August 19, 2019

Will All Audit Reports Include CAMs?

Hats off to Stinson’s Steve Quinlivan for listing recent SEC filings with CAMs in them. Steve notes that “there are a number of audit reports from smaller accounting firms on smaller issuers which indicate no CAMs were identified. Some may think this will change when the Big 4 start issuing reports on those beneath the large accelerated filer tier. That may be the case, but large accelerated filers by their nature seem to have complex accounting, which may not be true for smaller issuers and a finding of no CAMs may be appropriate.” And note this quote from this article by MarketWatch’s Francine McKenna:

Even though CAMS should, in theory, “enhance the informativeness of the audit report,” the researchers caution that their findings suggest that business priorities “may discourage auditors from disclosing important direct-to-investor communications that might make their clients look bad, and instead encourage auditors to withhold such information.”

Are Companies Punishing Their Auditors for Flagging Their Material Weaknesses?

As reflected in this article by MarketWatch’s Francine McKenna, this new study about internal controls reporting by independent auditors is getting a lot of press. Here’s the intro from this “Accounting Today” article (also see this WSJ article):

Auditing firms that tend to find material weaknesses in companies’ internal controls are seen as less attractive in the audit market, according to a new study. The study, by Stephen P. Rowe and Elizabeth N. Cowle of the University of Arkansas, looked at 13 years of data from 885 local offices of 358 audit firms in the U.S., and found offices that reported material weaknesses in internal controls over financial reporting for one or more clients in the course of a year saw their average fee total in the following year grow by about 8 percent less than would have been the case had they issued none. That decline was in addition to lost fees from clients who were found to have internal control material weaknesses, or ICMWs, and responded by switching auditors, which was something that companies tagged with ICMWs were often found to do by the researchers.

And here’s the intro from this article:

“Don’t Make Me Look Bad: How the Audit Market Penalizes Auditors for Doing Their Job.” That’s the title of a study being presented at this week’s annual meeting of the American Accounting Association. While it may not portray companies in the most favorable light, at the same time it’s merely the latest suggestion that auditors might not necessarily lean toward rendering unbiased opinions on paying clients.

“Presumably, audits that provide useful information to users of financial statements should serve to increase the credibility of financial statements and, in turn, increase auditor reputation,” the study’s authors write. But the research found exactly the opposite, at least with respect to one essential service auditors are required to perform: flagging material weaknesses in companies’ internal controls over financial reporting, a responsibility mandated by the Sarbanes-Oxley Act (SOX).

Are Activist Investors Sexist?

Here’s an excerpt from this WSJ article:

It’s a subject that has come up before, but now there is research that suggests that women CEOs are at higher risk of a brush with an activist than their male counterparts. Because these activists have the ear of institutional shareholders and strike fear in the heart of board members, creating a concrete plan for confronting these threats should top the to-do list of any female CEO. Nelson Peltz, a well-known activist who has targeted his share of female CEOs, told CNBC he is “gender blind.” Whether a firm lives up to its potential is all he cares about, he says. If it’s performing up to expectations, he’ll leave it be. If it ain’t making the numbers, he swoops in.

An investment banker who works on activist issues told me this week that Messrs. Icahn and Peltz could look at three dozen or so criteria in evaluating whether to launch a campaign against a company. “Whether the CEO is a man or woman is absolutely, positively not on that list.” Academics started taking a look for potential bias after a string of prominent women leaders—including Marissa Mayer (Yahoo), Mary Barra (GM), Meg Whitman (HP), Indra Nooyi (Pepsi) and Sandra Cochran (Cracker Barrel)—had battles with activists, who are almost exclusively men. Former Mondelez International Inc. CEO Irene Rosenfeld told The Wall Street Journal in 2015 that dealing with Mr. Peltz consumed 25% of her time. Ursula Burns relinquished Xerox Corp.’s CEO title after a confrontation with Mr. Icahn. Ellen Kullman led Dupont’s successful fight against Mr. Peltz in 2015, but abruptly retired five months later amid deteriorating results.

Broc Romanek