Here’s the basics – and some nuances – of what you need to know about audit committee disclosure under Item 407(d) of Regulation S-K:
1. Audit committee charter: Yes, you need one
Disclose whether the audit committee has a charter. NYSE and Nasdaq require a charter – and if it’s not on your website, it must appear in the proxy as an appendix at least every three years.
2. Website ready? Post that audit committee charter
If your audit committee charter lives online, disclose the URL in your proxy. It saves paper and money – and keeps you compliant.
3. Audit committee report belongs in the proxy, not the 10-K
Include the audit committee report in the proxy (per Item 407(d)(3)), not in the Form 10-K. The report helps to assure investors that the committee is doing its oversight job.
4. Say the magic words
The audit committee report must confirm that the audit committee:
- Reviewed the financials with management.
- Discussed them with the auditors.
- Assessed auditor independence.
- Recommended including the financials in the 10-K.
5. Print those names (not signatures)
List the names of the audit committee members under the report. Only include those audit committee members who participated in the review.
6. Independence means independence
If an audit committee member isn’t considered “independent” under stock exchange rules, disclose why and how they still got appointed.
7. Designate an audit committee financial expert – or explain why not
You must either name at least one “audit committee financial expert” (and say if they’re independent), or explain why you don’t have one (but nearly every company has at least one on the audit committee).
8. Financial expert? Must have all five traits
“Financial experts” need:
- GAAP understanding.
- Ability to assess GAAP application.
- Complex financial statement experience.
- Knowledge of internal controls.
- Familiarity with audit committee functions.
Education alone won’t cut it …
9. Committee must approve audit committee report
Audit committees should approve the audit committee report before the filing of the proxy.
10. Don’t volunteer too much extra – unless you mean it
You’re not required to disclose review details in the audit committee report – but if you do, be careful. Voluntary disclosure can create risk.
11. CAMs are the auditor’s responsibility
Critical audit matters (CAMs) aren’t the audit committee’s call, but they should understand and discuss them with the independent auditors in advance.
12. AI, E&S and cyber: Welcome to the club
Audit committees are increasingly responsible for oversight of AI, E&S and cybersecurity disclosures. If that’s your case, say so, and explain how oversight works.
13. Tell your unique story
Use the proxy to explain how the audit committee evaluates the auditor, considers fees and engages on quality and independence. Don’t fall into the trap of using boilerplate language – reconsider the disclosure every year.
14. Fee changes? Tell why
If audit fees went up or down, explain why. Was it scope, new tech or a big transaction? Stakeholders want the context.
Authored by
Broc Romanek