At its public meeting in Washington this morning, the PCAOB proposed its first substantive standard — the auditing and related professional practice standard for the attestation to Management’s Assessment of Internal Control over Financial Reporting. Section 404 of SOX, along with Section 103, directed the PCAOB to establish these professional standards.
The PCAOB’s chief auditor, Douglas Carmichael, explained that under the proposed standard, the auditor must evaluate both management’s assessment and conclusion and the internal controls themselves in order to provide its report with the required level of assurance. As part of that, audit committees should expect to have their own performances scrutinized and evaluated. An ineffective audit committee could itself be a failure of internal controls. The PCAOB expects to receive extensive comments on this last element of its proposal.
To satisfy the PCAOB, the audit of internal controls must be integrated with the audit of the financial statements. Note that while the PCAOB isn’t yet proposing to change the auditor independence rules generally, the PCAOB’s proposed standards would evidently prohibit the auditor from accepting an internal control engagement (for non-audit services) that has not been specifically (as opposed to categorically) pre-approved by the audit committee.
The PCAOB also adopted rules relating to its inspections of registered public accounting firms and proposed a rule defining some terms used in its professional practice standards.
More Details About Tomorrow’s SEC Open Meeting Leaked
Not to be outdone by the PCAOB, the SEC is set to have an open meeting tomorrow (at 9:30 a.m.) to take up its own significant and undoubtedly contentious topic – whether to propose rules that would require companies, under certain circumstances, to include security holder nominees for director in the company’s proxy materials.
Unlike the typical secrecy surrounding most proposals, the details of tomorrow’s proposal have been gradually leaked. The Washington Post reports today that the proposed framework will be triggered if either:
– a group representing at least 1 percent of a company’s investors puts a proposal on the proxy ballot requesting that a shareholder nominee or nominees be added to the ballot the following year. The proposal would need the approval of more than 50 percent of shareholders to win; or
– 35 percent of shareholders withhold their votes for a director or slate of directors, triggering a provision giving investors the right to try to get nominees on the next year’s ballot.
Once triggered, investors would have to win backing from 5% of shareholders to submit nominations. Shareholders would be allowed to propose one name for smaller boards and as many as three for larger ones. Nominees would have to get more than 50% of the vote to win.
Inside Scoop on Serving as a Director
For TheCorporateCounsel.net subscribers, we have posted a very interesting interview with Jim Ukropina on Serving as a Director. Jim, who sits on several Fortune 500 boards, provides his unique insights into a variety of topics, including the upcoming shareholder access proposal.
The upcoming issue of The Corporate Counsel will discuss the SEC’s new enforcement settlement policy, that I blogged about back on August 5th. With regard to D&O insurance, this new SEC policy is very significant as it has an impact on the application of the various forms of the so-called intentional misconduct or dishonesty exclusion that exists in many policies. Specifically, if the exclusion requires only that the misconduct be established “in fact”, coverage in any ensuing civil litigation may well be precluded by the consent injunction entered in the SEC proceeding.
For TheCorporateCounsel.net subscribers, we have launched a new “D&O Insurance Portal,” which includes sample underwriting questions that you can ask your insurer (courtesy of Patricia Villareal of Jones Day).
PCAOB = P-COB?
The answer to last week’s trivia question – what nickname for the PCAOB is Chairman McDonough pushing for – is “P-COB.”
Chairman McDonough urged the use of this nickname during his Senate testimony last week. Although the Chairman himself has been guilty of using “Peek-a-boo,” it is now well known that the PCAOB strongly dislikes that nickname. I don’t know about you, but I just get a feeling that P-COB will fail to attract followers…why not try something simple, like “Oversight Board”…
Evelyn Davis – Looking Her Best
Yesterday’s NY Times contains a brief article about how a photo of Dick Grasso graces the cover of Evelyn’s upcoming annual booklet (typically, $525 per copy, minimum order of two). Evelyn had chosen that photo before the recent controversy over Dick’s compensation – but she is happy to keep the photo because “the most important thing is that it’s a great picture of me.” For those that aren’t familiar with Evelyn, that says it all.
On GreatGovernance.com, we have posted an amusing interview with Evelyn from the Washington Post that ran in the spring.
Yesterday, a group of pension plans held a press conference to object to the SEC’s director nomination proposal – the one that is supposed to be voted on by the Commission next Wednesday!
As reported today by the New York Times, the SEC’s proposal will involve a two-year process. In the first year, a triggering event – such as a sizable percentage of shareholders that abstain or withhold votes for nominees – would have to occur. In the second year, a contested election could take place, with candidates selected by the board running against shareholder candidates (one to three candidates depending on the board’s size). The shareholder candidates would have to certify that they have no conflicts of interest nor financial relationship/special ties to the investors that nominated them.
