[caption id="attachment_2773" align="alignright" width="240"] ©killaee[/caption]
Over the years, the PCAOB has developed a reputation for pursuing zombie proposals – proposals that appear to be dead due to widespread opposition and even congressional action. Remember mandatory auditor rotation? It practically took a stake through the heart to kill that one off, and I’m informed that even after it was presumed to be long gone some PCAOB spokespersons were telling European regulators that it might yet be adopted.
Well, here we go again. The latest zombie proposal (OK, reproposal) would modify the standard audit report in a number of respects, the most significant of which would be to require disclosure of “critical audit matters”. The headline of the PCAOB’s announcement of the reproposal says that it would “enhance” the auditor’s report; not clarify, just “enhance”. And, as is customary whenever the PCAOB proposes to change the fundamental nature of the audit report, the proposal starts out by sayng that’s not the intention at all: “The reproposal would retain the pass/fail model of the existing auditor's report,” it says. It seems to me to lead to the opposite result – the introduction of critical audit matter (“CAM”) disclosure could easily lead to qualitative audit reports; one CAM would be viewed as a “high pass”, two would be ranked as a medium pass, and so on, possibly even resulting in numerical “grades” based upon the number of CAMs in the audit report. And let’s not fool ourselves into thinking that any audit firm would ever issue a clean – i.e., CAM-free – opinion. I just can’t envision that happening, ever.
[caption id="attachment_2770" align="alignright" width="240"] © Alex Harbich[/caption]
Until recently, I’ve firmly believed that the SEC’s use of the bully pulpit can be effective in getting companies to act – or refrain from acting – in a certain way. Speeches by Commissioners and members of the SEC Staff usually have an impact on corporate behavior. However, the use of non-GAAP financial information – or, more correctly, the improper use of such information – seems to persist despite jawboning, rulemaking and other attempts to stifle the practice.
Concerns about the (mis)use of non-GAAP information are not new. In fact, abuses in the late 1990s and early 2000s led the SEC to adopt Regulation G in 2003. It’s hard to believe that Reg G has been around for 13+ years, but at the same time it seems as though people have been ignoring it ever since it was adopted. Over the last few months, members of the SEC and its Staff have devoted a surprising amount of time to jawboning about the misuse of non-GAAP information; for example, the SEC’s Chief Accountant discussed these concerns in March 2016; the Deputy Chief Accountant spoke about the problem in early May 2016; and SEC Chair White raised the subject in a speech in December 2015. And yet, the problem seems to persist.
Over the past couple of months, the FASB has been busy. I wanted to point out one recent change and my thoughts on its impact. FASB has “simplified” share-based compensation accounting. I will always have a special place in my heart for old FAS123 since it was on my CPA exam a couple of decades… Continue Reading
According to SEC Chair White, regulators are looking – and not happily – at companies’ increasing use of customized financial disclosures. In fact, her recent remarks suggest that additional regulation is not being ruled out to curb the use of such “bespoke” data.
For some of us it may seem like only yesterday – though it was actually in 2003 – that the SEC adopted Regulation G to address the then-growing concern that companies were developing odd ways of communicating financial information to make their numbers look better. In general, Reg G says that companies
- cannot make non-GAAP disclosures more prominent than GAAP disclosures;
- need to explain why they use non-GAAP disclosures; and
- must provide a reconciliation showing how each non-GAAP measure derives from the GAAP financial statements.
So far, so good. However, some companies give little more than lip service to these requirements. For example, it’s not unusual to see Item 2 addressed by a statement along the lines of “investors who follow the company use this measure to assess its performance.” And, more recently, companies seem to be developing more peculiar ways of showing performance, such as excluding the effects of some taxes but not others. This creativity may not be as arch as excluding recurring items or turning losses into gains, but it still makes regulators uneasy.
For those who think nothing ever gets done in Washington, last week must have been a challenge. From outward appearances, both the SEC and the PCAOB seem to be working overtime, possibly in order to ruin our holiday weekend or at least lay some guilt on us for not spending the weekend reading what they’ve put out.
First, on July 1 the SEC published rule proposals on the last of the so-called Dodd-Frank “four horsemen” (or, as the SEC Staffers called them, the “Gang of Four”) compensation and governance provisions – specifically, clawbacks. It’s too soon for even nerds like me to have gone over the proposed rules in any detail, but at first blush they disappoint in a few respects. Among other things, they appear to call for mandatory recoupment of performance-based compensation whenever the financials are restated, without regard to fault or misconduct; even a “mere” mistake will trigger the clawback. Moreover, neither the board, nor the audit committee, nor the compensation committee will have any discretion or any ability to consider mitigating circumstances. Last (for now), they do not seem to provide any exemptions or relief for small companies, emerging growth companies or the like. Interestingly, equity awards that are solely time-vested will not be considered performance-based compensation for purposes of the proposed rules. Of course, these are only proposed rules, and they will eventually take the form of exchange listing standards rather than SEC rules, but the basic approach is absolute and draconian, and it’s difficult to envision them changing very much.
The PCAOB’s recently proposed auditing standards aim to “provide investors and other financial statement users with potentially valuable information that investors have expressed interest in receiving but have not had access to in the past” by changing the standard auditor’s report and increasing the auditor’s responsibilities. Sounds like a lofty goal, except that the information… Continue Reading