Strengthening Market Integrity

Without integrity, the capital markets can’t function. Investors in those markets rely on integrity on many levels—they need to know that the rules governing the marketplace are sound, that they can get trustworthy information to inform their decisions, and that the professionals providing financial services operate ethically.

In fact, this need for integrity is the underlying reason for the public company auditing profession’s entire existence. Auditors are charged with applying their expertise and high ethical standards as CPAs—along with their core values of independence, objectivity, and skepticism—to strengthen the integrity of information, which is the lifeblood of markets.

Happily, auditors are far from the only group strongly dedicated to the integrity of the capital markets. Over the span of my career—as a securities lawyer, as a regulator, as a compliance executive, and as Executive Director of the Center for Audit Quality (CAQ)—I’ve seen innumerable instances of individuals and institutions working hard to bolster the soundness of our market system.

One of the more extraordinary examples of dedication to integrity that I’ve witnessed has come from corporate directors and, more specifically, audit committees.

Five years ago, a group of leading governance organizations issued a call to action. In essence, the message was the following: audit committees play a vital role in investor protection through their oversight of financial reporting and the external auditor. They should tell investors and others more about their work through the public disclosure process.

Did audit committees have to answer that call to action? Was it a mandate? No. If they had been so inclined, audit committees could have ignored the call to action and done nothing.

But that's not what happened. Five years later, the trends in the data are clear—audit committees at US companies of all sizes have stepped up their disclosure game significantly.

Each year, the CAQ teams up with Audit Analytics to benchmark how audit committees are approaching the public communication of their oversight activities. We issue a report, titled the Audit Committee Transparency Barometer, which focuses on the robustness of proxy disclosures among large, mid-sized, and smaller public companies.

The Barometer provides year-over-year comparisons of key audit committee disclosures. Findings in this year's report include the following:

• 40 percent of S&P 500 companies disclose considerations in appointing the audit firm, up from 13 percent in 2014.
• 46 percent of S&P 500 companies disclose criteria considered when evaluating the audit firm, up from 8 percent in 2014.
• 26 percent of S&P 500 companies disclose that the evaluation of the external auditor is at least an annual event, up from 4 percent in 2014.

As the most recent Barometer acknowledges, there's still room to improve and to further enhance transparency. But in my mind, the double-digit increases in transparency represent a success story. Audit committees, like so many others in the capital markets, are doing their part to enhance the soundness of our capital markets. They are showing their dedication to integrity, and such dedication builds confidence. In fact, according to the CAQ's 2018 Main Street Investor Survey, 80 percent of investors express confidence that audit committees are effective in carrying out their investor-protection roles.

For more on the importance of audit committee reporting, check out this video featuring the insights of of Barbara Duganier. Barbara chairs the audit committees of Buckeye Partners, L.P. and MRC Global Inc., and she serves as an audit committee member at Noble Energy, Inc.

As always, I welcome your thoughts in the comments.

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.