Ever cry at a basketball game? Or make love to 20,000? Took my boys yesterday to see the basketball miracle of the century as my George Mason Patriots beat the prohibitive favorite to win the national championship, UConn.
For those that don’t follow basketball, George Mason was the last team to receive a bid into the tournament and many believed that they were not worthy of getting in at all. Against all odds, they have beaten three former national champs to earn a place in the Final Four. Boy, the place was rocking at Verizon Center; scared my 8-year old plenty…
Practical Considerations: Implementing a Majority Vote Standard
Tomorrow’s webcast – “Practical Considerations: Implementing a Majority Vote Standard” – will focus on the practical considerations and consequences of implementing a majority vote standard or director resignation guideline and will include these experts:
– Keith Bishop, Partner, Buchalter Nemer LLP
– Joshua Cammaker, Partner, Wachtell, Lipton, Rosen & Katz LLP
– Peggy Foran, SVP-Corporate Governance, Assc. General Counsel & Secretary, Pfizer Inc.
– David Katz, Partner, Wachtell, Lipton, Rosen & Katz LLP
– Cary Klafter, VP-Legal & Govt. Affairs; Director of Corporate Affairs & Secretary, Intel Corporation
– Charles Nathan, Partner, Latham & Watkins LLP
– Stephanie Schaeffer, Vice President, Chief Legal Officer, Paychex, Inc.
– Thomas Welch, Jr., Vice President – Legal, General Corporate Counsel, Dell Inc.
– Honorable Norman Veasey, Partner, Weil, Gotshal & Manges LLP
With Alaska Air Group, Altera and Safeway being the latest to join the ranks of those adopting pure majority vote standards – as noted by ISS on Friday – this is a program you don’t want to miss!
The Latest Proxy Compensation Disclosures
In his “Proxy Disclosure Blog” on CompensationStandards.com, Mark Borges continues to blog daily on the latest compensation disclosures as proxy statement are being filed. Here are two of his latest entries:
Comcast Execs Pay Their Own Way
My recent posts on perquisites don’t necessarily tell the entire story of what’s going on in this area. Take, for example, the Comcast proxy statement. While a footnote to the Summary Compensation Table notes the amounts that each named executive officer received as perquisites and to cover tax liabilities, it also discloses that, pursuant to a company policy regarding management perquisites, the NEOs paid the company certain amounts for items that otherwise would have been personal benefits.
The Board Compensation Committee Report sets out the company’s perquisites policy:
“Comcast’s policy on the provision of executive perquisites with respect to Messrs. Brian L. Roberts, Ralph J. Roberts and Burke is to allow each of them to receive perquisites up to a maximum taxable value of $50,000. If the executive receives benefits that would otherwise be considered perquisites in excess of this amount (generally calculated based on the associated tax value), he is required to pay Comcast the amount of such excess. With respect to the other named executive officers, they are generally required to pay Comcast for the full taxable value of any benefits that would be considered perquisites, other than the provision of parking at Comcast’s headquarters.
In addition, Comcast pays, or reimburses, premiums on life and executive long-term disability insurance policies for all named executive officers who participate in these plans and provides a tax gross-up with respect to certain of these payments.”
It appears that the policy has been in place for a few years, so it isn’t a response to the SEC proposals. It also appears that the policy calls for the NEOs to reimburse the company based on the tax value of the benefit, with the company disclosing the incremental difference between that amount and its cost in the SCT. That’s why, in spite of the policy, some perk amounts wind up in the table. Thanks to Ron Mueller for pointing out this disclosure.
Bank of America’s Proxy Statement
Bank of America’s recent proxy statement filing follows the recent trend of incorporating elements of the SEC proposals into the executive compensation disclosure. Here are some of the highlights:
Director Compensation
BofA begins with a description of its standard fees arrangements and then provides a table showing the amounts received by each director. The table starts with a total compensation column and then lists various cash and stock fees and retainers. This information is followed by a description of changes to the company’s director compensation program that go into effect in 2006. There is also a discussion of stock ownership guidelines for directors and a description of a retirement arrangements with one of the directors.
