February 20, 2020

SEC Brings KPI Enforcement Proceeding

It looks like the SEC didn’t waste much time in finding its big company poster child for key performance indicators (KPI). Yesterday, the SEC issued a press release announcing an enforcement proceeding where it brought charges against Diageo plc for disclosure failures. The enforcement proceeding is right on the heels of the SEC’s KPI interpretive release that John blogged about just a couple of weeks ago.  Here’s the crux of what the SEC had to say:

According to the SEC’s order, employees at Diageo North America (DNA), Diageo’s largest and most profitable subsidiary, pressured distributors to buy products in excess of demand in order to meet internal sales targets in the face of declining market conditions. The resulting increase in shipments enabled Diageo to meet performance targets and to report higher growth in key performance indicators that were closely followed by investors and analysts. The order finds that Diageo failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the overshipping had on sales and profits, and the negative impact that the unnecessary increase in inventory would have on future growth. The order further finds that investors were instead left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for Diageo’s products.

Without admitting or denying the findings in the SEC’s order, Diageo agreed to cease and desist from further violations and to pay a $5 million penalty.

You can find memos about the SEC’s KPI interpretive release posted in our “MD&A” Practice Area.

SEC Public Statement on Coronavirus

Yesterday, the SEC issued a public statement on the effects of the coronavirus on financial reporting.  In late January, John blogged about Chairman’s Clayton’s statement addressing disclosure implications from the coronavirus outbreak.

Yesterday’s statement said SEC Chairman Clayton, Corp Fin Director Hinman, SEC Chief Accountant Teotia and PCAOB Chairman Duhnke met with the leaders from the Big 4 audit firms to continue discussions around difficulties in conducting audits in China and other emerging markets.  In these discussions, they also discussed the “potential exposure of companies to the effects of the coronavirus and the impact that exposure could have on financial disclosures and audit quality, including, for example, audit firm access to information and company personnel.”  Here’s an excerpt from the SEC’s statement:

The coronavirus effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers.  However, how issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.

Specifically, we emphasized:  (1) the need to consider potential disclosure of subsequent events in the notes to the financial statements in accordance with guidance included in Accounting Standards Codification 855, Subsequent Events and (2) our general policy to grant appropriate relief from filing deadlines in situations where, in light of circumstances beyond the control of the issuer, filings cannot be completed on time with appropriate review and attention.  In addition, if issuers have questions regarding the reporting of matters related to the potential effects of the coronavirus, including potential subsequent event disclosure, we welcome engagement on these matters.

The SEC’s statement says that companies are encouraged to contact the SEC regarding any need for relief or guidance.

PCAOB Conversations with Audit Committee Chairs

The PCAOB recently issued a report that summarizes information gathered from conversations with nearly 400 audit committee chairs. The conversations were primarily focused on audit quality and provide insight on a variety of topics including audit committee perspectives of the auditor, new auditing and accounting standards and technology and innovation.  Here’s an excerpt about what audit committees are saying  works well:

– Reviewing other audit firms’ inspections reports to see if there are any lessons learned or questions about potentially similar issues that could be discussed with your auditor

– Conducting an assessment – on at least an annual basis – of the engagement team and audit, including discussions around what went well and what could be improved

– Using outside consultants or experts to educate the audit committee on new or complex accounting standards

The report also provides an overview of PCAOB 2019 inspections and touches on how the PCAOB selects audits for inspection, what an inspection entails and what happens when a deficiency is identified.

Lynn Jokela