The FASB’s new lease accounting standard presents complex accounting, internal control, system and implementation challenges. Learn the conceptual underpinnings, overall structure and details of the standard as it applies to both lessees and lessors. Register now for our live half-day seminar November 30th in San Francisco or December 15th in New York City, Implementing the FASB’s New Lease Accounting Standard Workshop 2016. Discussion includes implementation steps and system and ICFR issues.
In a recent post we discussed the “transformative effect” the SEC’s Whistleblower Program has had on SEC enforcement and reviewed the news that the SEC has now paid out more than $100 million to whistleblowers. We also, in an earlier post, walked-through both the Dodd-Frank and the SOX whistleblower programs and discussed some of their differences and similarities.
The most important thread running through all of this is the importance of whistleblowers in the detection and prevention of financial reporting fraud. The SEC’s Whistleblower Program affords “gatekeepers” a robust process for speaking out when they see something that isn’t right. The program is important in the detection of financial reporting fraud and is becoming an ever more important aspect of the SEC’s Enforcement program.
An important part of this program is sending messages to companies that they cannot act to harm whistleblowers. On two occasions thus far the SEC has acted strongly to punish companies who have sought to impede or retaliate against whistleblowers. The most recent case, in the words of the SEC, involved “firing an employee with several years of positive performance reviews because he reported to senior management and the SEC that the company’s financial statements might be distorted.”
The company paid a fine of half a million dollars.
Whistleblower situations are never simple. The issues involved are always grey. Whistleblowers can sometimes challenge areas where management has tried to make good decisions in complex situations. Loyalty is always an issue when someone blows the whistle. But even with these challenges the message from the SEC is clear; don’t retaliate when someone blows the whistle. Instead take steps to appropriately investigate and resolve the issues!
As always, your thoughts and comments are welcome.
The FASB’s new lease accounting standard presents complex accounting, internal control, system and implementation challenges. Learn the conceptual underpinnings, overall structure and details of the standard as it applies to both lessees and lessors. Register now for our live half-day seminar November 30th in San Francisco or December 15th in New York City, Implementing the FASB’s New Lease Accounting Standard Workshop 2016. Discussion includes implementation steps and system and ICFR issues.
Our year-end conferences have begun with the presentation of our 12th Annual SEC Reporting & FASB Forum for Mid-sized & Smaller Companies in Las Vegas last week and will continue with our 32nd Annual SEC Reporting & FASB Forums in November and December.
Disclosure effectiveness is a theme that is already emerging from CorpFin at these conferences.
As we think about how we communicate with shareholders this is another year-end planning consideration. We have done a number of posts about disclosure effectiveness and how the SEC (and FASB) are working on projects to make disclosure more effective. This project has roots that go back a good way, and both the JOBS Act and the FAST Act have helped it build momentum.
You can find a nice review of the SEC’s Concept Releases and related proposals about disclosure effectiveness here. All this rule making will, of course, require time as the SEC requests comments and revises its proposals based on constituent feedback.
In the meantime, the Staff is sending a clear message to make disclosures more effective right now. At our recent conference, CorpFin reminded everyone that SEC reports are intended to be communication documents as well as compliance documents and suggested actions we can all take in the context of current rules to make communication more effective:
Streamline disclosures,
Eliminate outdated information,
Tailor disclosures, focusing on factors unique to the company,
Don’t use comment letters in a generic sense.
These ideas fit nicely with the Staff’s previously discussed ideas we have been discussing for quite a while:
Reduce repetition,
Focus disclosure,
Eliminate outdated and immaterial information.
All of this dovetails together with a speech by Keith Higgins that started the initiative in 2014. And, with this much mention by the Staff, clearly change is in the wind, and we all have an opportunity to get ahead of the change and make communication better.
Making changes to annual and quarterly report disclosure is never a simple process, as the number of stakeholders and reviewers make change very challenging. And, thinking about how best to meet the information needs of investors is never easy.
