Our four Midyear SEC and FASB Forums are underway! This picture is from our Chicago Conference on May 28 and 29. In June the Forums will take place in New York and San Francisco. Check out the dates, agenda and speakers at:
http://www.pli.edu/Content/30th_Midyear_SEC_Reporting_FASB_Forum/_/N-1z12892Z4k?ID=231682
All the programs are chaired by Carol Stacey and bring you up to date with all important developments and current issues at the SEC, FASB and PCAOB.
As you likely know, when James Schnurr took the reigns of OCA Chair White asked him to address IFRS. She asked Mr. Schnurr to review the staff’s IFRS work to date and develop a recommendation about “what action, if any, the Commission should take regarding the further incorporation of IFRS into the U.S. capital markets”.
Mr. Schnurr discussed the progress of this review in a May speech. In his remarks he said:
“Some of the key themes we heard from our discussions were as follows:
There is virtually no support to have the SEC mandate IFRS for all registrants.
There is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS.
There is continued support for the objective of a single set of high–quality, globally accepted accounting standards.”
He also said he would work to finish his recommendation in the “near term”.
You can read the speech at:
www.sec.gov/news/speech/schnurr-remarks-before-the-2015-baruch-college-financial-reporti.html
As always, your thoughts and comments are appreciated!
For years we have been watching the FASB/IASB project on lease accounting. And many of us wonder whether or not this project will ever finish. Well, checkout what the FASB is saying about their meeting this Wednesday, May 13. Yes, they are working on the project, working on it carefully and diligently and are actually in the process of drafting a final standard!
Wednesday May 13. 2015:
FASB Board Meeting, 9:00 a.m. EDT
They have said they hope to issue the final standard before the end of this year!
You can learn more at:
www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220079452
As always, your thoughts and comments are welcome and appreciated!
For the 30th straight year our “Midyear SEC Reporting & FASB Forums” are being presented during May and June in Dallas, Chicago, New York, and San Francisco. These programs are always the best way to keep up-to-date with what is going on at the SEC and the FASB. You can see the detailed agenda and list of speakers and learn more at:
www.pli.edu/Content/30th_Midyear_SEC_Reporting_FASB_Forum/_/N-1z12892Z4k?ID=231680
Past participants are eligible for a discount. Please contact customer service at (888) 212-2010 or Secinstitute@pli.edu.
As always, your thoughts a comments are appreciated!
In our last post we explored the difference between the Annual Report to Shareholders (ARS) and the Form 10-K. The ARS, required by the proxy rules, is an example of a document that is “furnished” to shareholders and not actually “filed” with the SEC.
Just what does this mean?
Filed versus furnished is essentially a legal distinction. It does not impact how information appears on the EDGAR system (as they look the same) or other practical filing issues (as they are filed in EDGAR the same way). For example, an Item 2.02 Form 8-K is a “furnished” document, but an Item 2.01 Form 8-K is a “filed” document. To learn what is going on with this distinction, let’s explore:
Filed
When a document is “filed” it is formally “filed” with the SEC to meet the disclosure requirements under the laws the SEC administers, principally the 1933 and 1934 Acts. This means a “filed” document is subject to the liability provisions of the Acts, and is the principal difference between filed versus furnished.
Furnished
When a document is furnished, generally to shareholders, it is not actually filed with the SEC under one of the Acts, (even though it may be “filed” in the EDGAR system) so it is not subject to the liability provisions of the Acts.
This liability difference can be a substantial issue. For example, it is far easier to establish scienter in a 34 Act fraud case then in a non-34 Act fraud case. Generally in a non-34 Act action, to establish scienter it must be shown that the accused deliberately set out to cause harm. In a 34 Act action, gross negligence or reckless disregard can establish scienter, a much lower level of proof.
Another difference – if something is furnished rather than filed, it cannot be incorporated by reference into later filings. In the shelf registration process this is very important as furnished documents are not incorporated by reference into the S-3 on the shelf, and hence do not expose the company to the strict liability standards of the 33 Act! And, if you do later incorporate a furnished document into a filed document, it loses its furnished status, usually not a good thing!
So, how do you tell if something is filed or furnished? When they appear on the EDGAR system they look exactly the same! As discussed earlier, it is really a legal distinction, so you go back to the legal sources, in particular, the instructions to the forms.
