Tag Archives: INTERNAL AUDITING

Overcome the Challenges Resulting from the FASB’s New Lease Accounting Standard!

The FASB’s new lease accounting standard presents complex accounting, internal control, systems and implementation challenges. Attend SECI’s live interactive workshop, Implementing the FASB’s New Leases Accounting Standard Workshop being held May 17th in Dallas with additional dates and locations this fall. Attendees will learn the conceptual underpinnings, overall structure and details of this new standard as it applies to both lessees and lessors. Implementation considerations, system issues and related topics will be discussed in detail and concepts will be reinforced by use of examples and case studies.

http://www.pli.edu/Content/Seminar/Implementing_the_FASB_s_New_Lease_Accounting/_/N-4kZ1z10dmc?fromsearch=false&ID=309311&t=WLH7_DPAD

Audit Committees and Financial Reporting 2017: Recent Developments and Current Issues

The role of the audit committee is constantly changing. Recent regulations from the SEC and guidance from the PCAOB impact how audit committees, their advisors and those who prepare public company disclosures function. If you are a member of an audit committee, advise audit committees, or are responsible for corporate reporting on financial reporting and controls, you need to have the latest information and stay on top of current updates that occurred over the past year including SEC and PCAOB developments. Register today for PLI’s June 12th live program and webcast, Audit Committees and Financial Reporting being held in New York City.

http://www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z10o1a?fromsearch=false&ID=306520

The New Going Concern Disclosures – An Example

By: George M. Wilson & Carol A. Stacey

Sears, a storied retailer with a rich history, provides a perhaps not unexpected example of the new going concern disclosures in their recently filed 10-K. In their financial statements on page 66 of the 10-K you will find these disclosures:

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. In addition, the PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.

If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency.

This, as the bolded sentence above illustrates, is an example of the situation where there is substantial doubt about the ability of Sears to continue as a going concern, but the substantial doubt is mitigated by the company’s plans. The new reporting requirement for going concern disclosures has a two path approach. The first is:

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is alleviated as a result of consideration of management’s plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):

  • Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

The second disclosure path is:

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:

  • Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  • Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  • Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

Sears provides us an interesting example and the delicate dance of the wording in their disclosure sheds light on how challenging this new requirement can be for companies.

And, to close the loop, here is the opinion paragraph from the auditor of Sear’s financial statements:

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sears Holdings Corporation and subsidiaries as of January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2017, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As always, your thoughts and comments are welcome!

The Enforcement Division Found Evidence How?????

By: George M. Wilson & Carol A. Stacey

Earlier in March the Enforcement Division announced a settled case against homebuilder Desarrolladora Homex S.A.B. de C.V. This company fraudulently inflated revenues by reporting the sale of over 100,000 homes that had never been built or sold! This was a huge fraud, over $3 billion!

All of that is interesting, but what is really fascinating is how the SEC found that the homes had never been built. They used satellite imagery! You can see one of the pictures here.

We are tempted to say “watch the skies”, but that sounds too much like a 50’s sci-fi movie trailer…..

As always, your thoughts and comments are welcome!

Jeepers – More Whistleblower Enforcement Cases? – Do We Have the Message Yet?

By: George M. Wilson & Carol A. Stacey

Just a few weeks ago we did the latest in a series of posts about the SEC’s Whistleblower program. That post focused on two significant enforcement cases where companies attempted to impede whistleblowers. For other posts in our whistleblower series, see:

Our post discussing the background of the SOX and Dodd/Frank whistleblower programs

Our post about the total amount being paid-out to whistleblowers exceeding $100,000,000 (It is even more today!)

Our post discussing a company having to pay a $500,000 fine for firing a whistleblower

SEEMS LIKE THE MESSAGE SHOULD BE CLEAR BY NOW! Don’t try to limit how employees can blow the whistle.

But, the Enforcement Division is not done!

