The Future of the Audit Committee: How Effectiveness Can Enhance Trust

Rapid technological innovation. A new presidential administration and Congress. Geopolitical tension and escalating regional conflict. These are just a few of the challenges that public companies and their boards face as they look to 2025 and beyond. Despite the turmoil, the US economy has remained strong.

A fundamental component of a strong economy is investor trust in the US capital markets and the quality of corporate disclosures. Research conducted at the Center for Audit Quality (CAQ) found that investors specifically cite "the critical role of an independent audit committee that selects, hires, fires, and pays independent auditors." With public company audit committees today composed entirely of independent directors and with rigorous requirements for auditor independence, risks of conflicts of interests on the parts of both directors and auditors are minimized.

It is widely understood that audit committee effectiveness

• enhances investor trust,
• supports our capital markets, and
• supports our economy.

Against this backdrop, boards should ask two key questions as they look to strengthen their organizations for the year ahead: 1) Is our audit committee effective? and 2) How do investors know if our audit committee is effective?

Key actions that audit committees can take in 2025 to strengthen audit committee effectiveness and enhance trust include these:

1. Adapt—and keep adapting.
2. Avoid the kitchen sink effect.
3. Leverage the independent auditor.
4. Increase transparency of your audit committee oversight.

Adapt—and Keep Adapting

It's no secret that as the regulatory environment becomes more complex and public companies increasingly disclose new forms of information, audit committees are facing "scope creep."

Generative artificial intelligence (AI) is one area that audit committees must monitor in 2025 and beyond. Over 40 percent of S&P 500 companies mentioned AI in their most recent annual filings to the SEC. And a recent joint CAQ survey found that 33 percent of audit committee respondents said that finance transformation is among their audit committee's top three priorities for the next 12 months.

The final US Securities and Exchange Commission (SEC) climate disclosure rule (though currently stayed) requires public companies to provide climate-related disclosures in their annual reports and registration statements beginning with annual reports in 2025. (Interestingly, 98% of the S&P 500 are already voluntarily reporting some of this information.) 

According to the 2024 Audit Committee Practices Report, conducted by the CAQ in partnership with Deloitte's Center for Board Excellence, these topics and others like cybersecurity are now regularly showing up on many audit committee agendas.

Therefore, the audit committee members should be intentional in adapting and evolving their skill sets to be consistent with their evolving oversight responsibilities:

• Ensure that audit committee members possess and maintain financial literacy and expertise.
• Assess key emerging risks and create a plan for continuing education. Invite specialists to update the committee routinely.
• Evaluate the audit committee's oversight of cybersecurity risk, ensuring that it keeps pace with the acceleration of AI and digital strategies.
• Perform an audit committee assessment and determine whether new skills are needed on the board or the audit committee to appropriately oversee emerging risks.
• Carefully manage the audit committee agenda. Map areas of responsibilities to meeting dates and plan for deep dives on a variety of topics during the year.
• Review the audit committee charter at least annually to ensure it identifies the risks assigned to the audit committee outside of its core oversight responsibilities.

Avoid the Kitchen Sink Effect

Managing scope creep is important to ensure audit committee effectiveness. Having a focused work plan can help audit committees meet their primary objectives and balance their workload.

Some audit committees are regularly assigned oversight of emerging risks—in other words, the "kitchen sink" approach, as described in the report, Audit Committee: The Kitchen Sink of the Board. This can be suboptimal if the committee lacks sufficient bandwidth.

To prevent this, audit committees may need to consider situations where it makes sense to push back on the board, asking if the matter requires board-level attention, and, if so, if the audit committee is the best place to oversee it. Answers can come from a comparative review of all committee charters and calendars—conducted under the auspices of the nominating and governance committee.

Leverage the Independent Auditor

As new disclosure requirements crowd audit committees' agendas, there is an opportunity to consider the role that assurance services provided by the independent, external auditor can play. Such services can increase the reliability and value of information for investors and audit committee members.

