http://pcaobus.org/Standards/QandA/9-9-14_SAPA_12.pdf at page 33.
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III. Current Audit Committee Disclosure Requirements

A. Audit Committee Report and Other Disclosures About the Audit
Committee

    In 1999, following the recommendations from the Blue Ribbon
Committee's report, the Commission adopted new rules to improve
disclosure relating to the functioning, governance and independence of
audit committees and to enhance the credibility of financial statements
of public companies.\35\ These reporting requirements for audit
committees \36\ predate the Sarbanes-Oxley Act and the SRO listing
standards, which expanded the role of the audit committee in the
financial reporting process.
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    \35\ See, e.g., Release No. 34-42266 (stating that additional
disclosures about a company's audit committee and its interaction
with the company's auditors and management will promote investor
confidence in the integrity of the financial reporting process).
    \36\ Audit committee reports are currently reported by issuers
pursuant to the disclosure requirements of Regulation S-K and
closed-end investment companies through the proxy statement
requirements of Item 22(b)(16) of Schedule 14A.
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    Disclosure requirements for the audit committee report are
contained in Item 407 of Regulation S-K. The disclosure is only
required in the proxy or information statement relating to a
registrant's annual meeting where directors are elected or chosen by
written consents.\37\ An audit committee is required to make certain
statements related to its responsibilities for overseeing financial
reporting, internal control, and the audit. These statements include
that the audit committee has:
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    \37\ See Instruction 3 to Item 407(d) of Regulation S-K.
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     Reviewed and discussed the audited financial statements
with management;
     discussed with the independent auditor the matters
required by AU sec. 380, Communication with Audit Committees;
     received the required written communications from the
independent accountant concerning independence, as required by the
rules of the PCAOB, and has discussed with the independent accountant
his or her independence; and
     recommended to the board of directors that the audited
financial statements be included in the company's annual report on Form
10-K (or other form of annual report) for the last fiscal year for
filing with the Commission.\38\
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    \38\ See Item 407(d)(3) of Regulation S-K.
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    The name of each member of the company's audit committee must
appear below these required disclosures.
    Item 407 also requires disclosure of whether the audit committee
members are independent, the number of meetings held, and certain
information about member attendance at these meetings, in addition to
the following:
     Whether or not the audit committee has a charter; \39\
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    \39\ See Item 407(d)(1) of Regulation S-K.
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     The circumstances surrounding any appointment of a
director to the audit committee who is not independent; \40\
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    \40\ See Item 407(d)(2) of Regulation S-K.
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     Whether there is a separately-designated standing audit
committee or a committee performing similar functions, and the identity
of each member of such committee; \41\ and
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    \41\ See Item 407(d)(4) of Regulation S-K.
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     Whether or not the registrant has at least one audit
committee financial expert serving on its audit committee.\42\
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    \42\ See Item 407(d)(5) of Regulation S-K.
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    If the audit committee has a charter, the registrant should either
disclose where security holders may access a current copy of the audit
committee's charter or include a copy of the charter in an appendix to
the registrant's proxy or information statement that is provided to
security holders at least once every three fiscal years, or sooner if
the charter has been materially amended since the beginning of the
registrant's last fiscal year.\43\
---------------------------------------------------------------------------

    \43\ See Item 407(d)(1) of Regulation S-K.
---------------------------------------------------------------------------

B. Disclosure Requirements Regarding Preapproval of Services and
Auditor Fees

    The Sarbanes-Oxley Act also enhanced the ability of audit
committees to promote auditor independence. Section 202 of the
Sarbanes-Oxley Act added Section 10A(i) of the Exchange Act, which gave
the audit committee responsibility to preapprove all audit and
permissible non-audit services provided by the independent auditor.\44\
In 2003, the Commission finalized its rules to implement Section 10A(i)
of the Exchange Act.\45\ Under the rules, the audit committee is
required to preapprove all permissible non-audit services and all
audit, review, or attest engagements required under the securities
laws. Additionally, the issuer must provide disclosure of the audit
committee's preapproval policies and procedures in proxy statements
related to the election of directors or the ratification of the
independent public accountant.\46\
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    \44\ Section 202 of the Sarbanes-Oxley Act; 15 U.S.C. 78j-
1(i)(1)(A).
    \45\ See Release No. 34-47265.
    \46\ See Item 9(e)(5) of Schedule 14A [17 CFR 240.14a-101].
---------------------------------------------------------------------------

    Concurrently, the Commission adopted rules that changed both the
types of fees paid to the independent auditor that must be described
and the number of years for which the disclosures must be provided.\47\
As a result, an issuer is required to disclose the fees paid to its
independent auditor for each of the two most recent fiscal years,
separated into the following four categories: (1) Audit Fees, (2)
Audit-Related Fees, (3) Tax Fees, and (4) All Other Fees.\48\
Additionally, registrants are required to describe the nature of the
services provided that are categorized as Audit-Related Fees and All
Other Fees. The registrant is also required to

disclose the percentage of services in the Audit-Related Fees, Tax
Fees, and All Other Fees captions that were approved by the audit
committee pursuant to its preapproval policies and procedures.\49\
---------------------------------------------------------------------------

    \47\ See Release No. 34-47265.
    \48\ See Item 9(e) of Schedule 14A.
    \49\ Id.
---------------------------------------------------------------------------

C. Disclosure Requirements Regarding Proposal To Ratify Selection of
Independent Auditors

    While the audit committees of listed issuers are required to
appoint the issuer's auditors, many issuers solicit the approval or
ratification of the independent auditors from shareholders.\50\ If such
a proposal is solicited, the issuer must provide the information
required by Item 9 of Schedule 14A. Specifically, in addition to the
fee information and preapproval policies noted above, shareholders of
listed issuers must receive disclosure of the following:
---------------------------------------------------------------------------

    \50\ See Ernst & Young, ``Audit Committee Reporting to
Shareholders: Going Beyond the Minimum,'' (Feb. 2013), available at
http://www.ey.com/Publication/vwLUAssets/Audit_committee_reporting_to_shareholders%3A_going_beyond_the_minimum/%24FILE/Audit_committee_reporting_CF0039.pdf (noting that more than
90 percent of Fortune 100 companies seek annual shareholder
ratification of the auditor chosen by the audit committee); Ernst &
Young, ``Let's Talk: Governance--Audit Committee Reporting to
Shareholders 2014 Proxy Season Update,'' (Aug. 2014), available at
http://www.ey.com/Publication/vwLUAssets/ey-lets-talk-governance-
august-2014/$FILE/ey-lets-talk-governance-august-2014.pdf.
---------------------------------------------------------------------------

     The name of the auditor selected or being recommended for
the current year;
     the auditor for the most recently completed fiscal year,
if different from the one subject to the ratification;
     whether a representative from the auditor's firm will be
present at the meeting, will have the opportunity to make a statement,
and be available to respond to questions; and
     information regarding dismissed or resigned auditors as
required by Item 304(a) of Regulation S-K.\51\
---------------------------------------------------------------------------

    \51\ Item 9 of Schedule 14A (referring to Item 304(a) of
Regulation S-K [17 CFR 229.304(a)]).
---------------------------------------------------------------------------

    The rules do not require issuers to provide information about the
audit committee's process and reasons that lead to the selection of the
independent auditor subject to the ratification solicitation.

IV. Reasons To Seek Comment on the Audit Committee Reporting
Requirements

    While current audit committee reporting requirements provide
information about the role of the audit committee with respect to its
oversight of the auditor, these disclosures do not describe how the
audit committee executes its responsibilities. The ways in which an
audit committee discharges its responsibilities can be influenced by
its composition and the environment in which it operates. As discussed
below, the fact that a significant number of audit committees
voluntarily provide information beyond the disclosures required by our
current rules raises a question of whether there may be market demand
for such information.\52\ Similarly, during a series of roundtables
attended by audit committee members from various jurisdictions,
participants stated that investors and other stakeholders have
requested greater transparency about audit committee activities.\53\
However, there appears to be limited research as to why some companies
provide voluntary disclosure regarding audit committee activities and
whether and how such additional information impacts investors'
investment or voting decisions. For instance, variability in the nature
and extent of current voluntary disclosures could, to some extent, be
the result of tailoring the disclosures to a company's facts and
circumstances.
---------------------------------------------------------------------------

    \52\ See CAQ and Audit Analytics, ``2014 Audit Committee
Transparency Barometer,'' (Dec. 2, 2014), available at http://www.thecaq.org/docs/reports-and-publications/2014-audit-committee-transparency-barometer.pdf?sfvrsn=2 (``Audit Committee Transparency
Barometer''). In addition, a report based on a 2014 review of proxy
disclosures of Fortune 100 companies noted an upward trend in
voluntary disclosures by audit committees since 2012. See also Ernst
& Young, ``Let's Talk: Governance--Audit Committee Reporting to
Shareholders 2014 Proxy Season Update,'' (Aug. 2014).
    \53\ See Federation of European Accountants, the Institute of
Chartered Accountants Australia and the CAQ, ``Global Observations
on the Role of the Audit Committee,'' (May 13, 2013), available at
http://www.thecaq.org/docs/reports-and-publications/globalobservationsontheroleoftheauditcommittee.pdf?sfvrsn=2
(``Global Observations'').
---------------------------------------------------------------------------

