In this report, Critical Audit Matters: Public company adaptation to enhanced auditor reporting, Intelligize examines data from a survey, conducted by SourceMediaResearch/Accounting Today, of 171 compliance specialists at public companies to examine “how public company compliance officials are adapting their own corporate disclosure and processes to comply with this new regime.” Among the issues considered were the impact of “dry runs,” changes to company disclosures and changes in internal controls. The report includes a 25-page appendix with examples of CAMs, organized by subject matter, which should prove to be valuable reading for those about to embark on the project. Interestingly, the report stressed the importance of lining up the investor relations team to consider how best to communicate the company’s message about CAMs.
In 2019 Proxy Season Recap and 2020 Trends to Watch from consultant ICR, posted on The Harvard Law School Forum on Corporate Governance and Financial Regulation, the author concludes that, although, initially, the changes in voter behavior during the 2019 proxy season appear marginal, on a closer look, the changes portend an “already-shifting pattern of voter behavior, and contain important clues as to what companies must do to prepare for the 2020 proxy season.” These clues are reinforced by recent developments, such as the new Statement on the Purpose of a Corporation issued by the Business Roundtable (see this PubCo post). In the article, the author analyzes trends in say on pay, director elections, shareholder proposals and ESG and IPO governance issues, and prognosticates about what it all means for 2020.
Last week, the SEC announced settled charges against PwC and one of its audit partners for violations of the auditor independence rules. As described in the Order, the violations included “performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions.” PwC was also charged with “improper professional conduct” in connection with 19 engagements by failing to comply with PCAOB rules requiring an auditor to “describe in writing to the audit committee the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion.” According to the Order, the failure to properly advise these audit committees prevented them from examining whether the non-audit services affected PwC’s independence. Notably, because it issued an audit report stating that it was independent when it was not, PwC was also charged with having caused its audit client to violate the Exchange Act by filing with the SEC an annual report that contained materially false or misleading information and that failed to include financial statements audited by an independent public accountant, as required. The SEC concluded that these violations reflected “breakdowns in [PwC’s] system of quality control to provide reasonable assurance that PwC maintained independence.” In addition to requiring PwC to pay disgorgement and penalties, the SEC censured PwC. For companies, it is important to keep in mind that the consequences of violations of the auditor independence rules apply not just to the audit firm, but also to the audit client. An independence violation may cause the audit client to violate the Exchange Act, as in this case, and/or lead the auditor to withdraw its audit report, requiring the audit client to have a re-audit by another audit firm. Audit committees need to be on the alert for the possibility of auditor independence violations and be vigilant regarding the performance of non-audit services.
Corp Fin has announced a “realignment” of its disclosure program “to promote collaboration, transparency and efficiency,” effective yesterday. As part of the new realignment, companies have been reassigned to one of seven new industry-focused offices.
You may recall that, earlier this month, Corp Fin announced that it had revisited its approach to responding to no-action requests to exclude shareholder proposals. In essence, under the new policy, the staff may respond to some requests orally, instead of in writing, and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. (See this PubCo post.) Now, five investor organizations—Council of Institutional Investors, US SIF (Forum for Sustainable and Responsible Investment), Interfaith Center on Corporate Responsibility, Ceres and Shareholder Rights Group—have written to Corp Fin Director William Hinman to “express major concerns” regarding the new approach to Rule 14a-8 no-action requests and to ask that it be rescinded. Why? The organizations contend that the new policy “reduces transparency and accountability, increases the burden on investors, and could increase conflict between companies and their investors.”
This morning, without the benefit of an open meeting, the SEC announced that it had voted to adopt a new rule, Rule 163B, and other amendments that will level the playing field by expanding the JOBS Act’s “test-the-waters” reform beyond emerging growth companies to apply to all issuers. The new rule will allow a company (and its authorized representatives, including underwriters) to engage in oral or written communications, either prior to or following the filing of a registration statement, with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) to determine whether they might be interested in the contemplated registered securities offering. The new rule is designed to allow the company to gauge market interest in the deal before committing to the time-consuming prospectus drafting and SEC review process or incurring many of the costs associated with an offering. SEC Chair Jay Clayton remarked that the “final rule benefits from the staff’s experience with the test-the-waters accommodation that has been available to EGCs since the Jumpstart Our Business Startups Act (JOBS Act)….Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.” The amendments were adopted largely as proposed, with some tweaks designed to address aspects of the proposal that commenters suggested could raise uncertainty for issuers seeking to rely on the rule. The new rule will become effective 60 days after publication in the Federal Register.
All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.