A Broken Cycle: How a Lack of Feedback Hampers Disclosures of Audit Committee Oversight

Audit committee (AC) oversight is critical for maintaining investors’ confidence in high-quality financial reporting and other areas of expanded responsibility. Despite general improvements to governance disclosures, AC-specific disclosures have not evolved in the same manner. We use semi-structured interviews with 30 AC members, 5 disclosure preparers, and 14 members of the investment community to learn how companies decide what information to disclose about AC oversight and whether these disclosures meet stakeholder needs. We find that the current disclosure process creates a focus on standardized language that fails to provide investors with the ability to distinguish AC oversight quality across companies. We further observe that high-quality ACs are willing to expand disclosures to signal their oversight activities when they receive investor feedback about the usefulness of these disclosures. However, because channels for direct investor-to-company feedback are limited and investors feel like current disclosures do not provide enough information to engage, silence from investors leads many companies to incorrectly assume that investors are satisfied with current disclosures. We conclude with suggestions for moving forward, along with examples of potential disclosure enhancements.