Optimizing the Disclosure Committee

When the Securities and Exchange Commission, in 2002, adopted its rules requiring public companies to maintain and periodically update their disclosure controls and procedures, it recommended (but did not require) that companies establish a disclosure committee, comprised of company officers and senior managers, to be responsible for the company’s public disclosures. Typically reporting to the CFO or CEO, the committee is charged with supervising the company’s financial and nonfinancial disclosure process. It also ensures that information required to be disclosed is accumulated and communicated to management, so that decisions regarding disclosure can be made on a timely basis.

Many, if not most, boards today delegate oversight responsibility for the disclosure committee to the audit committee—and audit committees appreciate the importance of this assignment. Indeed, increased regulatory attention, coupled with the SEC’s new executive compensation disclosure rules, have made it clear that boilerplate disclosures and MD&As are no longer sufficient. So, while most audit committees at this time of year are considering the disclosures to be included in their company’s upcoming annual reports and proxy statements, they shouldn’t stop there. It’s also a good time to consider their relationship with the disclosure committee. The quality of that relationship can go a long way toward avoiding surprises and ensuring effective oversight of the company’s disclosures.

A number of audit committees have developed leading practices for oversight of the disclosure committee. The audit committee typically receives periodic, often quarterly, reports regarding matters that the disclosure committee considers. But these reports may not be sufficient to ensure that audit committee members have all the information they need to exercise oversight. Audit committees may want to discuss the reports in greater detail with disclosure committee members, probing into particular issues or concerns. Best practices for managing the relationship can include:

• Requesting the disclosure committee to advise the audit committee of any disagreements among members, particularly disagreements relating to whether a matter should be disclosed, the adequacy of the disclosure or the adequacy of the company’s disclosure controls and procedures.

• Requesting the disclosure committee to report to the audit committee on any matter that the disclosure committee spent substantial time discussing, then concluded the matter should not be disclosed.

• Requesting the disclosure committee to advise the audit committee of any significant differences between the company’s disclosures and the disclosures of leading companies in the industry.

•  Requesting the disclosure committee (or committee leaders) to periodically attend audit committee meetings, so that the audit committee has an opportunity to ask questions and explore issues in more detail.

The audit committee may also want to pay extra attention when the disclosure committee considers disclosure issues associated with a significant business risk, be it financial, operational or strategic. Audit committee members should also be kept aware of new disclosure-related developments, such as the SEC’s executive compensation disclosure rules or FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.”

Audit committees should clarify the disclosure committee’s role in the proxy preparation and review process, including the new Compensation Discussion and Analysis. And many audit committees are asking their disclosure committees to evaluate the adequacy of current-year disclosures regarding the impact of FIN 48.