The pension plan press conference comes a few days after the Business Roundtable sent a letter to the SEC urging that the Commission study the related issues further before it takes action.
My initial reaction to this extraordinary level of pre-proposal activity is that institutional investors truly are getting their act together. Undoubtably, this exercise in lobbying the SEC will strengthen their relationships and communication channels – so that when it comes time to act as a group to meet any ownership thresholds imposed by this rulemaking, it will not be as difficult to accomplish as it might have been a year ago.
Meanwhile, from the company perspective, it will be difficult for management to get its act together to impact this rulemaking. Aside from the ASCS, ABA and BRT, many of the other associations whose members are impacted by this rulemaking think of lobbying the SEC as a sideline; not a primary mission. Another factor is that this rulemaking most directly impacts CEOs and directors; not CFOs, controllers and lawyers (which are the professions more accustomed to lobbying the SEC). CEOs tend to lobby in groups broken out by industry – and directors normally do not lobby in their roles as directors (as being a director typically is not a primary job).
Convertible Debt Offerings – “Happy Meals” and More
For TheCorporateCounsel.net subscribers, we have posted the transcript for last week’s “New Twists in Convertible Debt Offerings.” Personally, I learned a lot, including why a convert offering coupled with an issuer’s repurchase program is called a “Happy Meal” (answer – everyone goes home happy).
A lot has been reported over PCAOB Board Member Charles Niemeier’s comments that the PCAOB will closely scrutinze any instances of a company changing auditors, as I blogged about on September 23rd.
At the PLI’s Directors Institute, the question was raised whether threatening to fire an auditor for the next year over a legitimate disagreement over the current year’s accounting would be “coercion” prohibited by the new auditor influence rules. Commissioner Goldschmid was the only panelist who ventured an opinion on this, stating that these facts would not support a finding of coercion. Thanks to Nathan Dooley of Baker McKenzie.
PCAOB Adopts Investigations, Adjudication and Registration Withdrawal Rules
On Monday, I asked the trivia question about which company rang the last bell with Dick. Shinhan Financial Group Co., Ltd. was the last to ring any bell with Dick, they rang the opening bell on September 16th. Sabre Holdings was the last listed company to ring the closing bell.
By the way, Christian & Timbers is conducting an online poll on “What do you think Dick Grasso will do next?” So far, writing a book is leading with 48%; becoming a CEO has 15%; consultant on regulatory issues has 13% and cable market analyst lags at 8% (heading another stock exchange has 2%).
As reported today by the NY Times, SEC officials noted after Chairman Donaldson’s Senate testimony on NYSE governance that the shareholder access rules will be considered next Wednesday, October 8th at an open meeting.
However, the Times incorrectly reported that the SEC would be approving these rules – hopefully, that was not the tone of the SEC officials! They have to be proposed and subject to public comment first.
October Eminders is Up – So is the “2004 Proxy Season Resource Center”!
For subscribers of TheCorporateCounsel.net, the 2004 Proxy Season Resource Center includes new activities for you to consider during this proxy season, either as required by law or as a matter of prudence.
There is ample commentary, analysis, sample disclosures and sample documents. For example, courtesy of John Newell of Goodwin Procter, we have posted a comprehensive “Time & Responsibility Schedule for Accelerated Filers.” We will be continuously adding new content as the proxy season wears on.
Following the Microsoft trend, Martha Stewart Living Omnimedia plans to offer officers the right to exchange underwater options for restricted stock – and also has a separate offer to other eligible employees to exchange underwater options for a special cash bonus right. Officers are not entitled to participate in the cash offer and vice versa.
Martha Stewart filed two related Schedule TOs on September 25th, one for eligible employees and the other for officers.
At the upcoming NASPP conference in Orlando on October 15-18, this trend to offer employees cash for underwater options will be the subject of several panels – register now for the conference!
Schering-Plough’s Regulation FD Action
For TheCorporateCounsel.net subscribers, we have posted an interview with Dave Matheson of Perkins Coie LLP on the SEC’s Schering-Plough FD Enforcement Action.
SEC Releases Hedge Fund Study
Yesterday, the SEC issued its Staff Report on Hedge Funds. From this 134 page pdf file, the following are the most significant Staff recommendations:
– consider requiring hedge fund advisers to register as investment advisers under the Advisers Act, taking into account whether the benefits outweigh the burdens of registration.
– address certain valuation and fee disclosure issues relating to registered funds of hedge funds.
– consider permitting general solicitation in fund offerings limited to qualified purchasers.
Readers of WSJ might have noticed a full-page advertisement on Thursday by a group of investors calling for the SEC to adopt a shareholder access rule. This ad followed a 9/23 press conference held by members of Calpers, AFSCME, CalSTERS, New York State Comptroller, New York City Comptroller and Connecticut State Treasurer on the same point.
