Monthly Archives: September 2016

September 30, 2016

Settling Trades: SEC Proposes T+2!

On Wednesday, the SEC proposed shortening the standard settlement cycle for most market transactions from 3 business days after the trade date to just two – known as “T+2” (here’s the 148-page proposing release). A significant number of European countries already use T+2 – & the SEC’s Investor Advisory Committee is already clamoring for T+1!

Technology keeps enabling further reductions in the settlement cycle. I remember back in the day when moving off of “T+5” was a big deal…

More on “Auditor Independence: SEC Settles 1st Violation Caused By Personal Relationships”

Last week, I blogged about the SEC’s first enforcement action against an auditor – EY – for auditor independence violations due to personal relationships. This blog by Davis Polk’s Ning Chiu raises the question about how this impacts the clients of the auditor (also see this blog). Here’s an excerpt:

EY’s policies require that activities with clients to include a “valid business purpose” with expectations that “meaningful business discussions” will take place and forbade gifts or hospitality that are beyond what is customary. The SEC, however, still faulted the audit firm for ignoring various red flags, such as the fact that two senior EY partners noted back in 2012 that the coordinating partner’s expense spending was double that of the next highest individual but did not investigate, and there was no follow-up responses to the issuer’s questions about the expenses it was billed in 2014.

EY already had policies and procedures assessing their employees’ independence from audit clients, which included training and certification and addressed possible familial, employment and financial relationships that are expressly prohibited under SEC rules. As part of the remedial efforts from both cases, additional procedures have been instituted that will require the audit firm’s engagement team members to ask management of an issuer whether they are aware of any “close relationships” between members of the audit engagement team and any individuals employed by “or associated with” the issuer.

Also note the SEC’s Enforcement Director – Andrew Ceresney – recently gave this speech on auditors & auditing.

Auditor Independence: PwC Settle $5 Billion Lawsuit

Speaking of auditor independence, Francine McKenna has been writing about the $5 billion lawsuit against PwC that was settled recently. Here’s an excerpt from this blog:

Right now I’d like to take an opportunity to document some interesting information about how the financial side of the firms, in this case PwC, works. Because the TBW v. PwC case went to trial, and a verdict could have included an assessment of punitive damages, we witnessed a highly illuminating series of motions and partial disclosures about PwC’s finances and how they manage them. This kind of information has not been made public by any Big 4 firm in a potential “tipping point” case for at least thirty years.

Broc Romanek

September 29, 2016

The Wells Fargo Clawback: Innovative – & Wave of the Future?

As noted in this NY Times article, MarketWatch article and Reuters article, CEO John Stumpf and the (now former) head of community banking for Wells Fargo have agreed to forfeit unvested equity awards to the tune of $41 million and $19 million, respectively (the CEO also agreed to forego bonuses for this year, nor draw any salary while an internal investigation is ongoing). These actions by the board more than effectuate what the company’s clawback policy would have otherwise required. The look of clawbacks going forward, perhaps? Here’s the related Form 8-K that Wells Fargo filed yesterday.

Here’s five notable items:

– The board was able to impose an “unvested equity” clawback that was much easier than clawing back dollars/stock that had already been delivered into the executive’s hands.
– Avoids possible need for the executive to amend past tax returns & file for a credit under Code Section 1341 (which Mike Melbinger has discussed in a few blogs).
– Necessary PR move, as the board was under a lot of pressure to show responsiveness. This came at little immediate cost to the company or the CEO (merely cancelling unvested equity awards for Stumpf). In theory, these forfeited awards could be made up in the future.
– We’ll see whether this situation leads to a restatement for the company. So far, news reports suggest it’s immaterial to the company’s financials. “Restatement” is such a subjective term as the numbers of “formal” restatements – those deemed material enough for an Item 4.02 8-K – are way, way down. In comparison, revision restatements (stealth?) are over 70% of all restatements now.
– Maybe a good lesson for drafting future clawback policies: don’t provide for a clawback triggered only upon a restatement…

Members of might want to check out this blog that I posted yesterday: “Does Wells Fargo Prove That All This Governance Stuff Is Just a Charade?“…

Our Executive Pay Conferences: Only 3 Weeks Left! Clawbacks will be tackled during our upcoming “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference” to be held October 24-25th in Houston and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Register Now: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reasonable rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register now.