In a case announced on January 17 a company paid a $650,000 fine for including language trying to restrict whistleblower rights in over 1,000 severance arrangements. After removing the language the company also voluntarily agreed to conduct annual training for employees about their whistleblowing rights.

In a case announced on January 21 the SEC found a company that actively searched for a whistleblower, to the point of essentially threatening employees. The reason for the hunt was clear, the treasurer and the company had manipulated information related to hedge accounting and was actively trying to hide the fact that certain hedging relationships were not effective. When the SEC began to ask questions about the issue, the company suspected someone had blown the whistle. The company tried to ferret out the whistleblower, compounding their offenses. The company and the treasurer both paid fines.

There is a very important reason for these cases. In many situations a fraud would go undetected if it were not for the conscience and courage of whistleblowers.

It would seem that the SEC is actively searching for more enforcement cases to make the point that it is illegal for a company to try and prevent or impede employees from blowing the whistle.

Not to be too preachy, and hopefully to be a bit practical, here are two thoughts:

For all of us who may see a need to blow the whistle, know that this is never easy, and know that you have rights and protections.

For companies, don’t try to hide problems and make sure any agreements surrounding employee departures don’t have these kinds of restrictions!

 

As always, your thoughts and comments are welcome!

Solid Knowledge and Tips Needed to Successfully Navigate SEC Reporting

Financial reporting professionals that are armed with the foundational knowledge and practical experience are better prepared to complete and review the SEC’s periodic and current reporting forms, including the 10-K Annual Report, the 10-Q Quarterly Report and the 8-K Current Report. Attend an upcoming SECI live workshop, SEC Reporting Skills, being held in March in San Francisco, New York and San Diego with additional dates and locations.

http://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2017/_/N-1z10od0Z4k?ID=290554

More Change – Final – Resource Extraction Payment Rule Repealed

By: George M Wilson & Carol A. Stacey

On February 14, 2017 President Trump signed the law eliminating the resource extraction payment disclosure provisions of the Dodd Frank Act.

From:

www.whitehouse.gov/the-press-office/2017/02/14/president-trump-cutting-red-tape-american-businesses

 

GETTING GOVERNMENT OUT OF THE WAY: Today, President Donald J. Trump signed legislation (House Joint Resolution 41) eliminating a costly regulation that threatened to put domestic extraction companies and their employees at an unfair disadvantage.

H.J. Res. 41 blocks a misguided regulation from burdening American extraction companies.

By halting this regulation, the President has removed a costly impediment to American extraction companies helping their workers succeed.

This legislation could save American businesses as much as $600 million annually in regulatory compliance costs and spare them 200,000 hours of paperwork.

The regulation created an unfair advantage for foreign-owned extraction companies.

 

 

As always your comments and thoughts are welcome.

 

Communicate Consistently – It Really Does Matter

By: George M. Wilson & Carol A. Stacey

 
As we discuss in our workshops, it is crucial that companies communicate consistently across all the channels they use. Here are a couple of SEC comments that illustrate this point.

This first comment refers to articles in the news. Yes, the SEC staff does read the paper! This means that companies need to monitor news stories to assure that publically disseminated information is consistent with other disclosures.

General

  1. Recent articles indicate that Yahoo’s November 2014 agreement with Mozilla contains a change-in-control provision that provides Mozilla with the right to receive $375 million annually through 2019 if Yahoo is sold and Mozilla does not deem the new partner acceptable. As this provision appears to take the agreement out of the ordinary course of business, please provide us with your analysis of the materiality of this agreement for purposes of Item 601(b)(10) of Regulation S-K.

 

Here is another frequent theme, how the staff monitors earnings calls and other presentations.

Results of Operations, page II-7

 

  1. We note in your September 8, 2015 earnings call, your chief executive officer made reference to verbal commitments from customers to escalate contract prices when oil prices improve. Given the importance of the price of oil on your results, please tell us and consider disclosing in more detail whether such verbal commitments represent a known event. Refer to Item 303(a)(3)(ii) of Regulation S-K and SEC Release No. 33- 8350.