Summary Compensation Table
Like the director table, the Summary Compensation Table includes a Total Compensation column. The Other Annual Compensation column is supplemented by a perquisites table (which itemizes each perquisite without regard to the minimum disclosure threshold) and the All Other Compensation column includes pension accrual amounts. For the majority of the named executive officers, these pension accruals reflect the amount of compensation credits under the company’s qualified and non-qualified pension plans with respect to plan-eligible compensation paid each year.
Pension Benefits
BofA provides summary descriptions of its multiple pension plans – two tax-qualified plans (including one for former employees of Fleet Bank) as well as various pension restoration plans and supplemental executive retirement plans. These descriptions are followed by a simple table setting forth the years of service and estimated annual benefits for each NEO.
Observations
These enhancements typify what I’m seeing in 2006 proxy disclosure. While some companies are making subtle refinements to their board compensation committee reports, most efforts appear to be devoted to improving tabular disclosure, both through the use of a Total Compensation column and perquisite and director pay tables. This makes sense, as these modifications are relatively easy to make, don’t involve difficult interpretive issues, and are consistent with next year’s disclosure regime.
Thanks to Stephen Quinlivan and Jill Radloff for this memo that lists the areas that you should bear in mind as you are preparing your upcoming Form 10-Q. I have posted the memo in our “Form 10-Q” Practice Area.
Understanding the Sell Side
If you need a laugh, check out this hilarious voicemail from a sell side research analyst. [Did I mention that I teach a class at George Mason, the Cinderella darlings of the tournament! Not that I picked them to even beat Michigan State. Go Patriots!]
US Litigation Overseas: Impact of the UK’s Company Law Reform Bill
The UK’s Company Law Reform Bill is a hot topic with the securities bar in England, specifically whether the Bill’s proposed reforms should be considered as a step towards the import of US-style securities litigation into the UK. In this article, which looks at the Bill from an American point of view, Werner Kranenburg – a London law student with a flair for writing – argues that the US securities bar needn’t be too interested in this Bill and seek to relocate to England soon, as the Bill’s reforms fall well short in providing a system that encourages and effectively facilitates shareholder representation.
Werner argues that, likewise, the Bill’s influence in the US should be neglible, citing four recent actions against three UK corporate defendants to highlight the differences of the existing approaches to private civil actions in the UK and US.
As noted in this LA Times article, Bristol-Myers Squibb and Staples recently agreed to disclose – and have their directors oversee – soft money political contributions made with corporate funds. Last year, Morgan Stanley, Johnson & Johnson, Schering-Plough, Pepsico, Coca Cola and Eli Lilly adopted similar political transparency and accountability policies. Under a typical policy, all soft money political contributions are reviewed at the Board level on an annual basis and the company posts a complete list of corporate political contributions as well as their guidelines for their political giving.
In addition, according to this press release, Amgen recently became the first company whose board endorsed a shareholder resolution calling for disclosure and board oversight of the company’s soft money giving. This development is part of a movement fostered by the Center for Political Accountability, among other groups.
Keith Bishop also notes that a bill was recently introduced in California that would require disclosure of political contributions related to California by corporations. The corporation would be required to make refunds or contributions to charities for objecting shareholders. We have posted a copy of the bill in our new “Political Contributions” Practice Area.
Overboarded Directors
Yesterday’s WSJ ran an article (not available electronically) about CEOs that serve on multiple boards that caught my eye. Back in the day before I knew better, my dream was to serve on a few boards to pass time once my kids moved out of the house. Now after serving five years on the board of a local domestic violence non-profit, I realize the serious time commitment that serving on a board really entails (putting aside the liability concerns).
So I can’t understand how a CEO of a major company could have the time to serve on more than one or two boards in addition to his/her own company. I would think even one extra board seat would be a challenge. Yet the article lists a few CEOs that serve on more than 10 boards! How do they even schedule board meetings without multiple conflicts?
ISS policy is that it generally will recommend withholding from directors who are CEOs of publicly-traded companies who serve on more than three public boards, i.e., more than two public boards other than their own board (but not recommend withholding at the CEO’s own company unless the overextension is particularly problematic or the company’s performance is poor).
