Speaking at the Heritage Foundation earlier this week, SEC Commissioner Mike Piwowar said that the SEC might be receptive to requests by IPO companies to include mandatory arbitration clauses in their charters. Here’s an excerpt from this Reuters article:
A key U.S. securities regulator on Monday voiced support for possibly allowing companies to tuck language into their initial public offering paperwork that would force shareholders to resolve claims through arbitration rather than in court. “For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charters,” said Michael Piwowar, a Republican member of the U.S. Securities and Exchange Commission. “I would encourage companies to come and talk to us about that.”
Mandatory arbitration bylaws got a lot of attention a few years back when Carlyle Group tried to install one in its IPO – although it ultimately backed off. The SEC Staff has historically said that these clauses were contrary to public policy & potentially inconsistent with the anti-waiver provisions of Section 14 of the Securities Act & Section 29(a) of the Exchange Act – so a shift in policy here would be big news.
IPOs: GOP Wants a Smoother Ride
Efforts to encourage IPOs are a big part of the SEC’s agenda. According to this MarketWatch report, Congressional Republicans are on-board as well – they believe that current rules discourage IPOs & deprive retail investors of a chance at the “lottery tickets” those deals represent.
SEC Commissioner Nominee: Hester Peirce to Get Another At-Bat
This WSJ article reports that President Trump plans to nominate former Senate aide Hester Peirce to fill the vacant Republican slot on the SEC (here’s a White House press release – this press release indicates the nomination was sent to the Senate yesterday).
If that name sounds familiar, it’s because President Obama nominated her to serve as a Commissioner in 2015 – but the full Senate never acted on her nomination, as we blogged about numerous times (here’s one of those blogs).
Yesterday, the SEC posted its updated “Edgar Filer Manual” – Broc blogged about it coming last week. The updated version of the Manual includes instructions on how to comply with the new requirement to link to exhibits (see Section 5.4.2. on pages 5-50 – 5-52) – which will go into effect on September 1st for the larger companies (non-accelerated filers & smaller reporting companies that submit filings in ASCII don’t need to comply until a year later).
Let’s just say the instructions are a wee bit on the technical side. For instance, here’s the summary on “using HTML styles to indicate the location of exhibit links and the summary section”:
To indicate where in the document an exhibit hyperlink is located, in your HTML document enter the text “<a style=”-sec-extract:exhibit” ” before the web address and the text “</a>” after the exhibit name. See Section 5.4.2.2 for instructions on creating hyperlinks to exhibits in HTML documents.
To indicate where in the document the Summary is located, in your HTML document enter the text “<p style=”-sec-extract:summary”>” before the Summary and enter the text “</p>” after the Summary.
This is followed by a discussion of the “detailed steps” required to accomplish whatever the task I just described is – but trust me, you do NOT want to read the detailed steps. Send this one right to the HTML wizards.
At some point, Corp Fin will likely issue a set of FAQs – or some other form of guidance – as we hear there are a lot of open questions that folks are wondering about. For example, how does one link to an exhibit in a 30-year old registration statement that was filed as one gigantic ASCII file? The only available “link” would be to the filing as a whole.
New Accounting Standards: CAQ’s Tips on SAB 74 Disclosure
Several new accounting standards are being rolled out over the next few years – so this recent “Center for Audit Quality” alert reviewing disclosure obligations about new accounting standards under SAB 74 seems pretty timely.
The CAQ alert points out that even in situations where a new accounting standard is not expected to significantly impact the face of the financial statements, new footnote disclosures may still represent a significant change that companies need to address.
Along the same lines, it’s worth noting that this MarketWatch article cites recent comments from an SEC accounting fellow to the effect that even though a new accounting standard may not have a material effect on a company’s financial statements, that doesn’t mean that disclosures about that new standard won’t be material.
Transcript: “Flash Numbers in Offerings”
We have posted the transcript for our popular webcast: “Flash Numbers in Offerings.”
SEC Chair Jay Clayton’s recent speech at the “Economic Club of New York” has received a lot of attention – it was his first as Chair – but this remark seems to have been overlooked:
My last point on capital formation is a reminder. There are circumstances in which the Commission’s reporting rules may require publicly traded companies to make disclosures that are burdensome to generate, but may not be material to the total mix of information available to investors. Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations. I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.
