It’s hard to believe, but year-end is upon us! This means turning our attention to the annual reporting season and gearing up for the first few months of 2024 — rolling from the 10-K to the proxy statement and the first quarter 10-Q in rapid succession with zero breaks. And in this annual reporting season, public companies are tackling a host of new disclosure obligations.
Fortunately, the memos are rolling in — like these from Davis Polk, Debevoise, Gibson Dunn and Paul Hastings — with summaries of new requirements & Staff guidance and suggestions of prior year disclosures that are ripe for review. On new disclosure topics, you may want to reference this thorough list from the Paul Hastings memo:
For the fiscal year ending December 31, 2023, issuers should keep in mind the following pertinent matters, and flow any necessary changes in disclosure throughout their Form 10-K:
– Current geopolitical conditions, including the Israel-Hamas War, the ongoing Russia-Ukraine War and conflict between China and Taiwan;
– Effects of sustained high interest rates and inflation on the financial and capital markets and related implications on the issuer’s ability to borrow funds or refinance existing indebtedness;
– Choppiness in the capital markets and potential impacts on the issuer’s ability to raise funds in the public or private markets;
– Downgrading of the United States’ credit rating, and the issuer’s preparedness to manage the related political risk;
– Risks related to the upcoming U.S. presidential election;
– Lingering impacts of the turmoil in the banking and financial services sector;
– Continued evolution and use of machine learning and generative AI, including risks arising from insufficient human oversight of AI or a lack of controls and procedures monitoring the use of AI in day-to-day operations as well as from potential future competitive disadvantages related to a lack of investment in AI tools;
– Effects stemming from long-term reliance on hybrid work arrangements, including impacts on productivity and profitability, as well as on operating expenses and overhead costs and / or risks related to return to office programs, including their impact on workforce retention and issues stemming from non-compliance;
– Climate-related or natural disaster-related events like increases in the cost of insurance coverage for entities with operations in high fire, hurricane or flood risk areas;
– ESG-related matters, including the pending SEC rules on climate-related disclosures and the new International Financial Reporting Standards sustainability and climate-related disclosure standards;
– Effects of any potential federal government shutdown (if applicable); and
– Impacts on the issuer’s supply or distribution chains related to the above factors or otherwise.
Issuers should also consider industry-specific and geography-specific developments, for example:
– Issuers in the entertainment and media space should consider the impacts related to the recently resolved SAG-AFTRA and WGA strikes;
– Issuers in the transportation industry should consider the financial and other impacts stemming from the United Auto Workers strike and related salary increases;
– Issuers in the residential real estate space should consider the impacts of the challenging housing market;
– Issuers that do business in California should consider the potential effects of recently adopted Senate Bill 253, the Climate Corporate Data Accountability Act and Senate Bill 261, Greenhouse Gases: Climate-Related Financial Risk and the issuer’s ability to prepare the required disclosures; and
– Issuers in the banking industry should review their liquidity disclosures in their MD&A and their interest rate risk and sensitivity disclosures in their Quantitative and Qualitative Disclosures About Market Risk in light of the Division of Corporation Finance’s focus on these disclosures coming out of the bank failures earlier this year.
We’re posting these and other resources in our “Form 10-K” practice area.
If your director orientation program could use a refresh, this PwC resource is a great quick reference guide on the basics. In two pages, it covers:
– A list of people a new director should meet with as part of the board orientation process, including executives, other directors, and key individuals in various functional areas
– Best practices for board orientation and onboarding, including site visits and assigning a “board buddy”
– Customizing the orientation for the director (for example, a deep dive on the company’s industry may not be necessary for a director with significant industry experience)
– Documents that should be included in any director orientation manual
– Since directed at PwC audit clients, the alert describes PwC’s involvement in the process (but could be applicable to any auditor), including scheduling a meeting between the new director and lead engagement partner and ensuring the director receives relevant publications
Join us tomorrow at 2 pm Eastern for the webcast “Related Party Transactions: Refresher & Lessons Learned from Enforcement Focus” to hear Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, White & Case’s Maia Gez, and Vinson & Elkins’s Zach Swartz discuss why and how to enhance your controls and procedures surrounding related party transactions.