    Providing additional disclosure about the audit committee's
oversight of the independent auditor could further inform investors
about the oversight process and provide them with useful context for
audit committee decisions. It may also 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. Therefore, the Commission is
seeking feedback to better understand whether additional audit
committee reporting requirements related to oversight of the auditor
would be useful to investors and if so, what information would be
useful.\54\
---------------------------------------------------------------------------

    \54\ For example, an academic paper indicates that events that
negatively impact the image of a company, such as a reporting
failure, have a direct impact on turnover of audit committee
members, while negative disclosures alone about audit committee
members appear to have limited or mixed impact on member turnover.
See Kachelmeier, S. et al., Why Do Ineffective Audit Committee
Members Experience Turnover? (September 18, 2013), available at
http://ssrn.com/abstract=1920850.
---------------------------------------------------------------------------

A. Public Discussion of the Need for Updated Audit Committee Reporting

    Investors, organizations representing audit committee members, and
auditors are among those that have expressed the need for audit
committees to evaluate their disclosures and consider whether
improvements can be made to provide investors with relevant information
that more transparently conveys the oversight responsibilities
performed by the audit committee relative to an issuer's auditor. For
example, a group of corporate governance and policy organizations has
expressed the view that public company audit committee reporting can
and should be strengthened.\55\ At a meeting in June of 2013, several
delegates from the Audit Committee Chair Advisory Council acknowledged
that ``[f]rankly, we don't do a good job of communicating what we do.
The public doesn't see all the work we do, quarter after quarter.''
\56\
---------------------------------------------------------------------------

    \55\ See A Call to Action supra note 2.
    \56\ Id. at 7, (quoting National Association of Corporate
Directors (``NACD'') Summary of Proceedings, Audit Committee Chair
Advisory Council, at 6 (June 19, 2013), available at http://www.nacdonline.org/Resources/Article.cfm?ItemNumber=7284). The Audit
Committee Chair Advisory Council is a group of audit committee
chairs, shareholder representatives, regulators and other
stakeholders that discuss ways to improve communications between
corporations and stakeholders, improve audit committee practices,
and give voice to audit committee members.
---------------------------------------------------------------------------

    Investors have also increased their focus on the activities and
transparency of audit committees, including those activities related to
enhancing audit quality through oversight of the independent auditor.
Some investors have sought greater disclosure from audit committees of
a number of public companies about matters such as the responsibility
of the audit committee for the appointment, compensation, and oversight
of the external auditor; audit firm tenure; audit firm fee
determinations; and audit committee involvement in the selection of the
audit engagement partner.\57\ Institutional investor groups have called
for additional audit committee disclosures as part of their published
``good corporate governance policies.'' \58\
---------------------------------------------------------------------------

    \57\ See A Call to Action at 6 (describing investors' increasing
interest and focus on the audit committee).
    \58\ See, e.g., Council of Institutional Investors, Policies on
Corporate Governance, Section 2.13 (updated Sept. 27, 2013),
available at http://www.cii.org/corp_gov_policies#BOD.

---------------------------------------------------------------------------

    Internationally, there appears to be interest in improving the
communication coming from audit committees. For example, one of the
themes that emerged at a 2013 summit hosted by the members of the Audit
Committee Leadership Networks in North America and Europe was the
recognition that ``[r]egulators, policy-makers, and many investors
would benefit from a more robust understanding of what the public
company audit committee does and how it oversees the external audit
firm and performs its other responsibilities.'' \59\
---------------------------------------------------------------------------

    \59\ See A Call to Action at 7, (citing Tapestry Networks,
ViewPoints, Issue 22, p.1 (May 2, 2013), available at http://www.tapestrynetworks.com/initiatives/corporate-governance/global-audit-committee-leadership-networks/upload/Tapestry_EY_ACLS_Summit_View22-May13.pdf).
---------------------------------------------------------------------------

    Some audit committee members, however, see additional reporting as
possibly contributing to a state of ``disclosure overload.'' \60\ Some
are also skeptical whether additional reporting would be helpful to
``stakeholders,'' ``in light of a lack of interest in audit committee
reporting currently required.'' \61\ Others have suggested the need for
principles-based reporting to allow for flexibility and to avoid a
``one size fits all'' approach.\62\ Given these varied views on the
usefulness and relevance of audit committee disclosures, the Commission
is seeking input on whether and how additional reporting may be useful
to investors.
---------------------------------------------------------------------------

    \60\ See Global Observations at 7; See also Center for Capital
Markets Competitiveness, Corporate Disclosure Effectiveness:
Ensuring a Balanced System that Informs and Protects Investors and
Facilitates Capital Formation, (Jul. 28, 2014), available at http://www.centerforcapitalmarkets.com/wp-content/uploads/2014/07/CCMC_Disclosure_Reform_Final_7-28-20141.pdf.
    \61\ Id.
    \62\ Id.
---------------------------------------------------------------------------

B. Divergence in Current Audit Committee Reporting Practice

    Some issuers, including their audit committees, already provide
disclosures that go beyond the required disclosures.\63\ For example, a
report by the CAQ and Audit Analytics reviewing the 2014 proxy
disclosures of 1,500 Standard & Poor's (``S&P'') composite companies,
including the S&P 500 (``S&P 500'') companies, the S&P MidCap 400
(``S&P MidCap'') companies, and the S&P SmallCap 600 (``S&P SmallCap'')
companies noted the following:
---------------------------------------------------------------------------

    \63\ See, e.g., A Call to Action at 7.
---------------------------------------------------------------------------

     83% of S&P 500, 69% of S&P MidCap, and 58% of S&P SmallCap
companies discussed how non-audit services may impact auditor
independence;
     47% of S&P 500, 42% of S&P MidCap, and 50% of S&P SmallCap
companies disclosed the length of time an auditor has been engaged;
     13% of S&P 500, 10% of S&P MidCap, and 8% of S&P SmallCap
companies discussed the audit committee's considerations of
qualifications, geographic reach, and firm expertise when appointing
the auditor;
     8% of S&P 500, 7% of S&P MidCap, and 15% of S&P SmallCap
companies discussed the criteria considered when evaluating the audit
firm;
     3% of S&P 500, 2% of S&P MidCap, and 1% of S&P SmallCap
companies disclosed the significant areas addressed with the auditor;
     13% of S&P 500 and 1% of both S&P MidCap and S&P SmallCap
companies included an explicit statement that the audit committee is
involved in the selection of the audit engagement partner; and
     13% of S&P 500, 4% of S&P MidCap and 1% of S&P SmallCap
companies discussed audit fees and their connection to audit
quality.\64\
---------------------------------------------------------------------------

    \64\ See Audit Committee Transparency Barometer.
---------------------------------------------------------------------------

    These additional disclosures are voluntary, not consistently
provided and may vary among registrants, depending on company
characteristics.\65\ Some audit committees may disclose only what is
specifically required, for a variety of reasons, for instance, to avoid
legal exposure,\66\ to avoid incremental associated efforts of the
disclosure process, or because they do not believe such additional
information would be useful to investors.
---------------------------------------------------------------------------

    \65\ According to the observations of an accounting firm,
variability in reporting may also be the result of, among other
things, differences in regulatory and listing requirements across
jurisdictions and interest by investors and others for disclosures
that go beyond the minimum. See Ernst & Young, ``Enhancing audit
committee transparency: Themes in audit committee disclosures in
Australia, Canada, Singapore, the UK and the US'' (Mar. 2015),
available at http://www.ey.com/Publication/vwLUAssets/EY-Enhanced-
audit-committee-transparency-themes-in-audit-committee-disclosures/
$FILE/EY-Enhanced-audit-committee-transparency-themes-in-audit-
committee-disclosures.pdf.
    \66\ See NACD Summary of Proceedings, Audit Committee Chair
Advisory Council, (June 19, 2013).
---------------------------------------------------------------------------

C. PCAOB Standard-Setting Projects

    The PCAOB is engaged in standard-setting initiatives that could
result in additional information being disclosed related to the auditor
and its work. One project has been exploring a requirement that the
auditor disclose, in the auditor's report, the name of the engagement
partner as well as the names, locations, and extent of participation of
other independent public accounting firms that took part in the audit
and the locations and extent of participation of other persons not
employed by the auditor that took part in the audit.\67\
---------------------------------------------------------------------------