SEC’s ALJs: SCOTUS Denies Cert

Speaking of Enforcement, the US Supreme Court denied cert a few days ago in the Tilton case that challenged the SEC’s ALJ system…

SEC’s Simplification Proposal: Comment Deadline Extended

The SEC has extended the deadline for comments for its disclosure simplification proposal to November 2nd. Here’s the comments received so far

Broc Romanek

September 28, 2016

ISS FAQ: You May Need to Review Grandfathered Employment & Other Agreements

Here’s a blog that Mike Melbinger recently wrote on It’s September, welcome back to “school”. As we all begin to prepare for setting 2017 compensation and the 2017 proxy season, among the issues that executives and compensation professionals should consider – and consider raising with compensation committees – is the subtle change ISS made to its policies for executive compensation early this year. This change appeared in the January 2016 FAQs, but that was too late for most companies to do anything about it. However, the change will be fully effective for the upcoming proxy season.

65. Would a legacy employment agreement that is automatically extended (e.g., has an evergreen feature) but is not otherwise amended warrant an adverse vote recommendation if it contains a problematic pay practice?

Automatically renewing/extending agreements (including agreements that do not specify any term) are not considered a best practice, and existence of a problematic practice in such a contract is a concern. However, if an “evergreen” employment agreement is not materially amended in manner contrary to shareholder interests, it will be evaluated on a holistic basis, considering a company’s other compensation practices along with features in the existing agreement.

Companies and committees should be conscious of the fact that ISS is taking a firmer approach to problematic pay practices in “grandfathered” agreements, including “evergreen” agreements with problematic pay practices. In fact, the 2016 U.S. Executive Compensation Policies, Frequently Asked Questions, does not include the phrase “grandfathered.”

Whistleblowers: You May Need to Review Severance & Other Agreements

Speaking of changes to agreements, these memos posted in our “Whistleblowers” Practice Area give similar advice to this excerpt from Bryan Pitko’s blog:

As part of the settlement, the company agreed to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without prior approval and without having to forfeit any resulting whistleblower award, and make reasonable efforts to contact former employees who had executed severance agreements, following the adoption of the whistleblower rules, to notify them that former employees are not prohibited from providing information to the SEC staff or from accepting SEC whistleblower awards. The defendant did not admit or deny the SEC findings in the enforcement action.

The terms of recent settlements should serve as reminder to any company that falls within the SEC’s enforcement jurisdiction (a significantly broader group that just public companies) to consider including provisions in severance and confidentiality agreements to explicitly provide that an employee may communicate with the SEC (and other federal agencies) about potential securities law violations without company approval (notwithstanding other confidentiality and disclosure obligations in the agreement). Likewise, for pre-existing severance and confidentiality agreements with employees, companies should consider broad communications highlighting that any agreements with former employees will not be interpreted as restricting such former employee’s ability to provide information to the SEC or accept SEC whistleblower awards.

Whistleblowers: Sean McKessy Lands at Whistleblower Speciality Firm

Recently, the SEC’s first Chief of its Whistleblower Office – Sean McKessy – announced he was leaving. He has now landed at Phillips & Cohen, a law firm that specializes in helping whistleblowers. Jane Norberg was promoted today to Chief of the SEC’s Whistleblower office – she served as the Deputy under Sean…

As noted in Ning’s blog, the SEC’s Enforcement Director – Andrew Ceresney recently gave this speech about the agency’s whistleblower program – including some interesting data. Ceresney also gave this recent speech on auditors & auditing…

Broc Romanek

September 27, 2016

Cybersecurity Disclosures: Not Happening Much in SEC Filings

Here’s an excerpt from this “D&O Diary Blog” about how few companies are disclosing cybersecurity & data breach incidents in their SEC filings (which could be a concern for investors – and for D&O underwriters):

According to a September 19, 2016 Wall Street Journal article entitled “Corporate Judgment Call: When to Disclose You’ve Been Hacked,” nothwithstanding the long-standing SEC disclosure guidelines, companies are being hacked more frequently but are not disclosing these incidents in their periodic reports to the SEC. The article cites a recent Audit Analytics report, in which the firm reviewed the filings of nearly 9,000 reporting companies during the period January 2010 to the present. The report found that only 95 of these companies had informed the SEC of a data breach. However, according to the Privacy Rights Clearinghouse, the number of data breaches during that period experienced by all U.S. businesses – including both public and private companies – totaled 2,642.