Here is an excerpt from the Form 8-K instructions:
So, this legal distinction is actually spelled out in the instructions.
As a concluding thought, the most commonly encountered furnished documents are:
The Annual Report to Shareholders
Form 8-K Item 2.02
Form 8-K Item 7.01
There are others, so when in doubt, consult the instructions!
As a preview for our next topic in this discussion, check out the furnished versus filed status of the performance graph required by Regulation S-K Item 201(e). You may find that a surprise awaits!
Whistleblowers are much in the news. With stories ranging from Jim Marchese of “Real Housewives of New Jersey” fame collecting his second whistleblower legal settlement, to the SEC announcing a $1 million dollar whistleblower payout to a compliance officer, the volume of whistleblower activity is clearly increasing.
(The SEC Release is at:
www.sec.gov/news/pressrelease/2015-73.html )
Whistleblowers clearly play a key role in the detection of fraud. The SEC’s Office of the Whistleblower says: “Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission”.
If you would like to get to the story of how blowing the whistle affected one person’s life and career, skip to the links at the end of this entry. But first, here is some background about how regulators have tried to create paths for whistleblowers.
Congress has built ways for whistleblowers to do what their label says, blow the whistle when they find something that is wrong, a major focus in the efforts to combat fraud.
The Sarbanes-Oxley act created a whistleblower’s hotline to the audit committee and required that whistleblowers be able to blow the whistle anonymously. The Dodd-Frank Act created a separate incentivized hotline directly to the SEC. A whistleblower using the Dodd-Frank hotline can also remain anonymous and may even be entitled to cash rewards if the matter about which they blow the whistle results in penalties against the company.
Importantly, companies are not allowed to try and restrict employees in blowing the whistle. This is an important enough issue that the SEC has enforced against companies and levied fines when companies try to limit how employees can contact the SEC. A very recent example is against KBR’s use of a confidentiality agreement containing overly restrictive language, summarized at:
www.sec.gov/news/pressrelease/2015-54.html#.VRw2AzbD_cs
You can learn more about the Dodd-Frank hotline and the SEC’s Office of the Whistleblower at:
One would think with all this legislative and SEC support being a whistleblower is becoming an easier path to walk. However, it is still true that few events in a persons professional career are more stressful and disruptive than blowing the whistle.
Marketplace and Propublica have put together an interesting study of how one whistleblower’s path unfolded. It is a great example with lots of gray issues, a prolonged period of uncertainty, and many other complications. You can read and hear about it at:
www.marketplace.org/topics/business/whistleblowers-tale-how-accountant-took-halliburton
www.propublica.org/article/the-whistleblowers-tale-how-an-accountant-took-on-halliburton
The role of the Audit Committee in corporate governance is continuously developing, expanding and becoming more complex. Even before the dramatic events at Enron and Worldcom (without going too much into history!) regulators and governance experts focused on clarifying and enhancing audit committee functions. After Enron, Worldcom and the rest of the wave of governance breakdowns in the early 2000’s the SEC began to require even more significant disclosures about audit committee function.
This process has continued. At the 2014 PLI SEC Speaks conference the Chief Accountant of the SEC delivered a speech entitled “Audit Committee – Back to Basics”. You can find the presentation materials at:
www.sec.gov/News/Files/1371146714240
Even matters as foundational as auditor independence have been issues for the SEC. Deputy Chief Accountant Brian Croteau focused on such areas in this December 2014 speech:
www.sec.gov/News/Speech/Detail/Speech/1370543616539
As Audit Committees deal with these challenges, PLI will have a great program on June 23, 2015 titled “Audit Committees and Financial Reporting 2015 – Recent Developments and Current issues”. Included will be the latest news on potential expanded audit committee reporting. You can learn more about the program at:
As always your comments, thoughts and ideas are welcome!
In all our workshops we always advise everyone to check the SEC’s webpage for the latest version of the instructions whenever it is 10-K or 10-Q time. And, recently, the SEC put updated instructions for Form 10-K on their webpage.
But this update has an interesting twist!
The updated instructions do not have any major changes. The only really new instructions relate to asset-backed issuers.
