Monthly Archives: November 2015

November 12, 2015

CAQ Alert: 2015 Audit Resource for Auditors & Companies

The CAQ recently released this Alert addressing select auditing considerations for the 2015 audit cycle, many of which were also identified by the PCAOB in its recently issued Inspection Brief. Although logically oriented toward auditors, the Alert is equally instructive for the typically multiple company representatives involved in the audit process. Among other things, the Alert does a nice job of outlining in a plain English fashion the auditor’s scope of responsibility relative to the company’s cybersecurity and related party transactions pursuant to the fairly new PCAOB AS 18.

The Alert includes a discussion of these key topical areas:

  • Professional skepticism
  • Internal Control over Financial Reporting
  • Risk Assessment and Audit Planning
  • Supervision of Other Auditors and Multi-Location Audit Engagements
  • Testing Issuer-Prepared Data and Reports
  • Cybersecurity
  • Revenue recognition
  • Auditing Accounting Estimates, Including Fair Value Measurements
  • Related Parties and Significant Unusual Transactions

Relatedly, the CAQ submitted this comment letter to the PCAOB in response to the PCAOB’s Audit Quality Indicators Concept Release, making a strong case for audit committee-determination of (rather than regulatory-mandated) AQIs – which the CAQ indicates should be used and reported only voluntarily, in the context of learnings attained from its own AQI initiative.

See these additional comment letters on the Concept Release, and this PCAOB Dialogues AQIs podcast. Note that the initial comment period for the release closed at the end of September, but (purportedly consistent with its standard practice) the Board announced that it is reopening the comment period until November 30th to provide further opportunity for comment – including on any new information that becomes available as a result of a PCAOB Standing Advisory Group meeting being held today and tomorrow, which will focus largely on the PCAOB’s AQI initiative and emerging issues.

Check out our oodles of additional helpful resources in our “Auditing Process” Practice Area, as well as specific topical Practice Areas, e.g., “Cybersecurity,” “Internal Controls,” and “Related Party Transactions.”

SEC Comment Letters & Trends

Deloitte recently issued this report on SEC comment letters, which contains (among other helpful information) extracts of SEC comment letters, links to relevant related resources, an analysis of staff comments to help companies understand trends and improve their financial statements and disclosures, and a best practice checklist for managing unresolved SEC comments. Disclosure topics covered include MD&A, non-GAAP measures, disclosure controls & procedures and ICFR, and executive compensation and other proxy disclosures.

This report is among the many useful resources in our “SEC Comment Process & Analysis” Practice Area.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– New & Departing D&O Checklists
– Auditor Independence: Deloitte Violation Serves as Good Director Compliance Reminder
– Hey There Fellow Securities Defense Lawyers: Omnicare is GOOD for Us!
– Pre-IPO Share Selling Under Scrutiny?
– Proxy Puts: Declining Use in Credit Agreements


– by Randi Val Morrison

November 11, 2015

Directors Survey Reveals Huge Perspective Gaps on Board Diversity

PwC’s recently released 2015 Annual Corporate Directors Survey of 783 public company directors reveals heaps of noteworthy data, including a startling gender gap concerning the perceived importance of boardroom diversity. Findings include:

  • 63% of female directors describe gender diversity as a very important attribute – compared to just 35% of male directors
  • 46% of female directors describe racial diversity as very important, compared to only 27% of male directors
  • 80% of female directors “very much” believe diversity leads to enhanced board effectiveness – compared to just 40% of male directors
  • 74% of female directors “very much” agree that board diversity leads to enhanced company performance, compared to only 31% of male directors


Other noteworthy board diversity perspective gaps include:

  • 67% of mega-cap company directors believe diversity is “very important” to board composition – compared to only 31% of micro-cap company directors
  • 62% of directors with less than one year of board service “very much” agree that having diversity on the board is important, compared to only 39% of directors with tenure of more than ten years.

See also this recent Lord Davies report on the status of the UK’s board gender diversity initiative, noting that 26.1% of FTSE 100 board positions and 19.6% of FTSE 250 board positions are occupied by women, and the absence of any all-male boards in the FTSE 100 (there are just 15 in the FTSE 250). The report also recommends a new voluntary target for women’s representation on FTSE 350 boards of a minimum of 33% to be achieved within the next five years, which has been endorsed by the UK Government.

