Tag Archives: CONFLICT MINERALS

Are There Consequences for Reporting ICFR Problems? – The Chief Accountant Speaks!

By: George M. Wilson & Carol A. Stacey

In a recent speech SEC Chief Accountant Wesley Bricker, towards the end of his remarks, made some interesting overall comments about the evaluation of ICFR. These comments are an interesting step in the ongoing conversation about whether the SOX 404 evaluation of ICFR makes any difference in investor behavior. There has been a lot of anecdotal evidence and much discussion about this question. Mr. Bricker’s comments are not based on supposition, inference or piecemeal observation. His comments have their roots in articles from various academic journals, including the Accounting Review and The Journal of Accounting Research. Research in these peer-reviewed journals is based on statistical analysis of quantitative data. (If you have never heard of these journals, they are very prestigious academic journals, so if you decide to read any of the articles grab a cup of coffee and a calculator!)

Here are some excerpts from his remarks. The footnote numbers are references to the academic papers which support his points. We left them in so you could follow-up if you would like to review the quantitative research underlying his comments.

 

Recent experience with disclosures 

Another point related to ICFR is consideration of disclosures.  Investors tend to incorporate disclosure of ICFR deficiencies in the price they are willing to pay for a stock.  For example, companies disclosing material weaknesses are more likely to experience increased cost of capital, and to face more frequent auditor resignations and restatements.[11]

 

Recent academic research suggests:

 

Companies disclosing internal control deficiencies have credit spreads on loans about 28 basis points higher than that for companies without internal control deficiencies; [12] and

 

After disclosing an internal control deficiency for the first time, companies experience a significant increase in cost of equity, averaging about 93 basis points. [13]

 

Remediation of ineffective ICFR tends to be followed by improved financial reporting quality, reduced cost of capital, and improved operating performance.[14]   For example,

 

Companies that have remediated their prior disclosed internal control deficiencies exhibit an average decrease in market-adjusted cost of equity of 151 basis points; [15]  and

 

Remediating companies also experience increases in investment efficiency and in operating performance, suggesting that accounting information generated by effective ICFR is more useful for managerial decision-making. [16]

 

A disclosure of material weaknesses, combined with demonstrating progress toward remediation, can provide investors with information about the company’s ability to function as a public company.  Some companies, for example, voluntarily disclose material weaknesses in their registration statements along with their plans for remediating those weaknesses. [17]

 

You can find citations in to the relevant articles in the text of the speech.

As always, your thoughts and comments are welcome!

A Bit of SEC News and a Hopefully Enjoyable Video

By: George M. Wilson & Carol A. Stacey

In the first few weeks of the new Administration there was news from the SEC including reconsideration of the Conflict Minerals and Pay Ratio disclosures as well as the legislative repeal of the Resource Extraction Payment disclosure.

While there have not been as many highly publicized developments in recent weeks, the Commission is continuing its normal business. A final rule for Hyperlinks to Exhibits, a proposal to for Inline XBRL, approving an XBRL Taxonomy for IFRS, and a Request for Comment to consider changes to Bank Holding Company Disclosures in Guide 3 are a few of the normal course of business things going on at the SEC. The Enforcement Division continues its normal process with cases ranging from an auditor trading on inside information to a Ponzi scheme involving resale of Hamilton tickets. And, of course, CorpFin continues its review program, and after reviewing over 50% of all companies last year it will be interesting to see the numbers this year.

In a way, especially with so many of our SEC reporting community working on year-end and quarter-end reports, it is nice to have a normal flow of work from the SEC instead of big stories!

So, enjoy the lull! And, to have a bit of fun in this lull, here is a hopefully entertaining diversion. The SEC’s Office of Investor Education and Advocacy has, via its investor.gov website, produced a number of educational videos for investors. This one, titled “Don’t let someone else live the life you’ve been saving for”, is particularly entertaining! Enjoy!

https://youtu.be/59iJmRDdeqY

 

As always, your thoughts and comments are welcome!

Things Are Changing!

By: George M. Wilson & Carol A. Stacey

Two of the provisions of the Dodd Frank Act relating to disclosures by public companies are being considered for change in Washington, DC.

 
Conflict Minerals Disclosures
Acting Chairman Piwowar has directed the Staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate. You can read his announcement including his formal statement and information he gathered on a trip to Africa here.

 
Resource Extraction Payment Rule
Congress has begun the process of revoking the Resource Extraction Payments provisions of the Act. The House passed this provision earlier and the Senate voted to revoke the provision Friday, February 3, 2017. You can read about the Senate vote here.

 

As always your thoughts and comments are welcome!

Form 10-K Tip Eight – Conflict Minerals and Form SD Disclosure

 

In our One-Hour Briefing presenting our thoughts on key issues for 2016 Form 10-K’s we discussed Conflict Mineral Reporting. Companies need to continue to refine their reporting processes as they gain experience with the rule and also watch for developments in the continuing legal challenges to the rule.

 

The short and sweet news here is that not a lot has changed since last year. That said, since this is a calendar year reporting requirement for all companies with a May 31 due date, there is time for change to occur before the due date.

 

One are that is not different is that because of the April 2014 court decision, issuers are still not required to report whether any of their products have “not been found to be DRC conflict free”.  You can review the SEC Order for the Partial Stay of the rule at:

www.sec.gov/rules/other/2014/34-72079.pdf

 

 

Corp Fin issued a Statement about the Court of Appeals decision which is at:

www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541681994

 

 

And there are SEC FAQ’s available at:

www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm

 

The FAQ’s do provide some process guidance, but the bottom line is that this area is still evolving.

 

As always, your thoughts and comments are welcome!

 

 

 

PS You can review the Form 10-K Tune-up Briefing and obtain CLE and CPE credit at:

www.pli.edu/Content/OnDemand/Second_Annual_Form_10_K_Tune_Up/_/N-4nZ1z116ku?fromsearch=false&ID=278540