All U.S. S&P 500 companies except one report some form of sustainability disclosure. This widespread reporting indeed is good news. But, isolated sustainability disclosures have proven to be of limited value to corporate management trying to improve the bottom line, and for investors seeking to gauge risk and opportunity.

New research from the Investor Responsibility Research Center Institute (IRRCi) and the Sustainable Investments Institute (Si2) – the first to benchmark the status of integrated reporting in the U.S. – finds that nearly all S&P 500 companies are failing to connect the disclosure dots. A mere seven companies are integrating financial and sustainability reporting. These trendsetters include American Electric Power, Clorox, Dow Chemical, Eaton, Ingersoll Rand, Pfizer and Southwest Airlines.

The study also finds companies typically are beginning to place a dollar figure on sustainability – about 74 percent of corporations. But, these disclosures frequently mention other initiatives without quantification of the benefits and costs. Also interesting is that some 44 percent of companies link executive compensation to sustainability criteria.

What’s driving increased disclosure is a combination of factors – rules, regulations, fines, and even the increased volume on the climate change debate. What’s problematic, however, is that the rules are disjointed. As a result, companies and investors don’t have a clear vision so they can factor sustainability into corporate planning and financials.

But this disorderly backdrop doesn’t mean companies lack the capability to quantify the impact of sustainability.

…continue reading: Are Companies Connecting the Sustainability and Financial Disclosure Dots?

In our paper, Audit Committee Elections, which was recently made publicly available on SSRN, we examine whether and in what ways shareholder votes in the elections of directors who sit on the audit committee (AC) are associated with the effectiveness of the audit committee. Within the board, the audit committee is responsible for monitoring the financial reporting process. This process involves oversight over the external auditor, internal controls and overall quality of the financial reports. Aside from voting in director elections, shareholders can do very little to influence or signal their satisfaction to the AC. Yet, research examining director elections does not generally focus on the AC. In this study we aim to fill this void.

…continue reading: Audit Committee Elections

Companies that fail to file a 10-K or 10-Q on time are required by SEC Rule 12b-25 to file a Form NT (NT for non-timely), which provides a narrative explanation for the late filing. No analogous rule exists for earnings announcements, which often precede 10-K or 10-Q filings. For companies that are unable to report earnings by their expected date, therefore, managers face a decision – to keep silent or announce the delay. The SEC has also manifested interest in earnings delays: it recently announced a quantitative model that is expected to supply potential leads to its Division of Enforcement and lists earnings delays as a signal of earnings management.

In our paper, How Do Investors Interpret Announcements of Earnings Delays?, which was recently accepted for publication in the Journal of Applied Corporate Finance, we show that announcements of a delay in the reporting of earnings produce an average one-day abnormal stock return of approximately -6%. So, although announcements of a delay in the reporting of earnings are infrequent, they tend to be associated with a considerable reduction in firm value. In addition, delays precipitated by accounting issues or lacking an explanation result in more negative market reactions than delays related to business events, implementation of new accounting standards, or non-business reasons such as bad weather.

…continue reading: How Do Investors Interpret Announcements of Earnings Delays?

Ernst & Young supports effective audit committees and believes that audit committee transparency can promote greater investor confidence in financial reporting. A number of companies currently disclose more information about their audit committees than is required under relevant rules. With this post, we seek to alert audit committees and other stakeholders to current disclosure practices, and also to proposals that have been made for additional disclosures, in order to facilitate consideration and discussion.

Going Beyond the Minimum

Audit Committee Transparency

In general, investor demand and regulatory changes are driving boards of directors of public companies to be more transparent about their activities.

More specifically, investor interest – and policy debate around the role of audit committees and auditor independence – are generating discussion about audit committee disclosures that go beyond the minimum requirements. For example:

…continue reading: Audit Committee Reporting to Shareholders

As you know, over the past couple of years, together with the board members and staff of the Public Company Accounting Oversight Board, I have been working to enhance the reliability of the external audit function and its usefulness to U.S. capital markets.

I will start off with an overview of some of the more significant issues confronting the audit profession. And then I’d like to open a more interactive discussion.

I. Corporate Governance Has Evolved to Suit the Needs of Capital Markets.

I have known many of you for years. I have watched and admired how you have navigated the many changes we have seen in both the energy industry and corporate governance.

Many of us have gained significantly more experience than we expected in identifying, addressing and preventing future threats to corporate success, such as differences in cultural expectations and business practices around the world and at home. Enron had a profound effect on Houston.

