Appointment of an Auditor – New Statement on Required Disclosure
On March 30, 2022, the Israel Securities Authority (ISA) published a new staff position statement: “Disclosure Required When Convening a General Meeting of Shareholders Whose Agenda Includes the Appointment of an Auditor.” The ISA’s new position statement emphasizes several matters:
- In reports on convening a general meeting of shareholders whose agenda includes the appointment of an auditor or termination the auditor’s terms of office, companies must be diligent about providing complete and relevant essential information at a level of detail enabling the shareholders to understand all relevant circumstances of the matters brought up for approval by the general meeting.
Overall, the scope of information to be included in the immediate report on the convening of a general meeting, in order to enable the reaching of informed decisions, should derive from the circumstances of the specific case and should be according to the assessment of the importance and relevance of the information to the shareholder’s decision.
- In relation to the appointment of an auditor, companies must consider if special circumstances exist that a reasonable investor may consider as material information to decide on the appointment. For example, when a company holds a significant process to select an auditor every few years, the expectation is the company will consider expanding its disclosure about the process it conducts, the criteria used to evaluate candidates, etc. Other information that may be material and require more extensive disclosure is a substantial reduction in the auditor’s salary due to the appointment.
- Regarding an auditor replacement, companies must consider if the circumstances surrounding the replacement are exceptional. If so, material information for an investor may include, inter alia:
A. A disclosure about the process conducted to choose the selected candidate for the role of an auditor; and
B. The number of candidates considered for this role and the criteria used to evaluate the various candidates.
Additionally, exceptional circumstances may exist if the decision to replace the incumbent independent auditor comes against the backdrop of material professional disagreements with said auditor, or other disagreements, including with the corporation’s controlling shareholder, or when the board of directors recommends a replacement contrary to the audit committee’s position.
The ISA’s staff stressed that the public reporting obligation surrounding retirement, which already exists in the designated form (immediate report on an auditor who has ceased to hold office), does not eliminate the need for such disclosure within the immediate report on the convening of a general meeting, whereas the general meeting’s resolution to appoint an auditor indicates the incumbent auditor has concluded its term of service.
Click here to view the full version of the ISA’s legal position (In Hebrew).
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