We have a packed agenda! This program will cover:
Overview of Disclosure Requirements
– Transactions & time periods covered by Item 404 of Regulation S-K – Definitional issues – Where disclosure may be required – Exhibit filing requirements – Special considerations for SRCs
Common Types of RPTs & Computing Transaction Amounts
– Family member employees – Participation in a public offering – Leases & aircraft – Loans – Charitable gifts
– Treatment under GAAP and Regulation S-X – Role of the auditor & communications to the Audit Committee
Related Party Transaction Due Diligence and Process
– D&O questionnaires, process & technology – AS 18 questionnaires – Company books & records – Audit Committee approval requirements & policies
Interplay with Other Considerations
– Director independence – Conflicts of interest
Wrap-Up & Recent Enforcement Focus
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
Just before Thanksgiving, the SEC announced an order officially staying the share repurchase disclosure rule and filed a motion with the 5th Circuit requesting more time to remedy deficiencies in the rule. Both the order and request followed the Court’s October ruling that the share repurchase rulemaking was “arbitrary & capricious” — requiring that the Commission fix it by November 30. As Liz shared last week, the Court denied that motion, which left the SEC only a few days to comply.
On December 1, following the expiration of the remand deadline, the SEC’s Office of General Counsel submitted a letter to the Court acknowledging the Commission was unable “to correct the defects in the rule” within the required 30-day period. Cooley’s Cydney Posner addressed the expected next steps in this blog:
Presumably, the Court will now vacate the rule and it will be up to the SEC to decide whether to appeal the decision or to try again with a new share repurchase proposal—this time one that addresses the defects identified by the Court.
John and Dave have blogged about FinCEN’s rules for reporting beneficial ownership information under the Corporate Transparency Act, which are effective January 1, 2024 and create new filing requirements applicable to a wide range of entities. As Dave shared when the final rules were issued, reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports, but under FinCEN’s original rule, reporting companies created or registered after January 1, 2024 would have had only 30 days after receiving notice of their creation or registration to file their initial reports. Last week, as reported by this McGuireWoods blog, FinCEN extended this original deadline:
On November 29, 2023, FinCEN extended the 30-day deadline to 90 calendar days for Reporting Companies created or registered on or after January 1, 2024 in order to give Reporting Companies more time to understand FinCEN’s reporting requirements and submit their BOI reports.
Reporting Companies created or registered prior to January 1, 2024, still have a calendar year from the Act’s effective date – until January 1, 2025 – to file their initial BOI reports.
For Reporting Companies created or registered on or after January 1, 2025, their initial BOI reports must be filed within 30 calendar days of receiving actual or public notice of their creation or registration becoming effective.
As a reminder, FinCEN will not accept BOI reports from Reporting Companies until January 1, 2024.
Proxy season is right around the corner! If you missed all or part of our “2023 Proxy Disclosure Conference” or “20th Annual Executive Compensation Conference” – or even if you didn’t — don’t forget that our conference sessions are archived for your continued reference as you navigate challenging proxy season issues! If you registered to attend, replays and transcripts are currently available on-demand and will be accessible until September 20, 2024. If you didn’t register, you can purchase access to the archives online or by emailing sales@ccrcorp.com or calling 1-800-737-1271.
And you may be able to earn CLE credit for watching replays! We are now offering on-demand credit for the session replays in states where that is available. There are some nuances to receiving that credit, so check out the on-demand CLE FAQs to take advantage of that.
Yesterday, the Center for Audit Quality announced the publication of its 10th annual “Audit Committee Transparency Barometer.” The report is compiled by the CAQ and Audit Analytics to measure disclosures about financial oversight and other audit committee responsibilities. This year’s report also takes a look back at big-picture changes to audit committee disclosures over the past decade. Here’s an excerpt:
After a decade of analyzing audit committee disclosures, we have seen disclosure rates increase across the majority of the questions and topics being tracked. In the current environment of economic uncertainty, geopolitical crises, and new ways of working, it remains as important as ever for audit committees to tell their story through tailored disclosures in the proxy statement. Investors and other stakeholders use these disclosures to understand how the audit committee is exercising oversight to navigate the challenges of this current environment.
This environment provides an opportunity for audit committees to revisit their disclosures to ensure that they are up to date and tailored to the specific events and circumstances that the audit committee currently faces. Providing detailed and relevant disclosures, instead of relying on boilerplate language, provides investors with useful information about the processes, considerations, and decisions made by the audit committee. Every year, each audit committee has a unique story to tell, and detailed disclosures in the proxy statement relay the extent of engagement of the audit committee, which contributes to audit quality.
