{"id":1897,"date":"2020-12-15T14:56:56","date_gmt":"2020-12-15T19:56:56","guid":{"rendered":"https:\/\/seci.wpenginepowered.com\/?p=1897"},"modified":"2020-12-15T14:56:56","modified_gmt":"2020-12-15T19:56:56","slug":"internal-control-versus-internal-accounting-control","status":"publish","type":"post","link":"https:\/\/seciblog.pli.edu\/index.php\/internal-control-versus-internal-accounting-control\/","title":{"rendered":"Internal Control Versus Internal Accounting Control"},"content":{"rendered":"

On October 15, 2020, the SEC announced a settled enforcement case against Andeavor, LLC<\/a>.\u00a0 The case centers on stock buybacks Andeavor made while in discussions to be acquired by another oil and gas company.\u00a0 This case is relevant for all public companies as it potentially expands the concept of internal accounting control to include administrative controls.<\/strong><\/p>\n

In January 2018, Andeavor and a potential acquirer agreed to resume acquisition discussions which had been suspended in October 2017.\u00a0 Just before the scheduled resumption of the talks Andeavor\u2019s CEO directed its CFO to initiate a stock buyback program.<\/p>\n

According to the SEC\u2019s press release<\/a>:<\/p>\n

The order finds that Andeavor used an abbreviated and informal process to evaluate whether the requirements for the buyback were satisfied, including that the company was not in possession of material non-public information. The order finds more specifically that the process for evaluating the materiality of the acquisition negotiations did not include discussing, with the CEO, the likelihood of a deal between Andeavor and Marathon.<\/p>\n

In addition, Associate Director Melissa Hodgman stated:<\/p>\n

While buybacks can be an important part of a company\u2019s capital allocation plan, this case makes clear the importance of effective controls when a company is contemplating transactions with its shareholders.<\/p>\n

The reason all companies should become familiar with this case is that the 1934 Act provisions it alleges that Andeavor violated focus on internal control.\u00a0 It is not a Rule 10b-5 case.<\/p>\n

Commissioners Peirce and Roisman published a Statement<\/a> to explain why they voted against this enforcement decision.\u00a0 A major issue in their dissent is that the Commission is taking the concept of internal accounting control and expanding it in ways that may not be appropriate.<\/p>\n

In the dissent they make this important point about internal control:<\/p>\n

Thus, accounting control \u201cis within the scope of the study and evaluation of internal control contemplated by generally accepted auditing standards, while administrative control is not.\u201d\u00a0 Put another way, \u201caccounting controls . . . generally bear directly and importantly on the reliability of financial records and require evaluation by the auditor,\u201d while \u201c[a]dministrative controls . . . ordinarily relate only indirectly to the financial records and thus would not require evaluation.\u201d<\/p>\n

They then raise this concern:<\/p>\n

We are concerned that the Commission\u2019s resolution of this case\u2014if pursued to its logical conclusion in future cases\u2014risks uprooting the core concept of \u201cinternal\u00a0accounting controls\u201d from the language, statutory context, and history of Section 13(b)(2)(B). \u00a0There may be temptation to simply view this provision as a generic \u201cinternal controls\u201d requirement.\u00a0 While this case is unprecedented in its application of the provision to the insider trading compliance context, the Commission has settled other actions in the recent past based on similar theories of inadequate internal controls that go well beyond the realm of \u201caccounting controls.\u201d<\/strong>\u00a0 It has found a violation, for example, where controls were inadequate to ensure that an airline\u2019s approval of a domestic flight route was consistent with its ethics policy. \u00a0<\/a>\u00a0 No court, however, has adopted the expansive view of Section 13(b)(2)(B) that such actions seem to require.<\/p>\n

They conclude with this thought:<\/p>\n

While we agree that Andeavor\u2019s decision processes in this case left substantial room for improvement, and inadequate processes may expose a company to potential Rule 10b-5 liability, we doubt it is our role under Section 13(b)(2)(B) to second-guess management\u2019s decision processes on matters that do not directly implicate the accuracy of a company\u2019s accounting and financial statements.<\/strong><\/p>\n

As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":"

On October 15, 2020, the SEC announced a settled enforcement case against Andeavor, LLC.\u00a0 The case centers on stock buybacks Andeavor made while in discussions to be acquired by another oil and gas company.\u00a0 This case is relevant for all public companies as it potentially expands the concept of internal accounting control to include administrative … Continue reading Internal Control Versus Internal Accounting Control<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[242,96],"tags":[],"coauthors":[154],"class_list":["post-1897","post","type-post","status-publish","format-standard","hentry","category-reporting","category-sec-hot-topic"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/1897","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/comments?post=1897"}],"version-history":[{"count":0,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/1897\/revisions"}],"wp:attachment":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/media?parent=1897"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/categories?post=1897"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/tags?post=1897"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/coauthors?post=1897"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}