    \67\ See PCAOB Release No. 2013-009, Improving Transparency
Through Disclosure of Engagement Partner and Certain Other
Participants in Audits (Dec. 4, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx. Similar
requirements exist in other jurisdictions, including but not limited
to, the European Union, United Kingdom, Australia, Sweden, China,
and Taiwan. Academic research has supported that, in at least these
particular jurisdictions, information about individual audit
partners, over and above information about the audit firm, is
relevant to financial statement users for both public and private
firms. See Carcello, J. and C. Li., Cost and Benefits of Requiring
an Engagement Partner Signature: Recent Experience in the United
Kingdom, 88 The Accounting Review, 1511 (2013); Aobdia, D. et al.,
Capital Market Consequences of Individual Audit Partners, The
Accounting Review, (forthcoming) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2321333 (discussing
Taiwan's mandate regarding disclosure of individual audit partners);
Knechel, R. et al., Does the Identity of Engagement Partners Matter?
An Analysis of Audit Partner Reporting Decisions, Contemporary
Accounting Research, (forthcoming) available at https://www.caaa.ca/_files/file.php?fileid=filerSDAxJgThx&filename=file_Knechel__Vanstraelen__Zerni__Does_the_Identity_of_Engagement_Partners_Matter.pdf (discussing
Sweden's disclosure requirement); Gul, F.A. et al., Do Individual
Auditors Affect Audit Quality? Evidence From Archival Data, 88 The
Accounting Review, 1993 (2013) (discussing China's disclosure
requirement); and The Association of Chartered Certified Accountants
and Macquarie University, The Drivers of Audit Quality: Views From
Australian CFOs, (2014), available at http://www.accaglobal.com/content/dam/acca/global/PDF-technical/audit-publications/pol-tp-daq1(cfo)-drivers-audit-quality.pdf.
---------------------------------------------------------------------------

    Some investors have indicated that the engagement partner's track
record compiled from the disclosure of the partner's name would be
relevant in ``overseeing the audit committees and determining how to
cast votes on more than two thousand proposals that are presented
annually to shareholders on whether to ratify the board's choice of
outside auditor.'' \68\ Audit firms and other commenters questioned
whether the auditor's report is the most appropriate place to provide
this information, for example, due to potential liability concerns.\69\
As a

result, the PCAOB is seeking further comment on whether these concerns
would be sufficiently addressed by providing the information in an
alternative location, outside of the auditor's report and outside of
the issuer's filing.\70\
---------------------------------------------------------------------------

    \68\ See, Reproposed Rule Comment Letter of the Council of
Institutional Investors (Aug. 15, 2014), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx.
    \69\ Some commenters voiced the concern, for example, that the
PCAOB's December 2013 reproposal on disclosure of the engagement
partner and other participants in the audit may lead to the
engagement partner and other participants (other independent public
accounting firms and other persons not employed by the auditor)
being deemed experts for purposes of liability under Section 11 of
the Securities Act of 1933 (``Securities Act''). See, e.g.,
Reproposed Rule Comment Letters of Deloitte & Touche LLP (Feb. 3,
2014), PricewaterhouseCoopers LLP (Feb 4, 2014), Ernst & Young LLP
(Feb 12, 2014), Society of Corporate Secretaries & Governance
Professionals (Mar. 12, 2014), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx.
    \70\ PCAOB Release No. 2015-004, Supplemental Request for
Comment: Rules to Require Disclosure of Certain Audit Participants
on a New PCAOB Form (June 30, 2015), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx.
---------------------------------------------------------------------------

    Commenters on the PCAOB's proposal have also suggested that it may
be more appropriate for any requirement for proposed disclosures to be
considered by the Commission, rather than the PCAOB, because having
these disclosures made by the issuer, in the audit committee report or
proxy statement, appears aligned with the responsibilities outlined in
Section 10A(m) of the Exchange Act.\71\ Requiring any such disclosure
by the audit committee would require Commission action because the
PCAOB does not have authority over issuer disclosures.
---------------------------------------------------------------------------

    \71\ See Reproposed Rule Comment Letters of Dennis R. Beresford
(Jan 6, 2014), Institute of Management Accountants (Jan 21, 2014),
Charles Noski (Jan 13, 2014), James L. Fuehrmeyer, Jr. (Jan 22,
2014), Audit and Assurance Services Committee of the Illinois CPA
Society (Feb 3, 2014), Professional Standards Committee of the Texas
Society of Certified Public Accountants (Feb 3, 2014), CAQ (Feb 3,
2014), Auditing Standards and SEC Committees of the New York State
Society of Certified Public Accountants (Feb 4, 2014),
PricewaterhouseCoopers LLP (Feb 4, 2014), Ernst & Young LLP (Feb 12,
2014), Crowe Horwath (Feb 12, 2014), G. Lawrence Buhl, CPA (Mar 5,
2014), U.S. Chamber of Commerce, Center for Capital Market
Competitiveness (Mar 10, 2014), KPMG LLP (Mar 13, 2014), Financial
Management and Assurance, U.S. Government Accountability Office (Mar
17, 2014), Robert N. Waxman, CPA (Mar 17, 2014), and CohnReznik LLP
(Mar 17, 2014), available at  http://pcaobus.org/Rules/Rulemaking/Pages/Docket029Comments.aspx.
---------------------------------------------------------------------------

    Another PCAOB initiative could result in disclosure of additional
information about the audit and the auditor, including the auditor's
tenure, in the auditor's report.\72\ Some commenters believe the
disclosure of auditor tenure in the auditor's report would be useful
because it could help investors evaluate the audit committee's
oversight of the auditor (including its rationale for selecting or
retaining the auditor) and develop a basis for shareholders to ratify
the audit committee's selection of the auditor, when applicable.\73\
Others raised concerns about the lack of evidence correlating auditor
tenure and audit quality and whether the placement of this data in the
auditor's report would imply that some correlation exists.\74\ Some
believe that issuer filings with the Commission would be a more
appropriate location for this disclosure.\75\
---------------------------------------------------------------------------

    \72\ See PCAOB Release No. 2013-005, Proposed Auditing Standards
on the Auditor's Report and the Auditor's Responsibilities Regarding
Other Information and Related Amendments (Aug. 13, 2013), available
at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx.
    \73\ See, e.g., Proposed Rule Comment Letters of Counsel of
Institutional Investors (Dec. 16, 2013), CFA Institute (Dec. 30,
2013), and Peter Clapman (Dec. 5, 2013), available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx.
    \74\ See, e.g., Proposed Rule Comment Letters of Deloitte and
Touche, LLP (Dec. 11, 2013), NAREIT (Dec. 11, 2013), Tyson Foods,
Inc. (Dec. 11, 2013), Nucor (Dec. 10, 2013), Williams (Dec. 4,
2013), Acuity Brands (Nov. 26, 2013), available at  http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx. Despite
commenters' views, there is some academic evidence connecting
auditor tenure and audit quality, which is discussed in Section
VI.C.3.
    \75\ See, e.g., Proposed Rule Comment Letters of National
Association of Corporate Directors (Dec. 11, 2013) (suggesting that
the Commission should consider inclusion of tenure information in
proxy statements if there is sufficient investor interests),
Federation of European Accountants (Dec. 11, 2013) (stating its
belief that an auditor could disclose tenure if it is not already
disclosed in management's report or annual financial statements),
Institute of Management Accountants (Nov. 12, 2013) (objecting to
inclusion in the auditor's report and noting that it may be a
corporate governance matter included in the proxy statement), and
BlackRock, Inc. (Oct. 30, 2013) (not objecting to the inclusion
while noting that inclusion in an issuer filing may be preferable),
available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Comments.aspx.
---------------------------------------------------------------------------

D. Initiatives in Other Jurisdictions To Enhance Audit Committee
Reporting

    Other jurisdictions also have been exploring expanded reporting
with respect to audit committees. For example, in 2012, the UK
Financial Reporting Council adopted amendments to its Corporate
Governance Code that require a separate section of the annual report
that describes the work of the audit committee in discharging its
responsibilities.\76\ The report now includes, among other things, the
significant issues considered in relation to the financial statements
and how they were addressed; how the audit committee assessed the
effectiveness of the audit process; the approach to appointing the
auditor and how objectivity and independence are safeguarded relative
to non-audit services; as well as information on the length of tenure
of the current audit firm and when a tender was last conducted.
---------------------------------------------------------------------------

    \76\ Section C.3.8 of the UK Corporate Governance Code,
available at https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-Governance-Code.aspx.
---------------------------------------------------------------------------

    The International Auditing and Assurance Standards Board (the
``IAASB'') has also acknowledged the merits of enhanced disclosure
around the activities of the audit committee. In connection with its
efforts to develop a framework for audit quality, it has stated:

    While users are likely to conclude that the active involvement
of a high-quality audit committee will have a positive impact on
audit quality, there is considerable variability in the degree to
which audit committees communicate to users the way they have
fulfilled these responsibilities. There is potential for fuller
disclosure of the activities of audit committees to benefit both
actual audit quality and user perception of it. Consequently, some
countries are actively exploring whether to include more information
in annual reports about the activities of audit committees in
relation to the external audit.\77\
---------------------------------------------------------------------------

    \77\ IAASB, ``A Framework for Audit Quality,'' p. 48 (Jan. 15,
2013), available at http://www.ifac.org/publications-resources/framework-audit-quality.

