In connection with yesterday’s AICPA conference, SEC Chief Accountant Wes Bricker provided this statement on financial reporting & auditing issues that he’s been discussing with SEC Chair Jay Clayton and others. As you’d expect, a lot of the statement is aimed toward auditors – e.g. what they should be doing to improve quality. But the statement also emphasizes the role of companies in the financial reporting process – with plenty of recommendations for audit committees and management:
– Internal controls – particularly where there are close calls as to a significant deficiency or material weakness, audit committees should pay extra attention to the adequacy of & basis for the company’s ICFR assessment, and seek training if necessary (citing this enforcement action). It’s vital to focus not just on actual misstatements but also whether it’s reasonably possible that a material misstatement won’t be prevented or detected in a timely manner.
Also remember that it’s the company’s responsibility to develop, maintain & assess ICFR – and that the thresholds for auditor attestation don’t change these requirements (it’s not obvious whether this remark is intended to foreshadow a change to the attestation requirement, which was discussed as a future possibility when the SEC increased the smaller reporting company threshold and in today’s Senate testimony by SEC Chair Jay Clayton). This blog from Cooley’s Cydney Posner reports that several members of the OCA Staff also discussed internal controls issues at yesterday’s AICPA Conference – with tips on how to assess controls and how to adequately disclose a material weakness.
– CAMs – conduct a “dry run” so that the auditors & audit committee can discuss issues. It’s also important to understand that CAMs aren’t intended to duplicate management’s MD&A disclosure of critical accounting estimates.
– Continuing education for audit committees – audit committee members must have time, commitment and experience to do the job well. Just possessing financial literacy may not be enough to understand the financial reporting requirements fully or to challenge senior management on major, complex decisions. Audit committees must stay abreast of these issues through adequate, tailored, and ongoing education.
– Audit committee agendas – must be balanced toward understanding accounting, ICFR and reporting requirements. For example, as business, technology, accounting, and reporting requirements change, it is crucial that the audit committee understand management’s approach for designing and maintaining effective internal controls.
– Voluntary disclosure – OCA Staff encourages audit committees for listed public companies of all sizes to communicate how the listing requirements related to the “appointment, compensation, and oversight of the work of any registered public accounting firm. . .” are carried out, especially among smaller companies. There are positive disclosure trends among S&P 1500 companies when it comes to disclosing considerations in appointing the audit firm, fee negotiations and evaluations – but there are opportunities for more progress among mid- and small-cap companies.
– Company processes to ensure auditor independence – emphasizing the role of companies to promote compliance by regularly monitoring corporate structural changes or other operational events that may result in new affiliates or business relationships and timely communicating these changes to the auditor, as well as evaluating the sufficiency of these monitoring processes & practices. Also note that the OCA Staff is assessing comments on the auditor independence “loan” rule – final rulemaking is expected in 2019.
– Auditor communications – to enhance oversight, audit committees should consider requesting additional voluntary information from the auditor to understand their level of investment in quality control functions, the connection of technology to audit quality and how audit firm performance compares to others.
– New GAAP standards – continue to focus on implementing & refining compliance with new standards on revenue recognition, leases & current expected credit losses
“Accredited Investor” Verification: SEC Enforcement is Watching
Last week, the SEC issued a cease-and-desist order against CoinAlpha Advisors for a Reg D offering gone wrong – which shows that Enforcement will take issue with relying on self-completed questionnaires to verify accredited investor status under Rule 506(c). Here’s an excerpt from Steve Quinlivan’s blog:
The SEC alleged CoinAlpha did not have pre-existing substantive relationships with nine of the fund’s investors and engaged in a general solicitation of public interest in the securities offering through CoinAlpha’s website, which was generally accessible without password protection. Additionally, CoinAlpha engaged in general solicitation through blog postings, and media interviews and digital asset and blockchain conferences, accessible both via live attendance and through the Internet. Despite collecting accredited investor questionnaires and representations from investors certifying to their accredited investor status, Respondent did not take reasonable steps to verify that investors in the Fund were accredited investors.
During the subsequent SEC investigation, CoinAlpha retained a third party who determined that all 22 investors were accredited investors.
The SEC found CoinAlpha engaged in an unregistered public offering. CoinAlpha did not admit or deny the SEC’s findings.
Podcast: “The Governance Revolution”
In this 30-minute podcast, turnaround expert & director Deborah Hicks Midanek discusses her new book, “The Governance Revolution: What Every Board Member Needs to Know, NOW!” – including:
– What led you to write “The Governance Revolution”?
– What are the most important messages in the book?
– When it comes to some of the hazards of the board process, what is “The State Dinner” all about?
– What about “Bullying”?
– What has been the biggest surprise for you in reaction to the book?
– Liz Dunshee