I don’t want to read too much into this – but it’s the third time in the past month or so that Rule 3-13 waiver requests have been mentioned in Corp Fin guidance or in comments by senior SEC Staffers.
In addition to Jay’s remarks, this Deloitte memo notes that Corp Fin’s Chief Accountant – Mark Kronforst – discussed waiver requests at a recent conference, and “urged companies to discuss their facts and circumstances” with the Staff. The Staff’s willingness to consider these waiver requests was also recently noted in Corp Fin’s announcement that all IPO filers would be permitted to submit confidential draft registration statements.
There’s no suggestion in any of these comments that it’s somehow “open season” on Reg S-X’s requirements. Still, I think it’s fair to say that the SEC Chair is sending a message that Corp Fin is more open to dialogue about Rule 3-13 waivers than some might assume.
Revenue Recognition: FASB’s “Gift” to Retailers
Over at “MarketWatch,” Francine McKenna recently pointed out that implementation of FASB’s new revenue recognition standard could turn out to be a big gift to the bottom lines of some major retailers. That’s because the new standard would change the way retailers recognize revenue from the unredeemed portion of company-issued gift cards.
This is known as “breakage revenue” – and companies have been recognizing it under various scenarios based on their own redemption experience. Under the new rule, companies will be required to spread breakage revenue over a gift card’s expected redemption period. That’s good news for many retailers:
Most companies will be able to accelerate breakage revenue rather than holding on to it until the likelihood anyone cashes in the balance becomes remote or until the card expires. The accounting change will affect everyone who issues gift cards, from classic bricks-and-mortar grocery and fashion retailers to restaurants to Amazon and other online stores.
Tomorrow’s Webcast: “FCPA Considerations in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “FCPA Considerations in M&A” – to hear Richards Kibbes’ Audrey Ingram, K&L Gates’ Vince Martinez and Schulte Roth’s Gary Stein discuss how to take the FCPA and other anti-corruption laws into account during M&A activities.
Yesterday, Corp Fin announced that it would extend eligibility for confidential review of draft registration statements to all IPO issuers – not just emerging growth companies as permitted under the JOBS Act. In addition to IPOs, the initial filing of a registration statement for follow-on offerings within 12 months after an IPO will also be eligible for confidential review. Companies registering securities for the first time under the Exchange Act will also have the ability to have their registration statements reviewed confidentially, such as spin transactions. This new position commences July 10th.
The press release accompanying the announcement notes that permitting all new issuers to do so “will provide companies with more flexibility to plan their offering.” Corp Fin says that this initiative is part of its “ongoing efforts to facilitate capital formation.” The position should create a significant movement towards more draft filings going into the SEC. We’ll see how many offerings make it to market this year – but this is a big change in the review process that should create some momentum. We understand more position changes can be expected as facilitating the offering process is a priority for Chair Jay Clayton and Corp Fin Director Bill Hinman.
Happy 241st Birthday, America! I hope everybody has a great holiday & celebrates in style – personally, I’m planning to follow the bird’s lead.
We romanticize our nation’s founding, but in doing so, we sometimes forget what a roll of the dice it was. During a time that’s high in partisan invective and low in common decency, that’s not a bad thing to keep in mind.
The 4th of July gives us a good reason to pause for a moment & remember that, in the end, we’re all in this thing together. As Ben Franklin put it when the Declaration of Independence was signed – “We must, indeed, all hang together, or most assuredly, we shall all hang separately.”
This Skadden memo discusses Stadnick v. Vivint Solar, a recent 2nd Circuit decision addressing when financial information about an incomplete quarter needs to be disclosed in a prospectus.
Most courts that have confronted this issue have followed the 1st Circuit’s 1996 decision in Shaw v. Digital Equipment, and require disclosure when the information suggests that the quarter will be an “extreme departure” from prior results. But as this excerpt notes, the 2nd Circuit took a different approach:
The Second Circuit declined to adopt Shaw’s “extreme departure” standard, adhering instead to the materiality test it articulated in DeMaria v. Andersen, 318 F.3d 170 (2d Cir. 2003). Under DeMaria, a duty to disclose interim financial information arises “if a reasonable investor would view the omission as ‘significantly alter[ing] the ‘total mix’ of information made available.’”
Instead, the Second Circuit analyzed the omissions holistically in light of the total mix of available information. The Second Circuit concluded that when viewed in the context of the registration statement’s extensive disclosures on Vivint’s six prior quarters and unique business, Vivint’s third quarter results were consistent with past performance and “the successful implementation of its business model.”
