Monthly Archives: April 2014

The Conflict Minerals Saga Continues!

While it does not eliminate all the uncertainties stemming from court action, the SEC’s Division of Corporation Finance has provided guidance about the first Form SD due June 2nd of this year.  The filing is still required, but with adjustments based on the appellate court decision.  You can find the details at:

We will all keep watching for developments, and you can listen to the live version or the recorded version of our SEC Institute Form SD program.  Check it out here:

Conflict Minerals Conundrum – Some Help?

We are all “conflicted” about what the heck is going on with the Dodd-Frank required conflict minerals disclosures. As you know, the SEC’s rules to implement this requirement were challenged in the courts, and at the appellate level a significant amount of uncertainty was created about certain disclosure provisions.

You can get details in an earlier post on this blog.

Well, where to go?

On April 30 PLI is presenting a program:

Preparing the 2014 Form SD (Conflict Minerals Disclosure)

This is a great example of how PLI brings so much to the SEC reporting world. As you know, this rule involves more than financial reporting, and the faculty for this program brings in experts from all the involved disciplines.

You can find out more about the program and see if it will help you in your efforts at:

What’s Up With Conflict Minerals – Stay Tuned For More Legal Developments!

As you may have heard, on April 14, to give us all a bit of a boost before the tax deadline, a divided panel of the US Court of Appeals for the District of Colombia Circuit issued a decision that finds that part of the SEC’s Conflict Minerals Rule violates the first amendment.

For those of us who have been hoping this Dodd-Frank imposed requirement would go away, this might not be all that we have been wishing for.

First, the rule is still in effect, it was not overturned at the appellate level. The matter was returned to the District Court, so more will follow.

Also, the ruling is very specific as to what part of the rule creates a problem with the first amendment, and in fact did not overturn the lower court ruling on a number of other issues.

The problem the court identified is the section that requires “regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free’.”

Various other parts of the rule that deal with issues such as:

An exception for de minimis use,
The due diligence requirements,
Issues if companies contract to manufacture, and
The SEC’s cost – benefit analysis,

were not overturned by the appellate court.

What will happen? Stay tuned!

You can find the decision at:$file/13-5252-1488184.pdf

Out in Front of SAB 74

As Carol used to emphasize when she was Chief Accountant in CorpFin, and still does every chance she gets, SAB 74 disclosures are an important issue to the Staff.  This disclosure requirement about recently issued accounting standards is codified in Topic 11-M of the SAB codification, which you can find here.

As we have recently passed first quarter end, and the FASB is actively working to finalize the new Revenue Recognition standard, this might be a good time to proactively begin drafting SAB 74 disclosures for this new standard, just in case it is issued before you file your 10-Q for the quarter ended March 31 (or whenever your next filing is due).

This posting will summarize the requirements and talk about a couple of the challenging issues they present.

In our next post we will talk about why they seem to be duplicated in the financial statements and MD&A, a frequent complaint about copy and paste disclosure duplication.

The SAB essentially considers a new standard to be a “known trend” in the context of the MD&A requirements, that is something that you can “reasonably expect” to have a future impact.  In essence the enactment of the standard by the FASB creates a requirement to make a forward-looking disclosure because you know it will make the past not be indicative or predictive of the future.

The SAB states that your disclosure could generally include four components:

“A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.”

These disclosures are generally pretty straightforward, but one issue that does come up frequently is companies saying they are not sure of the future impact of a new standard when they are in the period just before adoption is required.  If you are close to the adoption date, for example filing a 10-K in March when you are adopting in that quarter, seems likely you should have some idea of the impact.

Another issue that we hear from many participants is about including information about new standards that do not impact their companies at all.  And, there is no requirement to do this!  The SAB actually says:

“The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.”

So, if it does not have a material impact, it can be omitted.  In these days of reducing unnecessary disclosures, this is one to think about! We’ll give some tips on what to do if someone, aka your auditor, tells you that you need a complete list.

That is our brief review of SAB 74 issues in advance of the new revenue recognition standard.  Since we know it is out there, seems like we might as well get ready!

Meanwhile, any thoughts on why this disclosure is usually in both the financial statements and MD&A?  And we’ll answer the age old question: have you ever seen SAB 74 disclosure that is good, or at least decent? We will discuss both questions next time, so stay tuned!

About That “In Like a Lion” Thing…

In an earlier post Carol and George talked about the SEC Enforcement Division ramping up its activities and focusing on financial reporting fraud.  And, sure enough, on March 11, 2014 the SEC announced their latest financial reporting fraud enforcement.  We could make a bad joke about the SEC going “hog wild” with this one, but we won’t!  The company involved, AgFeed, which is a hog raising and selling company, committed what the SEC calls a “massive accounting fraud”.  The areas where fraud was found were the “usual suspects”, primarily revenue recognition.  (Being and agricultural company, the fraud areas were really interesting, including things like saying hogs for sale were fatter than they really were.)  And, adding a bit of intrigue to the fraud and the related enforcement, the bulk of the company’s operations are in China.

So, you might be tempted to say, well, this is just another typical fraud, similar to the accounting fraud cases we have seen historically.

But, when you read into the case, there turns out to be a lot more going on, and a lot more to learn.  While the company’s operations were primarily in China, they also had US operations, and the Chair of the audit committee and CFO were in the US.

One of the key aspects of this enforcement action is that the audit committee chair and the CFO became aware of several “red flags” about the company’s reporting in China, including the classic “we keep two sets of books” situation.  When they became aware of the “red flags”, as “gatekeepers”, they have a serious responsibility, which is where they fell down and where the SEC makes one of the key point in the enforcement action.

The real lesson of this case is seeing what the US based audit committee chair and CFO did.  What they did was essentially try to keep it all internal.  As gatekeepers, they failed in their responsibility.  According to the enforcement press release, the audit committee chair actually consulted with others who told him that there was “not just smoke but fire” and instead of taking action, “ignored the recommendation and internalized the situation while false financial reporting continued”.

In the words of Andrew J. Ceresney, director of the SEC’s Division of Enforcement,  “This is a cautionary tale of what happens when an audit committee chair fails to perform his gatekeeper function in the face of massive red flags.”

This is the lesson.  We are all gatekeepers.  And, as the SEC’s Enforcement Division ramps up its focus on financial reporting fraud, starts to use “Robocop” and charters its special task force for financial reporting fraud, we all need to remember our roles as gatekeepers.

Even accountants in staff rolls have this responsibility.  The Mckesson case, where a revenue recognition director of contract accounting was enforced against and lost her license for not challenging her supervisors clearly inappropriate instructions to record revenue is another clear example of the responsibility we all have.  For the lesson check out:


According to the enforcement division, the analyst, “a former Certified Public Accountant and former Manager of Contract Accounting at HBOC, also participated in the fraud by abdicating her gatekeeper role over the recording of software revenue when she repeatedly booked revenue on contracts where she knew it was improper to do so.”

So, lets stay away from the lion!