See my prior blogs on board diversity including:
Myths & Facts About Female Directors
Boards Increasing in Size to Add Women Directors
How Board Gender Impacts M&A Decision-Making
Attaining “Real” Board Gender Diversity
Reaping the Benefits of Board Diversity
Study Reveals Board & C-Suite Diversity Stats & Strategies

We have gobs of additional resources in our “Board Diversity” Practice Area.

Thirty Percent Coalition Issues Board Diversity “Call to Action”

Following its Fourth Annual Summit last month, the Thirty Percent Coalition, a national organization committed to women attaining 30% of public company board seats, issued this “Call to Action” to U.S. companies:

– Commit to best practice corporate governance policies that include explicit recognition of gender and race as considerations in the board nomination process
– Select from a gender and racially diverse candidate pool when a board opportunity presents itself
– Periodically report on their progress, as public accountability is an essential component of positive corporate change

During the summit, the Coalition commended these 62 companies that had appointed a woman to their board since the January 2012 start of the Coalition’s “Adopt a Company” Campaign, which was aimed at S&P 500 and Russell 1000 boards that were (at that time) completely lacking in gender diversity.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– CCO Survey: Regulatory Fatigue & Personal Liability Concerns
– XBRL Checklist
– Non-GAAP Measures: Reg. G vs. Reg S-K
– Why & How to Engage in FASB’s Standard-Setting
– Cybersecurity on Most Board Meeting Agendas


– by Randi Val Morrison


November 10, 2015

Conflict Minerals: SEC Denied on Petition for Rehearing (SCOTUS Next?)

As noted in the intro of this Cooley blog:

The D.C. Circuit issued a per curiam order denying the petitions of the SEC and Amnesty International for a rehearing en banc in Natl Assoc. of Manufacturers v. SEC, the conflict minerals case. No member of the court even requested a vote. The order leaves standing the decision of the three-judge panel, decided in August of this year (see this PubCo post). In that case, the panel, by a vote of two-to-one, reaffirmed its earlier decision, concluding that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” amounted to “compelled speech” in violation of companies’ First Amendment rights.

Will the SEC file a petition for cert? Given that the panel viewed the more lenient standard of review for compelled commercial speech under the First Amendment (announced in Zauderer v. Office of Disciplinary Counsel) to be applicable only to disclosures in connection with voluntary advertising or product labeling — a position the SEC asserted in it brief “was unprecedented” — it would seem surprising for the SEC to let the panel decision remain without a further challenge.

Also see this Cooley blog entitled “Is a lot more at stake in the conflict minerals case than the conflict minerals disclosure rules?” – and this Elm Sustainability alert. It’s unclear whether Corp Fin now needs to act – they have been saying that the April 2014 statement by Keith Higgins continues to be operative. But maybe now that will change…

Climate Change Disclosure: Enforcement Actions Coming?

A few years ago, it looked like the SEC’s Enforcement Division was on the verge of bringing at least one climate change disclosure cases as a number of companies responded to informal inquiries. But nothing has resulted from those investigations so far. As noted in this blog by Kevin LaCroix, perhaps a state attorney general will be the first to bring an action in the end. Here’s an excerpt from the blog:

However, in the past week, the service of a subpoena on Exxon Mobil Corp. by New York Attorney General Eric T. Schneiderman has raised the possibility that an enforcement action against the energy giant relating to its climate change-related disclosures may be in the works. The Attorney General’s action also raises the question whether other companies and industries could also be targeted. These possibilities highlight possible corporate climate change-related enforcement and liability exposures.

In a November 5, 2015 press release, Exxon acknowledged that it had received a subpoena from the New York Attorney General “for production of documents relating to climate change.” The service of the subpoena follows a series of articles in the Los Angeles Times about the company’s climate change-related disclosures. The articles, and similar articles that appeared on the Inside Climate News website, suggest that Exxon knew of the climate change risks from fossil fuel use from its own research since the 1970s, yet extensively funded politicians and campaigns that expressed doubt over climate change science.

