Financial Reporting and Disclosure
As noted above, disclosure is one of the risk areas for which the audit committee has primary responsibility. This liability arises from a number of legal requirements; for example, U.S. Securities and Exchange Commission (SEC) rules require the audit committee to recommend to the entire board of directors whether a company’s financial statements should be included in its annual report on Form 10-K. Another example is the Sarbanes-Oxley Act and related SEC rules, which give the audit committee full responsibility for recruiting, monitoring, compensating, and (if applicable) dismissing independent auditors. The Audit Committee is also responsible for overseeing the internal audit function. Flowing from these requirements and practices, the audit committee is the most knowledgeable and familiar custodian of disclosure requirements, including concepts such as materiality.
These and other disclosure-related areas will likely be in the spotlight in 2023, in part due to continued enforcement efforts by the SEC and other government agencies, investor scrutiny, and media, and other factors, including historical evidence that recessionary economies and market volatility tend to increase fraud levels. In fact, in November 2022, the SEC’s acting chief accountant stated that “(l) the current economic environment is subject to significant uncertainty and historically this often leads to heightened fraud risk.” In an earlier speech, he also said that “Auditors … have a responsibility to investigate fraud and obtain reasonable assurance about the absence of material misstatement of the financial statements, whether caused by fraud or error”.4 Other economic factors that could attract scrutiny by the SEC include inflation and exchange rate fluctuations.
The planned emphasis on disclosure in 2023 is also likely to be affected by new rules that may be adopted by the SEC. Under Chairman Gensler’s leadership, the SEC has proposed a number of rules that, if passed, will expand disclosures in areas such as cybersecurity and climate change. And the SEC is expected to come up with rules calling for additional disclosure in several areas, including human capital, emerging technologies, and cryptocurrencies, among others.
In short, disclosure and financial reporting are likely to be high on the 2023 agenda of many audit committees.