September 29, 2020

Staff Comment Trends: Corp Fin’s Top 10

Ernst & Young recently issued its annual review of Staff comment letters. The number of comment letters issued during the year ended June 30, 2020 declined by 15% over the prior year. That represents the continuation of a four-year trend that has seen the number of comment letters decline by nearly 2/3rds since 2016.

EY attributes the decline to the Staff’s continued use of a “risk-based” approach to the review process, which involves concentrating on larger filers and reviewing their filings more frequently. Here’s a list of the 10 topics that were most frequently the subject of SEC comments:

1. Non-GAAP financial measures
2. Management’s discussion and analysis
3. Revenue recognition
4. Segment reporting
5. Fair value measurements
6. Intangible assets and goodwill
7. Contingencies
8. Inventory and cost of sales
9. Income taxes
10. Signatures/exhibits/agreements

The list is pretty similar to last year’s, although revenue recognition comments led the way in 2019. Contingencies and inventory & cost of sales were the only additions to this year’s top 10 list, while comments on state sponsors of terrorism and acquisitions and business combinations failed to make the cut this year.

SEC Enforcement: “EPS Initiative” Snares First Two Companies

Corp Fin isn’t the only SEC division that takes a risk-based approach to its work. Yesterday, the Division of Enforcement announced settled enforcement proceedings against two companies for allegedly manipulating their reported earnings per share.  Here’s an excerpt from the SEC’s press release announcing the proceedings:

The Securities and Exchange Commission today filed settled actions against two public  companies for violations that resulted in the improper reporting of quarterly earnings per share (EPS) that met or exceeded analyst consensus estimates. The actions are the first arising from investigations generated by the Division of Enforcement’s EPS Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.

The proceedings, which were settled on a “neither admit nor deny” basis, involved allegedly inappropriate accounting adjustments that enabled the companies to present misleading earnings performance. Both companies consented to cease and desist orders and civil monetary penalties. Two accounting executives at one of the companies also consented to cease & desist orders, civil monetary penalties and temporary bars to practicing before the SEC.

This is the first I’ve heard about an “EPS Initiative,” but the Enforcement Division’s increasing emphasis on data analytics is something that the agency has publicized for some time. For example, this BakerHostetler memo discusses comments made by the Enforcement Division’s Chief Accountant, Matthew Jacques, at a conference last fall:

Mr. Jacques disclosed that the Division of Enforcement has also invested time and energy in technology to better detect fraud, such as the increased use of data analytics, to allow the SEC to detect complex fraud faster and catch bad actors more quickly. Mr. Jacques stated that the SEC will evaluate potential accounting cases brought to its attention based on considerations such as the egregiousness of the conduct, the size of the company and the SEC’s priorities.

My guess is that we’ll be hearing more from Enforcement’s EPS Initiative in the coming months. Cases targeting earnings shenanigans seem like a nice fit with the SEC’s current focus on violations that impact “Main Street investors,” and they also highlight the agency’s ability to leverage its resources through the application of technology.

Sustainability: CII Calls for Companies to Use Standard Reporting Metrics

Last week, the CII adopted a statement a statement urging companies to report on their sustainability performance using standardized metrics established by independent private sector standard-setters. In its press release announcing the adoption of the new statement, the CII provided some insight about why it decided to adopt the statement now:

The CII statement comes at a pivotal time for the future of sustainability reporting, with five leading sustainability standard setters recently releasing a document declaring intent to work together toward comprehensive reporting, and the International Federation of Accountants recently proposing the creation of a sustainability standards board that would exist alongside the International Accounting Standards Board. While CII does not endorse any particular framework or independent standard setter, these developments clearly indicate momentum toward the broad objectives described in the statement.

The CII’s statement says that “standards that focus on materiality, and take into account appropriate sector and industry considerations, are more likely to meet investors’ needs for useful and comparable information about sustainability performance.” The statement also endorses the idea that, over time, companies should obtain external assurance of the sustainability performance disclosures.

John Jenkins