May 30, 2006

Section 404: The Need for Input

Corp Fin Director John White delivered this speech on Thursday regarding the need for input into internal control matters, for both large and small companies. In the speech, John emphasizes the need for a different type of input now that a small business exemption is off the table. John notes that most of the energy expended by the small business community so far has related to obtaining the exemption – now, the SEC, PCAOB and COSO need input into how to shape the guidance that was promised a week ago as part of the regulatory four-point plan.

In addition, John reminds us of the PCAOB’s announcement a month ago about how this year’s inspections of audit firms will include analysis about how those firms conduct AS 2 audits – and that the SEC will be involved in this process as “the SEC’s inspectors will be inspecting the PCAOB inspectors.” For those dealing with internal controls, this is an important speech as it asks a number of questions as if it were a proposing release.

Presidential Memo: National Intelligence Director’s Power to Exempt Internal Controls, Etc.

Earlier this month, President Bush issued this memorandum that enables the Director of National Intelligence to exempt companies from the books and records and internal controls provisions of the Foreign Corrupt Practices Act. This shift in authority was accomplished without much fanfare and is only receiving coverage due to this article from Business Week. As noted in the article, the memo has the unrevealing title: “Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence.” Here is a transcript of a NPR interview with the Business Week article author.

The hubbub involves a little known provision in the ’34 Act. The Presidential Memo transfers the authority granted to the President under Section 13(b)(3)(A) of the ’34 Act, which states:

“With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.”

As someone who used to work at a defense contractor, I can imagine some – but not too many – scenarios where a company would want to bury the fact that it was working on a “black program” from its independent and internal auditors (as these programs are on a “need to know” basis). But the timing of this authority transfer is odd given the high profile of internal control exemptions today and in light of criticisms of this Administration being too secretive, etc.

The provocative thing is that there likely is at least one company out there that needs this relief now – otherwise, why would the President bother to sign the memo without a perceived need for it. We have posted a copy of the Presidential Memo in our “Foreign Corrupt Practices Act” Practice Area.

House Hearing Held on Executive Compensation

Last Thursday, the House Financial Services Committee finally held a hearing on Barney Frank’s bill on executive compensation – Rep. Frank was forced to use a parliamentary rule to force the majority Republican leaders of the committee to convene the hearing. Here is the prepared testimony delivered at the hearing – and here is a LA Times article and an article from Business Week about the hearing.