    An amendment to the Directive on Statutory Audits adopted by the
European Union in April 2014 \78\ included measures to strengthen the
independence of statutory auditors, make the audit report more
informative, and strengthen audit supervision. The Directive amendment
reinforces the role of the audit committee by expanding its
responsibilities in ensuring the quality of the audit being performed,
giving it responsibility for the auditor appointment process, and
enhancing the auditor's reporting requirements to the audit
committee.\79\ Specifically, the Directive requires that the audit
committee explain to the issuer's board how the auditor contributed to
the integrity of the financial statements and how the committee
assessed threats to the auditor's independence and implemented
appropriate safeguards, and also requires the audit committee obtain a
detailed report from the auditor on the results of the audit.
---------------------------------------------------------------------------

    \78\ See Directive 2014/56/EU of the European Parliament and
Council of April 16, 2014, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0056&from=EN.
    \79\ Id.
---------------------------------------------------------------------------

    Corporate governance practices, regulations, and enforcement vary
across countries.\80\ Therefore, the Commission is interested in
understanding whether enhanced audit committee disclosures would result
in benefits for U.S. investors.
---------------------------------------------------------------------------

    \80\ OECD, ``Corporate Governance Factbook,'' (Feb. 2014),
available at http://www.oecd.org/daf/ca/CorporateGovernanceFactbook.pdf.
---------------------------------------------------------------------------

E. References to PCAOB Auditing Standards

    With the Commission's approval of PCAOB Auditing Standard No. 16,
Communications with Audit Committees (``AS 16'') in 2012, changes

to the required audit committee communications by the auditor, among
others, were incorporated within PCAOB auditing standards and
superseded the prior communication requirements in AU sec. 380.\81\ As
a result, Item 407(d) of Regulation S-K is no longer current because it
references AU sec. 380. In addition to this outdated reference, there
are required communications in other PCAOB standards that are not
reflected in current audit committee disclosure requirements.\82\
Moreover, the existing audit committee report does not address the
Commission's communication requirements in Rule 2-07 of Regulation S-X.
---------------------------------------------------------------------------

    \81\ See Release No. 34-68453, Public Company Accounting
Oversight Board; Order Granting Approval of Proposed Rules on
Auditing Standard No. 16, Communications with Audit Committees, and
Related and Transitional Amendments to PCAOB Standards (Dec. 17,
2012) [77 FR 75689].
    \82\ Appendix B to AS 16 identifies other PCAOB rules and
standards that require audit committee communications, such as
communications related to an audit of internal control over
financial reporting that is integrated with an audit of financial
statements, related party transactions, fraud considerations, and
illegal acts, among others.
---------------------------------------------------------------------------

    The change to the communication requirements within the auditing
standards without a corresponding change in the audit committee
reporting requirements has resulted in divergent practices. For
example, some companies' audit committee reports refer to matters
required to be communicated under AS 16; others refer to matters
required to be communicated under all PCAOB standards. Still others
continue to refer to communications under AU sec. 380, even though AU
sec. 380 has been superseded. These differences in reporting may result
in confusion among readers of the audit committee reports as to whether
appropriate auditor and audit committee communications have occurred
and therefore, suggest a need to consider updating the audit committee
disclosure requirements.

V. Focus on Audit Committee Oversight of the Auditor

    The Commission is interested in understanding whether changes
should be made to required disclosures about audit committees regarding
oversight of the audit and the auditor relationship. The Commission is
also interested in understanding whether this additional information
would help inform investment decisions and, where applicable, voting
decisions regarding the ratification of auditors and the election of
directors who are members of the audit committee.

Request for Comment

    1. Do the current audit committee reporting requirements result in
disclosures that provide investors with useful information? Why or why
not? Are there changes to the current audit committee disclosure
requirements that the Commission should consider that would better
inform investors about the audit committee's oversight of the audit and
the independent auditor?
    2. Are there existing disclosure requirements in this area that
should be revised, reconsidered or removed? If so, which ones? How and
why should they be changed?
    3. Would investors find additional or different audit committee
reporting requirements useful given the committee's strengthened and
expanded role in overseeing a company's independent auditor that
resulted from the Sarbanes-Oxley Act? For example, to what extent is
information regarding how the audit committee discharges its
responsibilities useful to investors given the nature of the
requirements and likely variability in performance? Also, are there
particular audit committee responsibilities for which information would
be likely more or less useful and why?
    4. What, if any, are potential challenges that issuers or audit
committees may face that the Commission should consider as it assesses
potential changes to disclosures in this area?
    5. Are there other areas where changes to the current audit
committee disclosure requirements would be desirable? If so, what are
they?
    6. Should the audit committee provide disclosure of its work in
other areas, for example, its oversight of the financial reporting
process or the internal audit function? If so, what types of
disclosures would be most useful and why?

VI. Potential Changes to Disclosures

    The Commission is seeking comment on potential changes to required
disclosures regarding an audit committee's role and responsibilities
relative to the audit and the auditor, and other potential related
changes. The Commission is seeking feedback on the disclosure
requirements to determine the extent to which adding, removing, or
modifying certain audit committee disclosures would enhance the
usefulness of such disclosures for investors.
    The purpose of the disclosures discussed below would be to address
the audit committee's responsibilities with respect to the appointment,
compensation, retention, and oversight of the work of the registered
public accounting firm and better inform investors about how the audit
committee executes those responsibilities. The Commission is seeking
feedback on the content and scope of the audit committee disclosures,
as well as commenters' views on which of these disclosures, if any,
would be most useful in conveying how the audit committee executes its
oversight of the auditor and whether such enhanced disclosures would be
useful to investors' investment or voting decisions.
    Such disclosures could provide information that frequently is
either not readily available or inconsistently available today to
investors. These disclosures could also minimize the ``expectations
gap'' that some have expressed exists between investors and the audit
committee regarding the role of the audit committee.\83\ In a series of
roundtables organized by the CAQ, the Federation of European
Accountants, and the Institute of Chartered Accountants Australia in
January and February of 2013, participants noted that stakeholders'
expectations are not consistent with the audit committee's actual
responsibilities and how they are discharged, which results in the
current expectations gap.\84\
---------------------------------------------------------------------------

    \83\ See Global Observations.
    \84\ Id.
---------------------------------------------------------------------------

    For purposes of this concept release, the Commission has
categorized the specific audit committee disclosures about which the
Commission is interested in receiving comment into three groups: the
audit committee's oversight of the auditor, the audit committee's
process for selecting the auditor, and the audit committee's
consideration of the qualifications of the audit firm and certain
members of the engagement team when selecting the audit firm. The
Commission is also interested in receiving comments on where the audit
committee disclosures should be located and whether there are specific
concerns relating to smaller reporting companies \85\ and emerging
growth companies.\86\ In Section VII of this release, the Commission
also asks more general questions with respect to any potential new
disclosures.
---------------------------------------------------------------------------

    \85\ See Rule 12b-2 of the Exchange Act [17 CFR 240.12b-2].
    \86\ See Section 2(a)(19) of the Securities Act [15 U.S.C.
77b(a)(19)] and Section 3(a)(80) of the Exchange Act [15 U.S.C.
78c(a)(80)].

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A. Audit Committee's Oversight of the Auditor

1. Additional Information Regarding the Communications Between the
Audit Committee and the Auditor
    As noted in Section III.A, the audit committee report today
discloses whether certain communications have occurred. Potential
additional disclosures about the communications might provide
additional information about the actions the audit committee has taken
during the most recently completed fiscal year to oversee the auditor
and the audit. Also, as previously discussed, current requirements for
the audit committee report contain an outdated reference to AU sec.
380, which was superseded by AS 16. In addition to correcting this
reference, the Commission is considering whether to require additional
qualitative disclosures about the nature and timing of the required
communications between the audit committee and the auditor.
    For instance, the PCAOB has required that the auditor communicate
with the audit committee prior to the issuance of the auditor's
report.\87\ The disclosure rules could require the audit committee to
discuss not just whether and when all of the required communications
occurred, but also the audit committee's consideration of the matters
discussed. Such communications and related disclosures could address,
for instance, the nature of the audit committee's communications with
the auditor related to items such as the auditor's overall audit
strategy, timing, significant risks identified, nature and extent of
specialized skill used in the audit, planned use of other independent
public accounting firms or other persons, planned use of internal
audit, basis for determining that the auditor can serve as principal
auditor, and results of the audit, among others, and how the audit
committee considered these items in its oversight of the independent
auditor.
---------------------------------------------------------------------------

    \87\ See paragraph 26 of AS 16.
---------------------------------------------------------------------------

