Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
We’ve posted oodles of memos about the SEC’s Section 21(a) Report on initial coin offerings that John recently blogged about.
A number of articles written since the SEC’s Report indicate that the SEC’s position might not slow down the use of ICOs – instead, they will be offered to accredited and/or off-shore investors. For example, see this Reuters article – and this TechCrunch interview. This trend started even before the SEC’s Report was issued.
In fact, the Reuters article seems to indicate that some ICOs are going forward even with US investors that aren’t accredited. Either these companies are total gunslingers – or they don’t know what a shot across the bow looks like. Or more likely, they don’t believe the SEC’s position is a strong one. Or perhaps the word hasn’t gotten out.
As noted in this Gibson Dunn blog, Delaware Governor Carney recently signed Senate Bill 69 into law – effective August 1st – amending Delaware’s General Corporation Law to allow companies to utilize blockchain technology to maintain and distribute certain corporate records.
ICOs: What Are the Open Issues?
There certainly have been a ton of law firm memos on the SEC’s Section 21(a) Report on initial coin offerings! Some of them spot open issues, including this Cleary Gottlieb blog. Love that the Howey test & the whole “definition of securities” analysis is getting so much play! Securities law geek heaven…
The United States is not the only country grappling with this issue. This Morrison & Foerster memo examines a similar situation in Singapore…
ICOs: What Types Are There?
In this blog, Steve Quinlivan reviews the type of ICOs that have been conducted so far…
Speaking of algorithms, this memo discusses how management & boards should be analyzing algorithmic risks…
This recent Washington Post article describes the current state of the US Chamber of Commerce. Here’s an excerpt:
And in an era that allows virtually unlimited independent political spending, they can form their own more focused, and perhaps more effective, associations. Many lobbyists who represent companies individually think the Chamber has taken on the lumbering character of its aging building, a 92-year-old limestone edifice lined with Corinthian columns overlooking the White House.
“If there was a time in the past when they needed the Chamber for access to the White House, that’s kind of gone,” said a public affairs consultant who had worked with three Fortune 500 companies that have weighed leaving the Chamber. “Companies have the tools to create coalitions of like-minded firms on issues that are important to them.”
Here’s a note that I received from a member in response: “They are losing influence with the White House because Trump and the Bannon wing would rather listen to the Breitbart crowd and the alt-right. My guess is the generals high up in the administration also have no time for the Chamber. However, the Chamber still has good access to members of Congress since members rely more on that constituency. The Chamber’s future may lie with the state governors and legislatures, which is where there is some possibility of real work getting accomplished. Washington has become a three-branch circus.”
DERA’s 315-Page Report: Access to Capital & Market Liquidity
A few days ago, the SEC’s Division of Economic and Risk Analysis (DERA) published this 315-page report describing trends in primary securities issuance and secondary market liquidity, and assessing how those trends relate to post-crisis regulatory reforms. The report was requested by Congress as part of the 2016 appropriations process.
The report includes a survey &analysis of recent academic literature, as well as original analyses drawn from publicly available databases and non-public regulatory filings. The report examines the issuance of debt, equity and asset-backed securities, as well as activity and liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps, and bond funds. Specifically, the report identifies trends for unregistered offerings – including Reg D and Regulation Crowdfunding, as well as fixed income transactions, fixed income quotations, and broker-dealer financial positions…
Pay Ratio: Survey About Your Disclosure Intentions
We have posted a new anonymous “Quick Survey about Pay Ratio Disclosure” to learn whether folks are intending to disclose the bare minimum about pay ratio – or whether they intend to provide explanations, alternate ratios, carve-outs, etc. This is different than our recent survey about pay ratio readiness. Please take 10 seconds to participate…and also complete this “Quick Survey on Director Compensation.”
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
It’s hard to believe that Sunday was the 15th anniversary of SOX. Around here, we aren’t just dwelling on the “Sarbanes-Oxley Blues” – we’re also sharing personal reflections on the landmark law. Here are mine:
I was a college junior when Enron & WorldCom imploded & my accounting friends lost their Arthur Andersen offers. Despite massively changing the oversight framework for financial reporting, I don’t recall SOX being discussed in my business classes – or during my following years in law school.