As this morning’s discussion demonstrated, you recognize that your work is never done. There is no perfect governance regime for all time.

…continue reading: Challenges Facing the Audit Profession and PCAOB Initiatives

In our paper, Financial Reporting Quality of U.S. Private and Public Firms, forthcoming in The Accounting Review, we use a new database that contains accounting data for a large sample of U.S. private firms and provide an investigation of financial reporting quality (FRQ) of U.S. private versus public firms. Private firms are an important source of economic growth in the United States and elsewhere. In the aggregate, non-listed firms have about four times more employees, three times higher revenues, and twice the amount of assets than do listed firms (Berzins, Bøhren, and Rydland 2008). In 2008, Forbes reported that the 441 largest private companies in the United States accounted for $1.8 trillion in revenues and employed 6.2 million people. Despite their obvious importance to the U.S. economy, there is limited research on private firms in general, and almost no prior research related to the financial reporting quality (FRQ) of such firms.

…continue reading: Financial Reporting Quality of U.S. Private and Public Firms

I am particularly pleased to be at a conference that focuses on the role of institutional investors and their impact on corporate control, market liquidity, and systemic risk. The SEC has a great deal of interest in these areas and I hope that you will provide us with any observations that can help inform the SEC’s understanding.

Role Played by Institutional Investors

The topic of your conference recognizes the important role played by institutional investors and the great influence they exert in our capital markets. The role and influence of institutional investors has grown over time. For example, the proportion of U.S. public equities managed by institutions has risen steadily over the past six decades, from about 7 or 8% of market capitalization in 1950, to about 67 % in 2010. The shift has come as more American families participate in the capital markets through pooled-investment vehicles, such as mutual funds and exchange traded funds (ETFs).

Institutional investor ownership is an even more significant factor in the largest corporations: In 2009, institutional investors owned in the aggregate 73% of the outstanding equity in the 1,000 largest U.S. corporations.

…continue reading: Institutional Investors: Power and Responsibility

Regulation FD, adopted by the SEC in 2000, prohibits “selective disclosure” by requiring public companies to disclose material information through broadly accessible channels. Thirteen years ago, this meant EDGAR filings, press releases and quarterly earnings calls.

The SEC recently issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934 regarding its inquiry into a post by Netflix’s CEO on his personal Facebook page. In the report, the SEC affirmed that a company may use social media to communicate with investors without violating Regulation FD – as long as the company had adequately informed the market that material information would be disclosed in this manner. The report states that whether a company’s social media disclosure satisfies Regulation FD will depend upon the principles outlined in the SEC’s 2008 guidance, Commission Guidance on the Use of Company Web Sites, while recapping that guidance in a way that should make these principles more workable for companies that want to use websites, social media and other evolving communication methods to disclose important information to the market.

…continue reading: How to Use Social Media for Regulation FD Compliance

We have previously discussed a wave of “say-on-pay” lawsuits focused on allegedly inadequate proxy disclosures (in a memo, article, and memo). At least six courts (four state and two federal) have denied requests for injunctive relief against say-on-pay votes. Now, a federal court that had already denied preliminary injunctive relief has dismissed the complaint with prejudice. Noble v. AAR Corp., No. 12 C 7973 (N.D. Ill. Apr. 3, 2013).

Applying Delaware and federal law, the Northern District of Illinois held that Delaware law did not require a company soliciting proxies in advisory say-on-pay vote to disclose information beyond that specified in Regulation S-K:

…continue reading: Federal Court Dismisses Delaware Law Compensation Disclosure Claim

The US Court of Appeals for the Eleventh Circuit recently issued an important decision that addresses two types of allegations that plaintiffs routinely rely on to plead loss causation in federal securities fraud cases. In Meyer v. Greene, 2013 US App. LEXIS 4187 (11th Cir. Feb. 25, 2013), the Eleventh Circuit appears to have become the first federal court of appeals to rule definitively that the mere announcement of an investigation by the US Securities and Exchange Commission (“SEC”) followed by a decline in a company’s stock price is insufficient to plead loss causation. The Court also ruled, consistent with decisions from other federal circuits, that a negative third-party analyst presentation is not a corrective disclosure for purposes of pleading loss causation if the presentation is based on publicly available information.

…continue reading: Court: Disclosure of SEC Investigation Insufficient to Plead Loss Causation