On Friday, the SEC approved updated PCAOB standards that apply to audits involving multiple audit firms. The standards require lead auditors to plan, supervise & evaluate the work of other auditors, by:
– Specifying certain procedures for the lead auditor to perform when planning and supervising an audit that involves other auditors; and
– Applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors – so that the higher-risk areas in the audit are prioritized.
If you’re like me, your eyes glaze over when it comes to accounting standards. But there’s some info in here that will be relevant to anyone advising audit committees. First, the amendments require the lead auditor to collect independence & relationship info from the contributing auditors – so be on the lookout for that. The PCAOB also amended AS 1301 – regarding communication by the lead auditor to the audit committee about the overall audit strategy. In addition to the lead auditor communicating all participants in the audit to the audit committee, this excerpt from the 185-page adopting release gives more color on what the PCAOB expects those enhanced discussions to address:
Investors also may benefit from the amendments indirectly. For example, under existing standards, the auditor is required to communicate to the audit committee its overall audit strategy, significant risks, and results of the audit, including work performed by other auditors, among other things. Because of the lead auditor’s enhanced involvement in the work of other auditors, the quality of communications with audit committees could also be enhanced, specifically as it relates to risks of material misstatements in the financial statements related to the component(s) of the company audited by the other auditor(s).
Such enhanced discussions with the audit committee could improve the audit committee’s oversight of the audit by highlighting areas where audit committees and companies should increase attention to ensure the quality of their financial statements, including related disclosures. This increased attention by audit committees and companies could result in higher quality financial reporting, which benefits investors.
The PCAOB first proposed these requirements 2016, with supplemental requests for comment in 2017 and 2021. There’s some lead-time on the compliance date – the amendments will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024.
The new PCAOB requirements for audits involving multiple firms come at a time of heightened tension and complexity for international business, particularly if part of the audit relates to China-based operations. Since I last blogged about the SEC’s continued angst on this topic, the HFCAA determinations have continued to roll in – with Alibaba now among the 7 “provisionally” identified companies. There are now 155 “conclusively” identified companies, up from 128 in May.
Issuers on this list may face trading prohibitions & delistings – but that will take a while to come to fruition, and there’s still time for the Chinese & US governments to strike a deal. In the meantime, though, a handful of companies have started to voluntarily excuse themselves, with this MarketWatch article identifying 4 announcements as of Friday. It won’t be surprising if more companies follow suit.
The stock market ended last week on a positive note – but whether it’s a brief rally or a long-term upswing remains to be seen. These fluctuations can make executive compensation decisions particularly difficult. Tune in tomorrow at 2pm Eastern for the CompensationStandards.com webcast – “Executive Compensation & Equity Trends in a Volatile Environment” – to hear Compensia’s Mark Borges, Morrison Foerster’s Dave Lynn, Gibson Dunn’s Ron Mueller and Semler Brossy’s Greg Arnold discuss:
– Handling Equity Grant & Rule 10b5-1 Plan Practices in Uncertain Environment
– Key Issues & Considerations for Option Repricing
– Hedging & Pledging Issues
– Executive Pay Structuring Considerations in Volatile Market
– Use of Retention Awards and One-Time Grants
– Disclosure and Shareholder Engagement Planning around Compensation Decisions
– Maintaining Equity Plans Under Pressure
– Other Emerging Compensation Trends During Market Volatility
This webcast follows an in-depth examination of market volatility in the May-June 2022 issue of The Corporate Executive newsletter. Dave Lynn shared guidance on these topics:
– Option Repricing: Are You That Desperate?
– Hedging & Pledging Revisited in Volatile Markets
– Rule 10b5-1 Plans in Turbulent Times
Members of CompensationStandards.com are able to attend tomorrow’s critical webcast at no charge. The webcast cost for non-members is $595. If you are not yet a member with access to all of the great resources available on that site, sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The prices for an annual membership increase on September 1st, so act now to lock in the best deal! And if you do not subscribe to The Corporate Executive, please email us at sales@ccrcorp.com or call us at 800-737-1271. This newsletter is full of important insights that you won’t get anywhere else.
Earlier this month, the SEC delighted proxy advisors and many investors by adopting amendments that – among other things – reversed two of the “new” conditions governing proxy voting advice that were adopted just two years ago and never made it into effect. The new 2022 amendments and the rescission of related guidance are slated to become effective this September 19th and apply during the upcoming proxy season.