Don’t forget to tune in today for the webcast – “How to Draft Meaningful Sustainability Reports” – to hear Lou Coppola of the Governance & Accountability Institute, Kate Kelly of Bristol-Myers Squibb and Pam Styles of Next Level Investor Relations explain the keys to drafting sustainability reports that are meaningful to investors & other constituents and a “how to” list of things you should be aware of when drafting.

Found: Roving Billboard Tarnishing the SEC

A while back, I urged anyone that spotted the roving billboard that is lobbying against the SEC to take a picture. Someone forwarded this article that includes this pic:


Broc Romanek

November 9, 2015

Farewell to Edgar-Plus Services? The Demise of 10-K Wizard & LivEdgar

Recently, Morningstar announced that it’s “retiring” 10-K Wizard – and it looks like ThomsonReuters could be shutting down LivEdgar (aka “Business Law Research”) soon too. That would mean that the remaining Edgar-enhanced service providers would be Intelligize, Lexis Securities Mosaic, SEC Info, Wolters Kluwer’s RbSourceFilings, Bloomberg Law’s Edgar tool, RR Donnelley’s Edgar Pro and Westlaw’s Business Law Center.

There was a healthy discussion about pricing & alternatives in Topic #8586 of our “Q&A Forum” that is worth reading if you’re scrambling to figure out what to do now. Of course, the SEC’s site is free. And as one member posted in the Forum: “Why doesn’t the SEC invest a little in EDGAR and provide some basic form filtering for investors. Would be used much more than XBRL…”

Webcast: “How to Draft Meaningful Sustainability Reports”

Tune in tomorrow for the webcast – “How to Draft Meaningful Sustainability Reports” – to hear Lou Coppola of the Governance & Accountability Institute, Kate Kelly of Bristol-Myers Squibb and Pam Styles of Next Level Investor Relations explain the keys to drafting sustainability reports that are meaningful to investors & other constituents and a “how to” list of things you should be aware of when drafting.

Audit Committees: Disclosing More about Auditor Hiring & Compensation

As described in this blog, the Center for Audit Quality & Audit Analytics recently released this year’s report about audit committee disclosure practices among the S&P Composite 1500. Key findings include:

– 25% of S&P 500 companies show enhanced discussion of the audit committee’s considerations in recommending the appointment of the audit firm, up from 13% in 2014
– Percentage of the S&P 500 disclosing auditor tenure increased to 54% in 2015 from 47% in 2014
– 16% of S&P 500 companies explicitly stated the role audit committees play in determining the audit firm’s compensation, doubling from 8% in 2014
– Disclosure of the criteria considered when evaluating the audit firm tripled among the S&P 500 (from 8% to 24%), and more than tripled among S&P MidCap 400 companies – from 7% to 25%. Disclosure of this criteria among S&P SmallCap 600 companies increased from 15% to 22%
– Disclosure of the audit committee’s involvement in engagement partner selection more than doubled for the S&P 500 – from 13% in 2014 to 31% in 2015

Don’t forget to tune into our upcoming webcast: “Audit Committees in Action: The Latest Developments.”

Audit Report Reform: The UK Experience

This report highlights just how large the difference is between the transparency in audit reports in the UK and those issued in the US. Notwithstanding recommendations of a US Treasury Committee seven years ago to the PCAOB and SEC to improve audit reports, US audit reports are of substantially less quality then those discussed in the report. Nonetheless, the report does note several shortcomings in the UK reports. The EU will require extended audit reports for 2017 annual reports for calendar year companies…

Broc Romanek

November 6, 2015

Congress: Capital Formation Bills Rolled Into Transportation Bill (Ha Ha)

Try explaining this to your high school kid who is learning about how our government works – the House Financial Services Chair has woven a bunch of securities law bills into a transportation bill! Wha..? I’ve blogged about a number of JOBS Act 2.0 bills that have been floating around (eg. House passed 5 securities bills back in July). As reported in this blog by Anna Pinedo of Morrison & Foerster:

Chairman Hensarling offered an amendment to a transportation and transportation bill, which includes a number of JOBS Act and other capital formation related bills that had received bipartisan support. The capital formation related bills include HR 2064, the Improving Access to Capital for Emerging Growth Companies Act, HR 1525, the Disclosure Modernization and Simplifications Act, HR 432, the SBIC Advisers Relief Act, HR 1839, the Reforming Access for Investments in Startup Enterprises Act, HR 1723, the Small Business Freedom and Growth Act, and HR 1334, the Holding Company Registration Threshold Equalization Act. We previously reported on these bills.