When I became a bright-eyed law firm associate, it felt like SOX had always existed. The rules seemed natural to me: Why wouldn’t the CEO & CFO read SEC filings & certify their accuracy? Why would anyone other than independent directors oversee financial reports? Is there anything more suspenseful than monitoring the 404(b) phase-ins & exclusions – a tradition that lives on even today?
I’m more realistic after 10+ years of explaining – and helping in-house counsel explain – the reasons for SOX & related rules to execs who weren’t always keen on “independent oversight” or “transparent disclosure.” This EY memo suggests that financial reporting has improved. But executives continue to gamble with misleading & opaque financial calculations – and it’s clear that SOX didn’t save us from a “check-the-box” mentality. We keep playing the same game by different rules – forgetting the main principles.
Broc’s 10¢ on Sarbanes-Oxley
Broc has these five random thoughts about Sarbanes-Oxley:
1. I never liked calling it “SOX” – and I really disliked those that called it “Sar-Box.”
2. As I’ve blogged before, Sarbanes-Oxley was somewhat of a surprise at the time because the legislative bill seemed dead. Then WorldCom collapsed & Congress passed the legislation in a hurry. In this blog, Lynn Turner notes that there was some thought put into the bill.
3. It’s interesting to recall what the top issues were initially. In August 2002, the biggest concern involved CEO/CFO certifications and the mechanics of how those newfangled things worked, which really weren’t fully ironed out for several months. With a smile, I remember the chaos as I put together a last-minute teleconference regarding certifications (just two-days notice) and we had an incredible turnout as the first batch of certs were due to be filed the next week. It was wild, man. Better than Woodstock.
Can you imagine that internal controls were nowhere on the radar screen at the time? In fact, my March 2003 webcast on the topic (which I appropriately labeled then as a “sleeper,” thanks to a memorable conversation with John Huber) remains the most sparsely-attended webcast I have held in my 15 years of hosting them. Look back at the law firm memos drafted right after SOX was passed and you will not find anyone predicting that Section 404 was something formidable. That was because we all only had the bandwidth to tackle the numerous new requirements that were applicable immediately – and Section 404’s implementation seemed so far away.
4. Sadly, Mike Oxley passed away a few years ago. It was a thrill to interview Mike at our conference. A true gentleman. You could see why the people in his hometown voted him into Congress. Mike had six “hole-in-ones” during his lifetime. Six!
5. Way back then, I light-heartedly created a character named “Billy Broc” Oxley in jest. Dave was “The Animal” Sarbanes. We made short funny videos for a feature called “The Sarbanes-Oxley Report.” My favorites remain “Bad Hair Day” – and “Billy Broc’s Dream.” The margins were fabulous…
John’s 10¢ on SOX
John has these random thoughts about Sarbanes-Oxley:
Enron, WorldCom, Tyco – I can remember when these were some of the most respected and admired companies in America. I think that’s what made the corporate scandals of the first years of the 21st Century so shocking. These guys were the bluest of the blue chips, and the revelation of their greed and corruption was a cold slap in the face to investors and ordinary Americans. The scandals fundamentally changed the way a lot of people thought about American corporations and those who ran them.
And that begat Sarbanes-Oxley, an entirely necessary statute for which I have no love whatsoever. Yes, corporate governance changes had to be made, and there’s a lot – particularly in the area of internal controls – that Sarbanes Oxley set in motion that has benefitted corporations and investors. But a big price has been paid too.
The exponential growth in demands made on directors in the name of “good governance” has left them with less and less time to focus on the business. Boards have become more bureaucratic and internally focused. Consultants and governance experts have multiplied. Corporate governance flavors of the month have proliferated and become “must haves.” Disclosure documents have become increasingly full of trivial information that’s costly to generate.