 

As a parting thought, have all the members of your disclosure committee, and in particular the persons involved in drafting and reviewing MD&A, reviewed your earnings calls as part of their process? (And yes, the second comment is one of our favorite MD&A topics!)

 

As always, your thoughts and comments are welcome!

When Disclosure Obligations Reach Beyond Financial Reporting

By: George M. Wilson & Carol A. Stacey

Good accounting requires good communication. Many times information that is well-removed from the financial reporting and accounting functions has impacts on the financial statements or other parts of the SEC reporting process, especially MD&A. The Sarbanes Oxley Act built on the internal accounting controls guidance in section 13(b) of the FCPA Act in expanding the evaluation, audit and reporting requirements for internal control over financial reporting, or ICFR, and creating the concept of disclosure controls and procedures, or DCP.

A recent enforcement action brings home, at this important year-end time, the importance of effective disclosure controls throughout the company, with perhaps redundant controls that search beyond traditional financial reporting functions for issues that may impact the financial statements or require disclosure in other parts of a periodic report. It reinforces the idea that responsibility for disclosure is a company-wide obligation, and that companies need to build reliable infrastructures to ensure that investors receive all of the information they are supposed to receive.

ICFR and its related requirements have been part of the reporting process for decades. ICFR is formally defined in Exchange Act Rule 13(a)-15 as:

a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

ICFR is all about the financial statements and that of course includes all of the relevant disclosures in the footnotes to the financial statements.

Here is how SOX expanded this process and formally defined disclosure controls in Exchange Act Rule 13(a)-15:

For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

What is clear in this definition is that DCP relates to the entire report, not just the financial statements. And, both ICFR and DCP are relevant to the financial statements.

The terms “accumulate and communicate” are particularly relevant for this case. DCP clearly applies to the concept of a known trend in MD&A, which may not be relevant to the financial statements. It also applies to information that may be relevant to accounting for contingencies, even when that information is in an operational area.

In the enforcement case mentioned above the company paid “a $1 million penalty to settle charges that deficient internal accounting controls prevented the company from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.” Further,

“[t]he SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other (company) personnel understood in the spring of 2012 that there was a safety issue at hand. Therefore, during at least an 18-month period, accountants at the (company) did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch.

This case clearly addressed accounting for contingencies and the related GAAP disclosures. In other situations there may not be a contingency disclosure, but there could be a known trend in MD&A. Both are relevant issues as we work through year-end. What this all builds to is that the disclosure process, including both ICFR and DCP, has to reach beyond the information required for financial statement reporting.

It is all about communication! And this might be a good time to communicate this issue to your disclosure committee and all the parts of your organization.

As always, your thoughts and comments are welcome!

Whistleblower Reminders

By: George M. Wilson & Carol A. Stacey

 

On December 19 and 20, 2016, as a year-end reminder, the SEC’s Enforcement Division announced two more cases to emphasize that companies MUST NOT do anything to impede employees from blowing the whistle.

You can find a lot more background about this issue in this post.

In the first case NeuStar Inc. paid a fine of $180,000 for putting restrictive language in severance agreements.

The SEC found that NeuStar was “routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators ‘in any communication that disparages, denigrates, maligns or impugns’ the company.” The agreements were structured harshly. Departed employees would lose all but $100 of their severance pay if they violated the agreement. This language impeded at least one former employee from contacting the SEC.

In the second case Oklahoma City-based SandRidge Energy Inc. agreed to pay a fine of $1.4 million. Even though the company reviewed their severance arrangements several times after new Dodd/Frank rules were put in place, they continued to include language “restricting” former employees from blowing the whistle to regulators.

The SEC found that “SandRidge fired an internal whistleblower who kept raising concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves.”

The message is clear – Don’t try to limit a former employee’s ability to blow the whistle! Instead, take steps to investigate the matter!

As always, your thoughts and comments are welcome!