That said, there is something really strange about the new instructions. Check them out at:
www.sec.gov/about/forms/form10-k.pdf
Now, as you read them check out the cover page and as you look at the second line it says:
“For the fiscal yar ended”
While this looks like it might be a typo, we know the SEC is always VERY CAREFUL when they make these changes, and we think in all likelihood there has been some sort of a technical problem in the process of converting the instructions to PDF form and uploading them to the webpage.
So, how should we react? Should we literally follow these instructions? Include the likely technical issue errors?
Obviously NOT!
In fact, don’t forget what General Instruction C(1) says:
This form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report on paper meeting the requirements of Rule 12b-12. Except as provided in General Instruction G, the answers to the items shall be prepared in the manner specified in Rule 12b-13.
So, do it right!
As a last note, the 10-Q instructions have not been changed, but as we approach the First Quarter Form 10-Q, watch for updates!
As always, your thoughts and comments are welcome!
FCPA enforcement has become more and more of a priority for the SEC and a bigger and bigger issue for public companies in recent years. The SEC actually has a special section of its webpage devoted to FCPA Enforcement Actions!
www.sec.gov/spotlight/fcpa/fcpa-cases.shtml
Any business with foreign operations, or thinking of establishing one, even if they are modest, needs to pay attention to the challenges of FCPA compliance. Lawyers, accountants and professionals working in almost any aspect of a company with foreign operations need to understand this complex law.
To manage FCPA risks it is crucial to understand issues such as:
What are the Act’s anti-bribery provisions?
What are the Act’s “accounting and recordkeeping” (internal control) provisions?
What are the traps and major issues in the “accounting and recordkeeping” provisions?
How payments that may be immaterial for financial reporting still matter for FCPA compliance.
How internal audits and FCPA compliance audits differ.
What is the difference between a bribe and a “facilitating payment”, and does it matter for FCPA compliance?
What are the civil and criminal consequences of violating the Act?
What are the major parts of a compliance program?
How does a company build an effective compliance program?
If you need a good place to start understanding what is required to deal with FCPA issues, PLI’s One-Hour Briefing, Basics of the U.S. Foreign Corrupt Practices Act (FCPA) 2015, on April 17, 2015, is a great resource for understanding the issues and complying with the Act.
In recent speeches SEC Staff members have emphasized the importance of appropriate disclosure of Critical Accounting Estimates. In this blog entry we will go a bit further. We will:
In our workshops we unfortunately find a fair amount of confusion about the SEC’s requirements in this area.
Just what is the SEC Staff saying to registrants about this disclosure? Here are some representative comments. (Fortunately most of these comments are “fix in future filings” comments!)
First, a comment that simply tells a registrant what they are, and where to find the guidance. Note the language that makes it clear this is very different from the Summary of Significant Accounting Policies!
Next, here are three comments to illustrate the level of analysis that the SEC Staff expects in your discussion of the historical and potential future variability in financial results related to Critical Accounting Estimates.
Goodwill impairment uncertainty is a frequent comment area:
And this last comment is just good, sound analysis:
So, just where is the current guidance for Critical Accounting Estimate disclosure? There is a bit of confusion here! This all started in the post-Enron period with FR 60 (the FRs are Financial Reporting Releases, interpretations that are approved by the SEC Commissioners). This release addressed the aggressive use of accounting principles and required disclosure of “Critical Accounting Policies”. It also required that this disclosure be made in plain English. It was issued very quickly in order to apply to year-end 2001 financial statements, and was called a “Cautionary Advice”. As this disclosure was a very new concept, it did not describe in great detail exactly what a critical accounting policy was or what disclosures should be made. You can find this brief FR, for perhaps historical purposes, at:
www.sec.gov/rules/other/33-8040.htm
The key reason the FR was short was that the SEC planned to make a formal rule concerning this disclosure. The rule was proposed, but was never actually finalized.
The reason the rule was never finalized is that the SEC instead addressed this disclosure in FR 72. You can find the current guidance in FR 72 way towards the end in Section V. Here is the release, just scroll way down:
www.sec.gov/rules/interp/33-8350.htm
(Note the evolution in terminology from Critical Accounting Policy to Critical Accounting Estimate.)
If you read this brief Commission interpretation and keep in mind the comments above, you will create meaningful disclosure in this area. A few points to consider:
We hope this helps, and as always, your thoughts and comments are appreciated!