The 2nd Circuit also rejected plaintiff’s argument that the company’s failure to address certain regulatory risks in its MD&A violated Item 303’s “known trends” disclosure requirement. In doing so, it pointed to the company’s risk factor disclosure, which in the Court’s view provided investors with ample warning of the regulatory issues in question.
Securities Act Claims: Do States Still Have Jurisdiction?
I recently blogged about the growth in Section 11 lawsuits in state courts – with California, in particular, emerging as a favorite venue for these actions. Now this Shearman & Sterling blog reports that the Acting Solicitor General is asking the US Supreme Court to review whether state courts still have jurisdiction over these suits:
On May 23, 2017, the Acting Solicitor General filed a brief on behalf of the United States as amicus curiae urging the Supreme Court to grant the petition for a writ of certiorari in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, to resolve confusion in lower courts as to whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) divests state courts of jurisdiction over cases that allege only claims under the Securities Act of 1933.
The issue has been a significant one. California state courts in particular have become a forum of choice for plaintiffs asserting claims under the Securities Act, and procedural bars on interlocutory review of decisions denying motions to dismiss or remand have precluded significant appellate review.
The Supreme Court had invited the government to weigh-in last fall. The Acting Solicitor General’s brief urged the Supreme Court to hold that SLUSA doesn’t divests state courts of jurisdiction – but renders Securities Act cases removable to federal court.
The Supreme Court granted cert earlier this week. Check out this ‘D&O Diary’ blog for more details on the case.
The blog points out that there are some pretty interesting provisions in the legislation, including a section forbidding a federal court from certifiying a class action in which the named plaintiff is “a present or former client” of class counsel. As this excerpt notes, that’s pretty radical stuff:
As skeptical as we may be about some of the securities class action lawsuits brought against public companies, it’s very unusual to take the position that plaintiffs cannot choose counsel they’ve worked with in the past to represent them.
It’s particularly unusual given that institutional investors and others are not naïve entities unable to protect their own interests. Many of the plaintiffs being represented in securities class action litigation are large, sophisticated institutional investors.
This McGuire Woods blog says that this statute faces fairly long odds – it has a long list of opponents & PredictGov gives it only a 21% chance of passing. But the last time Republicans controlled the White House & both branches of Congress saw the most recent round of reforms enacted – so the time may be ripe for this kind of legislation.
Earlier this month, the SEC’s Division of Enforcement entered a cease & desist order against the former CEO & CFO of UTi Worldwide, a multinational freight forwarding company. The proceeding involved alleged failures to comply with S-K Item 303’s requirement to disclose in the MD&A section any “known trends and uncertainties” that are “reasonably likely” to impact a company’s liquidity.
UTi experienced delays in billing resulting from a new operating system. This resulted in a hit to cash flow, and came at a time when the company was also struggling to comply with its debt covenants. The 10-Q for the relevant period didn’t address the billing problems and their cash flow impact. When UTi subsequently disclosed that it blew its debt covenants due to liquidity issues resulting from the billing problems, its stock cratered – and Enforcement came knocking.
This Cleary Gottlieb blog reviews the proceeding & the “known trends” requirement. Here’s an excerpt discussing the SEC’s views about when known trends disclosure is required:
Regulation S-K Item 303 requires the “disclosure of a trend, demand, commitment, event or uncertainty…unless a company is able to conclude either that it is not reasonably likely that the trend, uncertainty or other event will occur or come to fruition, or that a material effect on the company’s liquidity, capital resources or results of operations is not reasonably likely to occur.” As the SEC noted in the Order, the “reasonably likely” standard is a lower standard than “more likely than not.”
What the SEC did not discuss, but what is equally important for companies that need to comply with the disclosure requirements to understand, is the probability floor for when this forward-looking disclosure is required. The good news is that the “reasonably likely” standard is a higher probability threshold than if a material effect is “reasonably possible” (which is the standard for the disclosure of contingent liabilities under ASC 450, Contingencies, and which would require disclosure in the event the likelihood of a “material effect is higher than remote”.
This Drinker Biddle blog notes that the case is the most recent example of the SEC’s increasing willingness to bring financial reporting & accounting actions that aren’t premised on financial statement materiality, and don’t involve fraud-based allegations.