And remember that the SEC only requires directors to disclose the public company boards that they sit on – directors aren’t required to disclose private company or non-profit directorships, which can be quite time-consuming too. If I sat in the shoes of a major investor, I want a CEO that spends some time with their family…
How to Handle a SEC Enforcement Inquiry Today
We have posted the transcript from the recent webcast: “How to Handle a SEC Enforcement Inquiry Today.”
Remembrance of Regina Baker
For those SEC alumni out there, I am sad to note that long-time Corp Fin Staffer Regina Baker passed away Tuesday after an extended illness. Regina was one of my favorite Staffers and I believe that anyone who worked alongside her – during her 40-year tenure – felt the same way. She was a very special person and we will all miss her. My condolences to her family and friends.
Yesterday, the US Supreme Court ruled unanimously in favor of Merrill Lynch in a decision that limits the ability of shareholders to bring so-called “holders” class action lawsuits in state court – even if the claim is only that shareholders were induced to hold on to their stocks, not to buy or sell – because such lawsuits were found to be preempted by the Securities Litigation Uniform Standards Act of 1998.
In vacating the decision from the US Court of Appeals for the Second Circuit (and overruling the majority of courts that have addressed this issue), Justice John Paul Stevens’ opinion rejected the argument that SLUSA only preempts lawsuits involving a purchaser or seller by narrowly constructing SLUSA and finding it would give rise to wasteful and duplicative litigation – thus, the phrase “in connection with the purchase or sale” of securities was given a broad reading.
As you might recall, after the enactment of the PSLRA, plaintiffs began to bring more state law securities class actions in state courts – and after SLUSA was passed, plaintiffs commenced the filing of “holders” class actions in state court. These practices should be over now; wonder what will be the next angle sought by the plaintiff’s bar? Lots of blogs will undoubtedly analyze this decision as they love the Supreme Court stuff, like Ideoblog and The 10b-5 Daily.
Nifty Chart: Initial and Continuous Listing Standards of US Trading Markets
They say it couldn’t be done! Many thanks to Neil Kaufman and Chris Seamster of Davidoff Malito & Hutcher for this handy one-page chart that compares initial and continuous listing standards of the US trading markets, including the NYSE, Nasdaq, Amex, OTC Bulletin Board and pink sheets.
It’s amazing that so much information can be boiled down onto one page! I tend to get excited about simple things like this, but I know more than one of you are reading this saying, “What. Ever.” I have posted this chart in a number of our Practice Areas, including “NYSE Guidance,” “Nasdaq Guidance,” “Small Business” and “IPOs.”
PCAOB’s Two Releases on Auditor Process to Address Quality Control Criticisms
Yesterday, the PCAOB issued two releases concerning the implementation of the Sarbanes-Oxley provision that gives registered accounting firms incentive to address quality control criticisms included in PCAOB inspections reports within 12 months after the reports have been issued. Specifically, Section 104(g)(2) of Sarbanes-Oxley provides that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.”
The first release details the PCAOB’s process for determining whether a registered accounting firm has addressed quality control criticisms included in an inspection report to the Board’s satisfaction.
The second release describes the efforts undertaken by the Big Four audit firms to address quality control concerns included in the August 2004 reports regarding limited PCAOB inspections. This release includes a general summary of some of the steps taken by the firms to address the PCAOB’s quality control concerns.
Here are the survey results regarding auditor inspection reports and engagement letters:
1. Have you requested information from your independent auditor about the non-public portions of the PCAOB’s inspection report (ie. Part II of the report) that could impact your company’s audit?
– Yes, our auditor agreed in the auditor engagement letter to provide a copy of the inspection report – 3.3%
– Yes, our auditor agreed informally to provide a summary or a copy of the inspection report – 40.0%
– Yes, but auditor refused our request to receive information regarding the non-public portions of the inspection report – 13.3%
– No, we have not made such a request from our auditor – 43.3%
2. Does your most recent engagement letter with your independent auditor include a provision that imposes a cap on the auditor’s liability (ie. no liability except for willful misconduct and gross negligence)?
– Yes – 63.3%
– No – 36.7%
3. Does your most recent engagement letter with your independent auditor include a provision that waives a jury trial?
– Yes – 70.0%
– No – 30.0%
New Survey: Trading Policies for Outside Directors
Please take our new survey on trading policies for outside directors.