Too often, I think, investors and companies have drunk the Kool-Aid without really examining the underlying principles. For instance, I wonder, in 50 years, if people will still think it was a good idea to require a majority of the board of the world’s largest corporations to be comprised of outsiders, with no prior experience in the company’s business? In an environment where directors who make compensation decisions are only liable for “waste”, is 40 pages of executive comp disclosure really good for much more than providing CEOs with a chance to pour over competitors’ disclosures and come up with a detailed wish list of their own?
And don’t get me started on the Governance Industrial Complex. . .
But in the end, corporate tool that I am, I still have to concede that Cassius was right – “the fault, dear Brutus, is not in our stars, but in ourselves.” We’re sleeping in the bed that we made.
Pay Ratio Conference: Discounted Rate Ends Today, Friday
Last chance to register at a reduced rate for our comprehensive “Pay Ratio & Proxy Disclosure Conference.” The discount expires at the end of today, Friday, July 28th. New Corp Fin Deputy Director Rob Evans will open the event.
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. And in addition to the October Conference, you gain access to three pre-conference webcasts. And a set of “Model Pay Ratio Disclosures” in both PDF & Word format.
Register Now – Discount Ends Today, Friday: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
– Mark Borges, Principal, Compensia
– Mike Kesner, Principal-in-Charge, Human Capital Advisory Services, Deloitte Consulting LLP
– Dave Lynn, Editor, CompensationStandards.com and Partner, Jenner & Block LLP
– Maia Gez, Of Counsel, Gibson Dunn & Crutcher LLP
Register Now – Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
Our “Annotated Model Pay Ratio Disclosures”: Now Posted
Oodles of Pay Ratio Panels: Comprehensive Coverage
It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or by video archive at your convenience. We’ve clarified that in the box at the top of our Conference FAQs.
Among the panels for the October 17-18th Conference are:
1. Corp Fin Speaks (speaker from the Staff to be announced)
2. The SEC All-Stars: A Frank Pay Ratio Conversation
3. Parsing Pay Ratio Disclosures: US-Only Workforces
4. Parsing Pay Ratio Disclosures: Global Workforces
5. Pay Ratio: Sampling & Other Data Issues
6. Pay Ratio: The In-House Perspective
7. Pay Ratio: How to Handle PR & Employee Fallout
8. The SEC All-Stars: The Bleeding Edge
9. The Investors Speak
10. Navigating ISS & Glass Lewis
11. Keynote: A Conversation with Nell Minow
12. Proxy Access: Tackling the Challenges
13. Clawbacks: What to Do Now
14. Dealing with the Complexities of Perks
15. The Big Kahuna: Your Burning Questions Answered
16. Hot Topics: 50 Practical Nuggets in 60 Minutes
Register Now – Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register by July 28th to take advantage of the 10% discount.
As part of the mad rush to register for our comprehensive “Pay Ratio & Proxy Disclosure Conference”, we’ve fielded questions from a number of members who want to attend next Thursday’s webcast – but who can’t make it to Washington DC for the October 17-18th Conference. It doesn’t matter whether you can make it to DC – because the October 17-18th Conference is available to watch online by video webcast, live on those specific days or at your convenience by video archive. We’ve clarified that in our Conference FAQs.
As Steve Quinlivan has blogged, the NYSE recently proposed that listed companies provide notice to the Exchange at least 10 minutes before making any public announcement for a dividend or stock distribution – in all cases. This mean that notice would be required outside of the hours in which the Exchange’s “immediate release” policy is in operation, which goes beyond the current rule.
NYSE Refiles Proposal to Facilitate Direct Listing
A few months ago, John blogged about the NYSE’s proposal to facilitate “direct listings” – which which involves bypassing an IPO, and simply registering common stock under the Exchange Act & listing on an exchange. Then, David Feldman blogged that the NYSE had withdrawn its proposal. Now the NYSE’s proposal has been refiled as SR-NYSE-2017-30 (the withdrawn proposal and amendments 1, 2 and 3 were all related to SR-NYSE-2017-12).
We’re excited to announce three new resources for those grappling with Section 16:
1. “Section 16 Tales” – A Section 16 Beginner’s Manual – a 200-page paperback – filled with practical stories from in-house practitioners. Includes the “soft stuff” – practical guidance not found in the rules. Here’s a list of the 16 chapters in this paperback.
