We hear the words “transparency” and “disclosure” in most every conversation about corporate governance today. And in light of recent economic conditions, shareholders and prospective shareholders, rating agencies, and the SEC are focusing even more closely on corporate disclosures. For audit committees, transparency and disclosure are at the top of their agendas—and many are benchmarking the company’s disclosures against others in the industry.
SEC Commissioner Elisse B. Walter emphasized the agency’s continuing focus on disclosures in a recent speech at the annual Corporate Counsel Institute. “[The SEC’s] efforts have been extensive, but, in my view, corporate MD&As are still not where they should be…I call on you to do everything you can to assure that the companies that you serve provide disclosure that enables their owners…to view the company and its prospects through the eyes of insiders.”
In a speech before the AICPA National Conference on current SEC and PCAOB developments, Robert Khuzami, director of the SEC’s Division of Enforcement, said that during investigations of financial fraud, the SEC will “want to ensure that board members have properly discharged their duties when significant financial frauds occur…For audit committees, this means an active role in the accounting and
auditing issues confronting issuers…[and] insuring that the ‘tone at the top’ reflects…a desire to produce accurate financial statements that reflect the true picture of a company’s performance.”
At our Annual Audit Committee Issues Conference, there was a good discussion as to how audit committees are overseeing their companies’ disclosures—e.g., the nature of the committee’s involvement with management’s disclosure committee; the process and timeline for review of the company’s 10-K, 10-Q, and other SEC filings; and most importantly, how to get “behind” the numbers and ensure that financial reports contain proper disclosures.
An oversight practice that several audit committee members recommended was “benchmarking”—to compare the company’s important disclosures with others in the industry. Ask management’s disclosure committee, or perhaps the CFO organization, to take the lead and compare the company’s key disclosures to those of industry leaders.
Among the potential disclosure areas to benchmark:
Critical accounting policies, judgments and estimates. The SEC has repeatedly stressed the importance of explanations regarding the company’s most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions. Compare the company’s critical accounting policies, judgments and estimates with others in the industry. Are they more or less aggressive? Are they different? If
so, why? Do the company’s disclosures provide incrementally useful information, such as sensitivity data about the estimates, or are they “boilerplate” or redundant?
Risk factors. As a result of the economic crisis and uncertainty, companies have reassessed and, as necessary, updated their risk-factor disclosures to reflect the new risks to the company’s business. Consider what risk factors others in the industry have disclosed, and how these risk factors and related disclosures differ from the company’s and why. Does the company’s risk-factor disclosure clarify rather than obscure which risk factors are most significant?
Non-GAAP performance metrics. Twenty percent of the SEC’s comment letters in 2009 questioned the use of non-GAAP measures, suggesting that many companies—and the SEC—continue to wrestle with this area of disclosure. Clearly, non-GAAP information (both non-GAAP financial measures and non-financial measures) is playing an increasingly important role in “telling the company’s story” to the marketplace. Consider the types of non-GAAP performance metrics others in the industry disclose, and whether these metrics provide important insights into the company’s financial performance and operations.
SEC comment letters. As part of the benchmarking effort, monitor SEC comment letters sent to others—particularly those in your industry—as these letters contain the views of SEC staff regarding
important accounting and disclosure issues, and can help identify emerging issues that will be the focus of SEC attention for your industry.
Depending on the company and industry,there may be other disclosures to compare. Clearly, benchmarking can help management and the audit committee have a more robust discussion about what the company is disclosing, why and how.
Mary Pat McCarthy is U.S. vice chair, KPMG LLP, and executive director of KPMG’s Audit Committee Institute. Teresa E. Iannaconi is
a partner in the national office of KPMG LLP.