SEC Files Amicus Brief in At Home Corp. v. Cox Communications
A few weeks back, the SEC filed its amicus curie brief with the Second Circuit in At Home Corp. v. Cox Communications, Inc., a case discussed in the November 2004 issue of Section 16 Updates. Below is some commentary from Alan Dye snipped from his Section16.net Blog:
Interestingly, 12 of the 24 pages of legal argument are devoted to the level of deference courts should pay to the views of the SEC as expressed in amicus briefs. On that issue, the SEC argues that the Commission’s interpretations of its own regulations are “binding, unless they are plainly erroneous or inconsistent with the regulations,” and that its interpretations of federal securities statutes should be considered “controlling,” or entitled to “Chevron deference,” if the statute is ambiguous and the SEC’s interpretation is reasonable.
The facts of the At Home case are discussed in an August 17, 2004 posting in the Litigation Corner. Briefly, Cox, Comcast and AT&T at one time shared control of At Home, and on March 28, 2000, AT&T agreed to purchase shares of At Home stock from both Cox and Comcast based on a hybrid pricing structure. In Cox’s case, AT&T agreed to purchase shares for a purchase price of $1.4 billion. If the price of At Home’s stock on the date of exercise were $48 per share or less, the number deliverable would be determined by dividing $1.4 billion by $48. If the price of At Home’s stock exceeded $48 per share (based on the market price during the 30 trading days beginning 15 days before Cox’s exercise of the right), then the number of shares deliverable would be a number having a value of $1.4 billion. Cox exercised the right on January 11, 2001, when the market price of At Home’s stock was $7.72 per share, and therefore Cox was entitled to the fixed price of $48 per share. (Because AT&T would have incurred significant tax liability had it purchased the shares, the parties worked out an agreement in on May 18, 2001 whereby AT&T satisfied its liability to Cox by allowing Cox to keep the shares and also to receive shares of AT&T stock.) Comcast entered into substantially identical transactions with AT&T.
At Home ended up in bankruptcy, and the bankruptcy trustee brought an action against Cox and Comcast, alleging that their put rights were not derivative securities because they did not have a fixed price. As a result, the trustee alleged, the exercise of the rights resulted in non-exempt purchases, matchable with the “purchase” of the shares back from AT&T within less than six months. As an alternative theory of liability, the plaintiff alleged that Comcast’s establishment of the put was a sale, matchable with Comcast’s purchases within six months of three cable companies which also owned At Home securities in their portfolios. Judge Buchwald dismissed the complaint, holding that the put rights were hybrid securities, having both a fixed exercise price and a floating exercise price, and that the rights therefore were derivative securities from the time they were created in March 2000. The exercise of the rights at the fixed price, in turn, was exempt from Section 16(b) by virtue of Rule 16b-6(b). Comcast’s purchase of the three cable companies was held to be outside Section 16 under the unorthodox transaction doctrine.
The SEC’s brief reaches some interesting conclusions. The opening section states that the SEC “agrees with the district court that defendants are not liable under Section 16(b).” The Commission then goes on to argue that (i) the puts were hybrid securities, and therefore were derivative securities to the extent of their fixed price component, (ii) the establishment of the puts on March 28, 2000 constituted “sales” of the stock that could sold at the fixed price, (iii) the puts were never effectively exercised on January 11, 2001, because the underlying stock was never delivered, and (iii) the options were “cancelled for value” on May 18, 2001, resulting in a “purchase” of the underlying shares on that date (more than six months after the March 28, 2000 sales).
The SEC disagreed with the district court’s conclusion that the unorthodox transaction doctrine applies to Comcast’s purchases of the three cable companies, arguing that the doctrine applies only to “forced” transactions that present no potential for speculative abuse because the insider has no access to inside information. The SEC asserted instead that Comcast’s purchases of the cable companies were not “purchases” of At Home stock as the term “purchase” is defined in Section 3(a)(13) of the Exchange Act. While that definition is broad enough to pick up Comcast’s purchases of the cable companies, the SEC argues that the lead-in to the definition says “unless the context otherwise requires.” The Commission argues that a change-of-control transaction typically is not motivated by a desire to purchase the acquiree’s portfolio securities and therefore should be presumed not to be a purchase for purposes of Section 16(b) (because the “context otherwise requires”). The Commission argues that the plaintiff would have the burden of rebutting the presumption, such as by proving that the acquisition of another company was a subterfuge for purchasing the underlying securities.