Also check out this MoFo blog about this paper: “The Disappearing Small IPO and the Life Cycle of the Small Firm“…

“Materiality” Definition: A Fight is Brewing

As reflected in this article from “Crooks & Liars,” there is some real anger about the FASB’s recent “materiality” proposal. See this WSJ article – and this piece by Edith Orenstein. And we’re posting memos in our “Materiality” Practice Area.

Following NYSE’s guidance about date changes for earnings announcements, the Nasdaq has put out this alert about similar issues…

Insider Trading Cartoons Vol. I: Classical Theory

Brooks Pierce’s David Smyth uses cartoons to teach classical insider trading theory:

– by Broc Romanek

November 5, 2015

Let’s Do This! 31 Top Pet Peeves for Earnings Releases!

Recently, I canvassed my advisory board for their concerns about quarterly earnings releases. Some of the pet peeves related to Regulation FD or other compliance concerns. Some were merely drafting or process issues. Here are the top 31 pet peeves (there might be some overlap but I thought it was important to couch a few of these in different ways to ensure the point was made):

1. Failure to pre-announce a scheduled earnings call.

2. Failure to pre-announce a change in the date/time of the scheduled earnings call (or merely selectively announcing the change).

3. Failure to identify forward-looking information & providing tailored cautionary language.

4. Including boilerplate cautionary language regarding forward-looking statements.

5. Including safe harbor language that has been cut & pasted from a different document and has little relevance to the forward-looking statements that actually are in the earnings release (and do not identify them adequately).

6. Including statements that say that the company “will” do something when it’s more appropriate to say they “expect” or “anticipate.”

7. Failure to update PSLRA risk factors/meaningful cautionary statements for the specific forward-looking statements that are made in the earnings release or are to be made in the earnings call.

8. Guidance/outlook that isn’t included in the earnings release; only provided orally on the earnings call.

9. No mention in the earnings release that management plans to discuss matters other than past results on the earnings call (like guidance).

10. Not remembering that there are multiple constituencies that read earnings releases. Even though earnings releases are targeted toward the investor community, they are obviously accessible to your employees, customers, etc.

11. Reconciling with your earnings release & your periodic report. Many companies provide more “color” in the release than in MD&A, which then can draw a comment from the Corp Fin Staff that you should have disclosed the same “trends” in your MD&A.

12. Missing non-GAAP reconciliation.

13. Including non-GAAP financial measures without addressing the requisite Reg G/Item 10 required information, such as not complying with Instruction 2 to Item 2.02 of Form 8-K, which states that the requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K shall apply to disclosures under this Item 2.02. This is for when the earnings release is furnished as Item 2.02 to Form 8-K.

14. Not fully complying with Item 10(e) by using the non-GAAP numbers with greater prominence & not presenting with “equal or greater prominence” the most directly comparable GAAP measure.

15. Highlighting a non-GAAP measure in the earnings release headline. This raises an unsolvable equal prominence problem since there is no way you can give the GAAP measure comparable equal prominence unless it also is in the headline.

16. Including non-GAAP measures in the bullet points, an equal prominence problem (but a more solvable one compared to headlines as you might be able to live with including the GAAP measures in the first textual paragraph before the bullets).

17. Way too many non-GAAP measures and an inconsistency from period-to-period in using them.

18. Failure to explain why certain non-GAAP measures are useful to investors.

19. Including a full non-GAAP income statement. As reflected in CDI 102.10, Corp Fin clearly does not like this.

20. Failure to update – or comply with – Item 10(e) of Regulation S-K for non-GAAP numbers. For instance, they may use non-GAAP numbers in the call and then say the reconciliation is in the release attached to the 8-K but sometimes it is not there or there is an incomplete reconciliation.

