The New Auditor Reporting Standards

Late last month, the SEC approved the new auditing standards adopted by the PCAOB back in June, which substantially modify the content of the auditor’s report. They also raise various concerns that public companies and the SEC will need to closely monitor going forward. Critical audit matters disclosure. By far the biggest and most controversial change to the old standards is the requirement that the auditors include in a separate section of their report “critical audit matters” applicable to the current period covered by the report. CAMs are defined as: “any matter … that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment.” The auditor must identify the CAM, describe the principal considerations that led the auditor to determine it was a CAM, describe how the CAM was addressed in the audit, and reference the accounts or disclosures related to the CAM. In the unlikely event that a report contains no CAMs, it must affirmatively so state. Though the determination of a CAM is supposed to be principles-based, the new rules provide a nonexclusive list of factors for the auditor to consider in its determination. Even so, the standards emphasize that disclosure must be tailored to the particular company and audit, meaning that it should not be boilerplate. Emerging growth companies and employee stock purchase plans, savings plans and similar plans are excluded from the CAM disclosure requirements. Additional changes. The modified auditor’s report also must: State the year the auditor began serving as...

Evolution of the General Counsel—A TerraLex Report

TerraLex recently published The General Counsel Excellence Report 2017, which tracks the continuing evolution of the role of corporate general counsel to encompass important nontraditional areas of focus and responsibilities. TerraLex, a referral network of more than 150 law firms (including Parker Poe) in more than 100 countries, sponsored similar surveys in 2013 and 2015. The 31-page report makes for interesting reading. For example, it notes that even the GC’s title is changing, with 45 percent of respondents describing their role as “General Counsel” (slightly down from 2015) while more than 20 percent use titles like “Head of Legal,” “Group Head of Legal,” “Head of Legal & Regulatory Affairs” or even “General Counsel, Director of M&A, Strategy and Risk.” The report states that “[i]t is clear … that the exact role of the general counsel is becoming an increasingly difficult one to define.” Also interesting is the general counsel’s perception of his or her role within the company. According to the report: “General counsel thought it most important that they were a stakeholder in business decisions rather than just managing the legal department – just over 60 percent gave this answer the most important or next most important score compared with 45 percent who voted for managing the legal department. Being the conscience of the business was also a popular answer and this idea of the legal officer as moral guardian of the corporate entity is a theme which runs through the survey and the interviews. “ This leads to the report’s observations regarding the issues that general counsel find most concerning. Not surprisingly, “regulation and compliance” remains the...

The NYC Comptroller and Pension Funds Boardroom Accountability Project 2.0

Board composition is increasingly at the forefront of governance activists’ focus and initiatives. A recent, high-profile example of this comes from New York City Comptroller Scott M. Stringer and the New York City Pension Funds via their Boardroom Accountability Project 2.0. This initiative builds on their 2014 initiative and, according to their press release, is intended to “ratchet up the pressure on some of the biggest companies in the world to make their boards more diverse, independent, and climate-competent, so that they are in a position to deliver better long-term returns for investors.” The campaign directly targets the boards of 151 U.S. companies, calling on them to “disclose the race and gender of their directors, along with board members’ skills, in a standardized ‘matrix’ format and to enter into a dialogue regarding their board’s ‘refreshment’ process.” They believe this will push boards to be more diverse and independent. The targeted companies include “139 that enacted proxy access after receiving a proposal from the New York City Pension Funds, and 12 at which the pension funds’ proposal received majority shareowner support in 2017, but have yet to enact the reform.” Comptroller Stringer and the Funds blame the “persistent lack of diversity on corporate boards” on a nomination and election process “that is effectively controlled by the existing board — and as a result, more akin to a coronation.” They cite PwC’s 2016 Annual Corporate Directors Survey as reporting that 87% of directors rely on board member recommendations to recruit new directors, while only 18% consider investor recommendations. Fundamentally, they believe that shareowners “need to know the race and gender of...

