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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

  1. cannot make non-GAAP disclosures more prominent than GAAP disclosures;
  2. need to explain why they use non-GAAP disclosures; and
  3. 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.Continue Reading Bespoke financial data?

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.Continue Reading  Summer doldrums in DC? Not so much!

Costs of PCAOB proposal greatly outweigh benefitsThe 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 that they are proposing to require auditors to provide is either (i) self-evident; (ii) an infringement on the judgment of the issuer’s audit committee; or (iii) just plain not helpful.  What the proposed auditing standards do accomplish, however, is to add more costs to being a public company just like their last proposal on mandatory auditor rotation.

Critical Audit Matters.  Under the proposed auditing standards, an auditor will be required to include a discussion in its auditor’s report about the issuer’s “critical audit matters.”  Difficult, subjective, or complex judgments, items that posed the most difficulty in obtaining sufficient evidence, and items that posed the most difficulty in forming the opinion on the financial statements are deemed to be “critical audit matters.”  While this requirement may seem straightforward at first, the reality is that this “new” information should be self-evident by anyone who knows how to read a financial statement.  Revenue recognition, estimates for allowances, pension assumptions, etc. are typically deemed to be “critical audit matters” by an auditor when planning audit procedures.  These critical accounting policies are already discussed in issuers’ MD&A and in their financial statements.  Further, any investor who actually is looking at the fundamentals of an issuer’s business and historical results should already be highly focused on estimates that, if wrong, could materially impact the financial statements.  Auditors will end up being overly inclusive on what is deemed “critical” for fear of having
Continue Reading PCAOB proposal piling on more costs for public companies (again)