Month: December 2021
SEC charges company and finance executives with raiding the cookie jar
Just in time for the holidays—cookie jars full of…revenue adjustments! In this complaint, the SEC charged American Renal Associates Holdings, Inc., a national provider of dialysis services, and three of its finance executives with securities fraud and other misconduct. According to the SEC, the alleged fraudulent scheme involved a “series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse.” After receiving an inquiry from the SEC, ARA conducted an internal investigation that led the company to restate its financials, which, according to the SEC, showed that the company had overstated its net income by over 30% for 2017 and by more than 200% for the first three quarters of 2018. The revenue adjustments in the cookie jar, the SEC charged, were one of the key ingredients used in this alleged effort to cook the company’s books.
SEC adopts final amendments under the Holding Foreign Companies Accountable Act
In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was signed into law. The HFCAA amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) According to SEC Chair Gary Gensler, “[w]e have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the [PCAOB]….This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors….The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.” Last week, the SEC adopted final amendments to implement the HFCAA. The amendments will be effective 30 days after publication in the Federal Register.
2021 CPA-Zicklin Index shows steady rise in board oversight and disclosure of political spending
In the aftermath of January 6, a number of companies, highly sensitized to any dissonance or conflict between their public statements or announced core values and their political contributions, determined to pause or discontinue some or all of their political donations. Notwithstanding those actions—or perhaps to some extent because of them—the clamor for disclosure regarding corporate political spending has continued. To that end, in March, Senators Chris Van Hollen and Robert Menendez reintroduced the Shareholder Protection Act of 2021, a bill to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. (See this PubCo post.) The chances that this bill will pass in this Senate? Not great. Nevertheless, even in the absence of legislation, investor pressure and public sentiment may well be having some effect. As shown in the new 2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability (from the Center for Political Accountability and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania), the number of companies increasing transparency and enhancing board oversight of corporate political spending, whether on their own initiative or prodded by shareholder proposals, is on a gradual but determined rise.
Enforcement again brings charges for failure to disclose perks
Failure to disclose executive perks continues to be a flashing target for SEC Enforcement. Just last year, there were two actions against companies for disclosure failures regarding perks—Hilton Worldwide Holdings Inc. (see this PubCo post) and Argo Group International Holdings, Ltd. (see this PubCo post). And earlier this year, Enforcement brought settled charges against Gulfport Energy Corporation and its former CEO, Michael G. Moore, for failure to disclose some of the perks provided to Moore (see this PubCo post). Now, the SEC has once again filed settled charges against a company, ProPetro Holding Corp., and its co-founder and former CEO, Dale Redman, for failure to properly disclose executive perks—including, once again, personal use of aircraft at the company’s expense—as well as two stock pledges. While the topic is not new, the different types of blunders and slip-ups—which seem to be unique to each case—can be instructive. In this case, the focus was—in addition to absence of a policy regarding personal travel reimbursement, inadequate internal controls around perks and failure to disclose paid personal travel expenses—an inadequate process for completion and review of D&O questionnaires.
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