It likely will be several months before the Second Circuit issues its decision.
Thanks to this comprehensive survey by Claudia Allen of Neal, Gerber & Eisenberg, there are a surprising number of companies that have recently adopted a pure majority standard without fanfare. These companies include Motorola, Allied Capital, Texas Instruments, Career Education, Freeport-McMoRan Copper & Gold and United Technologies. We have added all these companies to our own “Majority Vote Chart” and posted Claudia’s survey in our “Majority Vote Movement” Practice Area.
Of 116 companies listed in Claudia’s survey as having taken definitive action since the emergence of the majority vote movement, 78% adopted policies, 18% adopted bylaws, and 4% adopted both a policy and bylaw. Of course, the more important stats relate to which companies adopted pure majority vote standards versus director resignation provisions. Check out Claudia’s survey for more info on that – as well as our chart which is even more comprehensive: we show about 75 companies with a pure majority vote standard (that # likely is comprehensive for that category) and another 50 with a director resignation policy (that # likely is not comprehensive, as these policies are harder to track). And don’t forget about our March 28th webcast: “Practical Considerations: Implementing a Majority Vote Standard.”
Voting Results on First Majority Vote Proposals of the Proxy Season
Last week saw the first voting results from this proxy season on the Carpenters’ Union proposal to implement a majority vote standard. These results indicate that such proposals may not fare too well this year at companies that have adopted director resignation policies.
The proposal received a 35% vote at Analog Devices; 31% at Ciena and 45% at Hewlett-Packard; all of these companies had adopted a director resignation policy in advance of their annual meetings. In comparison, majority vote proposals received an average level of support of 44% last year, as noted in the ISS “Corporate Governance Blog.”
Update on CII and the Majority Vote Movement
Last June, the Council of Institutional Investors asked the 1,500 largest US companies to adopt a majority vote standard for director elections, as covered in this popular podcast with Ann Yerger, Executive Director of CII. About 200 response letters were received.
A few weeks ago, CII completed two follow-up mailings: one letter geared to companies considering the reform, and the other letter pressing non-responders for action. CII already has received 30 responses to the follow-up mailings and more are pouring in every day.
Over 65 companies replied that a form of majority voting was in place, and well over 100 responses said the Council’s request would be taken under consideration at an upcoming governance committee or a full board meeting.
For Those With a New Majority Vote Standard: A Word to the Wise
“For those companies using some form of ‘majority voting’ arrangement for directors this proxy season: You should give an early heads-up to your transfer agent and to ADP if you plan to have director vote choices on your proxy other than the traditional Yes and Withhold. Intel is using For, Against and Abstain this year, and that affects the proxy card and the ADP Voting Instruction Form (VIF). For example, on the VIF each of the director nominees will be treated like a separate proposal in terms of formatting, numbering of proposals, etc.
Our transfer agent, Computershare, and ADP were each a bit surprised when we raised the point and it took some discussion to resolve the matter. ADP says that it is now fully prepared, but it only knows if you are using a non-traditional vote choice when it gets your proxy statement or if you contact in advance. Advance notice to your service providers would be useful.”
From my DealLawyers.com Blog: Last week, the SEC Staff issued a batch of no-action responses, where on reconsideration the Staff said that Bristol Myers (and other companies) could exclude John Chevedden’s poison pill shareholder proposals. The Staff originally took the position that the companies could not exclude the proposals under Rule 14a-8(i)(10), even though the companies had eliminated their poison pills and adopted a policy that any new pill would be put to a stockholder vote. The basis for the Staff’s initial refusal was that the proposal asked for the policy to be “in the bylaws or charter if practicable.” Upon reconsideration by the Commission, the Staff then overturned its earlier refusal and now has allowed exclusion of the proposals. We have posted a copy of the reconsideration responses in DealLawyers.com’s “Poison Pills” Practice Area.
