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 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.
One frequently asked question in our Workshops concerns the “10-K Wrap” or the annual report that companies prepare: Is this a required report or is it an optional investor relations “marketing” document?
Turns out it actually is required for the proxy process. When a company solicits proxies for its annual meeting, and the annual meeting includes, the election of directors, the proxy statement must be accompanied or preceded by an Annual Report to Shareholders or “ARS”. You can find all the details about this requirement in Rule 14a-3. The Form 10-K and the ARS, however, are significantly different. The Form 10-K is a filed document while the ARS is furnished to shareholders pursuant to the proxy rules.
In this earlier post we reviewed the details of the proxy requirement for the ARS.
If you would like a refresher on the filed vs. furnished issues, check out this post.
One of the seeming anachronisms in this process is that the SEC has, even in these days of EDGAR, still required that paper copies of the ARS be sent to the SEC. This requirement is in the proxy rules. (Check out rules 14a-3(c) and Rule 14c-3(b)). Every time we talk about this requirement in our Workshops there are visions of the last scene from “Raiders of the Lost Ark” with a huge warehouse full of boxes no one will ever open again!
On November 2 the SEC modernized this requirement with the following Compliance and Disclosure Interpretation:
Proxy Rules and Schedule 14A (Regarding Submission of Annual Reports to SEC under Rules 14a-3(c) and 14c-3(b))
Question: Exchange Act Rule 14a-3(c) and Rule 14c-3(b) require registrants to mail seven copies of the annual report sent to security holders to the Commission “solely for its information.” A similar provision in Form 10-K requires certain Section 15(d) registrants to furnish to the Commission “for its information” four copies of any annual report to security holders. Can a registrant satisfy these requirements by means other than physical delivery or electronic delivery pursuant to Rule 101(b)(1) of Regulation S-T?
Answer: Yes. The Division will not object if a company posts an electronic version of its annual report to its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K respectively, in lieu of mailing paper copies or submitting it on EDGAR. If the report remains accessible for at least one year after posting, the staff will consider it available for its information. [November 2, 2016]
So, as we approach this year end we can change this process and even save some postage!
As always, your thoughts and comments are welcome!
George M. Wilson, Director, The SEC Institute & Carol A. Stacey, Director, The SEC Institute
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.
As we approach year-end another issue to plan well in advance is whether or not you should ask OCA to pre-clear any extremely complex or subjective accounting decisions. This is a well-established process and when you are faced with a complex transaction, extremely subjective accounting determinations or an area where GAAP is not clearly established it makes sense to pre-clear the issue and avoid the possibility of restatement, amendment, or getting hung up in the CorpFin comment process. This is especially true when we know we will all be reviewed at least once every three years.
OCA’s process for consultation is outlined here. The process does need a significant amount of preparation and usually requires a few weeks to complete, sometimes more, so advance planning is important. The document link above has a very detailed list of what needs to be included in your correspondence with OCA and what to expect from the process.
Since this is a consultation with the Office of the Chief Accountant, the answer you get will be definitive and cannot be over-ridden in the review process.
There is also a telephone consultation service you can use to consult with the CorpFin Chief Accountants office, a different process of course, but sometimes a good starting point. You can find out about this less formal process here.
Lastly, here is a recent list of frequent OCA consultation areas you can use to access whether your issues would benefit from this process:
Revenue Recognition, gross vs net etc.
Business combinations, who is the acquirer, business vs assets, contingent consideration
Financial assets, impairments valuation
Segments and aggregation
Consolidation VIE
Long lived assets, e.g. goodwill impairment
Taxes,
Leases
Pension
Debt vs equity
As always, your thoughts and comments are welcome!
FINRA, the Financial Industry Regulatory Authority and how this Self-Regulatory Organization affects us are less well known aspects of being a public company. Perhaps you have seen a “FINRA list”, the list of people who have bought and sold your stock in the period surrounding a major change in your stock price. This is one of the tools that regulators use to search for insider trading. Or maybe you have read about how FINRA’s fines for broker/dealers are on a pace to set new records.
One way or another, we should all know about FINRA. You can find out a lot about them on their web page. Here is how FINRA describes their mission in the “About” section of their web page:
“FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.
FINRA is not part of the government. We’re an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.
We do this by:
writing and enforcing rules governing the activities of 3,895 securities firms with 641,761 brokers;
examining firms for compliance with those rules;
fostering market transparency; and
educating investors.”
Our independent regulation plays a critical role in America’s financial system—by enforcing high ethical standards, bringing the necessary resources and expertise to regulation and enhancing investor safeguards and market integrity—all at no cost to taxpayers.
FINRA’s role does go beyond broker/dealers. They also say:
FINRA uses technology powerful enough to look across markets and detect potential abuses. Using a variety of data gathering techniques, we work to detect insider trading and any strategies firms or individuals use to gain an unfair advantage.
In fact, FINRA processes, on average, 50 billion—and up to 75 billion—transactions every day to build a complete, holistic picture of market trading in the United States.
We also work behind the scenes to detect and fight fraud. In addition to our own enforcement actions, in 2015, we referred more than 800 fraud and insider trading cases to the SEC and other agencies. When we share information with other regulators, it leads to important actions that prevent further harm to investors.”
With this level of referrals, they are clearly a proactive watchdog of the markets! We all need to know who they are and what they do.
As always, your thoughts and comments are welcome.
Have you ever wondered why the SEC puts this language at the end of every comment letter?
We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing to be certain that the filing includes the information the Securities Exchange Act of 1934 and all applicable Exchange Act rules require. Since the company and its management are in possession of all facts relating to a company’s disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made.
In responding to our comments, please provide a written statement from the company acknowledging that:
The history of this language goes all the way back to the 70’s. Tandy was the first company to receive this language in a comment letter. The comment process had been asserted as a possible defense and the staff wanted to make it clear that this was not appropriate. It was in 2004, after a flood of FOIA requests to obtain comment letters, that the staff decided to make all comment letters and responses public. With that decision they decided to require “Tandy” language in all comment letter responses. You can read more in this 2004 release.
The Staff has now changed their position. Since this language has been around for so long they will no longer require it in each response. Instead, the staff will simply put this language in comment letters:
We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.
You can read the details here.
The change is effective immediately, so all comment letter responses after October 5, 2016 do not need the “Tandy” language.
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
Lawyers involved in the preparation, drafting and review of SEC filings often struggle with Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) as it involves not only an understanding of the company’s business, but an ability to understand the company’s financial statement information and how it intersects with the SEC reporting process. Register today to attend our upcoming live workshop, MD&A In-Depth Workshop for Lawyers 2016 being offered October 18th in San Francisco, October 26th in Chicago and November 4th in New York City. This Workshop will help you build an in-depth understanding of how the financial statements fit together, the information they provide, and how to use financial statement information to make appropriate MD&A disclosures about financial position, changes in financial position, liquidity, results of operations, cash flow and other areas.
http://www.pli.edu/Content/MDA_In_Depth_Workshop_for_Lawyers_2016/_/N-1z10w3yZ4k?ID=279583