21. Incorrectly stated explanation of a change in financial metric.

22. Including text from a concurrent filing (e.g., the 10-Q or an 8-K) without conforming “the Company” to “us” or “we” (or vice versa).

23. Earnings releases that simply are too long. If it is more than a couple of pages, even for the large companies, the incremental information starts to become marginal.

24. Earnings releases that highlight only the positive news that will be published in the 10-Q. Mostly happens with development stage companies, but surprisingly there are some S&P companies that seemingly try to “manage” expectations carefully by how they structure their releases.

25. Selective emphasis in the headline from quarter to quarter to exclude any “bad news.” For example, if the company had a net loss for the quarter, the headline might say only “XYZ Reports Record Revenues” (only the good news and not any bad news). But the next quarter, if the company had income, the release would say “XYZ Reports Earnings Per Diluted Share of $0.12 in Second Quarter.” This practice becomes even more worrisome when a company uses selective emphasis from quarter to quarter when non-GAAP measures are involved, particularly when there are new types of excluded charges.

26. Comparisons between periods that are unnecessarily complex and hard to follow (e.g., “Sales for the twelve months ended September 30, 2015, were $100 million, or and increase of $10 million, or 11%, compared to sales for the twelve months ended September 30, 2014” versus “Sales for the twelve months ended September 30, 2015, increased by 11%”).

27. Statements suggesting a mere transaction signing represents the closing of the transaction.

28. Quotes from CEO or other senior managers that are “lame” and don’t add value.

29. Draft earnings releases prepared by the IR department or IR vendor that don’t match up with a draft MD&A prepared by the internal accounting/finance team. The two groups need to communicate with each other and coordinate before they send out any drafts.

30. Audit committee not reviewing earnings releases or not having adequate time to review.

31. Ignoring comments from the Legal Department or the outside lawyer who reviewed the earnings release.

This list doesn’t cover the earnings release mistakes that sometimes happens, such as hacking incidents; accidentally releasing them early or posting them online on a URL that is not so hidden. Send me your peeves! And thanks to these members of my advisory board for their input: Troutman Sanders’ Brink Dickerson; Faegre Baker Daniels’ Amy Seidel; Hunton & Williams’ Scott Kimpel (& his friends at H&W); Weil Gotshal’s Howard Dicker; Orrick’s Ajay Koduri; Maslon’s Marty Rosenbaum and Gibson Dunn’s Jim Moloney.

Broc Romanek

November 4, 2015

Our New “Corporate Secretary’s Department Handbook”

Spanking brand new. By popular demand, this comprehensive “Corporate Secretary’s Department Handbook” covers how to run a corporate secretary’s department, from how it’s organized and staffed to potential conflicts with other roles within the company. This one is a real gem – 30 pages of practical guidance.

ISS Data Verification Period Ends on November 13th

As noted in this blog by Ning Chiu, the ISS verification period has started – and companies have only until November 13th to review and correct the information that ISS uses to make its voting recommendations (& QuickScore calculations). Also read this Sidley memo about how ISS has updated it’s QuickScore formulas…

PCAOB’s Attempt to Inspect Chinese Auditors Collapses

This Bloomberg article gives us the bad news that the PCAOB still won’t be allowed to inspect the auditors for Chinese companies listed on US exchanges. Investors beware…

Webcast: “An M&A Conversation with Myron Steele & Jack Jacobs”

Tune in tomorrow for the webcast – “An M&A Conversation with Myron Steele & Jack Jacobs” – to hear about the latest state law developments from former Delaware Supreme Court Chief Justice Myron Steele and former Delaware Supreme Court Justice Jack Jacobs.

Broc Romanek

November 3, 2015

Sights & Sounds: Wendy Davis Goes Off (& the “Pay Ratio Puppet Show”)!