Interestingly, the Staff’s responses in the reconsideration included this commentary:
“We note that there is a substantive distinction between a proposal that seeks a policy and a proposal that seeks a bylaw or charter amendment. In this regard, however, we further note that the action contemplated by the subject proposal is qualified by the phrase `if practicable’ and that the company has otherwise substantially implemented the proposal.”
One possible interpretation of this commentary is that the Staff hung their hat on the “if practicable” language and the Staff believes that there is a substantive distinction between a corporate policy and a bylaw provision.
I think a fairer reading is that the Staff simply changed its mind on this one, but that it still believes that a policy is not as binding as a bylaw. The truth of the matter is that the phrase “as practicable” is pretty subjective – and a company would still have to convince the Staff that it is not practicable to adopt the poison pill change requested by the proposal.
This also crosses paths with the majority vote issue and the position the Staff took that a Pfizer-type policy does not substantially implement a majority vote proposal. Some practitioners believe that it was the “location matters” argument (policy vs. bylaw) that the Staff relied upon for their conclusion in those letters. It seems that Time-Warner and other companies may be testing this theory when they recently adopted a director resignation policy, but put it in their bylaws.
And then you have to consider the complaint in the lawsuit against Hewlett-Packard for repayment of Carly Fiorina’s severance. Some view that as taking the recent News Corp. decision to the next level, arguing that disclosure regarding policies in proxy statements makes them binding contracts.
Towards Better Online SEC Filings
Going back to my roots in this podcast, during which Rhoda Anderson, CEO of EZOnlineDocuments, provides some insight into how companies can improve the effectiveness of their online proxy materials and other SEC filings (here are samples of what EZOnlineDocuments can do), including:
– What are most companies doing with their financial documents or shareholder communications today?
– What are common limitations in a typical SEC filing that is posted online?
– Why isn’t a PDF good enough for shareholders’ purposes?
– Why is it challenging to get online documents into the HTML format?
– What characteristics do effective online documents have?
The Canadian Approach to Internal Controls
Recently, the Canadian Securities Administrators announced a change in approach for Canada’s version of Section 404, which would be implemented as early as December 31, 2007. At this time, the Canadian securities regulators have decided not to require companies – of any size – to have an auditor attestation on internal control, stating: “After extensive consultation, the CSA has decided not to proceed with an earlier proposal that would have required companies to obtain from their external auditors an audit opinion in respect of management’s evaluation of the effectiveness of internal controls over financial reporting.”
Further details regarding the status of the Canadian proposals is provided in CSA Notice 52-313. In essense, the Canadian regulators have proposed a new element for the existing Section 302-like certifications requirements to include a Section 404-a like management assertion as to the effectivess of internal control over financial reporting – but not require a Section 404-b like auditor attestation.
A fuller description of the Canadian approach is available in FEI’s Section 404 Blog – there also are related law firm memos in Section 3.F of our “Canadian Law” Practice Area.
Last week, I blogged about a position announced by Corp Fin at “SEC Speaks” that they would object to a takedown from a WKSI’s automatic shelf filed between filing of the 10-K and the proxy statement unless a company filed either an amendment to its 10-K or its proxy statement to include Part III information – or unless it included the Part III information in a prospectus supplement to the automatic shel.
From a bunch of kind members, I have heard that the SEC Staff has now withdrawn that position and the Staff’s current position is that they will not object to such a filing or a takedown during that period – rather, the Staff will leave it up to companies to make their own decisions as to whether the registration statement and prospectus satisfy applicable requirements. This position is consistent with the Staff’s traditional position regarding shelf takedowns.
However, the Staff stated that they have not changed their position – as historically stated in Telephone Interpretation H-6 – regarding their unwilliness to declare a non-automatic registration statement effective during the period between filing of the 10-K and the proxy statement unless the current year’s Part III information is included in the filing or incorporated (but not forward incorporated).
A Parody
March Madness begins (here is some tourney history)! Check out this video of an Ipod/Microsoft parody. No, I didn’t get it from Office Pirates, Time Warner’s new site designed to look like it was developed by renegades (just like “independent films” are now produced by the big movie studios).
Should Auditors Be Airport Screeners?