Request for Comment

    7. Should the Commission consider modifying any of the existing
audit committee disclosure requirements regarding communications with
the auditor? If so, which disclosure requirements should the Commission
consider modifying and what modifications should be made?
    8. Should the Commission update the existing disclosure
requirements to include all communications required by Commission rules
and PCAOB standards rather than only those required by AS 16? Would
expanding the requirements to encompass all required communications
create difficulties for issuers or audit committees in complying with
the disclosure requirements? Why or why not?
    9. Should there be disclosure about the audit committee's
consideration beyond a statement that they have received and discussed
the matters communicated by the auditor as required by PCAOB Rule 3526,
Communication with Audit Committees Concerning Independence? If so,
what should be included in the disclosure?
    10. Currently, audit committees are only required to disclose
whether the required communications occurred. Are statements confirming
that required communications have occurred helpful disclosure? Why or
why not?
    11. Should there be disclosures regarding the nature or substance
of the required communications between the auditor and the audit
committee? Are there other types of communications between the audit
committee and the auditor about which the Commission should consider
mandating disclosure?
    12. Should such discussion be required to address all required
communication topics or a subset of overarching topics related to how
the auditor planned and performed the audit? For instance, should the
audit committee disclose information regarding how the audit committee
considered the nature of the required communications that were made
under paragraphs 9 and 10 of AS 16 as it relates to significant risks
identified, nature and extent of specialized skill used in the audit,
planned use of the company's internal auditors, involvement by other
independent public accounting firms or other persons, and the basis for
determining that the auditor can serve as the principal auditor in its
oversight of the independent auditor? Should the audit committee
disclose how it dealt with disagreements between company management and
the auditor? If so, what should be included in the disclosure? Are
there other categories of the communications between auditors and the
audit committee that should be considered for disclosure?
    13. For audits involving multiple locations, should the audit
committee report disclose information regarding how the audit committee
considered, in its oversight of the auditor, the scope of the audit,
locations visited by the auditor, and the relative amount of account
balances related to such locations compared to the consolidated
financial statements?
    14. Communications between the auditor and the audit committee may
not be limited to the items required by Commission rules and PCAOB
standards. Should the audit committee report be required to disclose
any information about the extent to which additional matters were
discussed with the auditor? If so, what level of detail should be
required?
    15. Are there benefits, costs or unintended consequences that could
result from requiring disclosure that goes beyond a statement that the
required discussions have occurred? How would the disclosures be used
by institutional and retail investors, investment advisers, and proxy
advisory firms in making voting decisions and recommendations on
matters such as director elections, executive compensation, or
shareholder proposals, among others?
    16. Would the potential disclosures referenced here be decision-
useful to investors? If so, would it be sufficient for the disclosure
to address the consideration given by the audit committee without
necessarily disclosing the underlying substance? Would disclosing the
substance of the communications between the audit committee and the
auditor be useful to investors? Why or why not?
    17. Could these potential disclosures chill communications between
the audit committee and the auditor? If so, how? Could they reveal
proprietary information about the issuer or the audit methodology? If
so, how?
2. The Frequency With Which the Audit Committee Met With the Auditor
    The audit committee and auditor can determine the timing, frequency
and forum (e.g., in-person or telephonically and extent of committee
participation) for meetings, provided that required communications are
made in accordance with PCAOB standards and Commission rules.\88\ Also,
there are listing requirements that the audit committee meet separately
and periodically with management, the internal auditor, and the
independent auditor.\89\ Recognizing that the number of audit committee
meetings is already required to be disclosed,\90\ requiring additional
disclosure about the specific meetings with the auditor may provide

additional insight into the audit committee's oversight of the auditor.
---------------------------------------------------------------------------

    \88\ AS 16 and Rule 2-07 of Regulation S-X.
    \89\ See NYSE Listed Company Manual, Section 303A.07(E) and the
Commentary to Section 303A.07(E).
    \90\ See Item 407(b)(3) of Regulation S-K.
---------------------------------------------------------------------------

Request for Comment

    18. Should there be additional disclosures required about the
meetings the audit committee has had with the auditor? If so, what type
of disclosures should be made and why? If not, why not?
    19. Should the audit committee report disclose the frequency with
which it met privately with the auditor? Would confirmation that
private conversations occurred be useful disclosure even if there are
no disclosures about the topics discussed? Should there be a
requirement to disclose the topics discussed?
3. Review of and Discussion About the Auditor's Internal Quality Review
and Most Recent PCAOB Inspection Report
    Pursuant to certain listing requirements, the audit committee must
obtain and review a report by the independent auditor describing the
firm's internal quality-control procedures,\91\ any material issues
raised by the most recent internal quality-control review, or peer
review, of the firm, or by any inquiry or investigation by governmental
or professional authorities, within the preceding five years, with
respect to one or more independent audits carried out by the firm.\92\
Audit committees not subject to these listing standards may choose to
request or discuss this information with their auditors, but they are
not required to do so.
---------------------------------------------------------------------------

    \91\ Paragraphs .04-.07 of PCAOB QC Section 30, Monitoring a CPA
Firms Accounting and Auditing Practice, discuss the requirements
related to an audit firm's internal quality-control review.
    \92\ See NYSE Listed Company Manual, Section 303A.07(b)(iii)(A).
---------------------------------------------------------------------------

    Information about the results of internal quality reviews, or a
PCAOB inspection of a company's audit, as well as more general
inspection results, can help an audit committee in carrying out its
oversight role. Inspection reports can inform an audit committee about
how its auditor performed in high-risk areas across audits. As the
PCAOB has stated, ``[t]he [Sarbanes-Oxley] Act does not permit the
[PCAOB] to make public, or otherwise to share with an audit committee,
all of the information obtained by the PCAOB that could assist an audit
committee in carrying out its role. . . . Beyond the public portion of
an inspection report, voluntary disclosure by the inspected audit firm
is an audit committee's only means of obtaining information concerning
a PCAOB inspection.'' \93\ The PCAOB also has provided sample questions
an audit committee may wish to ask auditors. Specifically, the PCAOB
stated:
---------------------------------------------------------------------------

    \93\ See PCAOB Release No. 2012-003, Information for Audit
Committees about the PCAOB Inspection Process (Aug. 1, 2012),
available at http://pcaobus.org/Inspections/Documents/Inspection_Information_for_Audit_Committees.pdf.

    [W]ithout necessarily framing discussions in terms of an
inspection or an inspection report, an audit committee might benefit
from having an understanding with its audit firm through which the
audit committee receives timely information (both during the conduct
of the inspection and when the Board has issued a final inspection
report) about--
     whether anything has come to the firm's attention
suggesting the possibility that an audit opinion on the company's
financial statements is not sufficiently supported, or otherwise
reflecting negatively on the firm's performance on the audit, and
what if anything the firm has done or plans to do about it;
     whether a question has been raised about the fairness
of the financial statements or the adequacy of the disclosures;
     whether a question has been raised about the auditor's
independence relative to the company;
     whether any of the matters described in the public
portion of an inspection report on the firm, whether or not they
involve the company's audit, involve issues and audit approaches
similar to those that arise or could arise in the audit of the
company's financial statements;
     to the extent any such similarity exists, whether and
how the firm has become comfortable that the same or similar
deficiencies either did not occur in the audit of the company's
financial statements or have been remedied; and how issues described
by the Board in general reports summarizing inspection results
across groups of firms relate to the firm's practices, and
potentially the audit of the company's financial statements, and how
the firm is addressing those issues.\94\
---------------------------------------------------------------------------

    \94\ Id. at p. 10-11.

    Disclosure could be required as to whether this type of discussion
has occurred. There also could be disclosure required about the nature
of any discussions held with the auditor about the results of the
firm's internal quality review and most recent PCAOB inspection. These
disclosures may provide transparency with respect to the extent of the
audit committee's oversight of the auditor.

Request for Comment

    20. Would disclosure about the audit committee's review and
discussion of the audit firm's internal quality-control review and most
recent PCAOB inspection report be useful to investors? If so, what
types of disclosures should be made in this regard? Would disclosures
about the nature and extent of such discussions be useful without
disclosure of the specific review or inspection results? Should the
disclosures include information about how the audit committee
considered any deficiencies described in the PCAOB inspection report on
the audit process? If not, why not?
    21. Is there a risk that the confidentiality of the nonpublic PCAOB
inspection results could be undermined (e.g., if this information is
sought and provided through the audit committee)? If so, what type of
information could be presented that might be problematic?
    22. Should we require disclosure about how the audit committee
considered the results described in PCAOB inspection reports in its
oversight of the auditor? Why or why not?
    23. Are there particular issues or challenges in this area that
should be considered? If so, please describe and provide data.
4. Whether and How the Audit Committee Assesses, Promotes and
Reinforces the Auditor's Objectivity and Professional Skepticism
    Through its interactions with the auditor, the audit committee may
be in a position to assess, promote, and reinforce the auditor's
objectivity and professional skepticism. Heightened oversight by the
audit committee of the auditor's objectivity and professional
skepticism should promote greater audit quality. The audit committee
could disclose whether, and if so how, as part of its oversight of the
auditor, it assesses, promotes, or reinforces the auditor's objectivity
and professional skepticism. Additionally, the audit committee could
disclose the results of its evaluation of the auditor's objectivity and
professional skepticism.

