I continue to team up with Courtney Kamlet of Vontier to interview women (and their supporters) in the corporate governance field about their career paths – and what they see on the horizon. We recently celebrated our two-year anniversary of this series. Check out our latest episodes!
– Ginny Fogg, recently retired General Counsel of Norfolk Southern
– Michelle Leder, Founder of the financial news site footnoted*
– Karen Francis, Senior Advisor at TPG Capital, and Board Chair at Vontier Corporation
– Jackie Cook, Director of Sustainable Stewardship Research at Morningstar
You know we love “fake SEC filings” around here – and this CNBC article recaps quite the scheme. Allegedly, a group of scammers scooped up shares from dormant shells that were still trading sporadically on the OTC. After using fake resignation letters and statements to reinstate the companies’ state corporate registrations and get the companies’ EDGAR codes, they filed 8-Ks to say that they were the new execs/directors, issued press releases about completely fabricated deals, and dumped the stock at an inflated price. Yesterday, the SEC announced that it had filed a complaint against the apparent ringleader.
Although I’m somewhat impressed and flattered that these folks would take the time to understand the mechanics of EDGAR and Secretary of State filings, I’m left thinking that these steps turned the pump & dump into an extra well-documented crime. They used their real names in the filings!
I’m also a little disappointed. If the alleged scammers were trying to appear legitimate, they should’ve gone all the way and made the other required filings, like the press releases and periodic reports. Maybe these filings were made and have since been removed – but if not, I’d like to know whether it was the time & effort that held them back from doing that, or if they simply decided that more securities fraud was a bridge too far.
While I’m nit-picking, here’s another suggestion for improvement: at least some of the companies also had suspended their Exchange Act filing obligations many years in advance of the Item 5.02 filing. It’s suspicious to drop a new Form 8-K out of nowhere. What legitimacy was gained from all this work?
I’m definitely not giving crime advice here, and I’m too risk averse to understand the appeal of any of this – especially for a mere $100k in trading profits! But what I’ve learned today is that it’s probably better to just stick to message boards and social media for your pump & dump.
A recent Gartner survey of 166 public & private companies found that 62% expect audit fees to increase this year. The survey also found that companies that automate at least a quarter of their internal controls paid 27% lower audit fees on average, and that companies have some success in keeping fees down through negotiation.
– Companies in the banking and insurance sectors had the highest percentage of fee increases – 69 percent of those respondents reported increases. The technology/telecom sector had the lowest percentage of fee increases – 41 percent of respondents in that sector reported increases in 2020.
– Of the companies in all industries that reported fee increases, 22 percent reported increases of 6 percent or more, compared to 2019.
– Companies that sought to negotiate fees with their auditor were frequently rewarded. Gartner reports that, of the respondents that undertook negotiation, 45 percent said their fees decreased by more than 6 percent, while half were able to decrease their fees by 3 to 6 percent.
– Companies with fewer controls were the greatest beneficiaries of automation. Respondents with less than 50 controls, and more than 25 percent of those controls automated, reported 52 percent lower audit fees, compared to companies with less than 25 percent of automated controls.
Dan says that other surveys also indicate that fees could jump this year – so audit committees may want to look at internal control automation & fee negotiation as cost-control tools.
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 Morrison & Foerster and Ron Mueller of Gibson Dunn analyze this year’s wild say-on-pay results, key 2021 lessons, ongoing pandemic-related issues, ESG metrics, CEO pay ratios, status of SEC rulemaking, and what to start thinking about for next year.
If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
The Enforcement Division is contacting companies that may have been affected by the December 2020 SolarWinds cyberattack, according to an alert that Brian Breheny, Raquel Fox and others on the Skadden team sent to clients over the weekend. If you get an inquiry, you need to act fast if you want to get “cooperation credit” in exchange for info that you provide. Here’s an excerpt:
In broad strokes, the SEC is offering amnesty to companies who voluntarily disclose (i) how the company was impacted by the SolarWinds cyberattack, and (ii) any remedial actions the company implemented in response, to the extent that those voluntary disclosures show that the company failed to make prior required disclosures or maintain adequate internal controls. Companies must also preserve documents related to the SolarWinds cyberattack, and any other cyberattack since October 2019. Companies who learned of the SolarWinds cyberattack before September 2020 are ineligible for amnesty.