From Gary Zeune – who did this interesting podcast with me a while back – as posted on AuditNet.org:
“To test terrorism readiness, British authorities conducted Threat Image Projection (TIP) and digitally inserted one of 250 images of guns, knives and other banned objects into luggage. Initially the screeners’ performance was mediocre. But with practice it improved dramatically. Then the images were changed, and the screeners’ performance dropped like a rock to no better than when the program started. But why? There are several reasons.
First, because we ‘see’ only what we expect to see. It’s the same reason you don’t see the bottle of beer on the shelf in your fridge, RIGHT IN FRONT OF YOU, because you’re hunting for, and expect to see, a CAN of beer. So when the images of the grips on the guns or the orientation of the knives were changed, the screeners detection skills were back at the starting gate. For accountants, this means that if they haven’t received significant training in what the ‘red flags’ of fraud look like, they likely won’t detect fraudulent financial statement items.
Second, is ‘distractions’ or ‘noise’. That is, the more items in the bag, ‘noise’ or distractions, the more likely the screeners failed to detect the weapon. One’s ability to pick out a single item declines when it’s part of a complex scene, loaded with similar items. That may be why screeners at the Newark, NJ airport missed a butcher knife in a cluttered handbag. Likewise, financial statement auditors look at hundred or even thousands of transactions, journal entries, and events. So finding the one or few fraudulent items is difficult at best, and near impossible at its worst.
Cognitive scientist J. David Smith at State University of New York, Buffalo, used origami-like items. The 88 participants studied not just the original shape but variations and orientations. They eventually the spotted up to 76% of the targets. Then Smith slightly changed the target and performance fell off a cliff. Why? Because the screeners were looking for the original shapes and orientation, not the variations. Just like screeners have trouble applying their knowledge to new situations, might auditors not recognize a fraud or misstatement because they’ve not seen it, or been trained to look for it, before?
The failure to recognize variations of learned items is specific-token strategy. Screeners recognize the Beretta 9mm but not the 32 caliber revolver or the Beretta packed upright in the bag instead of lying flat.
Just to be sure the nature of the origami items was causing the poor results; Smith had the participants look for actual guns, knives and scissors in over-packed suitcases. Again, their ability to spot the items started low then eventually increased to 90%. But as soon as new banned items were inserted in the luggage, the number of missed items soared 300%.
Statement on Auditing Standards Number 99 says, “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” Thus, auditors have a positive affirmative duty to detect fraud. So, the question is whether auditors will detect methods of cooking the books if they haven’t been trained on those methods? Of course, there are about a bazillion ways to cook the books. In light of the specific-token phenomenon, is there any amount of training that will allow auditors to fulfill their obligation under SAS 99?
In the final analysis the question is, how do auditors train their brains to generalize their fraud detection skills to recognize fraud indicators that they haven’t been trained on? So far, I’m not aware of anyone has figured out how to do that.”
Those following the tussle for control of the London Stock Exchange know that one of the reasons why the LSE is so attractive is that many of the IPOs during the past year have chosen to list there rather than on the Nasdaq or the NYSE (read Sarbanes-Oxley). In fact, I had announced this upcoming webcast – “How to Go Public on the London Stock Exchange’s AIM” – a few weeks back, before Nasdaq made its recent offer for the LSE (which clearly is still alive as Nasdaq reportedly is meeting with LSE’s largest shareholders).
In a somewhat related note, the newly-public NYSE Group filed this Form S-1 yesterday in an effort to remove a barrier to it making its own offer for the LSE. This registration statement will allow current shareholders (ie. former seat holders) to liquidate some of their new-found wealth (and lists Nasdaq’s LSE bid in the “Risk Factors” as well as discloses the pay levels of top NYSE executives).
And yesterday, the SEC and its UK counterpart, the Financial Services Authority, agreed to cooperate more closely in what they called a “landmark cooperation regulatory agreement” – these regulators also said they have discussed a possible deal marrying the London Stock Exchange with a top US exchange.
The Latest on Attorney-Client Privilege Waivers
Last week, the House Judiciary Committee held a hearing on attorney-client privilege waivers, primarily as part of a campaign spearheaded by a number of major big business groups (including the American Chemistry Council, Business Roundtable, Financial Services Roundtable, National Defense Industrial Association and U.S. Chamber of Commerce).
