June 25, 2018

Earnings Reports: “Fraudtastic 4?”

Last week, the WSJ reported that some companies may have found another way to be “creative” when it comes to reporting their results – and it’s attracted interest from SEC Enforcement. Here’s an excerpt:

Enforcement officials at the Securities and Exchange Commission have sent queries to at least 10 companies, asking the firms to provide information about accounting adjustments that could push their reported earnings per share higher, one person familiar with the matter said.

The queries follow the release of an academic paper that found evidence of companies nudging up earnings results. The academic research found the number “4” appeared at an abnormally low rate in the tenths place of companies’ earnings per share. Reporting that figure as “5” or higher allows a firm to round up its earnings per share another cent. For instance, a company with earnings of 55.4 cents a share would round to 55 cents a share, while a company with earnings of 55.5 cents a share would round to 56 cents.

What’s kind of puzzling is how long it’s taken for this alleged practice to draw attention from regulators. Warren Buffett actually raised this issue – and cited the study referenced in the WSJ article – at the 2010 Berkshire-Hathaway annual meeting.

Board Oversight: Updating Caremark for the #MeToo Era?

We’ve previously blogged about the increasing focus on the board’s oversight responsibilities in the area of sexual harassment. This Cleary Gottlieb blog  suggests that the principles underlying Delaware’s Caremark doctrine might well provide the basis for an expanded concept of what’s required of corporate boards in the #MeToo era. This excerpt explains:

Chancellor Allen anticipates today’s business challenge for directors by expressly premising his holding on moral considerations: “one wonders on what moral basis might shareholders attack a good faith business decision of a director as ‘unreasonable’ or ‘irrational’” (emphasis added). That is not to say that the Caremark opinion suggests that moral failures should be a basis for director liability.

Rather, the Caremark opinion suggests that the standard for director liability should in some way reflect the moral issues at stake: asking whether there is a moral basis for the courts to hold directors liable for not ferreting out an obscure compliance failure that results in a modest financial penalty is also by implication asking whether there is a moral basis for the courts to not hold directors liable for turning a blind eye to issues of great political, social or cultural consequence.

For those who consider social issues as being beyond the responsibility of corporate boards, the blog cautions that Caremark’s “duty of attention” may provide the moral basis for judging directors based on how they deal with these issues.

Cybersecurity: What to Think About When Buying Cyber Insurance

Earlier this year, we blogged about efforts by some of the nation’s largest companies to get into the cyber insurance game. Now this Wachtell memo has some advice for those on the buy side about what they should consider when shopping for coverage. This excerpt addresses coverage for “preexisting conditions”:

Companies should understand whether a policy will restrict coverage for breaches stemming from conditions existing at the time the policy is purchased. While sometimes explicit, such limitations can also be implicated through the use of a “retroactive date” for the start of coverage. As some cyber events are caused by a latent, sometimes long-existing, vulnerability in a company’s infrastructure, this type of carveout could result in a significant gap in coverage.

Other topics include coverage of third party claims, the need to ensure that policy provisions are consistent with cyber-incident response plans, & coverage for data under the control of third parties.

John Jenkins