Companies must inform the SEC whether they intend to provide the requested information by June 24, 2021, and provide the information by July 1, 2021, although extensions may be requested for “extenuating circumstances.”
Amnesty will not extend to other securities violations related to the SolarWinds cyberattack (e.g., Reg FD violations, insider trading). If a Company chooses not to participate and the SEC otherwise learns that the company did not appropriately disclose or prevent/remediate the SolarWinds cyberattack, the SEC intends to pursue enforcement actions with heightened penalties.
Although the SEC did not disclose how it selected recipients of the voluntary request, SolarWinds previously disclosed DOJ, SEC and State AG investigations related to the cyberattacks (in addition to civil litigations) so the SEC may have SolarWinds data and documents, including customer lists.
Last week – by a single vote – the House passed the “Corporate Governance & Investor Protection Act.” Among other things, the bill would amend the Exchange Act to require new ESG-type disclosures. It consists of 5 parts:
– Title I, the “ESG Disclosure & Simplification Act”
– Title II, the “Shareholder Political Transparency Act”
– Title III, the “Greater Accountability in Pay Act”
– Title III, the “Climate Risk Disclosure Act”
– Title V, the “Disclosure of Tax Havens & Offshoring Act”
This Twitter thread from Ann Lipton walks through some of the nonsensical parts of the bill, while this Accounting Today article gives a more straight-faced recap of the tax component:
The ESG bill would require the Securities and Exchange Commission to create a standard definition of ESG metrics and mandate that the SEC require standardized ESG disclosures. The tax havens bill would provide investors and the public with greater transparency about corporations’ use of tax havens and tax incentives for outsourcing jobs abroad, requiring public companies to disclose their financial reporting on a country-by-country basis about the extent to which they are using tax havens or offshoring jobs.
The overall legislative package would impose greater requirements on companies to disclose their use of offshore tax havens and provide ESG disclosures in a standard way. The legislation comes at a time when various ESG standard-setters have begun working together more closely to align their varying standards, as the SEC and financial regulators in other countries take more of an interest in requiring ESG and climate risk disclosures from companies.
The G-7 finance ministers included language in their announcement this month backing recent moves by the International Financial Reporting Standards Foundation to establish an International Sustainability Standards Board. At the same time, the Organization for Economic Cooperation and Development and the G-7 have also been moving toward country-by-country reporting of taxes by multinational companies to curb tax avoidance strategies along with a global minimum tax rate.
The suggestion that this type of tax disclosure should be included in SEC filings struck me as onerous and unrelated to typical investor-focused disclosures – but Accounting Today notes that the info is already privately provided to the IRS. Making public disclosure about tax loopholes part of a “corporate governance” bill may be an early signal that aggressive tax planning could be flagged as being at odds with ESG, especially as the impact of tax disparities is getting attention internationally and domestically. However, the narrow margin of approval in the House suggests that this legislation is exceedingly unlikely to pass in the Senate.
Next April will mark the 10-year anniversary of the JOBS Act. WilmerHale’s recent “IPO report” devotes a couple of pages to analyzing the evolution of regulations & practices since “emerging growth companies” hit the scene.
In many ways, EGCs paved the way to greater relief for all issuers. Page 10 of the memo recaps how the confidential submission process has been expanded to allow all companies the opportunity for nonpublic review of registration statements – and how financial disclosure requirements have also been eased for all companies.
There’s also been an uptick in EGCs taking advantage of the accommodations that are available under the rules. Here’s an excerpt about delayed application of new accounting standards:
EGCs may choose not to be subject to any accounting standards that are adopted or revised on or after April 5, 2012, until these standards are required to be applied to nonpublic companies. In the past few years, a major shift in EGC practices has occurred.
– Through 2016, the vast majority of EGCs, regardless of industry, opted out of the extension of time to comply with new or revised accounting standards. This decision appears to have been motivated by the uncertain value of the deferred application of future, unknown accounting standards, and concerns that a company’s election to take advantage of the extended transition period could make it more difficult for investors to compare its financial statements to those of its peers.