Request for Comment

    24. Would investors find disclosure about whether, and if so how,
the audit committee assesses, promotes, and reinforces the auditor's
objectivity and professional skepticism useful? Why or why not?
    25. What specific types of disclosures could the audit committee
make in this regard? For example, should the audit committee disclose
whether, and if so how, it evaluated the auditor's objectivity and
professional skepticism, as well as the results of such an evaluation?
Commenters are encouraged to provide examples of such disclosures.

B. Audit Committee's Process for Appointing or Retaining the Auditor

    For listed issuers, the audit committee is responsible for
appointing the auditor and deciding whether to retain an auditor.\95\
However, satisfying this requirement can involve a wide range of
activities. In fulfilling this responsibility, the audit committee may
conduct an assessment of the current auditor. It may also decide to
seek requests for proposals from other auditors. Potential disclosures
could provide information about the actions the audit committee took in
reaching a decision about which auditor to select for the upcoming
fiscal year's audit.
---------------------------------------------------------------------------

    \95\ Even for non-listed issuers, the audit committee may have a
role in the selection of the auditor. See, e.g., paragraphs 4-7 of
AS 16.
---------------------------------------------------------------------------

1. How the Audit Committee Assessed the Auditor, Including the
Auditor's Independence, Objectivity and Audit Quality, and the Audit
Committee's Rationale for Selecting or Retaining the Auditor
    Disclosure about the process the audit committee undertook and the
criteria used to assess the auditor and the audit committee's rationale
for selecting or retaining the auditor could provide transparency into
how the audit committee oversees the auditor and the rigor with which
the audit committee exercises its responsibility to appoint a new, or
retain an existing, auditor. In addition to the steps involved in the
process to assess the auditor, disclosure also could be provided
regarding the specific elements or criteria the audit committee
considered during the process. Disclosures could, for example, include
a description of the nature of the audit committee's involvement in
evaluating and approving the auditor's compensation.
    There are also numerous ongoing efforts to identify ways to assess
audit quality (``audit quality indicators'') and these efforts may
result in published metrics and criteria that could be used for
providing insight into audit quality.\96\ Audit committees may choose
to use the output from these efforts to guide discussion with the
auditor about audit quality. To the extent the audit committee uses
such indicators or metrics in assessing the quality of the auditor and
the audit, disclosure about the use and consideration of such metrics
may provide useful information about the audit committee's process for
assessing the auditor and determining whether to select or retain the
auditor.
---------------------------------------------------------------------------

    \96\ Organizations such as the PCAOB, IAASB, and CAQ have
discussed projects related to audit quality frameworks or
indicators. The CAQ has published, ``The CAQ Approach to Audit
Quality Indicators'' available at http://www.thecaq.org/docs/reports-and-publications/caq-approach-to-audit-quality-indicators-april-2014.pdf?sfvrsn=2.
---------------------------------------------------------------------------

Request for Comment

    26. What types of disclosures could be made regarding the process
the audit committee undertook to evaluate the external audit and
performance and qualifications of the auditor, including the rationale
for selecting or retaining the auditor?
    27. Should the disclosures include a description of the nature of
the audit committee's involvement in approving the auditor's
compensation, including how compensation is determined and evaluated?
Should the disclosures include the criteria or elements the audit
committee considered? Should the audit committee provide additional
disclosure about the nature and extent of non-audit services and its
evaluation on how such services relate to its assessment of
independence and objectivity?
    28. If audit quality indicators are used in the evaluation of the
auditor, should there be disclosure about the indicators used,
including the nature, timing, and extent of audit quality indicators
considered by the audit committee? \97\ If audit quality indicators are
not used in the evaluation of the auditor, what, if any, disclosures
regarding the assessment of audit quality should be provided?
---------------------------------------------------------------------------

    \97\ See PCAOB Release No. 2015-005, Concept Release on Audit
Quality Indicators (June 30, 2015).
---------------------------------------------------------------------------

2. If the Audit Committee Sought Requests for Proposal for the
Independent Audit, the Process the Committee Undertook To Seek Such
Proposals and the Factors They Considered in Selecting the Auditor
    The audit committee may periodically seek requests for proposals
for the independent audit. Disclosures about the process the audit
committee undertook, including the number of auditors that were asked
to propose, information on how those auditors were selected, and the
information that the audit committee used in its decision, may provide
information about the audit committee's process in selecting or
retaining an auditor and about the quality and qualifications of the
auditor selected. Additionally, academic research is mixed as to
whether companies engage in ``opinion-shopping.'' \98\ The Commission
is interested in knowing whether relevant disclosures of the audit
committee's process in selecting the auditor might be useful to
investors.
---------------------------------------------------------------------------

    \98\ See Lennox, C., Do Companies Successfully Engage in
Opinion-Shopping? Evidence from the UK, 29 Journal of Accounting and
Economics, 321 (2000); and Chan, H.K. et al., A Political-Economic
Analysis of Auditor Reporting and Auditor Switches, 11 Review of
Accounting Studies, 21 (2006), both of which provide evidence that
opinion shopping may occur. In contrast, in the United States, a
study of auditor changes from the four largest U.S. accounting firms
to small, not mid-market, audit firms found market reactions that
support the notion of auditor changes in the post-Sarbanes-Oxley Act
and PCAOB inspection era as being driven by better services. These
results refute a notion of opinion shopping or shopping for lower
audit fees. These authors also note that academic research in the
1980s and 1990s indicated that opinion shopping is generally
unsuccessful. Chang, H. et al., Market Reaction to Auditor Switching
from Big 4 to Third-Tier Small Accounting Firms, 29 Auditing: A
Journal of Practice and Theory, 85 (2010).
---------------------------------------------------------------------------

Request for Comment

    29. What types of disclosures could be made about requests for
proposals for the audit, including the process undertaken and the
factors considered in selecting the audit firm?
    30. Should there be disclosure as to whether the audit committee
sought proposals for the audit (including the reason the request for
proposal was made), or whether the audit committee has a policy in this
regard?
3. The Board of Directors' Policy, if any, for an Annual Shareholder
Vote on the Selection of the Auditor, and the Audit Committee's
Consideration of the Voting Results in its Evaluation and Selection of
the Audit Firm
    In those cases where a company voluntarily seeks ratification of
its auditor, requiring additional disclosure may be useful to promote
informed voting decisions. The Commission is interested in feedback on
potential disclosure about the board of directors' policy, if any, for
annual shareholder vote on the selection of the auditor, and the audit
committee's consideration of the voting results in evaluating and
selecting the audit firm, including situations where the audit firm
fails to achieve majority support. Such disclosure could provide useful
information to shareholders as to how and why the board is seeking
ratification of the auditor, as well as the implication of the
shareholder vote being solicited.

Request for Comment

    31. Would additional disclosures in this area provide meaningful
additional information with respect to the selection of the auditor? If
so, what types of disclosures should the Commission require to be made
in this regard? For example, in addition to disclosure of whether there
is a policy about shareholder ratification, should there

also be disclosure of the factors the board considered in establishing
the policy?
    32. If there are a significant number of votes against the
ratification, and the board nevertheless proceeds with the auditor in
question, should the audit committee report provide the reasons why the
board determined to go forward with that auditor? If not in the audit
committee report, where should this information be provided and when
should it be provided?
    33. If it is determined that additional disclosure is required in
this area, should voting on ratifications of independent auditors
continue to be considered a ``routine matter'' allowing for
discretionary voting by brokers on such ratifications pursuant to NYSE
Rule 452? \99\
---------------------------------------------------------------------------

    \99\ NYSE General Rules, Operation of Member Organizations, Rule
452 available at http://nyserules.nyse.com/nysetools/PlatformViewer.asp?SelectedNode=chp_1_2&manual=/nyse/rules/nyse-rules/.
---------------------------------------------------------------------------

C. Qualifications of the Audit Firm and Certain Members of the
Engagement Team Selected By the Audit Committee

    In the course of carrying out its responsibilities related to
auditor oversight, an audit committee is likely to gain an
understanding of the key participants in the audit, their experience,
and their qualifications to perform a high-quality audit. The key
participants in the audit can vary, but at a minimum include the
engagement partner and engagement quality reviewer. Given this
knowledge, the audit committee is in a position to evaluate the
independence and qualifications of both the audit firm and key members
of the engagement team, including the engagement partner, and determine
whether to select or retain the auditor. Disclosures could convey the
factors the audit committee considered most relevant in selecting or
retaining the auditor and provide information about the auditor
selected by the audit committee for the upcoming fiscal year's audit.
1. Disclosures of Certain Individuals on the Engagement Team
    Disclosure could be provided with the name of the engagement
partner, alone or with the name(s) of other key members of the audit
engagement team (e.g., the engagement quality reviewer), the length of
time such individual(s) have served in that role and any relevant
experience.\100\ Regarding experience, information could be provided
about the number of prior audit engagements performed and whether they
were in the same industry. To the extent it is known that the
individual(s) disclosed will be changing for the upcoming year's audit,
that information could also be disclosed.
---------------------------------------------------------------------------