The most important consideration accounting for this apparent discrepancy is the question of “materiality.” If the company believes that the incident or incidents it experienced are not “material” within relevant reporting obligation standards, then, many companies apparently are concluding that they have no obligation to report the incident.

Significantly, while only a small number of companies have reported cyber incidents in their periodic reports, a greater number are reporting data breaches and other incidents to other regulators. The Journal article cites the Audit Analytics report as stating that about 300 publicly traded U.S. companies have reported cybersecurity incidents to a state regulator or directly to affected consumers over the past six years.

Obviously, whether or not any potentially reportable item is “material” and therefore subject to disclosure is a judgment call of a type that corporate officials have long been called upon to make. The concern is that these types of judgment calls can be subject to hindsight scrutiny. In that regard, it is probably worth noting that to date the SEC has not yet brought a regulatory enforcement action against a company that failed to disclose a cyberincident – but, the Journal article notes, SEC officials “have not ruled out doing so.”

Disclosing “Risks”: Breaking Down Apple’s Tax Uncertainties

This blog by the “SEC Institute” does a great job of analyzing the various ways that Apple discloses the “uncertainties” related to its international tax situation, including risk factors, MD&A and financial statement disclosures…

Tomorrow’s Webcast: “Middle Market Deals – If I Had Only Known”

Tune in tomorrow for the webcast – “Middle Market Deals: If I Had Only Known” – to hear Joe Feldman of Joseph Feldman Associates talk about how to best avoid post-closing deal surprises for a mid-market deal. Please print these “Course Materials” in advance.

Broc Romanek

September 26, 2016

Life as a Corporate Lawyer: Brink Dickerson

I had a lot of fun taping this 36-minute podcast with Brink Dickerson of Troutman Sanders. I’m still chuckling over Brink’s response to my query about “least favorite tasks” (starting at the 23:45 mark). I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. Brink tackles:

1. Where did you grow up?
2. I understand that you may be the only securities lawyer without a customary qualification?
3. How did you end up going to law school?
4. Although you are in Atlanta now, you started practicing in Chicago. How did that come about?
5. What early experiences shaped how you practice law?
6. Were there any particular experiences that impacted how your practice evolved?
7. I understand that you considered joining the SEC at one point. Tell me about that.
8. How do you prepare for a speaking gig?
9. What types of work tasks are your favorite to work on?
10. Least favorite?

This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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Rebuttal: “How the SEC Enabled the Gross Under-Reporting of CEO Pay”

Here’s a rebuttal from a member to the blog that I excerpted from on Friday: About this new study about how to calculate “total compensation” for purposes of the Summary Compensation Table, not only are the authors misstating what goes into the SCT – but that even is of little consequence to their analysis. The grant date value of awards issued during the year (not vested) are reported in the Summary Compensation Table. What these these authors are saying is realized compensation (W-2 pay) is far more valuable than SCT pay:

– For example, they reference data from 2014, which indicated S&P 500 company CEOs’ SCT pay averaged $19.3 million, while average realized compensation was $34.3 million.

– The authors conclude that pay is seriously underreported – and the SEC is aiding and abetting this understatement.

The problem with the paper’s analysis is that realized equity gains are based on awards granted several years ago – and comparing gains realized in the current year to awards granted during the year is largely irrelevant & very misleading (to quote Mark Twain: “there are lies, damn lies and then there are statistics”):

– A careful statistician would have examined the grant date value of the specific awards from prior years and compared it to the actual value of the award; in that way, they would be truly matching grant date and realized values of the same award.

– A likely distortion in their analysis is gains realized in the current year might include several years of prior awards (for example 2-3 years of stock options exercised in a single year), thus one year’s pay reported in the SCT is being compared to multiple years’ awards reported in the gain realized table.

– Stock price performance could have soared since the awards were granted, thus realized values are far more valuable than anticipated ( as are shareholders’ gains); why do the authors believe this is a bad outcome?

– Executives who hold onto stock options until expiration (rather than exercise at vest) are likely to report the largest realized gains; arguably, the gains realized after vesting are investment rather than compensation decisions, and should not be included in the authors’ analysis of grant date versus realized pay.

The SEC’s proposing release on pay-for-performance includes a table that attempts to address the lack of disclosure of realized pay, as equity awards will be reported as they vest – but this wouldn’t completely address the authors’ concerns as they are using the value of options when exercised, not when vested.

