Auditor independence follow-up

by Cydney Posner

As discussed in this PubCo post, last week, the SEC announced settled charges against EY and individual EY auditors (and certain officers at the audit clients involved) with regard to alleged violations of the auditor independence rules as a result of “close personal relationships” with officers at audit clients.  As noted in the post, these cases are of interest to issuers as well as auditors because the auditors’ (and the officers’) violations caused the companies involved to violate Section 13(a) of the Exchange Act and Rule 13a-1, which require public companies to file Forms 10-K with financial statements that have been audited by independent accountants.

But what is the impact of the absence of independence on the audit client involved? This article in Compliance Week explores that issue. As noted in the PubCo post, in addition to  the censure of and penalties imposed on EY and the penalties and suspensions imposed on the EY auditors charged, various penalties and suspensions were also imposed on the company officers who were involved in (or who ignored red flags related to) the “personal relationships.” The SEC orders did not, however, identify the audit clients involved.  To that end, the article’s author conducted an investigation with help of Audit Analytics. Continue reading

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New CDI regarding investments through a self-directed “brokerage window” under a 401(k)

by Cydney Posner

Today, Corp Fin posted a new CDI under both Securities Act Section 5 and Form S-8.   The CDI involves the issue of whether a company-sponsored 401(k) plan that does not offer an employer securities fund as an investment alternative might still be deemed to be offering employer securities requiring Securities Act registration when the plan permits contributions to be invested through a self-directed “brokerage window” and does not prohibit employee contributions to be invested in employer securities through that  “brokerage window.”    Continue reading

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Does a low favorable vote for a say-on-pay proposal affect directors’ reputations outside the company?

by Cydney Posner

As discussed in a PubCo post last week, say on pay has had some surprising consequences. While there hasn’t been much impact on the levels of executive pay, according to this paper, one group that have experienced some impact from say on pay are directors. The academic study indicates that, following low favorable votes for say-on–pay proposals, directors incur significant reputational damage and financial costs, which the authors contend should motivate directors to provide better oversight of executive comp from the get-go.  Moreover, the authors believe that their study shows that say on pay “has given shareholders an important, albeit indirect, increase in influence over executive compensation.”  Continue reading

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Are the days of “I’ll-scratch-your-back” cronyism history?

by Cydney Posner

As discussed in a PubCo post last week, a theory that is currently gaining purchase is that, whether as a result of say on pay or otherwise, the increased influence of proxy advisory firms has led to a kind of homogenization of executive pay packages based on standard metrics.  This piece in the WSJ, by a former CFO, argues that these types of standardized formula pay programs are problematic and, because “the days of ‘I’ll scratch your back’ cronyism are long gone,” more board discretion is warranted. He even spots a trend in that direction. Continue reading

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First SEC enforcement actions for violations of auditor independence rules resulting from personal relationships

by Cydney Posner

In two orders made public today, the SEC announced settled charges against EY and individual EY auditors (and officers involved at the subject companies) with regard to alleged violations of the auditor independence rules as a result of “close personal relationships” with officers at audit clients.  According to the press release,  these “are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.” EY and the other auditors charged consented to the SEC’s order without admitting or denying the findings and paid penalties, as did the officers involved at the audit clients. EY was also censured, and the individual auditors (as well as the CAO of one of the issuers) were suspended from practice before the SEC.  These cases are of interest to issuers as well as auditors because the auditors’ (and the officers’) violations caused the companies involved to violate Section 13(a) of the Exchange Act and Rule 13a-1, which require public companies to file Forms 10-K with financial statements that have been audited by independent accountants. Continue reading

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Ninth Circuit addresses SOX 304 clawback requirements and liability for Rule 13a-14 false certifications

by Cydney Posner

A new case from the 9th Circuit, SEC v. Jensen, is the first circuit court case to confirm the SEC’s position that the “clawback” provisions of SOX 304 provide for a disgorgement remedy against CEOs and CFOs when the issuer has restated its financial statements as a result of misconduct, even if the CEO and CFO are not alleged to have engaged in the misconduct themselves.  Likewise, in another first, the three-judge panel concluded that the certification requirements of Rule 13a-14 create a potential cause of action against the signatories, not just, as defendants claimed, in the event that they had failed to sign and file the mandated certifications, but also for false statements in the certifications that were filed, even though the Rule does not explicitly require truthfulness.  Continue reading

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The unintended consequences of say on pay

by Cydney Posner

This post from the Columbia Law School CLS Blue Sky blog, “Should Say-on-Pay Votes Be Binding?,”  by two executives from the Institute for Governance of Private and Public Organizations  in Canada, in exploring the issue raised in the post’s title, looks at the question of the effectiveness and impact of non-binding say-on-pay votes.  Initially conceived as a way to allow investors to express their views on executive compensation and, presumably, rein in runaway executive pay packages, say on pay has not exactly had the consequences that had originally been anticipated. Continue reading

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