However, many companies are already making changes to disclosure. If you want to find examples, check out American Express and GE. Both have been very proactive in this arena.
Now is a good time to consider and search for opportunities to make current disclosure more effective!
As always, your thoughts and comments are welcome!
Have you stayed on top of recent developments at the SEC, FASB and PCAOB? Register for our live seminar and webcast, 32nd Annual SEC Reporting & FASB Forum being held November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco. Prepare for year-end reporting season and hear a discussion of current events, including disclosure effectiveness, juggling Rev. Rec., Leases and more.
http://www.pli.edu/Content/32nd_Annual_SEC_Reporting_FASB_Forum/_/N-1z11c8sZ4k?ID=262904
At the September 22, 2016 EITF meeting the SEC Staff made an important announcement about SAB Topic 11-M/SAB 74 disclosures about recently issued accounting standards.
We have done a number of posts about this disclosure, and you can review the basics here.
Because companies will be implementing three major new standards over the next few years the Staff:
Emphasized the importance of these disclosures because investors need to be aware of how much the new revenue recognition, leases and financial instrument impairment standards may or may not affect future results, and
Discussed what companies should do if they cannot yet quantify the impact of these changes.
In the Staff Announcement SEC Assistant Deputy Chief Accountant Jenifer Minke-Girard stated that if a company cannot yet estimate the impact of adopting these new standards then it should consider making incremental qualitative disclosures about the potential significance of adopting the new standards that would include:
The status of the company’s implementation process,
A description of any significant implementation matters that have not yet been addressed,
The effect of any accounting policies that the registrant expects to select upon adoption, and
How such policies may differ from current accounting policies.
While not saying that a specific time table was appropriate, Ms. Minke-Girard said it would be appropriate to include these disclosures in interim filings before the end of the calendar year and the timing of this announcement at the September EITF meeting was to provide time to make these disclosures in year-end filings.
As always, your thoughts and comments are appreciated!
Cybersecurity Risk continues to be a huge and problematic issue. Processes and tools to respond to Cybersecurity incidents are constantly evolving. To help you keep up to date with these issues our “Cybersecurity 2016: Managing Cybersecurity Incidents” program will be offered on September 20 live in NY and via webcast.
Topics to be addressed will include:
Overview of the cyber insurance market and what to look for when purchasing
Cybersecurity provisions to include in vendor and business partner agreements
Managing a forensic investigation
Threat landscape: how can companies protect themselves?
Cybersecurity Act of 2015 and its ramifications for the private sector, plus SEC activity
EU developments on breach notification in the GDPR and NIS Directive
The program will also include these special features:
Cyberattack simulation
Hacker’s perspective: what are they seeking?
CISO and Regulators panel: strategies for global companies and guidance on sharing information with the government
You can learn more here.
As always, your thoughts and comments are welcome!
Our last post was about the on-going messaging from the SEC’s Enforcement Division to all of us to “do the right thing” for investors. Of course, another reason to do the right thing is the risk of litigation. And this risk, according to a report from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, shows that securities class action litigation is up substantially. According to the report filings are “up 36.7% from the first half of last year and up 16.6% from the second half of last year.”
In a startling statistic the report shows that on an annualized basis 6.4% of the S and P 500 were subject to class action filings.
Interestingly, the report indicates a substantial part of the increase relates to filings concerning merger and acquisition activity.
You can find a press release and the report here.
The Stanford Law School Securities Class Action Clearing house is a pretty scary website. If you would like to review it you can find it here.
Lastly, a great way to supplement what you read here on our blog and keep up with developments like this is to subscribe to the PLI Smart Brief, a periodic e-newsletter with lots of great information.
You can sign-up to receive the Smart Brief here.
As always, your thoughts and comments are welcome!
As they occasionally, (and at times frequently), do, the SEC has sent us a reminder to do the right thing.
