TheCorporateCounsel.net

Got a jolt yesterday when I read the lead article in the Washington Post Business section, during which a reporter interviewed SEC Chair Donaldson about executive pay. Not only did it include some interesting comments about the significance of the GE disclosure settlement and the upcoming Tyson Foods action, but it referred to our conference and dealt with a number of other topics that we have been talking about (eg. tally sheets, “holy cow” moments).

Clearly, there is some momentum for change as reflected by our 1000th registration yesterday – combined webcast and in-person attendance – for the October 20th compensation conference.

How to Disclose Material Weaknesses in Internal Controls

Last week, SEC Chief Accountant Donald Nicolaisen gave a speech during which he urged companies to disclose material weaknesses in a manner that enables investors to carefully evaluate the circumstances underlying the material weakness. He also noted he has met with investors and urged them not to treat all material weaknesses as equally significant and encouraged them to consider issuing timely guidance on what impact the following scenarios may have on their investment decisions:

– Management fails to complete the work necessary to issue its report on a timely basis.
– The auditor fails to complete the work necessary to issue its report on a timely basis.
– The work is completed and the reports are issued timely, but they identify one or more material weaknesses.

The Chief Accountant said he was encouraged to learn during a recent meeting with Moody’s that they are considering these issues and are tentatively considering grouping material weaknesses into different categories. One category, for example, might include a material weakness whose effects are limited to a single account balance that an auditor could address by expanding audit procedures. Other categories might include an ineffective control environment, such as the tone at the top, an ineffective audit committee or an ineffective financial reporting process. In these cases it may be more difficult for the auditor to audit around the problem. Moody’s tentatively does not expect to take any rating action for some categories of material weaknesses; whereas it may for other categories.

Parsing the New Deferred Compensation Legislation

Parsing the new tax legislation is no easy task – and as with all legislation, there are bound to be some surprises. Consider Section 402 which contains a new SEC reporting requirement to disclose penalities incurred by the the JOBS Act:

(e) PENALTY REPORTED TO SEC- In the case of a person–
(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and
(2) which–
(A) is required to pay a penalty under this section with respect to a listed transaction,
(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or
(C) is required to pay a penalty under section 6662B with respect to any noneconomic substance transaction, the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.