2. “Section 16 Bootcamp” – A combination of three resources for Section 16 beginners, including 13 online videos, copy of the “Section 16 Tales” paperback & the ability to attend a Section 16 Forum.
3. “Section 16 Forums” – A one-day event for all Section 16 practitioners – not just beginners – facilitating education & networking among your peers – one will be held on each coast, each year.
Cross-Border Conflict Over Analyst Research
Here’s the intro from this WSJ article by Dave Michaels:
The SEC is weighing how to alleviate the harshest side effects of a European Union law that could have U.S. repercussions for banks trying to comply with it. The EU law, which goes into effect in January, will require investors to pay directly for investment research provided by banks’ brokerage arms. The EU measure aims to make research costs more transparent for end investors by breaking them out separately from the trading commissions that investment firms pay.
Yet U.S. law discourages paying for research directly by imposing stricter legal obligations on brokers that accept separate payment for research. U.S. rules have for many years accommodated the current arrangement, which dates to an era when commissions were fixed by exchange rules and brokers competed by offering extra services such as research reports. The extra responsibilities would entail higher legal costs and complicate brokers’ roles as sellers of stocks and bonds, according to industry officials. Wall Street wants to avoid that outcome, and two Republican lawmakers took up their cause on Tuesday at a Senate budget hearing by urging SEC Chairman Jay Clayton to find a solution.
Cryptocurrency: What’s a “Security”?
Not sure I fully understand this article on “tokens” and other emerging digital currencies (think “blockchain” & “bitcoin”) – but reading #6 & 7 in the piece seems to indicate that the securities law might not apply to them. Here’s ten cents about this from John:
I think the author is saying that as conceived, these tokens/API keys aren’t securities. Since that’s the case, they qualify for application of the “Tulip Test,” which I learned from an analyst back in the ’90s. It says that whenever you don’t understand a technobabble sales pitch for a world-changing, non-traditional investment, try substituting the word “tulip” or “beanie baby” for the magic word in the article (i.e. “token” and “API Key”) and see how it reads:
“Tokens Tulips aren’t equity, because they have intrinsic use and because they are non-dilutive to the company’s capitalization table. A token tulip sale is more similar to a Kickstarter sale of paid API keys beanie babies than equity crowdfunding.”
Members still ask me if I plan to resurrect the “Proxy Disclosure Award Contest” that I ran a few years back. If you recall, I allowed the community to vote for the winners rather than selecting the winners myself.
I don’t have plans to run another contest. But I’m game to pick a “proxy disclosure award” winner this year – because I have heard a number of institutional investors rave about Allstate’s proxy statement. It indeed is awesome. Congrats to Deborah Koenen & her team!
Here’s some of the notables:
– Board Refreshment – Allstate focused on board refreshment disclosures, showing that the board is continuously engaged in succession planning – including data about the number of directors considered and added in the past five years. The additional information adds insight into board activities & appears to validate its processes.
– Lead Independent Director – Allstate provided detail regarding the profile sought to serve as the board’s lead director, as well as biographical detail regarding the director currently in the role (including notable highlights from her tenure).
– Board Highlights – A visual flow chart makes clear significant strategic, governance & compensation developments overseen by the board over the last five years.
– Management Succession – Allstate provided an overview of the board’s management succession oversight responsibilities & annual practices – showing a proactive board that prioritizes long-term organizational stability & prepares for multiple leadership transition scenarios.
– Corporate Responsibility – The proxy statement highlighted the board’s oversight of the company’s corporate responsibility initiatives, pointed out recent achievements – and provided a line of sight through to the most recent CSR report.
– Insights into Board Committees – Allstate presented a double-page overview of its board committees, including quotes from committee chairs and lead director. Love how the “New” tags highlight recent developments.