Enforcement: SEC Stakes a Claim to Anti-Money Laundering Violations
This Ballard Spahr memo reviews recent cases where the SEC has used a new enforcement tool – the Bank Secrecy Act & its anti-money laundering (AML) regulations – against financial institutions. While violations of these actions has traditionally been addressed by other regulators, this excerpt says that the SEC appears ready to flex its muscle more frequently in this area:
This most recent complaint filed by the SEC is not an isolated event, but rather part of a trend. Earlier this year, another broker dealer was charged in a similar civil enforcement action with failing to file SARs. These enforcement actions – and others – are consistent with the public pronouncements of the former SEC Enforcement Director, who has stated that the SEC Broker Dealer Task Force must “pursue standalone BSA violations to send a clear message about the need for compliance.”
The memo compares the SEC’s decision to stake a claim in the AML arena to its decision to pursue FCPA cases – a statute that historically had been addressed by other agencies, but where the SEC now has an established role.
FCPA: Many Derivative Actions Filed, But Few Make the Cut
Over on the ‘D&O Diary,’ Kevin LaCroix recently blogged about the fate of many derivative actions that follow on the heels of the announcement of an FCPA violation. Qualcomm announced a high-profile FCPA settlement with the SEC in March 2016, and a derivative action was filed shortly thereafter in Delaware Chancery Court. This case, like most other FCPA-based derivative claims, didn’t make the cut:
As I have observed in the past (for example), while plaintiffs’ lawyers frequently are quick to file follow-on civil suits in the wake of an FCPA investigation or enforcement action, in many instances these suits are unsuccessful as the suits often fail to clear the initial pleading hurdles. As was the case here, a frequent basis on which these suits are dismissed is the failure to establish demand futility. To be sure, there are FCPA follow-on actions that survive motions to dismiss (as discussed for example), but in many other instances the cases do not survive.
The blog notes that despite their poor track record, plaintiffs keep trying – which since the underlying FCPA cases are often based on significant misconduct, isn’t really surprising.
As Liz recently blogged, it’s no secret that public companies have been declining nearly as fast as honeybees – & in some circles, their endangered status is just as disquieting. However, this EY report says we all need to chill out about this. Here’s an excerpt from the intro:
US public companies are fewer in number today than 20 years ago but much larger by market capitalization. They are also more stable, and delisting rates are much lower than immediately following the dot-com boom. In general, the total number of domestic US-listed companies has stabilized, especially post-2008, and the number of foreign companies listed on US exchanges has steadily increased over the same time.
A lower number of IPOs than during a boom-bust cycle should not automatically be viewed as problematic. There is ample evidence that today’s IPOs are creating stronger, healthier companies than at any time in the past. Growth companies choosing to sell shares to the public today are typically stable and have solid prospects for growth. Today’s healthy IPO market is a stark contrast to the post-dot-com bubble years, when companies with uncertain business prospects that went public, often shortly after formation, later collapse.
Is it a good thing that we have fewer public companies that are larger and more stable? As “The Economist” notes, how the market came to be dominated by those larger & more stable companies matters too:
Some firms get bought by private-equity funds but most get taken over by other corporations, usually listed ones. Decades of lax antitrust enforcement mean that most industries have grown more concentrated. Bosses and consultants often argue that takeovers are evidence that capitalism has become more competitive. In fact it is evidence of the opposite: that more of the economy is controlled by large firms.
As for the previous IPO boom & bust cycles, it’s hard to defend the dot.com bubble, but is it really a bad thing that “companies with uncertain business prospects” were able to go public during hot markets? Some win; most lose – you pay your money & you take your chances. An appetite for some risk isn’t such a bad thing.
So… Is Private the New Public?
No sooner do I finish my rant about the decline of public companies than Prof. Ann Lipton blogs that “publicness” is now increasingly an attribute of a lot of private companies. Here’s what she means:
“Publicness,” a concept first developed by Hillary Sale, refers to the general social obligations a corporation is perceived to have toward the public in terms of transparency and regularity of operations.
The growing private resale market for shares in high-profile private companies is blurring some of the lines between “public” and “private” companies. So perhaps it’s not surprising that in today’s environment, a company like Uber is perceived by the public to have certain duties in terms of ethics and responsible governance – despite not having public shareholders.