This most recent reminder actually started with an action announced last September against a company that involved one of the classic financial fraud reporting areas, inappropriate revenue recognition. The complaint alleges significant self-dealing by officers and a variety of other inappropriate actions to fabricate financial results. The case was serious enough that the company’s registration was revoked. You can read the press release and find related documents here.
Whenever an action like this is announced, one of the questions we all ask is “where were the auditors?”
Usually an action against auditors happens separately from the related action against a company. Many times the two are hard to correlate. In this case the action against the auditor took almost nine months longer. It was formally announced on July 22, 2016. The SEC’s order against the auditor found that the auditor
“failed to perform sufficient procedures to detect the fraudulent sales in the company’s financial statements. (The Audit Firm) also failed to obtain sufficient audit evidence over revenue recognition and accounts receivable, identify related party transactions, investigate management representations that contradicted other audit evidence, perform procedures to resolve and properly document inconsistencies, and exercise due professional care.”
In the action the partner for this engagement paid a fine of $25,000 and was permanently suspended from practice before the SEC. This includes both auditing and working as a company accountant. The firm paid a $100,000 penalty and it can only begin accepting new public company clients again next year after an independent consultant certifies that the firm has corrected the causes of its audit failures. You can read the release and find related documents here.
As a final reminder about accountant’s and auditor’s role as gatekeepers the enforcement staff said:
“Auditors are supposed to act as gatekeepers to protect the integrity of our markets, but (The Audit Firm) failed to live up to their professional obligations”.
As always, your thoughts and comments are welcome!
In a recent post we explored a very complex securities registration issue within retrospective application of the new revenue recognition standard. (The issue arises with any retrospective application, so it will also arise in the new leasing standard.) In a nutshell the registration issue comes up when you:
(1) Adopt the new revenue recognition standard as of January 1, 2018 (assume a December 31 year-end), then
(2) File your March 31, 2018 10-Q and then
(3) File an S-3 to register to sell securities.
The S-3 incorporates your 2017 Form 10-K by reference which includes 2015 financial statements. The 2015 financial statements would not normally be retrospectively adjusted for the new revenue recognition standard. In this case though that could be necessary. You can read all the technical details here.
This first post led to a really interesting question from a reader. What happens if you file the S-3 before you file your March 31, 2018 10-Q? We explored the issue in this post.
This then led to a really great comment from another reader. In our workshops we always emphasize building research skills and using all the relevant SEC resources, especially the CorpFin Financial Reporting Manual (FRM). This really astute reader found this section in Topic 13 of the FRM:
13110.2 In the case of a registration statement on Form S-3, Item 11(b)(ii) of that form would specifically require retrospective revision of the pre-event audited financial statements that were incorporated by reference to reflect a subsequent change in accounting principle (or consistent with staff practice, discontinued operations and changes in segment presentation) if the Form S-3 also incorporates by reference post-event interim financial statements. If post-event financial statements have not been filed, the registrant would not revise the pre- event financial statements in connection with the Form S-3, however, pro forma financial statements in accordance with Article 11 of Regulation S-X may, in certain circumstances, be required. In contrast, a prospectus supplement used to update a delayed or continuous offering registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item 11(b)(ii) updating requirements. Rather, registrants must update the prospectus in accordance with S-K 512(a) with respect to any fundamental change. It is the responsibility of management to determine what constitutes a fundamental change.
Here there is at least some relief for the S-3 filed after year-end but before the Form 10-Q is filed! As a reminder S-X Article 11 contains this requirement:
(a) Pro forma financial information shall be furnished when any of the following conditions exist:
………………….
(Note: (1) to (7) omitted)
(8) Consummation of other events or transactions has occurred or is probable for which disclosure of pro forma financial information would be material to investors.
Some judgment will be required to make that decision! If the effect of the new revenue recognition standard is large enough, it could well be material to investors.
Similarly, for the S-3 shelf takedown S-K 512(a) includes this requirement (in bullet ii):
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.
Again, some judgment will be required to make that decision!
Thanks to both the readers who contributed to this discussion, and as always your thoughts and comments are welcome!