However, while audit committees & disclosure teams have overall earned a “gold star,” the report notes that there is always room for improvement. To support that effort, the appendices to the report include disclosure examples and questions for consideration. Among other suggestions, the CAQ suggests that companies could consider discussing not just “what they do” but also “how they do it,” and enhancing disclosure about audit fees in the upcoming year:
Another area where we continue to see lower rates of disclosure is the discussion around audit fees, particularly disclosures about the connection between audit fees and audit quality (Q3) and explanation for a change in fees paid to the external auditor (Q6). For audit committees to enhance their disclosures, they should provide more robust disclosures about how the audit committee considers the appropriateness of the audit fee, including key factors affecting changes to the audit fee year over year. For example, it may be helpful for stakeholders to understand efficiencies achieved, such as the auditor’s use of new technologies, or changes in the scope, such as a major transaction during the year, that could lead to changes in the audit fee.
Audit fees can be an indicator of audit quality for stakeholders because abnormally low fees may indicate that not enough time or resources are spent on the audit engagement, which could contribute to low audit quality. On the other hand, abnormally high audit fees could indicate inefficiencies, which may also be a red flag for stakeholders. In selecting, retaining, and evaluating the independent auditor, the audit committee should always be focused, in the first instance, on audit quality. Describing the audit committee’s views on the audit fee’s appropriateness can help stakeholders understand what contributes to the audit fee and can provide stakeholders further insights into how the audit committee considers audit quality throughout its engagement with the external auditor.
The report concludes with this encouragement to keep moving onward & upward:
We applaud audit committees for their efforts to increase disclosures over the past 10 years and continue to encourage audit committees to consider how their disclosures can be enhanced to provide further transparency for investors regarding the critical oversight work that audit committees perform.
The “Audit Committee Transparency Barometer” released yesterday by the Center for Audit Quality and Audit Analytics says that 59% of S&P 500 companies are disclosing that the audit committee is responsible for oversight of cybersecurity risk – up from 54% last year. Here’s an excerpt describing how to communicate what that role involves and how the audit committee members are well-equipped to carry it out:
As the audit committee’s role continues to expand, it is increasingly important for boards to monitor the skill set and composition of committee members to ensure that audit committee members have appropriate expertise to exercise their oversight. Beyond disclosing the expertise of certain committee members, audit committees may also consider disclosing how all members of the committee stay abreast of emerging areas. In the 2022 Audit Committee: The Kitchen Sink of the Board report, researchers interviewed audit committee members and found that more than half of them consider their continuing education to be a critical part of their ability to manage evolving responsibilities, and they often strategically select continuing education that focuses on emerging risk areas, such as cybersecurity, ESG, and risk management. Telling this story to stakeholders demonstrates the audit committee’s commitment to the oversight role.
The same study also found that investors want to understand the roles and responsibilities assigned to the audit committee, why audit committee members are appropriate for the specific company, examples of continuing education for audit committee members, how audit committees address key risks, and details that reflect broader audit committee responsibilities.
As the SEC has recently adopted its Cybersecurity Disclosure rule and is continuing to work on its Climate Disclosure rule, we expect that these topics will continue to be relevant for audit committees, particularly as this information is included in SEC filings. Audit committees play an important role in the oversight of these areas given their expertise and experience in oversight of financial reporting and internal controls.
Even though a lot of companies are disclosing the audit committee’s role in some dimension of cyber risk oversight, the CAQ also notes that this broad responsibility is parceled out among existing committees at 85% of S&P 500 companies, according to the latest Spencer Stuart Board Index. Yesterday on CompensationStandards.com, Meredith highlighted why even the Compensation Committee can’t escape involvement.
Yesterday, the PCAOB announced three settled disciplinary orders relating to China-based audit firms & individuals involved with auditing US-listed companies. These are the PCAOB’s first enforcement settlements under the protocol established last year that finally granted the Board’s longstanding demand to inspect & investigate registered public accounting firms headquartered in mainland China and Hong Kong.
Three firms & four individuals were fined a total of $7.9 million for alleged training exam misconduct and violations of quality control and independence standards, among other things. As part of the settlements, the targets of the proceedings – who have not admitted or denied the findings – have also agreed to take steps to improve their policies & procedures (in the case of the firms) and remedial undertakings & restrictions (in the case of the individuals). PCAOB Chair Erica Williams said the settlements are a big deal:
These sanctions represent the highest civil money penalties the Board has ever imposed against firms in mainland China and Hong Kong, some of the highest penalties the Board has imposed against any firm around the globe, and the first time ever that the PCAOB has been able to bring enforcement action against a mainland Chinese firm based on its audit deficiencies.
The days of China-based firms evading accountability are over. The PCAOB is demonstrating that we will take action to protect investors in U.S. markets and impose tough sanctions against anyone who violates PCAOB rules and standards, no matter where they are located.
The PCAOB thanked the SEC for its assistance in this effort, and Chair Gensler issued a statement applauding the protection of American investors.