    \100\ Both the PCAOB and the IAASB have been pursuing projects
that would require naming the engagement partner in the audit
report. See PCAOB Release No. 2013-009; PCAOB Release No. 2015-004;
and the IAASB final rule International Standard on Auditing (ISA)
700 (Revised), Forming an Opinion and Reporting on Financial
Statements), including paragraph 45 of ISA 700, available at http://www.ifac.org/publications-resources/international-standard-auditing-isa-700-revised-forming-opinion-and-reporting.
---------------------------------------------------------------------------

Request for Comment

    34. Would disclosure of the name of the engagement partner be
useful to investors? Would disclosure of any additional members of the
engagement team be useful and, if so, which? (For example, should the
names of all partners who are required to rotate under SEC independence
rules be disclosed? Why or why not?) Should there be other disclosures
about the engagement team or others involved in the audit? If so, what
additional information should be disclosed? Are there any costs to such
disclosure?
    35. Are there incremental benefits to disclosing the name (such as
increased accountability)? Is disclosure of the name helpful in
promoting audit quality? Are current risks of potential legal
liability, regulatory sanction and significant reputational costs
strong enough incentives to develop a team that is capable of executing
the audit in accordance with professional standards? Why or why not? In
addition to disclosure of the name, there could be disclosure regarding
other qualifications, such as the length of time the individual has
served in that role, professional licenses, or his or her experience.
What, if any, additional information should be disclosed? Why?
    36. Is the audit committee the appropriate party to provide such
disclosure? If not, what other party or parties should provide the
disclosure and why?
    37. Would such disclosure be more appropriately disclosed in the
auditor's report? Why or why not? Would it be better disclosed in a
separate filing with the PCAOB? Why or why not? If the disclosure is
provided in a separate filing with the PCAOB, what information should
the disclosure include?
    38. If the name of the engagement partner is available elsewhere
(e.g., included in the auditor's report or a supplemental filing with
the PCAOB), would investors benefit from having it also reported as
part of the audit committee's disclosures? Why or why not? Also, if the
name of the engagement partner is available elsewhere, should the audit
committee's report refer to where the disclosure is otherwise located?
    39. If the name of the engagement partner is reported in the audit
committee report, would investors benefit from this information also
being available in one location for all audits?
    40. If disclosures are required and it is known that the person(s)
disclosed will change for the next audit, should there be disclosure of
this fact including who will, or is expected to, take on the role for
the next audit? Why or why not?
    41. If there is a change in the engagement partner during the year,
should this be disclosed sooner than in the next annual update? If
other named individuals change during the year, should this be
disclosed as well?
    42. Are there any liability implications (e.g., for engagement
partners, audit committee members, the company or other participants)
with respect to disclosure of participants in the audit? If so, what
are these implications? Do the implications change based on where or
how the disclosure is made?
2. Audit Committee Input in Selecting the Engagement Partner
    The audit committee may provide input into an audit firm's
assignment of the individual who will serve as the engagement partner
for the upcoming audit. Disclosures about the involvement of the audit
committee in this selection, and any input the audit committee had in
the decision, may provide transparency and insight into the exercise of
the audit committee's responsibilities in overseeing the auditor.

Request for Comment

    43. Should the audit committee be required to disclose what it
considered in providing input to the firm's assignment of the
engagement partner? If so, what information should such disclosures
contain?
    44. Should the disclosures be limited to whether the audit
committee participated in the selection of the engagement partner, or
should there be more detail regarding the audit committee's input?
3. The Number of Years the Auditor Has Audited the Company
    The number of years the auditor, or its predecessor(s) in the case
of merged audit firms, has audited the company may be a relevant
consideration to the audit committee's determination of

whether or not to engage or retain the auditor. The role of auditor
tenure in audit quality has attracted significant attention over the
past few years.\101\ Most academic research indicates that engagements
with short-term tenure are relatively riskier or that audit quality is
improved when auditors have time to gain expertise in the company under
audit and in the related industry.\102\ However, some academic research
suggests that both short and long tenure can have detrimental effects
on audit quality.\103\ Audit committees may view auditor tenure as a
positive or negative influence on audit quality, depending on the
length of such tenure. In light of the public interest in the subject
of auditor tenure, disclosure of this data could provide insight into
the audit committee's overall decision to engage or retain the auditor.
---------------------------------------------------------------------------

    \101\ See, e.g., PCAOB Release No. 2011-006, Concept Release on
Auditor Independence and Audit Firm Rotation (Aug. 16, 2011),
available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx; and PCAOB Release No. 2013-005, Proposed Auditing
Standards on the Auditor's Report and the Auditor's Responsibilities
Regarding Other Information and Related Amendments (Aug. 13, 2013),
available at http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx.
    \102\ See Myers, J. et al., Exploring the Term of the Auditor-
Client Relationship and the Quality of Earnings: A Case for
Mandatory Auditor Rotation? 78 The Accounting Review, 779 (2003);
and Carcello, J. and Nagy, A., Audit Firm Tenure and Fraudulent
Financial Reporting, 23 Auditing: A Journal of Practice and Theory,
55 (2004).
    \103\ See, e.g., Davis, L. et al., Auditor Tenure and the
Ability to Meet or Beat Earnings Forecasts, 26 Contemporary
Accounting Research, 517 (2009).
---------------------------------------------------------------------------

Request for Comment

    45. Should the audit committee's report include information about
the length of the audit relationship? What types of disclosures could
the audit committee make in this regard? Should it be just the years of
auditor tenure?
    46. Should there also be disclosure as to whether and, if so, how
auditor tenure was considered by the audit committee in retaining the
auditor? Should there be disclosure of how tenure was considered in
evaluating the auditor's independence and objectivity? Why or why not?
    47. Would disclosure of auditor tenure be more appropriately
disclosed in the auditor's report? Why or why not? Would it be better
disclosed somewhere else (such as in a form filed with the PCAOB)? Why
or why not?
4. Other Firms Involved in the Audit
    In many audits, especially audits of companies with multiple
locations and international operations, the firm signing the auditor's
report involves other affiliated accounting firms, non-affiliated
accounting firms, and other third-party participants, such as tax
advisors or actuaries, in the conduct of a portion of the audit work.
The auditor is required to communicate to the audit committee the
names, locations, and planned responsibilities of other independent
public accounting firms or other persons, who are not employed by the
auditor, that perform audit procedures in the current period audit.
Specifically, paragraph 10 of AS 16 requires:
    As part of communicating the overall audit strategy, the auditor
should communicate the following matters to the audit committee, if
applicable:
     The nature and extent of specialized skill or knowledge
needed to perform the planned audit procedures or evaluate the audit
results related to significant risks;
     the extent to which the auditor plans to use the work of
the company's internal auditors in an audit of financial statements;
     the extent to which the auditor plans to use the work of
internal auditors, company personnel (in addition to internal
auditors), and third parties working under the direction of management
or the audit committee when performing an audit of internal control
over financial reporting;
     the names, locations, and planned responsibilities of
other independent public accounting firms or other persons, who are not
employed by the auditor, that perform audit procedures in the current
period audit; and
    Note: The term ``other independent public accounting firms'' in the
context of this communication includes firms that perform audit
procedures in the current period audit regardless of whether they
otherwise have any relationship with the auditor.
     the basis for the auditor's determination that the auditor
can serve as principal auditor, if significant parts of the audit are
to be performed by other auditors.\104\
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    \104\ AS 16.
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    After receiving the above information from the auditor, the audit
committee may choose to meet with and discuss with the auditor, the
other firms, or other persons who will be performing work on the audit.
The audit committee is not required to disclose these communications
with the auditor to investors.

Request for Comment

    48. Should the Commission require any additional disclosures in
this regard? For example, should the names of the other independent
public accounting firms and other persons involved in the audit be
disclosed? Should the extent of involvement by these other participants
be disclosed? Why or why not?
    49. Should the names of other participants be included in the
required disclosure instead of in the auditor's report? Should the
names be disclosed elsewhere? If so, why? Would investors benefit from
having all of the information located in the audit committee report?