At the press conference, AFSCME released a survey showing that 84% of 1,030 individual investors stated that there should be a process to allow shareholders to nominate candidates for boards. The survey also showed that a majority of the respondents believed that management is not in the best position to determine who should be nominated. Many institutional investors have made clear that this rulemaking is their top priority right now.
It is my belief that the SEC is not going to be able to ignore this kind of pressure – just like Dick Grasso couldn’t. Trivia question – Which company was the last to ring a bell on the floor of the NYSE with Dick? Answer in tomorrow’s blog – winners to be prominently identified.
Always a laggard, the ABA finally has submitted its comment letter on the disclosure of nominating commitee activities proposal.
SEC Ain’t Spending It As Fast As It Gets It
Before the end of its fiscal year tomorrow, the SEC will not be able to spend $103 million (or 40% of the $258 million budget increase) it received from Congress to hire more accountants and lawyers. The SEC is moving carefully towards it goal of bringing on 800 new professionals. Believe me, they have more than enough resumes and have their pick of the litter (i.e. only Ivy League need apply).
What is Harvey Pitt Doing Now
Based on an interview published yesterday with the Washington Post, Harvey’s new consulting firm is giving “seals of approval” to boards before they obtain D&O insurance.
In the interview, Harvey espouses an opinion about using more cash in executive compensation – which Professor Charles Elson rightfully criticizes. Catch Professor Elson with Pat McGurn of ISS on our October 22nd webcast, “The Wildest Proxy Season Ever: Forecast for 2004.”
In its definitive proxy statement filed September 24th, Micronetics discloses personal e-mail addresses for both of its audit committee members.
We doubt that many other companies will go this far to comply with the rules adopted by the SEC under Section 301 of SOX, which require that audit committees establish confidential, anonymous procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters. As you might recall, the SEC’s rules do not mandate specific procedures.
SOX Scorecard/Timeline for Small Business Issuers
Thanks to Faegre & Benson for contributing a SOX Scorecard and Timeline for Small Business Issuers that we have coded and posted in TheCorporateCounsel.net’s “Small Business” Practice Area. A quick glance at this excellent resource reveals that small business issuers really didn’t get cut much of a timing break from the SEC – all the effective dates are in 2003…
Back on September 11th, I blogged at length about the costly nature of the PCAOB registration process and indicated that only 200 – of the likely universe of 700 – audit firms had registered.
On Tuesday, PCAOB Chair William McDonough testified before a US Senate Committee that the PCAOB has received almost 500 registration applications from U.S. accounting firms and that the first 38 of those applications were approved last week. That is more than I expected, but it still appears that a few hundred small firms said “fuhgedaboutit.”
One aspect of boardroom reform that has not been fully explored is what should be an acceptable motivation for someone who seeks to serve as a director. Historically, directors have agreed to serve principally for the prestige and clublike atmosphere. Some have done it for the money – although this is unlikely the case for those directors that earn big dollars as officers at other companies.
At the recent BRT Roundtable on Corporate Governance, Fannie Mae CEO Franklin Raines explained that he joined Pfizer’s board to enhance his ability to be an innovator – which in turn would benefit his employer. This is an honest and understandable answer – but does it serve the needs of Pfizer’s shareholders to whom he now owes fiduciary duties?
Professional directors are not necessarily the answer as they inevitably take on multiple board seats to earn their livelihood. I’m not sure there is a good answer here. I just know that I serve on a local domestic violence non-profit board to give back to my community (there is no pay involved) – but that “feel good” model doesn’t really fit the public company world.
On GreatGovernance.com, we have posted the transcript from the BRT Roundtable, which included Reps. Oxley and Frank, Hank McKinnell, Dick Grasso, Nell Minow, William Donaldson and others.
But I Live For My E-mail…
Although the news constantly reminds us of the perils of e-mail communications – WSJ reports today that the case against Frank Quattrone hinges on a single email – most lawyers can’t help but use e-mail as their primary mode of communication, both internally within their organization as well as externally with their clients. We have posted an interview with Michele Lange of Kroll OnTrack to further explore Potential E-Pitfalls.
What many of us don’t realize is that some organizations capture every voicemail that is left for one of their employees. These voicemails are archived on disks and stored according to a document retention policy (I guess this is where Comedy Central finds the ideas for “Crank Yankers”). It’s all too scary for someone like me that is addicted to e-mail.
PCAOB Reschedules Consideration of Investigation Rules
For companies, the investigation rules probably will be among the most important rulemakings the PCAOB conducts – as they will set forth the terms of how independent auditors turn over the records of their clients, etc.
