July 10, 2017

Links to Exhibits: Updated Edgar Filer Manual (Coming Soon)

Back in May, I blogged about 7 early adopters of the SEC’s new “link to exhibits” rule. I blogged that these companies had experimented by including links to their exhibits voluntarily – without the benefit of an updated Edgar Filer Manual.

Last Thursday, the SEC posted this adopting release about an updated Edgar Filer Manual. However, the updated Manual itself is not yet posted (the currently posted Manual was last updated in March). Perhaps it will be posted when this adopting release is published in the Federal Register? Regardless, it will be out soon. Hat tip to Goodwin Procter’s John Newell for alerting us to this development.

The adopting release doesn’t hint at the degree of instructive detail that the updated Manual will ultimately provide. Will it provide a detailed roadmap of what the SEC expects? Or will it state that companies have wide latitude as to how they provide links? We’ll know the answer when the updated Manual is posted.

Here’s what the adopting release says about all this on page 3:

Effective September 1, 2017, large accelerated and accelerated filers filing Forms S-1, S- 3, S-4, S-8, S-11, F-1, F-3, F-4, F-10, SF-1, and SF-3 under the Securities Act and Forms 10, 10- K, 10-Q, 8-K, 20-F, and 10-D under the Exchange Act will be required to submit these forms in HTML and include a hyperlink to each exhibit listed in the exhibit index of these filings, including exhibits that are incorporated by reference. Instructions for hyperlinking to an exhibit submitted with a previous submission, or an exhibit that is being filed concurrently with the submission, have been included in Chapter 5 of Volume II of the EDGAR Filer Manual. Instructions for using HTML Styles to indicate the location of the Exhibit Links and the Summary Section have also been included in Chapter 5 of Volume II of the EDGAR Filer Manual.

GE Creates Internal Yelp-Like Resource for Lawyers

Interesting article about how GE has created an internal Yelp-like resource to manage the 200 outside law firms it deals with. Not sure it will really used much by GE’s 800 in-house lawyers, but probably will be used by procurement – and that’s who everybody is increasingly answering to these days…

Controlling Audit Fees: “How-To Guide”

Here’s something from Dan Goelzer of Baker & McKenzie: As discussed in the December 2016 Update, the Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), found, in its 2015 survey of audit fees, that the median SEC filer audit fee rose 1.6 percent in 2015. However, the largest public companies – large accelerated filers – enjoyed a 3.8 percent decrease in fees. FERF and Workiva, a provider of business data and control solutions, have followed up on the audit fee survey with a report on how companies can reduce audit fees or limit fee increases. The new report – “Mitigating Increases in Audit Fees” – is based on interviews with financial statement preparers and auditors.

The FERF recommendations fall into six categories:

1. Rethink the business and centralize business processes. “Audit fees are often related directly to the size and complexity of the business, so if any parts of the business are sold or discontinued, audit fees should decline in proportion. However, reducing audit fees for a company with a newly simplified structure often requires negotiation with the external auditor.” The report also notes that FERF’s annual audit fee survey has consistently found that companies with centralized operations average significantly lower audit fees than decentralized companies.

2. Align key controls with key risks. “Public Company Accounting Oversight Board (PCAOB) inspections have encouraged auditors to spend more time reviewing management controls during the annual audit, prompting registrants to align key controls with the most relevant risks.” In this respect, one of the auditors interviewed observed:

“Audits are a function of the amount of time that it takes to do the audit. If there are fewer key controls that need to be tested, the audit fees could possibly go down. However, there is a balance that needs to be struck, because the opposite could also be true. We think it is really important that the company and the external auditor align their control structure and do some upfront planning, because if the company and the external auditor both agree on the key controls that are in place and can be tested, there is a real opportunity for efficiency.”

3. Document internal controls. “Reviewing the documentation of internal controls, which can be time-consuming, has become a key part of the audit. If the client has very light or poorly organized documentation, or hasn’t thought through all the branches in a process, attestation becomes difficult for the auditor — and more costly for the registrant.”

4. Consider outsourcing internal audit. “A Big Four audit firm may be able to rely on the internal audit work of a regional firm with a significantly lower hourly rate.” Outsourcing internal audit to a firm in which the auditor has confidence should increase the extent to which the auditor is willing to rely on that firm’s work, rather than duplicating its testing. However, as the report notes, the effectiveness of this strategy also depends on the independence of the firm that performs the internal audit function.

5. Communicate with the auditor. “Good communication should be continual through the process, not limited to the start or end of the audit.” For example, in a case discussed in the report, the controller asked the auditor what the company could do to make the audit more efficient. The auditor responded with suggestions for analytics that could be prepared by the company’s staff, for review by the auditor, as a way of reducing audit hours. Another suggestion involved early communication to reach agreement on risk assessment.

6. Evaluate the latest technology. “External auditors and internal auditors are both using data analytics technology to increase audit quality, work smarter and potentially reduce costs. Technology can be used to detect and identify all exceptions, anomalies and outliers, rather than just those found within a sample.” One of the auditor interviewees suggested that–

“reports should generated [by the company’s IT system] in a way that the system retains a lot of audit evidence or evidence that the company might anticipate an external auditor would look for. * * * For example, the tracing and vouching to source documents, whether they’re invoices generated internally by the company or documents or evidence that is retained by a third party, such as a proof of delivery or a cash receipt.”

Comment: Because of their responsibility for the relationship with the outside auditor, audit committees may find the FERF publication a useful reference. The strength of the FERF approach is that it suggests ways in which the cost of the audit can be reduced with out compromising quality. Fee reduction demands which merely encourage the auditor to reduce audit hours run the risk of increasing the probability the audit will fail to detect a material misstatement or internal control weakness – either of which is likely to result in costs and embarrassment for the company and the audit committee out of proportion to any audit fee savings. Conversely, audit committees may want to probe more deeply into the reasons for fee reductions that are not based on the kinds of approaches outlined in the FERF guide.

Broc Romanek