As illustrated by this 5-minute video of conference snippets, we really did have some fun during last week’s “Proxy Disclosure Conference” in San Diego. The 5-minute PEP Talks were well-received as they gave everyone a break from the non-stop practical guidance delivered over 20 panels. Dave & Marty performed a “pay ratio” puppet show, Liz Stoudt delivered some serious poetry slam & Wendy Davis led us all in gleeful parody song. And “Family Feud” was hosted by yours truly:

Jones Day’s Wendy Davis: The Lyrics

Here are the lyrics for Wendy Davis’ remake of “Thrift Shop” by Macklemore (this video shows the original):

I’m gonna comp some peers
Only got $20M in my budget
I – I – I’m hunting, looking for a clawback
This is gonna be awesome

Talk to Radford cause I gotta find a reason
ISS yelled about RSUs last season
Only time based; too damn many
Investors like “Darn, you should pay him just a penny”
Rolling in, hella deep, heading to a board meeting
Show my CEO the data I’ve been tally-sheeting
Armed with my slide deck, GC standing next to me
List out our peer group: Pfizer and Fidelity
Oooooppps … but I thought those made sense!

Narrative, imperative, ending single trigger
Every year the CD&A grows bigger and bigger
Board’s unhappy, better use best practice
Independent comp committee gonna watch our …
I’m a take Mark Borges’ style, I’m a take Mark Borges’ style,
No for real, ask him, can he read my proxy?
Exec summary and some anti-hedging
Melbinger blogging about stock pledging

He said realized pay, we used realized pay
We used plain English, we cut redundancy
Hello, hello, Broc, my mello
Ain’t got fringe benefits, oh hell no!
Take some charts, make them color, and use those
ISS will be like, “But where’s the pay ratio?”

– Hook –

What you know about exec pay audits
What you know about claw-backs from profits
I’m reading, I’m reading, I’m searching thru guidance
Barb Baksa’s got the answers at the booth with the experts

Dodd Frank – they created these rules
I’m at this conference trying to get some tools
Howard Dicker, Marty Dunn and Scott Spector
Give good advice, gonna make it all better

Finance, HR, stock plan, legal
Take their data and I make it readable
Build a table with the footnotes in them
I do the edits, and we’re good with them

I think Item 402 is so damn foxy
Alan Dye’s like yo, it’s only just a proxy.
Limited edition, let’s do some addition
50 hours on a proxy that goes right in the waste bin
I need to reach my retail investors
I need to daz-zle the rigor testers
Will they think my P4P is alright?
Til the vote’s in I can’t really sleep at night
The Journal views my proxy with a microscope
Trying to get votes with repricings, no you hella won’t
No you hella won’t

– Hook –

I found the median employee in my shop
I’ll run the ratio with Mike Kesner down the block
I found the median employee in my shop
I’ll run the ratio with Mike Kesner down the block

– Hook –

Broc Romanek

November 2, 2015

Crowdfunding: SEC Adopts Final Rules

On Friday, by a 3-1 vote, the SEC adopted its final crowdfunding rules – “Regulation Crowdfunding” is born! – in this 686-page adopting release. Humongous (and it doesn’t include this related DERA white paper analyzing unregistered offerings). We’re posting memos in our “Crowdfunding” Practice Area.

Meanwhile, as noted in this blog, FINRA has proposed the Funding Portal Rules and related forms that would apply to SEC-registered funding portals that become FINRA members pursuant to the JOBS Act and the SEC’s “Regulation Crowdfunding.”

SEC Proposes Changes to Rule 147 & Rule 504

In addition, the SEC proposed amendments to Rule 147 and Rule 504 in this 168-page proposing release. As noted in this blog, Rule 147 currently provides a safe harbor for compliance with the Section 3(a)(11) exemption from registration for intrastate securities offerings. The proposal would modernize the rule and establish a new exemption to facilitate capital formation, including through offerings relying upon recently adopted intrastate crowdfunding provisions under state securities laws – and eliminate the restriction on offers and ease the issuer eligibility requirements, while limiting the availability of the exemption at the federal level to issuers that comply with certain requirements of state securities laws.

And as noted in this blog, the SEC’s Rule 504 proposal that would increase the aggregate amount of securities that may be offered and sold in any twelve-month period pursuant to Rule 504 from $1 million to $5 million and to disqualify certain bad actors from participation in Rule 504 offerings.

Our November Eminders is Posted!

We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

Broc Romanek