Yesterday, the US Chamber of Commerce, the Business Roundtable and the Tennessee Chamber of Commerce & Industry announced that they had joined together as plaintiffs to file this complaint (in Tennessee district court) that accuses the SEC of not following proper procedures or providing adequate justification for the rollback under the Administrative Procedure Act. Here’s the relief they’re seeking:
– A declaratory judgment that the Amended Rule at issue in this lawsuit is arbitrary, capricious, or otherwise contrary to law within the meaning of the Administrative Procedure Act, see 5 U.S.C. § 706(A);
– An order vacating and setting aside the Amended Rule in its entirety pursuant to the Administrative Procedure Act, see 5 U.S.C. § 706(2);
– An order issuing all process necessary and appropriate to delay the effective date and implementation of the Amended Rule pending the conclusion of this case;
– An order setting aside Defendants’ suspension of the compliance date for the 2020 Rule;
– An order awarding Plaintiffs their reasonable costs, including attorneys’ fees, incurred in bringing this action; and
– Any other relief as the Court deems just and equitable.
The 2020 rules were the result of a long effort on the corporate side to bring more lead-time, transparency and accuracy to proxy advisor recommendations. The newly adopted amendments – while not a total surprise – confirm that predicting votes & correcting inaccuracies will remain very difficult for many corporate secretaries. Maybe even more difficult than when this rulemaking saga began, since ISS stopped providing draft reports to the S&P 500 in the wake of the 2020 rules.
For those keeping track at home, this is at least the third lawsuit relating to the rules – and boy has there been a lot of drama along the way. ISS sued the SEC in 2019 over guidance that foreshadowed the 2020 proposal – which was then stayed and then back on. Then, NAM sued the SEC when the SEC suspended the compliance date. The CII also jumped in along the way.
Update: An eagle-eyed member alerted me that NAM also filed another complaint last week, in Texas. So, this Chamber/BRT complaint is at least the FOURTH lawsuit these rules have drawn.
Last week, the SEC posted this order instituting proceedings on a proposed NYSE rule change to modify pricing limitations for securities listed on the Exchange via a primary direct listing. The proposal was filed back in April and the Commission had only received one comment when it instituted these proceedings, despite an extension of the consideration period. Here’s more detail:
The Exchange has proposed to modify the Price Range Limitation to provide that a Direct Listing Auction for a Primary Direct Floor Listing may be conducted if the Auction Price is outside of the price range established by the company in its effective registration statement (the Issuer Price Range) but is either (i) at or above the price that is 20% below the lowest price or at or below the price that is 20% above the highest price of the Issuer Price Range or (ii) above the price that is 20% above the highest price of the Issuer Price Range.
The NYSE believes that this pricing flexibility would make direct listings more attractive, and that investors would continue to be adequately protected. Companies would have to make certain public disclosures & certifications to the Exchange to be able to take advantage of the flexibility.
Although last week’s order doesn’t indicate that the Commission has reached any conclusions on the proposal, it starts the process for additional analysis & input and gives notice of the grounds of disapproval under consideration. Yesterday, the CII submitted this comment letter in response to the order and the specific questions raised therein. The CII opposes the rule change. In February, the SEC rejected a Nasdaq proposal on the same topic.
We’re sad to bid farewell this week to our friend & colleague Emily Sacks-Wilner, who is rejoining the Big Law ranks as a leader in securities practice management. During her tenure here, Emily has enhanced our team in every way and has kept our members front-of-mind every single day. She created our “cheat sheet” to keep everyone grounded during the SEC’s rulemaking deluge, spearheaded our virtual Women’s 100, diligently updated all of our handbooks (thousands of pages), and opened my eyes to what it’s like to be a “cat person” (in a good way!). Emily, we wish you continued success – we have been lucky to have you on our team!
Dave blogged last fall that the SEC paid out more whistleblower awards in fiscal 2021 than in all prior years combined since the whistleblower program began in 2011. While he noted that the trend in Europe was similar, what has continued to draw criticism here in the US is the lack of transparency around the circumstances of each award, and how the process even works. This new Bloomberg article shares findings from their 5-month pursuit & review of records obtained through a FOIA request and more than a dozen interviews. Here’s an excerpt that describes the screening process:
About 12,000 tips came in the last fiscal year. They first go through an internal screening process that is supposed to select only the best for full investigations, which can last five years.