Public company auditors can and should play an important role in the next era of corporate reporting. Not only must auditors meet stringent professional requirements, including continuous technical training to perform an audit or attestation engagement, but they must also operate under a sturdy framework of SEC and Public Company Accounting Oversight Board (PCAOB) regulations and standards. While private companies may not be subject to the same level of regulatory scrutiny as public companies, they can still benefit from the same key considerations/questions.

As audit committees tackle their evolving agendas, they should consider asking their external auditor the following questions:

• What is the experience of the engagement partner and other senior engagement team members with expanded disclosure areas (e.g., climate, genAI, cyber risk)? Would the audit firm be able to supplement the engagement team's expertise if necessary (e.g., by engaging qualified specialists)?
• How has the engagement team evaluated the financial reporting implications of new reporting requirements (e.g., SEC climate rule, SEC cyber rule) and the company's use of new technologies (e.g., genAI)?
• Can the independent auditor provide assurance on sustainability metrics? If so, which ones?
• Are there any interesting insights in the data and information generated from the audit work outside of the audit results?
• How has the audit of the company's financial reporting and related internal control risks changed in response to the geopolitical, macroeconomic, and risk landscape—including supply chain disruptions, cybersecurity, inflation, interest rates, market volatility, climate change, and other ESG issues, as well as remote work and changes in the business? In light of this, how has the auditor updated its risk assessment approach?

Audit committees should also utilize resources available to help them navigate new disclosure areas. The CAQ offers resources for the audit committee in areas like generative AI, and the PCAOB also offers insights and resources for audit committee members.

Increase the Transparency of Your Audit Committee Oversight

In discussions with the CAQ, investors continue to provide the same answer about their expectations for audit committees: they want more transparency, but with context.

Specifically, investors want more transparency in the form of disclosures related to the audit committee oversight process. In partnership with Audit Analytics, the CAQ conducts an annual analysis, the Audit Committee Transparency Barometer, that examines disclosures among S&P 1,500 companies. The 2024 results show that audit committees have made improvements in disclosures over the past decade, but room for improvement remains.

Findings for S&P 500 companies:

• Fifty-three percent of audit committees state that they are involved in the selection of the audit engagement partner, but only 17 percent share details about that involvement.
• Seventy-three percent of audit committees disclose the audit firm's tenure, but only 13 percent disclose how the audit committee considers their audit firm's tenure.
• Six percent of audit committees disclose a discussion of audit fees and their connection to audit quality.

Investors have shared with the CAQ that they want more than boilerplate disclosures—they want information that will help them understand the audit committees' responsibilities and processes.

Audit committees should consider how they can seek feedback from investors to evaluate whether their disclosures align with investor expectations. Two additional opportunities for audit committees to increase transparency are direct conversations between investors and audit committee chairs and enhanced audit committee reports, with details on not only what areas audit committees are overseeing but also how they are doing so.

Conclusion

By adopting the practices recommended, audit committees can reinforce investor trust and ensure that their organizations are well equipped to navigate a complex and shifting landscape in 2025 and beyond. This strengthened focus on trust and transparency not only will support investor confidence but also will help boards effectively manage and respond to emerging disruptions.

Questions for Audit Committee Members to Ask

• Is our audit committee truly adaptive? In the coming year, what issues do we anticipate and how do we plan to respond?
• Are there areas assigned to the audit committee that belong elsewhere—for example, to another committee or to the board as a whole?
• Are we making the best use of our independent auditor? As the company's needs evolve, how can the independent auditor support the audit committee's needs beyond the traditional financial statement audit without running afoul of SEC independence rules under Section 201 of Sarbanes-Oxley?
• How can we improve our audit committee reports in the proxy statement? What do our key shareholders want to know about our work?

Vanessa Teitelbaum, CPA, is senior director on the Professional Practice team at the Center for Audit Quality. She joined the CAQ in 2016 and advocates for stakeholders in the audits of public companies.

About the Center for Audit Quality (CAQ)

The Center for Audit Quality is a not-for-profit think tank and the recognized leader—inside and outside of the auditing profession—on all things public company auditing: resource provider, thought leader, and convener.