Pay Ratio Disclosures are an Employee-Relations Opportunity … Really

Most companies are now devoting substantial resources and effort to ensuring compliance with the SEC’s new rules requiring disclosure of the ratio of the CEO’s and median employee’s respective annual total compensation. Because the disclosure is required for fiscal years beginning on or after January 1, 2017, calendar-year-end companies must include it in their upcoming proxy statements. As the number crunching and parsing of new SEC disclosure guidance (see Doug’s Notes here and here) begins to take shape, these companies will soon get a sense of the magnitude of their ratio and, therefore, of any concerns it may raise. Discussions are also taking place regarding the extent to which companies can, or should, provide supplemental proxy disclosure that adds explanatory context to the mandated ratio disclosures. In the course of all of that analysis, it would be a shame to overlook “silver-lining” opportunities to engaging in proactive, positive dialogue with the company’s various stakeholders. And the most important constituency at most companies is the employees. Pay ratio disclosures may be disconcerting to employees for a variety of reasons. Most obviously, while the CEO’s total compensation has long been public information, its stark numerical contrast to median employee compensation could be expected to generate negative emotional responses from some members of the workforce. Less obvious, but perhaps as disconcerting, may be the realization by half of your employees that they are compensated below the median. This realization could be further exacerbated by negative comparisons to peer company compensation medians and ratios, which will likewise now be public. Failure to proactively address these issues could result in a disgruntled subset of...

New SEC Pay Ratio Disclosure Guidance

As everyone knows by now, the SEC amended Item 402 of Regulation S-K, as required by the Dodd-Frank Act, to state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K must also provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. Companies must provide the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. There had been a chance, albeit dwindling, that the new rules might somehow be repealed or delayed before the 2018 proxy season. Recent statements by the SEC staff, followed by last week’s barrage of staff guidance on pay ratio disclosure, now make it clear that the rules will go into effect as written. The new guidance. A September 21 interpretive release “… reflects the feedback the SEC has received and encourages companies to use the flexibility incorporated in our prior rulemaking to reduce costs of compliance,” according to SEC Chairman Jay Clayton. As summarized in the accompanying press release, the guidance: States the SEC’s views on the use of reasonable estimates, assumptions and methodologies, and statistical sampling permitted by the rule; Clarifies that a company may use appropriate existing internal records, such as tax or payroll records, in determinations about the inclusion of non-U.S. employees and in identifying the median employee; and Provides guidance as to when a company may use widely recognized tests to determine whether its workers are employees for purposes of the rule. Of particular note is the staff’s articulation...

Join Us at the Fall 2017 GRC Forum, featuring NC Attorney General Josh Stein

You recently received an email invitation to our upcoming Governance, Risk & Compliance Forum. The GRC Forum is a half-day, interactive event devoted specifically to the issues faced by risk and compliance personnel at companies in all industries and at all stages of GRC development. The Fall 2017 session will be held on Thursday, September 28 at the Duke Mansion in Charlotte. We’ll start with coffee and breakfast at 8:15 a.m. The three presentations will run from 9:00 a.m. until noon. There is no charge for attending, and attendees are expected to be approved for compliance certification and continuing legal education credit. Topics to be covered. The GRC Forum and related GRC Blog generally address topics related to assessing, enhancing and maintaining an enterprise-wide governance, risk and compliance function. Specific topics to be discussed at this upcoming Fall 2017 session will include: Session I:  Update on the current state of corporate social responsibility, including CSR reporting and corporate America’s response to the Trump administration’s withdrawal from the Paris climate accord. Session II:  A discussion of cybersecurity breach response policies and plans, including background on current data privacy and security laws in the U.S., the EU’s new comprehensive data protection law and the EU Network Infrastructure Security Directive, critical components of a comprehensive plan, and practical tips on how to create, draft, train on and implement a plan. Session III:  Remarks by North Carolina Attorney General Josh Stein on compliance and public protection, followed by Q&A. Who should attend? GRC touches a variety of professionals, including: compliance officers risk management officers boards of directors legal departments CFOs, internal auditors and...