UK: Theresa May’s Upcoming Corporate Governance Consultation

As I blogged a few months ago, in the wake of Brexit, the new UK Prime Minister Theresa May is seeking a number of governance reforms – she recently promised that a corporate governance consultation would take place within the next few months. The Prime Minister has promised bold action including “cracking down on excessive corporate pay” and giving employees and customers representation on boards.

Meanwhile, the UK Parliament Business, Innovation & Skills Committee launched its own governance consultation last week. This is what Marty Lipton wrote about that:

In announcing the inquiry, the chairman of the committee stated that principle purposes were to determine whether under existing law, corporate governance encourages companies to achieve long-term prosperity and assures fair treatment of employees. That the inquiry is focused on a stakeholder approach to corporate governance is made clear by the first three questions it poses:

– Is company law sufficiently clear on the roles of directors and non-executive directors, and are those duties the right ones? If not, how should it be amended?
– Is the duty to promote the long-term success of the company clear and enforceable?
– How are the interests of shareholders, current and former employees best balanced?

In addition to combatting short-termism, promoting long-term investment and protecting employees, the inquiry is focusing on executive compensation and its relation to companies long-term performance. Lastly, the inquiry poses the following questions about the composition of boards:

– How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age sexuality, disability, experience, socio-economic background?
– Should there be worker representation on boards and/or remuneration committees? If so, what form should this take?

While the outcome of the inquiry is not certain, it is clear that corporate governance in the U.K., in the U.S., and in the EU has again become a serious political issue. If companies and investors do not find a mutual path to governance that promotes long-term investment and accommodates employee, customer, supplier and community interests, legislation will result. That legislation may not be to the liking of either companies or investors.

“Consultations” are the UK’s rulemaking process – and they typically involve multiple bodies to accomplish the feat. It’s confusing. For an example, look at this blog leading up to the UK adopting binding say-on-pay where I note dual consultation processes in the House of Commons/House of Lords and the Financial Reporting Council (which looks after the “UK Corporate Governance Code”)…

Broc Romanek

September 23, 2016

Corp Fin: New CDI on 401(k) Broker Windows

Yesterday, Corp Fin issued this new “CDI 139.33/126.41” under the Securities Act Section 5/Form S-8 areas – while withdrawing “CDI 239.16/226.15.”

The new CDI deals with whether a company-sponsored 401(k) plan that doesn’t have an employer securities fund alternative might still be deemed to be offering securities that require ’33 Act registration (when the plan permits contributions through a self-directed “brokerage window”). The CDI concludes that “it depends” – whether the securities need to be registered “depends on the extent of the employer company’s involvement.” And the CDI goes on to provide more gloss…

Whistleblowers: OSHA’s Interim Guidance

Here’s a note from Hunton & Williams’ Scott Kimpel about interim OSHA guidance that was issued last month:

Through a peculiar quirk of Sarbanes-Oxley, OSHA administers Section 806, which provides whistleblower protection for certain parties who report (1) federal mail, wire, bank, or securities fraud, (2) federal law relating to fraud against shareholders, and (3) any rule or regulation of the SEC. The interim OSHA guidance lays out various confidentiality and related provisions in employee settlement agreements that OSHA deems problematic.

Many of the points are derived from the three SEC enforcement cases brought over the past year on this issue. But the OSHA guidance goes a step further and deems problematic any provision that requires a complainant to waive a government whistleblower award. There has been some uncertainty as to the enforceability of such waiver provisions, and the SEC enforcement cases to date do not address the issue directly. While the OSHA guidance is not binding on the SEC, it is still instructive to parties seeking to comply with the SEC whistleblower rules in the absence of any formal guidance from the agency or its staff. Of course, if parties find themselves in a situation in which OSHA has the responsibility to review a settlement agreement, as detailed in the OSHA guidance, we fully expect each of its criteria to apply.

“How the SEC Enabled the Gross Under-Reporting of CEO Pay”

Here’s the intro from this blog entitled “How the SEC Enabled the Gross Under-Reporting of CEO Pay” by “truthout”:

Think it’s scandalous that the average 2014 pay of the CEOs of the 500 biggest companies was 373 times that of the typical worker, as the AFL-CIO reported? You aren’t scandalized enough. Their take home pay, which is reported in the bowels of SEC filings, as opposed to the Summary Compensation Table that the AFL-CIO, along with most analysts and reporters rely on, was a stunning 949 times that of the average worker in 2014.

How did this massive disparity come about, and why is the SEC on the side of such gross understatement?