Small Cap IPOs: First Reg A+ Listing on NYSE.MKT
Here’s a little good news on the IPO front – a few months ago, I blogged about medical device company Myomo’s efforts to obtain a listing on the NYSE.MKT in conjunction with its Reg A+ IPO.
This Duane Morris blog reports that the company completed its offering and became the first Reg A+ IPO issuer to officially begin trading on an exchange. This excerpt provides an upbeat take on the results of Reg A+ & this listing milestone:
The Reg A+ rules permit non-listed companies a “light reporting” option after their IPO, further reducing costs and burdens as a public company while retaining strong investor protections. The SEC also has given extremely limited review to these filings, and has reported an average of 74 days from initial filing to SEC approval or “qualification.” As a result, companies are reporting a speedier, more cost-efficient and simpler process in completing their Reg A+ offerings than with traditional IPOs.
To date, the SEC has reported that dozens of Reg A+ deals have been consummated and hundreds of millions of dollars raised since the SEC’s final rules were implemented in 2015. Only a handful of these companies, however, have commenced trading their stock. To have completed the first Reg A+ deal to trade on a national exchange, therefore, is a very significant development for those working to redevelop a strong new IPO market for smaller companies.
This Shearman note flags the SDNY’s recent decision in Xiang v. Inovalon Holdings. To make a long story short, the plaintiff in a Section 11 case alleged that the issuer should’ve disclosed the effect of pending tax changes on its earnings in response to Item 303’s “known trends” requirement. The court refused to dismiss this claim, holding that the plaintiff adequately pled knowledge on the part of the company.
How did the plaintiff establish knowledge? That’s where the plot thickens. Here’s what the blog has to say:
The Court also found that plaintiffs had adequately pleaded that Inovalon should have disclosed its increased tax liability under Item 303, which requires disclosure of known trends reasonably expected to have a material impact on the registrant’s revenues or income.
Plaintiffs adequately pleaded that defendants knew of the tax change by pleading that Inovalon was a client of Deloitte, and as such “would have received Deloitte’s January 23, 2015 client alert” regarding the impending tax reforms. This directed communication, the Court held, adequately alleged actual knowledge even though allegations of public information alone have been held insufficient to establish such knowledge in other cases.
Aside from making a subscription to our sites even more of a necessity, this case shows both the resourcefulness of the plaintiffs’ bar and the potential need for companies to incorporate the “client alert” communications from their professional advisors into their disclosure controls & procedures.
Board Diversity: Female CEOs Have More Women on the Board
This Equilar blog says that S&P 500 companies whose CEO is a woman have more women on their boards – a lot more. Check out the stats in this excerpt:
In analyzing the boards of directors at those companies with female CEOs using BoardEdge data, Equilar found that 33.2% of board seats were occupied by women. In 2016, just 21.3% of S&P 500 boards overall were female, according to the Board Composition and Recruiting Trends report, and just 15.1% of board seats in the Russell 3000 overall were occupied by females in 2016, as noted in the recent Equilar Gender Diversity Index report.
Also on the board gender diversity beat, this Davis Polk blog says that SEC Chair Jay Clayton is getting heat from Congress to push for more gender diversity disclosure:
Citing research that found that only half of S&P 100 companies referenced gender when disclosing their board diversity, Representatives Carolyn Maloney (D-NY) and Donald Beyer (D-VA) asked Clayton to consider the SEC staff’s review of the existing rule previously ordered by former SEC Chair White. In March, Representative Maloney reintroduced a bill on board gender diversity that would require the SEC to establish a group to study and make recommendations on ways to increase gender diversity on boards. Companies must also disclose the gender composition of their boards.
Representative Gregory Meeks (D-NY), along with 28 other House Democrats, requested that Clayton go further, and to work on a rule proposal. That letter also asked the SEC to share with Congress the status of the SEC staff’s review.
10b5-1 Plans: They Really Do Work
Over on CompensationStandards.com, Mike Melbinger recently blogged about Harrington v. Tetraphase Pharma., Inc. (D. Mass.; 5/17), which held that the use of a 10b5-1 plan implemented prior to an alleged fraud will undermine allegations that trades made pursuant to that plan are indicative of scienter.
As Mike put it, the decision is important “because it illustrates how executives’ sales of stock made (or begun) prior to a period of adverse public information and declining stock price can still be protected.”