Tomorrow’s Webcast: “12 Strange Things in the Securities Laws”
Tune in tomorrow for the webcast – “12 Strange Things in the Securities Laws” – to hear Fenwick & West’s Dawn Belt, TheCorporateCounsel.net’s John Jenkins, Manatt Phelps’ Ben Orlanski and Faegre Baker Daniels’ Amy Seidel tackle the practical solutions to bizarre & illogical things that happen in your daily practice. Or once in a blue moon…
Corp Fin: NFL Fan Clubs as “Securities”
I find this blog by Bryan Pilko interesting because I processed a similar no-action letter when I was in Corp Fin’s Office of Chief Counsel twenty years ago. Think it was the Green Bay Packers no-action letter (11/13/97). Anyway, this no-action response to the LA Fan Club allows LA Rams fans (a NFL team) to buy memberships in the fan club without the Staff considering it to be a Section 5 violation…
For those registered for the upcoming “Pay Ratio & Proxy Disclosure Conference,” tune in on July 20th for the first in a series of three monthly webcasts that serve as a pre-conference: “Pay Ratio Workshop: What You Need to Do Now.” When you go to the webcast page on July 20th, you will be able to download a set of “Annotated Model Pay Ratio Disclosures” in both PDF & Word format. The second webcast is on August 15th.
The speakers for the July 20th webcast are:
– Mark Borges, Principal, Compensia
– Mike Kesner, Principal-in-Charge, Human Capital Advisory Services, Deloitte Consulting LLP
– Dave Lynn, Editor, CompensationStandards.com and Partner, Jenner & Block LLP
– Maia Gez, Of Counsel, Gibson Dunn & Crutcher LLP
The speakers for the August 15th webcast are:
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
Register Now – 10% Discount Ends July 28th: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.
“Human Capital Management” Disclosure: A SEC Rulemaking Petition
As noted in this press release, a group of institutional investors with $2.8 trillion in assets – that is “trillion” with a “T” – has filed this rulemaking petition with the SEC that includes 9 categories of disclosures about human capital management. The driving force behind this is that companies are now only required to disclose their employee headcount – yet a large body of evidence links investments in human capital to better corporate performance…
By the way, as John has blogged before, Delaware has now passed legislation that will allow shares to be traded on a blockchain…
Transcript: “Proxy Season Post-Mortem – The Latest Compensation Disclosures”
We’ve posted the transcript for the CompensationStandards.com webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.”
Back in May, I blogged about 7 early adopters of the SEC’s new “link to exhibits” rule. I blogged that these companies had experimented by including links to their exhibits voluntarily – without the benefit of an updated Edgar Filer Manual.
Last Thursday, the SEC posted this adopting release about an updated Edgar Filer Manual. However, the updated Manual itself is not yet posted (the currently posted Manual was last updated in March). Perhaps it will be posted when this adopting release is published in the Federal Register? Regardless, it will be out soon. Hat tip to Goodwin Procter’s John Newell for alerting us to this development.
The adopting release doesn’t hint at the degree of instructive detail that the updated Manual will ultimately provide. Will it provide a detailed roadmap of what the SEC expects? Or will it state that companies have wide latitude as to how they provide links? We’ll know the answer when the updated Manual is posted.
Here’s what the adopting release says about all this on page 3:
Effective September 1, 2017, large accelerated and accelerated filers filing Forms S-1, S- 3, S-4, S-8, S-11, F-1, F-3, F-4, F-10, SF-1, and SF-3 under the Securities Act and Forms 10, 10- K, 10-Q, 8-K, 20-F, and 10-D under the Exchange Act will be required to submit these forms in HTML and include a hyperlink to each exhibit listed in the exhibit index of these filings, including exhibits that are incorporated by reference. Instructions for hyperlinking to an exhibit submitted with a previous submission, or an exhibit that is being filed concurrently with the submission, have been included in Chapter 5 of Volume II of the EDGAR Filer Manual. Instructions for using HTML Styles to indicate the location of the Exhibit Links and the Summary Section have also been included in Chapter 5 of Volume II of the EDGAR Filer Manual.