A separate group of attorneys review the records once the investigation is completed and makes a decision on which whistleblowers get paid. The agency has 13 full-time and three temporary attorneys who determine how much each claimant should get. The SEC refused to provide more detailed information on how decisions are made.
It has rejected claims because applicants hadn’t followed program rules while approving claims under similar circumstances.
For example, the law says the program can only make awards to people who provide original information that leads directly to a sanctions of $1 million or more.
But in March the commission overruled staff and awarded about $14 million to someone who SEC lawyers ruled “was not a whistleblower within the meaning of the statute” and that the claimant’s information did not lead to the success of the investigation.
It disagreed with some staff conclusions, and wrote it was in the “public interest” to waive the 30-day requirement for filing. The whistleblower waited four years.
The program’s defenders argue that the screening process considers relevant facts & circumstances – which can lead to the appearance of inconsistencies. But the reporting leaves the overall impression that when it comes to winning a whistleblower award or having a successful whistleblower practice, the old adage applies: “it’s who you know, not what you know.”
This article underscores the need for companies to have robust whistleblower programs and procedures for handling whistleblower complaints. You don’t want an employee calling up one of the lawyers named in here! Visit the transcript from our February webcast – “Whistleblowers: Best Practices in the New Regime” – for practical guidance on effective programs, the board’s role, documentation, and more. It’s available along with lots of other resources in our “Whistleblowers” Practice Area.
In remarks yesterday to the Center for Audit Quality, SEC Chair Gary Gensler marked the 20-year anniversary of the Sarbanes-Oxley Act, as well as the Enron and WorldCom debacles that preceded it. Among other SOX-related initiatives that are still a work in progress, Chair Gensler’s speech highlights current PCAOB initiatives – e.g., updating almost all of its remaining interim standards – the ongoing importance of auditor independence, the recently reopened comment file on proposed clawback rules, CEO & CFO certifications, and the commitment to the Holding Foreign Companies Accountable Act of 2020.
The SOX/Enron/WorldCom era yielded wide-ranging and enduring lessons for auditors – but there were also plenty of takeaways for legal counsel. This blog from Bryan Cave Leighton & Paisner pulls out findings by the Examiner in the WorldCom bankruptcy and explains why they’re still relevant today. It’s worth reading the blog in it’s entirety – here’s the high-level guidance:
1. Remember when advising clients that attorney-client privilege can be waived or lost
2. Avoid fragmented reporting lines in law department
3. Ensure appropriate advice to board on fiduciary duties for material transactions
4. Confirm receipt of proper corporate approvals before executing material agreements
5. Build an appropriate record when directors act by written consent, and limit its use to appropriate circumstances
6. Apply independent judgment and consider yellow flags when clearing stock trades instead of deferring to management
Protiviti recently released its annual “Sarbanes-Oxley Compliance Survey,” which benchmarks companies’ compliance efforts, associated costs & hours, and the impact of current business conditions. This year’s survey says that SOX compliance hasn’t been immune to the Pandora’s Box of market disruptions we’ve experienced over the past two years. Twenty years in, the costs for many companies are still on the upswing – and the hours commitment continues to grow.
Here’s an excerpt with some of the key takeaways:
– Costs continue to climb due to a range of factors: A combination of internal and external factors creating volatility — technology-driven transformation and innovation, talent shortages, strategic pivots and more — is contributing to rising SOX compliance costs. More companies spend $2 million or more on compliance while fewer spend $500,000 or less. A surge in the number of smaller companies spending $2 million or more in SOX compliance costs likely reflects last year’s significant increase in initial public offerings (IPOs), driven by special
purpose acquisition companies (SPACs).
– Hours on the rise as well: A majority of organizations increased the number of hours logged for SOX compliance during their most recent fiscal year. This growth is driven by the same factors contributing to rising compliance costs. SOX compliance teams are also spending more time responding to higher volumes of more detailed information requests from external auditors, whose scrutiny is intensifying in response to actions of and guidance from the Public Company Accounting Oversight Board (PCAOB).
– A growing number of companies are deploying automation to support SOX work; more should follow suit: Automation platforms and applications bring greater efficiency to SOX compliance activities. The deployment of process mining, advanced analytics, robotic process automation (RPA) and continuous monitoring, along with other advanced technological tools, can significantly reduce the volume of manual compliance tasks as well as retention risks associated with subjecting internal full-time staff to heavy loads of repetitive, task-driven work.