D. Location of Audit Committee Disclosures in Commission Filings

    As noted in Section III, current audit committee disclosures can
appear in different places. None of the disclosures are specifically
listed in the registration statement forms used for public offerings.
As such, audit committee disclosures are not generally included in the
prospectus delivered to investors for initial public offerings. Some of
the audit committee disclosures are required in an issuer's annual
report on Form 10-K filed with the Commission.\105\ These disclosures
would be considered part of the prospectus when the registration
statements incorporate an issuer's annual report by reference.\106\
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    \105\ Item 10 of Form 10-K references the disclosure
requirements in Items 407(d)(4) and (5) of Regulation S-K. A similar
requirement is also included in Item 7(b) of Schedule 14A.
    \106\ In practice, many registrants provide the Items 407(d)(4)
and (5) disclosures in their definitive proxy statements in reliance
on General Instruction G(3) of Form 10-K. Once the definitive proxy
statements are filed, the information is incorporated by reference
into their Form 10-K, which is then incorporated by reference into
any currently effective Form S-3 or other registration statement
subsequently filed, as applicable.
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    The audit committee report \107\ and the disclosure of the function
and number of meetings held by the audit committee \108\ is not
generally considered part of the prospectus in a registered offering,
since it is not required by the Securities Act registration forms or
the annual report on Form 10-K.\109\ As the audit committee disclosures
may inform investors' investment decisions, the Commission solicits
feedback regarding the placement of current and potential additional
audit committee disclosures, including the audit committee report.
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    \107\ Item 407(d)(3) of Regulation S-K.
    \108\ Item 407(b)(3) of Regulation S-K.
    \109\ Pursuant to Instruction 1 to Item 407(d) of Regulation S-
K, the information required by Items 407(d)(1), (2), and (3) is not
deemed to be soliciting material or filed with the Commission,
except to the extent that a registrant specifically requests such
information be treated as soliciting material or is incorporated by
reference into a Securities Act registration statement.

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Request for Comment

    50. Would investors benefit from the audit committee disclosures
being presented in one location? If so, where should the disclosures
appear and how would investors benefit? If not, why is the existing
location of the various audit committee disclosures appropriate?
    51. Should all or any of the audit committee disclosures, including
the audit committee report, be included in registration statements
filed pursuant to the Securities Act? If not, why not? If so, why and
should the disclosure requirements be included within Securities Act
registration statement forms or as a Form 10-K disclosure requirement
that may then be incorporated by reference into Securities Act
registration statements?
    52. With respect to the additional disclosures discussed in this
release, where should they be made? If required, should they be in the
audit committee report, a separate section of the proxy statement, the
annual report, on the company's Web site, or elsewhere? Please provide
an explanation as to why the disclosure should be made in a suggested
location. If required, should the disclosure be furnished but not
filed? Why or why not?

E. Smaller Reporting Companies and Emerging Growth Companies

    Item 407(g) of Regulation S-K provides the only audit committee
disclosure accommodation within Item 407 that is specific to smaller
reporting companies.\110\ The Jumpstart Our Business Start-Ups Act (the
``JOBS Act'') \111\ did not change the audit committee disclosure
requirements for emerging growth companies. As such, the Commission is
soliciting feedback regarding the application of the current and
potential audit committee disclosure requirements to smaller reporting
companies and emerging growth companies.
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    \110\ 17 CFR 229.407(g).
    \111\ Public Law 112-106, 126 Stat. 306 (2012).
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Request for Comment

    53. Should current audit committee disclosure requirements be
changed for smaller reporting companies or emerging growth companies?
If so, which requirements and why? Would investors in smaller reporting
companies or emerging growth companies find this information any more
or less useful than similar disclosure requirements for other issuers?
If so, how, and why?
    54. With respect to the additional disclosures discussed in this
release, should any disclosure requirements, if adopted, apply to
smaller reporting companies or emerging growth companies? If so, which
requirements and why? If not, why not? Would different disclosure
requirements impact the issuers (e.g., secondary market liquidity)?

VII. Additional Request for Comment Regarding Audit Committee
Disclosures

    In addition to seeking public comment on the foregoing topics for
disclosure, the Commission seeks public comment in response to the
following questions about the disclosures as a whole. If views of these
questions would differ based on what type of disclosure is being
considered, please differentiate and explain why.

Request for Comment

    55. Should additional disclosures, such as those presented in
Section VI, be required, or should they be voluntary as they are today?
Should the Commission consider requiring specific disclosures, or
requiring certain categories of disclosures? If so, which categories?
    56. Are there specific issuer, industry, audit committee member, or
auditor characteristics that should be considered in establishing new
disclosure requirements? Are there particular disclosures that should
always be required and, if so, which? Are there particular disclosures
that should only be required if certain conditions or characteristics
are present and, if so, which disclosures and under what circumstances?
Are there particular disclosures for which specificity in the
requirement is important and, if so, for which disclosures and elements
of disclosures should the requirements be specific?
    57. Would the disclosures prompt the audit committee to change how
it oversees the auditor? If so, how?
    58. Would such disclosures provide insight into the nature, timing,
and extent of the audit committee's oversight of the auditor?
    59. Would the disclosures promote audit quality? If so, how?
    60. Would the disclosures discussed herein result in boilerplate
information? If so, how could the requirements be crafted to avoid
boilerplate disclosure?
    61. Would any of the additional disclosures discussed in this
concept release result in disclosure that is not useful to investors?
Why or why not?
    62. Would additional information need to be disclosed in order to
place any or all of the disclosures discussed above in the appropriate
context? If so, what additional disclosures might be needed, and should
they be required or discretionary?
    63. If the Commission were to proceed with requiring some or all of
the disclosures proposed above, should the disclosures be made by all
issuers? For example, should the disclosures be required only for those
subject to the proxy rules? Should they be required for foreign private
issuers? \112\ Why or why not? Should there be accommodations made for
certain types of companies or certain circumstances? If so, what should
they be?
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    \112\ Foreign private issuers are not subject to the proxy
rules. See Rule 3a12-3(b) of the Exchange Act [17 CFR 240.3a12-
3(b)].
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    64. If the Commission proceeds with requiring some or all of the
disclosures proposed above, should there be a requirement to update
these disclosures for changes between proxy or information statements?
If so, what should trigger amended disclosures? Should any such updates
be made quarterly or more frequently?
    65. If the Commission proceeds with requiring some or all of the
disclosures discussed above, should the disclosures be required to be
provided in an interactive data format? If so, what elements of
disclosure should be provided in that manner and in what format should
the information be provided?
    66. The audit committee disclosure requirements may reference other
documents, such as an audit committee charter. Should such documents be
provided along with the required disclosures? If not, should
information be provided to help locate the information referenced? Why
or why not? Should information be hyperlinked? If so, are there any
unintended consequences or implementation challenges that may result
from information being presented in this manner?
    67. If the Commission proceeds with requiring some or all of the
disclosures proposed above, under existing reporting deadlines, would
there be sufficient time to prepare these disclosures? Would there be
difficulties in making these disclosures?
    68. Would the additional disclosures discussed above help minimize
information asymmetries that may exist between management and
investors? If so, how? What other benefits may accrue from providing
this information?
    69. Expanded disclosures may have direct and indirect economic
impacts on market participants. What direct and indirect economic
impacts would these disclosures have on market participants? Are there
any unintended

consequences that could result from such disclosures with respect to
audit firms, individual audit partners, audit committee members, audit
committees, issuers, investors, or others? For instance, could
potential changes chill or overly formalize audit committee
communications with auditors? Are there specific liability implications
with respect to additional disclosure made by the audit committee? If
so, please describe.
    70. Would other categories of disclosures about the audit
committee's role relative to the auditor be useful? If so, what other
categories?
    71. How should the Commission address potential changes in the
auditor's report with respect to audit committee oversight of the
auditor?
    72. If audit committees are required to provide disclosure that
relates to information provided by the auditor (and it is not currently
required to be communicated by the auditor under existing PCAOB
auditing standards), would changes to PCAOB auditing standards be
necessary to ensure that additional information beyond existing
required communications is provided to the audit committee?
    73. Are there improvements that the Commission should consider to
the reporting on the audit committee's oversight of the accounting and
financial reporting process or internal audits? For instance, should
the audit committee disclose how it interacts with the company's
management?
    74. Should the Commission consider the potential for changes that
would affect the role and responsibilities of the audit committee, such
as those related to qualifications of members of the audit committee or
areas for which audit committees should (or should not) be responsible?
Should the audit committee disclose its role, if any, in risk
governance? Should the audit committee report on other areas of
oversight? For example, audit committees may be charged with overseeing
treatment of complaints, cyber risks, information technology risks, or
other areas. Would this disclosure distract from the report's focus on
oversight of the audit function? In this regard, we note that
commentators have recently indicated concern that audit committees are
becoming the catch all of board committees by overseeing anything
related to risk.\113\
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    \113\ Michael Rapoport & Joann S. Lublin, Meet the Corporate
Board's ``Kitchen Junk Drawer,'' Wall St. J. (Feb. 3, 2015).
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    In addition to the areas for comment identified above, we are
interested in any other issues that commenters may wish to address and
the benefits and costs relating to investors, issuers and other market
participants of revising disclosure rules pertaining to the audit
committee and the audit committee report included in Commission
filings. Please be as specific as possible in your discussion and
analysis of any additional issues. Where possible, please provide
empirical data or observations to support or illustrate your comments.

    By the Commission.
    Dated: July 1, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-16639 Filed 7-7-15; 8:45 am]
 BILLING CODE 8011-01-P