An important new paper by William Lazonick and Matt Hopkins, which is recapped in detail in The Atlantic, explains this gaping disparity. The culprit is the differences in the approach used to measure stock-related compensation, which is the bulk of top executive pay.

Broc Romanek

September 22, 2016

Broc & John: “Blues Brothers Don’t Have Nothing on Us”

John & I had a lot of fun taping our first “news-like” podcast. This 9-minute podcast is about director compensation & Smithsonian museums – the new African-American museum is opening this weekend (it’s already “sold out” for a few months)! I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc. And as we tape more of these, it’s inevitable we’ll figure out how to be more entertaining…

This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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Transcript: “After Brexit! Current Developments in Capital Raising”

We’ve posted the transcript for our recent webcast: “After Brexit! Current Developments in Capital Raising.”

Corp Fin Updates Small Business Guide for Resource Extraction

Last week, Corp Fin updated its “Small Business Compliance Guide for Resource Extraction“…

And last week, SEC Chair Mary Jo White threw out the first pitch at a Washington Nationals game!

Broc Romanek

September 21, 2016

Auditor Independence: SEC Settles 1st Violation Caused By Personal Relationships

Here’s the intro from this Cooley blog:

In two orders made public today, the SEC announced settled charges against EY and individual EY auditors with regard to alleged violations of the auditor independence rules as a result of “close personal relationships” with officers at audit clients. According to the press release, these “are the first SEC enforcement actions for auditor independence failures due to close personal relationships between auditors and client personnel.”

EY and the other auditors charged consented to the SEC’s order without admitting or denying the findings and paid penalties. EY was also censured,and the individuals were suspended from practice before the SEC. These cases are of interest to issuers as well as auditors because the auditors’ violations caused the companies involved to violate Section 13(a) of the Exchange Act and Rule 13a-1, which require public companies to file Forms 10-K with financial statements that have been audited by independent accountants.

Cybersecurity: New York Proposes 1st State Legal Framework

Here’s an excerpt from this Morgan Lewis article (we’re posting memos in our “Cybersecurity” Practice Area):

The New York Department of Financial Services (NYDFS) has proposed cybersecurity rules that would require banks, insurers, and other NYDFS-regulated financial services companies to adhere to stringent cybersecurity requirements mandating firms to test their systems, establish plans to respond to cybersecurity events, and annually certify compliance with the cybersecurity requirements, among other mandates. Comments on the proposed rules are due in 45 days.

Political Spending Disclosure: Fight Within Congress Continues

Here’s the intro from this WSJ article:

A political fight over whether to require companies to disclose their political spending activities is complicating congressional efforts to hammer out a stopgap spending measure by the end of the month, Republican and Democratic aides say. Senate Democrats are asking their Republican counterparts to drop language from a short-term spending measure to keep the government operating through the fall. The GOP provision would prevent the Securities and Exchange Commission from working on a rule that would require publicly traded companies to disclose political contributions.

The government’s current funding, which expires next week, already bars the SEC from using its funding to “finalize, issue or implement” a political-spending disclosure rule. And Democrats face a high hurdle in getting that provision eliminated, since language from existing funding plans typically carry over into any new short-term spending bills.

Broc Romanek

September 20, 2016

The “Other” Reg Flex Agenda: Piwowar Tries to Make It “Real”

As I have blogged many times (here’s one), the SEC’s Reg Flex Agendas tend to be “aspirational” – and experience bears that out as the SEC often misses its “target” deadlines. I actually loathe blogging when a new Reg Flex Agenda comes out – because some folks read too much into it. In fact, I’m only blogging about it now to try to stave off more misinformation (until just the last few years, the Reg Flex Agenda was completely ignored by everyone)!

Last week, the SEC issued this Reg Flex Agenda, which is a different type of one than the ones that folks normally pay attention to – the new one is under Section 610 of the Regulatory Flexibility Act & requires federal agencies “to review its rules that have a significant economic impact upon a substantial number of small entities within ten years of the publication of such rules as final rules.” The other type of Reg Flex Agenda is like this one that foretells possible new rulemaking. One is forward-looking/future action; the other is to review old rules already on the books to see if they are still “state of the art.”