– A widespread desire for efficiency is kindling interest in centers of excellence and alternate sourcing strategies: The ongoing goal to moderate SOX compliance cost increases makes alternative delivery models for SOX compliance services more appealing. In addition to investing in supporting automation, efficiency-minded compliance and internal audit leaders are evaluating and adopting internal shared services models as well as partnerships with third parties that operate external centers of excellence for controls testing.
Protiviti remains optimistic that automation and technology will eventually bring down (or at least slow the increase in) compliance costs. I don’t doubt that there’s been more adoption since I wrote about that same optimism three years ago, but at this juncture it seems like the improvements from automation have been outweighed by new complexities and challenges.
If you’ve been able to rein in your compliance costs and have words of wisdom for others who are looking to do the same, shoot me an email at liz@thecorporatecounsel.net. I would love to collect & share real-world pointers as we head into the even more demanding compliance environment that will accompany anticipated SEC rulemaking on climate & human capital disclosure.
Yesterday, BlackRock Investment Stewardship released a 27-page summary of the 72-page “Voting Spotlight” that it published last week. The reports detail the asset manager’s engagement & proxy voting stats, its rationale for voting decisions, and its ambitions for the BlackRock Voting Choice program. BlackRock makes sure to note that its core focus continues to be long-term, durable financial performance and that it highly values discussions that come from engagements. Based on the voting results this year, it seems that these conversations have been a valuable use of company & director time.
BIS doesn’t rely on the recommendations of proxy advisors – it follows its own policies. So, what voting outcomes did those policies & engagements yield this year? Here’s an excerpt from page 12 of the Spotlight:
Our voting in support of management was largely consistent with the prior proxy year: globally we voted in support of 90% of directors standing for election and for all items on the agenda at 57% of shareholder meetings (also 57% last year). This year, BIS was more supportive of management in the Americas and EMEA, where companies have made significant progress on the governance and sustainability matters that inform our voting.
In the Americas, we were more supportive of directors as companies made substantial improvements in board diversity; we did not support the election of 4% of directors (6% last year) for lack of board diversity.
In both the Americas and EMEA, we were also more supportive of companies with material climate risk in their business models as they improved their climate action plans and disclosures, voting to signal concern at 155 companies (264 last year).
BIS centers our stewardship work in corporate governance. In our experience, sound governance, in terms of both process and practice, is critical to the success of a company, the protection of shareholders’ interests, and long-term shareholder value creation. That is why board quality and effectiveness remain a top engagement priority, and a key factor in the majority votes cast on behalf of clients. Like last year, our leading reasons for not supporting director elections — and management proposals more broadly — were governance-related: 1) lack of board independence, 2) lack of board diversity, 3) directors having too many board commitments and 4) executive compensation that was not aligned with company strategy or long-term performance.
BlackRock goes on to note that – due to a combination of overly prescriptive resolutions and corporate progress on climate disclosure & action – it voted for fewer climate-related shareholder proposals this year. It also voted “against” only 176 directors for climate-related concerns this year, compared to 254 last year.
These stats aren’t too surprising: BlackRock emphasized the need for an “orderly transition” to net-zero in commentary early this year, which Lawrence wrote about on PracticalESG.com. That was a sign that the asset manager would take a measured approach to new “asks.” In May, it published late-season commentary and guidance to signal its lower support for ‘22 shareholder climate resolutions, which I blogged about at the time on our “Proxy Season Blog.”
Overall, BlackRock supported 22% of the E&S shareholder proposals that it voted on. Unlike its declining support for aggressive climate proposals, it supported 54% of proposals for DEI audits. Here’s the breakdown of why the Investment Stewardship team voted the way it did:
– Supported because in the financial interests of long-term shareholders – 22%
– Not supported because too prescriptive/immaterial – 21%
– Not supported because not beneficial to shareholders – 8%
– Not supported because company implemented/company progress – 46%
– Not supported, rationale unspecified (voted by independent fiduciary) – 2%
While BlackRock’s acknowledgement of company progress is very reassuring, it doesn’t mean we can all rest on our laurels. BlackRock says it doesn’t anticipate significant changes in its global principles and voting guidelines or its engagement priorities – which include board quality & effectiveness; strategy, purpose & financial resilience; incentives aligned with value creation; climate & natural capital; and company impacts on people. All of these topics are complex, and practices continue to evolve. The write-up continues to emphasize an “orderly energy transition” towards eventual decarbonization – BlackRock just disfavors proposals that micro-manage how companies go about that process.
