Archive for the ‘Audit’ Category

Current Efforts Toward Corporate Disclosure Reform

August 22nd, 2014 | By

The discussion surrounding corporate disclosure reform has consistently centered on the issue of how to provide sufficient levels of information to investors and other readers without overburdening those responsible for preparing the disclosures. On July 29, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) hosted an event addressing corporate disclosure reform. A variety of issues involving disclosure reform were discussed in panels featuring general counsels from leading companies, former officials from the Securities and Exchange Commission (SEC), the current head of the SEC’s Division of Corporation Finance, and other stakeholders.

Corporate disclosure reform has also been a recurring topic of discussion among the delegates of NACD’s advisory council meetings. Delegates are committee chairs of Fortune 500 companies and, along with key stakeholders, they discuss the issues and challenges currently affecting the boardroom. In particular, NACD’s Audit Committee Chair Advisory Council has discussed this topic at length, and this issue featured prominently in the discussions at the June 2013, November 2013 and March 2014 meetings. In particular, the November meeting featured senior leaders from the Society of Corporate Secretaries and Governance Professionals to discuss their efforts to streamline disclosures, while the March meeting included analysts from Moody’s Analytics and Morgan Stanley to share how they use disclosures.

Many of the key takeaways from the CCMC’s July meeting have been echoed at NACD’s advisory council meetings. These include:

The “disclosure burden” is largely driven by a desire to reduce liability. The first CCMC panel focused on the perspectives of two former SEC commissioners: Roel Campos, who is currently a partner at Locke Lord; and Cynthia Glassman, now a senior research scholar at the Institute for Corporate Responsibility at the George Washington University School of Business. There was agreement that disclosures have become documents of litigation. The usefulness of many disclosures was called into question, and in fact, many of the disclosures found on today’s financial statements are not actually mandated. For example, while comment letters issued by SEC staff from the Division of Corporation Finance and the Division of Investment Management “do not constitute an official expression of the SEC’s views” and are “limited to the specific facts of the filing in question and do not apply to other filings,”[1] many companies include disclosures based on these comment letters, often aiming to reduce their company’s liability by accounting for every possible contingency.

What’s more, if one company is asked by the SEC to provide a particular disclosure, other companies may feel compelled to disclose the same information even though they may operate in different industries.

Nevertheless, elimination of unnecessary or outdated disclosures requires a lengthy review process. Without a champion for reform, disclosures can linger on financial statements in perpetuity. An advisory council delegate noted: “It’s possible to take the initiative and cut the 10-K down. But it’s a significant time commitment, so you need buy-in from the CEO, CFO, and audit committee.”

Technology provides promising solutions. It was also observed that many disclosures are mandated by laws and rules stemming from the 1930s to the 1980s, when corporate information was only accessible in a physical form. Today, company websites often provide more detailed, current information than the 10-K. One CCMC panelist suggested that the SEC should encourage companies to rely more on these websites for the disclosure of certain information, such as historical share prices.

CCMC panelists also discussed ways to take advantage of technology to redesign and standardize the financial statements themselves, which could make them searchable and allow investors to make comparisons over time or across companies more easily. One panelist suggested that disclosure transparency could be enhanced by creating a “digital executive summary” document. In this summary, new, newly relevant, and the most material disclosures could be grouped in one place with hyperlinks to more detailed information. A similar notion has been discussed at recent Audit Advisory Council meetings, as one delegate offered: “Perhaps we need a second document, aside from the 10-K, that provides a shorter, more meaningful narrative that’s focused on the material issues that investors are interested in.”

Disclosure reform involves multiple stakeholder groups. The second CCMC panel of the morning focused on balancing the disclosure needs of various stakeholders. The panel included the perspectives of several professionals whose work is heavily influenced by the disclosure regime. They included Julie Bell Lindsay, managing director and general counsel for capital markets and corporate reporting, Citigroup Inc.; Chris Holmes, national director of SEC regulatory matters, Ernst & Young; Flora Perez, vice president and deputy general counsel, Ryder System Inc.; and Ann Yerger, executive director, Council of Institutional Investors.