GE Creates Internal Yelp-Like Resource for Lawyers
Interesting article about how GE has created an internal Yelp-like resource to manage the 200 outside law firms it deals with. Not sure it will really used much by GE’s 800 in-house lawyers, but probably will be used by procurement – and that’s who everybody is increasingly answering to these days…
Controlling Audit Fees: “How-To Guide”
Here’s something from Dan Goelzer of Baker & McKenzie: As discussed in the December 2016 Update, the Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), found, in its 2015 survey of audit fees, that the median SEC filer audit fee rose 1.6 percent in 2015. However, the largest public companies – large accelerated filers – enjoyed a 3.8 percent decrease in fees. FERF and Workiva, a provider of business data and control solutions, have followed up on the audit fee survey with a report on how companies can reduce audit fees or limit fee increases. The new report – “Mitigating Increases in Audit Fees” – is based on interviews with financial statement preparers and auditors.
The FERF recommendations fall into six categories:
1. Rethink the business and centralize business processes. “Audit fees are often related directly to the size and complexity of the business, so if any parts of the business are sold or discontinued, audit fees should decline in proportion. However, reducing audit fees for a company with a newly simplified structure often requires negotiation with the external auditor.” The report also notes that FERF’s annual audit fee survey has consistently found that companies with centralized operations average significantly lower audit fees than decentralized companies.
2. Align key controls with key risks. “Public Company Accounting Oversight Board (PCAOB) inspections have encouraged auditors to spend more time reviewing management controls during the annual audit, prompting registrants to align key controls with the most relevant risks.” In this respect, one of the auditors interviewed observed:
“Audits are a function of the amount of time that it takes to do the audit. If there are fewer key controls that need to be tested, the audit fees could possibly go down. However, there is a balance that needs to be struck, because the opposite could also be true. We think it is really important that the company and the external auditor align their control structure and do some upfront planning, because if the company and the external auditor both agree on the key controls that are in place and can be tested, there is a real opportunity for efficiency.”
3. Document internal controls. “Reviewing the documentation of internal controls, which can be time-consuming, has become a key part of the audit. If the client has very light or poorly organized documentation, or hasn’t thought through all the branches in a process, attestation becomes difficult for the auditor — and more costly for the registrant.”
4. Consider outsourcing internal audit. “A Big Four audit firm may be able to rely on the internal audit work of a regional firm with a significantly lower hourly rate.” Outsourcing internal audit to a firm in which the auditor has confidence should increase the extent to which the auditor is willing to rely on that firm’s work, rather than duplicating its testing. However, as the report notes, the effectiveness of this strategy also depends on the independence of the firm that performs the internal audit function.
5. Communicate with the auditor. “Good communication should be continual through the process, not limited to the start or end of the audit.” For example, in a case discussed in the report, the controller asked the auditor what the company could do to make the audit more efficient. The auditor responded with suggestions for analytics that could be prepared by the company’s staff, for review by the auditor, as a way of reducing audit hours. Another suggestion involved early communication to reach agreement on risk assessment.
6. Evaluate the latest technology. “External auditors and internal auditors are both using data analytics technology to increase audit quality, work smarter and potentially reduce costs. Technology can be used to detect and identify all exceptions, anomalies and outliers, rather than just those found within a sample.” One of the auditor interviewees suggested that–
“reports should generated [by the company’s IT system] in a way that the system retains a lot of audit evidence or evidence that the company might anticipate an external auditor would look for. * * * For example, the tracing and vouching to source documents, whether they’re invoices generated internally by the company or documents or evidence that is retained by a third party, such as a proof of delivery or a cash receipt.”
Comment: Because of their responsibility for the relationship with the outside auditor, audit committees may find the FERF publication a useful reference. The strength of the FERF approach is that it suggests ways in which the cost of the audit can be reduced with out compromising quality. Fee reduction demands which merely encourage the auditor to reduce audit hours run the risk of increasing the probability the audit will fail to detect a material misstatement or internal control weakness – either of which is likely to result in costs and embarrassment for the company and the audit committee out of proportion to any audit fee savings. Conversely, audit committees may want to probe more deeply into the reasons for fee reductions that are not based on the kinds of approaches outlined in the FERF guide.