The National Association of Criminal Defense Lawyers (NACDL) and the Association of Corporate Counsel (ACC) are coordinating this attack on the “culture of waiver,” collaborating on their main piece of evidence – which is a survey of NACDL’s 13,000 members and ACC’s 15,000 members.
Here’s information relating to the first hearing; the second hearing was postponed for now. This story in the Corporate Crime Reporter does a good job of summarizing this development.
And don’t forget you have only until March 28th to submit comments on the US Sentencing Commission’s Sentencing Guidelines Commentary on Waiver of Attorney-Client Privilege and Work Product.
AICPA Issues Proposed Statement on Auditor Communications
Last week, the AICPA published this proposed Statement of Auditing Standards: The Auditor’s Communication With Those Charged With Governance. The proposed statement would replace SAS No. 61 and would establish standards for auditor/audit committee communications. Comments must be submitted by May 31st. Since the PCAOB lists this topic among its priorities for this year, I’m not sure why the AICPA is also tackling it…
Yesterday, the Committee on Corporate Laws of the ABA’s Section of Business Law released its Report containing proposed amendments to the Model Business Corporation Act. Now the 3rd comment opportunity commences, which ends on May 30th – so the Report isn’t quite “final.” We have posted a copy of the Report in our “Majority Vote Movement” Practice Area.
In the Report, the Committee concluded that the “failed election” consequences make it unwise to change the statutory plurality default rule – because it would apply universally to all companies governed by state statutes adopting the Model Act provisions. Rather, the Committee decided that the statutory framework should facilitate individual corporate action.
Among other proposals, the Committee would permit shareholders – or directors by private ordering – to adopt a bylaw providing for a form of majority voting. Thus, the heart of the Committee’s proposal is a carefully-tailored majority voting bylaw standard that can be adopted unilaterally by either the board of directors or the shareholders. This approach, coupled with other measures described in the Report, would normally have the effect of not seating, for more than a 90-day transitional period, a director whose election or reelection has effectively been rejected by a majority of votes cast.
In response to concerns regarding the validity of voluntarily-adopted board policies, the Committee also is separately proposing to adopt a statutory method expressly to facilitate and enforce resignations tendered by directors. The Report raises a number of specific questions that the Committee seeks input on – last chance to speak up!
FASB and IASB Seek Comments on Fair Value Accounting
As highlighted in this recent podcast with Jack Ciesielski, this is the year of fair value accounting. Last week, the FASB and IASB issued this request for comment about the financial analysis of companies that report some – or all – financial instruments at fair value. Here is some background on the request – and here is the related questionnaire. Responses are sought by April 14th.
Reminder: Careful with Your Voicemails!
I got a kick out of this voicemail that was discussed in Sunday’s NY Times column by Gretchen Morgenson. It was left by a retail investor for analyst Michael Krensavage.
Brought back memories from my days working in Corp Fin’s Office of Chief Counsel, where you spend hours each day talking to whomever calls OCC’s hotline and receive some quacky voicemails. Also reminded me of the voicemail left by an associate working on a deal that made the online rounds a few years back, as so eloquently blogged by Wilson Chu on the DealLawyers.com Blog.
Is Hiring A Defense Attorney Obstruction of Justice?
From the White Collar Crime Prof Blog: “The Second Superseding Indictment in the case of United States v. Singleton provides some fascinating language in Count Ten, an obstruction charge under 18 USC 1512(c)(2). It seems that comments made by an employee during an internal investigation are now being used to form the charge of obstruction. The indictment actually states that the defendant “informed the Outside Lawyers that he had retained an attorney and wanted to reschedule the interview for a time when his attorney could be present…..The attorney was a criminal defense attorney.”
This approach of using employee statements during an internal investigation to form the basis of a charge in an indictment was seen in the case of Computer Associates (see post here).
The ramifications of the government taking this approach is that employees will be less likely to participate in internal investigations. Such an approach will not be beneficial to the company, not assist the shareholders, and certainly destroys any trust between a company and its employees. And if the conversations will no longer take place, then the government will get nothing. This is not an impressive move by the government. Is it really worth getting the information in these two cases to cause such damage to the corporate environment?”