We’ve already blogged quite a bit about the new revenue recognition standard, but this blog by Steve Quinlivan provides advice on preparing the first post-adoption MD&A – and it’s definitely worth a look. Here’s the intro:
The SEC has made clear its expectations regarding MD&A disclosure for periods prior to the adoption of the new revenue recognition standard. What has received less attention is the content of MD&A after the new revenue recognition standard has been adopted. Set forth below are some guidelines to be considered. While putting pen to paper to draft the first MD&A is still months away, public companies need to begin crafting disclosures controls and procedures so they will be in place when disclosures must be made.
Steve recently followed up with this blog reviewing the MD&As filed by early adopters of the new revenue recognition standard.
FASB Lease Standard: We Have An Early Adopter!
Speaking of early adopters, although companies have until 2019 to implement the new FASB lease standard, Microsoft will adopt it on July 1, 2017 (the first day of their next fiscal year). This SEC Institute blog has an excerpt of the disclosure about the impact of the new standard from the company’s most recent 10-Q.
FCPA: Kokesh Case Will Impact DOJ Pilot Program
It seems that the fallout from the Supreme Court’s recent Kokesh decision– which held that SEC disgorgement claims are subject to a 5-year statute of limitations – is going to hit other regulators as well. As this McGuire Woods blog notes, the DOJ’s FCPA pilot program could feel a major impact:
The five year statute of limitations at issue in Kokesh is a general one that applies in FCPA civil enforcement actions as well as in the securities laws underlying Kokesh. Indeed, the parties’ briefing in the case referenced the large amounts of disgorgement in FCPA cases and that disgorgement in FCPA cases often goes directly to the U.S. Treasury and not to any victims as they may be difficult to ascertain in the FCPA context.
In holding that the statute of limitations applies to disgorgement, the Supreme Court affected a critical component of the DOJ’s FCPA Pilot Program. DOJ guidance expressly requires that to be eligible for the Program’s main benefit of mitigation credit, a company must disgorge all profits resulting from the FCPA violation. Accordingly, published declinations pursuant to the Program have indicated substantial disgorgements.
Potential responses to Kokesh include DOJ conditioning participation in the program on waivers of the statute of limitation, or requiring full disgorgement in order to award cooperation credit. The blog also notes that the decision may also increase the reluctance of parties whose conduct occurred primarily outside of the statute of limitations to participate in the program.
The article also makes clear that, if the Corp Fin Staff questions the use of a non-GAAP financial measure in the comment letter process, a public company may be able to convince the Staff that the use of a particular non-GAAP financial measure is appropriate and compliant.
The article notes, however, that the ability of public companies to prevail may be correlated with the nature of the non-GAAP financial measure being used, and that public companies have been less successful in defending their usage of non-GAAP revenue-based measures (which have been the subject of particular scrutiny by the Staff) in comparison to non-GAAP earnings-based measures.
Just like with other types of Staff comments, resolving a non-GAAP comment without being required to make a change in disclosure remains quite common. For example, the Corp Fin Staff has said at multiple conferences that they didn’t expect practice to change much for restructuring & related exclusions – and that is exactly what happened. And on the speaking circuit, Corp Fin Staffers have been talking recently about the success of the non-GAAP project and how they expect comment volume in this area to drop…
Audit Reports: Will “Critical Audit Matters” Become “Fighting Words”?
Like most of what is referred to – apparently without irony – as “accounting literature,” the definition of the term “critical audit matters” seems dull & lifeless. Under the PCAOB’s new auditing standard, critical audit matters are “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.”
The definition may not sound exciting – but this recent blog from Cooley’s Cydney Posner says that its application may result in some real battles between auditors & management:
I don’t think I’d be going too far out on a limb if I predicted that we might see some disputes erupt over CAM disclosure. Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria.
But will auditors’ judgments about which CAMs were the real nightmares be called into question? Will the new disclosure requirement precipitate many auditor-management squabbles over the CAMs selected or the nature or extent of the disclosure? And just how enthusiastic will the CFO be about the prospect of the auditor’s sharing with the investing public the convoluted nature or opacity of the company’s policies or the struggles involved in performing the audit or reaching conclusions about the financials?
While the process of identifying CAMs is supposed to involve collaboration, auditors may be unlikely to give much weight to management & audit committee input – and may use the new requirement as a leverage point in disclosure disputes with management.
Tomorrow’s Webcast: “Proxy Season Post-Mortem – Latest Compensation Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast — “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Jenner & Block, Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