Anyway, in tandem with this new Reg Flex Agenda, SEC Commissioner Piwowar issued this statement – begging people to comment on the newly posted Reg Flex Agenda (particularly Reg NMS). As Piwowar notes in his statement: “the annual Rule List has prompted, on average, only one comment.” It’s likely that Piwowar asked that Reg NMS be included in the list – the inclusion of that item doesn’t necessarily mean that Chair White thinks it should be. Because the list has little meaning – because it’s aspirational…

I’ll leave you with three thoughts:

1. The SEC Chair primarily sets the agenda for the agency’s rulemaking (see the transcript from our webcast: “How the SEC Really Works”). For the most part, it doesn’t matter how many people seek a rulemaking change. Remember that the political contribution rulemaking petition has garnered over 1 million comments in support – and the SEC hasn’t proposed anything there.

2. This year’s Reg Flex Agenda is even more aspirational than normal – because there is a high likelihood that the SEC Chair (and some of the Division Directors) will be gone soon after the upcoming Presidential election. A new SEC Chair will then eventually be appointed – and that Chair will be driving the bus in 2017.

3. Our community has more than enough things to comment on these days. The pace of change is breathtaking. We don’t need to be commenting on topics that aren’t even proposed yet…

The “Lookback” Reg Flex Agenda: What’s On The List?

Anyway, here are a few notables from the newly posted Reg Flex Agenda:

– Securities offering reform
– Section 16, including Item 405 disclosures
– Accelerated filer definition & deadlines
– Penny stock
– Shell companies
– Deregistration under Section 12(d)

Poll: When Will SEC Chair White Serve Her Last Day?

Take an anonymous guess as to when SEC Chair White will serve her last day in that position:


Broc Romanek

September 19, 2016

Non-GAAP: Many Quickly Moving GAAP Numbers Up (But 20% Still Don’t)

Here’s an excerpt from this Audit Analytics blog (also see these memos posted in our “Non-GAAP Measures” Practice Area):

According to Audit Analytics’ research published in a recent WSJ article, however, there is some evidence of a changing tide; in the most recent quarterly reports, more than 80% of the SP500 companies reported GAAP results first, compared to 52% in the prior quarter.

Nevertheless, only a handful of companies have so far stated their intent to drop non-GAAP numbers completely. The vast majority of companies will still present non-GAAP results, albeit presented after comparable GAAP numbers, with better labeling and clearer descriptions.

But let’s take this line of thought a bit further. If custom metrics are so important to investors, then, analogous to GAAP results, it should be important to investors when non-GAAP metrics turn out to be misstated. What would happen if non-GAAP numbers were to be revised – for example, to correct an error?

We have seen a few instances where this question would be very relevant. In a handful of cases where non-GAAP numbers were intentionally manipulated, we’ve seen an array of related negative events (including management turnover and SEC investigation), which makes these cases hard to overlook. So if errors are found in non-GAAP metrics, how should investors be notified? Non-GAAP numbers are not audited, there is no Item 4.02 requirement for them, and there are rarely any SOX 302 or 404 implications.

A few recent examples, provided below, provide some insight into how companies may disclose error corrections that affected only the non-GAAP presentation (i.e., comparable GAAP results were not revised). In both cases, the correction was discussed in a footnote to the non-GAAP reconciling tables.

Also check out this MarketWatch article which notes that the SEC’s Enforcement Division & DOJ brought a parallel case against a financial professional at a REIT for using non-GAAP metrics fraudulently…

Edgar Filings: 9 FAQs

Recently, the SEC’s Edgar Filer Support posted these 9 FAQs about common issues that folks have when filing…

Internal Controls: A 12-Year Review

Here’s an excerpt from this Audit Analytics blog:

Overall, the percentage of adverse 404 auditor opinions has seen a steady decrease, from 15.7% in 2004, the first year the requirements went into effect, to 5.3% in 2015. However, a less encouraging trend – depending on one’s perspective – is hidden in that overall view; the percentage actually hit its lowest point in 2010, at 3.4%. Since, we have seen an increase in the percentage of adverse 404(b) audit opinions.

Beginning in 2010, the PCAOB began to place a strong emphasis on whether the auditor obtained adequate evidence to substantiate its attestation of the effectiveness of ICFRs. This focus on the part of the PCAOB appears to have had an impact.

Turning our attention to smaller companies, we see a very different picture. One interesting aspect of our report highlights the difficulties faced by non-accelerated filers in achieving an effective level of internal controls over financial reporting. While larger companies rarely (5.3% in 2015) have material weaknesses in their ICFRs, smaller companies are much more often to be found in the weeds.

Broc Romanek