– The percentage of EGCs adopting the extended transition period jumped from 11% through 2016 to 63% between January 1, 2017, and December 31, 2020. This trend has been most pronounced among technology companies, with the percentage electing the extended transition period spiking from 12% to 71% between these periods (including 94% in 2020), and life sciences companies, with the percentage increasing from 10% to 62% (including 90% in 2020). This change in behavior appears to have been motivated by the desire of many EGCs to delay the application of the new accounting standards for revenue recognition (ASC 606) and lease accounting (ASC Topic 842) or, at a minimum, to take more time to evaluate the effects of the new standards before adopting them.
With the Federal government recognizing Juneteenth (June 19) as a Federal holiday, we were happy to see the SEC’s Edgar Filer Communications announcement clarifying that Edgar is closed today, June 18. Edgar will resume normal operations on Monday, June 21.
Please be aware that on June 18, 2021:
• EDGAR filing websites will not be operational.
• Filings will not be accepted in EDGAR.
• EDGAR Filer Support will be closed.
It was late yesterday afternoon before the EDGAR announcement was released and members were reaching out asking whether EDGAR would be accepting filings today. The SEC’s announcement resolved those questions and June 21, 2021 is EDGAR’s next operational business day – so filings required to be made today, June 18, 2021, will be considered timely filed if filed on or before Monday, June 21, 2021.
The SEC also tweeted the Juneteenth holiday observance news with an SEC spokesperson noting “the exchanges make their own determinations on operating status for federal holidays & we understand that major markets will operate with normal market hours.”
Not sure if the sun’s shining where you are, but a forthcoming academic article purports to link exposure to sunshine to upwardly biased earnings forecasts. It’s not too surprising to hear of research linking sun exposure to good moods and according to this forthcoming article, it may be worthwhile to watch the weather forecast around the time when management prepares earnings forecasts. Here’s an excerpt from a Forbes article about the study:
A sunshine-induced good mood leads managers to make upwardly biased earnings forecasts, according to a study forthcoming in The Accounting Review.
In an article titled “Emotions and Managerial Judgment: Evidence from Sunshine Exposure” researchers analyzed the relation between the amount of sunshine around a corporation’s headquarters in the days preceding a management earnings forecast, and the extent to which that forecast exceeded the actual earnings reported by the company.
In the article, the researchers describe how prior research has linked sunshine exposure to good moods and higher expectations about future outcomes. As such, the study tests the notion that greater pre-forecast sunshine exposure leads managers to issue overly optimistic earnings forecasts. Specifically, the researchers measure the amount of sun exposure around the corporate headquarters during the 14 days preceding the management forecast.
Using a sample of 29,912 annual earnings forecasts from U.S. publicly traded companies between 1994 and 2010, the study reports a positive relation between sun exposure in the days preceding a forecast and the extent to which that forecast exceeds the earnings later reported by the company. The study controls for a host of other weather-related variables, like temperature and precipitation and finds that none of these other weather-related factors bias forecasts.
To avoid these negative biases and the risk of missing an overly optimistic forecast, the study’s authors say tying CEO and CFO bonuses to accurate earnings forecasts can help reduce the bias. They also say companies that have more analyst or media coverage are at reduced risk for overly rosy forecasts.
Earlier this month, John blogged about a view of how to structure SPAC warrants to permit them to be classified as equity for financial reporting purposes. This followed the joint statement by Corp Fin leadership that SPAC warrants may need to be classified as liabilities. Although this path forward has emerged, according to reporting from Bloomberg, most SPACs that have gone public in the time since Corp Fin’s statement have taken a more conservative approach and stuck with classifying warrants as liabilities. Here’s an excerpt:
The majority of the almost three dozen special purpose acquisition companies that went public since the Securities and Exchange Commission’s market-jolting accounting announcement in mid-April are sticking to what they know: the same investor terms and incentives they used prior to the SEC’s warning. This means less favorable accounting that produces swings in earnings.
Twenty four of the 34 SPACs that raised money through public offerings included warrants — incentives that let investors buy shares at a fixed price in the future—with terms that require them to be accounted for as liabilities on their balance sheets. Nine offered no warrants at all and one blank-check company structured its warrants so they would be classified as equity, securities filings show.
The article does say though things may start to change and cites an example of a company planning to issue warrants and account for them as equity. For now, most companies appear to be sticking with a less risky path and it’ll likely take some time to see whether the pace picks up with more companies dipping their toes in the water and structuring SPAC warrants to classify them as equity.
