October 18, 2019

SOX 404: 15 Years of Negative Attestations & Assessments

Section 404 of the Sarbanes-Oxley Act requires companies to review their internal control over financial reporting and report whether or not it is effective. Non-accelerated filers are required to provide management’s assessment of the effectiveness of their ICFR, while larger companies are required to accompany that assessment with an attestation from their outside auditors.

As it does every year, Audit Analytics took a look at the most recent round of negative auditor attestations & management-only assessments of ICFR.  This recent blog reviews the results of the past 15 years of experience under SOX 404, and makes several interesting observations:

– Negative auditor attestations bottomed out in 2010 at 3.5% of filings. They rose fairly steadily and peaked at 6.7% in 2016. After declining to 5.2% in 2017, they rose again last year to 6.0% of filings.

– Negative management-only assessments peaked at a whopping 40.9% of filings in 2014, and have remained at or slightly below the 40% level since that time. In 2018, they declined slightly to 39.6% of filings.

The top reasons for negative audit attestations in 2018 were material or numerous year-end adjustments, shortcomings in accounting personnel, IT & security issues, inadequate segregation of duties and inadequate disclosure controls. Many of these same issues resulted in negative management-only assessments, although accounting personnel issues topped the list here. One item that made the top five reasons for negative management-only assessments that didn’t make the audit attestation list was an ineffective, understaffed, or non-existent audit committee.

Canada Heading for Mandatory “Say-on-Pay-Eh”?

Okay, that title is a very lame Canadian joke, but if you were made to look like a fool on a hockey rink by your Canadian pals as frequently as I am, you’d be looking for a little payback too.  Anyway, according to this Blakes memo, recent amendments to the Canada Business Corporation Act may result in a mandatory “say-on-pay” regime for federally chartered Canadian public companies.

Details are in the memo, but what’s more interesting to me is that the memo points out that say-on-pay has already become pretty widespread in Canada among larger cap companies on a purely voluntary basis:

Shareholder Say-on-Pay advisory votes on the compensation practices of public companies in Canada started in 2010 when the major Canadian banks gave their shareholders an advisory Say-on-Pay vote. By 2011, 71 reporting issuers in Canada had adopted Say-on-Pay advisory votes, representing approximately 7% of Canadian listed issuers by number, excluding structured-product issuers and non-listed issuers.

That number has steadily grown each year, such that a total of 220 companies in Canada have now adopted an annual Say-on-Pay advisory vote, including more than 71% of companies in the TSX Composite Index and 52 of the TSX60 Index companies. The adoption of this practice has been completely voluntary thus far, in many cases in response to pressure from institutional investor groups, such as the Canadian Coalition for Good Governance (CCGG), or non-binding votes on shareholder proposals.

Board Elections Less Cozy? Yeah, But Let’s Not Get Carried Away . . .

A recent WSJ headline breathlessly announced that 478 directors failed to get a majority vote this year – and that’s up 39% since 2015. Okay, fair enough – but this Hunton Andrews Kurth memo analyzing the study upon which the WSJ article was based notes that it’s still exceedingly rare for a director to get less than a majority of the votes cast:

How often do directors fail to receive majority support when they stand for reelection? The answer is not often. According to a recent report, however, director “against/withhold” votes are on the rise even though they remain rare. In 2019, 478 directors failed to receive majority support—a small number, but up 38% from 2015. Likewise, the number of directors failing to receive at least 70% support for reelection increased 45% from 2015 to 2019. Overall average shareholder support for directors last year was 95% (votes cast).

The memo breaks down some of the study’s data, and notes that it’s rare for directors to receive less than 70% support – but that data indicates that institutional investors have become more willing to withhold votes from directors in uncontested elections.

John Jenkins