From the investors’ perspective, it was noted that because investors are voracious consumers of information, they will rarely say “no” if offered more information.

Several corporate counsels noted initiatives at their companies that are designed to increase disclosure transparency, including efforts to work directly with investors to determine the information that was the most important to them. In fact, nearly half of the respondents to the 2013–2014 NACD Public Company Governance Survey indicated that a representative of the board had met with institutional investors in the past 12 months:

survey graphic

The SEC is currently developing solutions. The final panel of the morning featured Keith Higgins, director of the SEC’s Division of Corporation Finance, who provided his views regarding the state of the disclosure system and described how the division is currently conducting its disclosure reform initiatives. More details regarding the division’s plans to tackle disclosure reform can be found in this speech by Higgins to the American Bar Association in April.

Throughout the morning’s discussions, there were also points of disagreement, such as the relevance of specific disclosures. Each session, however, provided evidence that on all sides of the issue there are those making good-faith efforts to improve the system.

[1] http://www.sec.gov/answers/commentletters.htm.

How Can Companies Improve the Usefulness of Disclosures to the Investor Community?

May 1st, 2014 | By

In March, the National Association of Corporate Directors, KPMG’s Audit Committee Institute, and Sidley Austin co-hosted the latest meeting of the Audit Committee Chair Advisory Council. Delegates were joined by analysts from Moody’s Analytics and Morgan Stanley, as well as leadership from Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB). The group discussed how investors and ratings agencies use financial statements in their assessment of corporate performance, the audit committee’s role in helping to ensure the quality of the company’s financial disclosures, and ongoing FASB and PCAOB projects.

As detailed in the summary of proceedings, the discussion addressed several factors that can diminish the utility of financial disclosures, including high volume as a result of duplication, “boilerplate” disclosures, and the timing of releases. Dialogue yielded the following suggestions for how companies might improve the usefulness of disclosures to the investor community:

  • Expanded reporting at the business unit, segment, or geography level. “We want to see performance data at a more granular level in order to develop a view of the company’s future growth prospects.”
  • Providing data that shows trends over multiple years. “Understanding trends over 2, 3, 5 years tells a fuller story. One of my pet peeves is when a company’s MD&A includes comparative data only from the previous year. Investors want more context.”
  • Using more charts and visuals. “Visuals can deliver a wealth of information using very little real estate in the financial statement.”
  • Including more forward-looking disclosures. “Investors and rating agencies are trying to assess and project future valuations of the company. I’d be in favor of more safe harbors [in this area] if it would encourage companies to offer more forward-looking information.”

For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.

Trust but Verify: The Power of Skepticism in the Boardroom

October 25th, 2013 | By

Bribery and corruption risk continue to be big issues for companies—especially with the increasing number of reported incidents and regulatory enforcements in recent years. This panel of audit, legal, and governance experts discussed cultural factors that can breed fraud, and they also discussed what directors should know about combatting fraud. The experts outlined steps that boards can take in their oversight role, as well as the importance of that role in transactions.

Highlights:
1. Tone at the top is paramount. The CEO sets the tone for the company, and the board should be aware of the specific tone that has been set. Directors should attend management meetings from time to time, make note of any problem areas, and reiterate to the company that the board is watching. The ethics and compliance leader should report to the board periodically, as well. Sometimes, the presence of the general counsel at a meeting can help deter fraud.

2. The internal audit and compliance teams need to coordinate on who will be covering which issues. This is not to make them competitive with one another, but instead will help ensure efficient and complete coverage.

3. Boards need enough time to give ample consideration to significant transactions. For example, does a transaction fit in with the strategic direction the company wants to take? Boards should have a similar thinking in regard to the divestment of current business, and must be fearless in exercising responsibility in this area.

Speakers:
Andrea Bonime-Blanc
CEO and Founder, GEC Risk Advisory LLC

Cynthia Fornelli
Executive Director, Center for Audit Quality

Michele J. Hooper
President and CEO, The Directors’ Council

Vikramaditya Khanna
Professor, University of Michigan Law School; Director, Directors’ College for Global Business and Law, University of Michigan

This summary provided by PricewaterhouseCoopers.