In this year’s Foreword, Dougherty differentiates the need for directors to focus on their core mission of informed oversight and vigilance rather than merely reacting to the constant influx of “daily corporate governance commentary,” and explores other front-burner issues, such as the marked increase in SEC enforcement actions and other recent SEC initiatives; the continuing trend of class action suits as de facto settlement instruments; proxy advisory firm priorities for directors; and new guidance from the Public Company Accounting Oversight Board (PCAOB) that recommends that audit committee directors discuss internal auditing deficiencies with their auditors.
Posts Tagged ‘Audit committee’
The SEC today has about 4,200 employees, located in Washington and 11 regional offices across the country, including one in San Francisco that is very ably led by Regional Director Jina Choi, who is here [June 23, 2014]. Many of you have likely had some contact with our Division of Corporation Finance, which, among other things, has the responsibility to review your periodic filings and your securities offerings. Some of you that work for or represent a company that we oversee know our staff in our National Exam Program, and I imagine a few of your companies know something about our Enforcement Division staff. Our other major divisions are Investment Management, Trading and Markets and the Division of Economic and Risk Analysis.
So that is just a quick snapshot of the structure of the SEC and as you undoubtedly know, the SEC has a lot on its regulatory plate that is relevant to you—completion of the mandated rulemakings under the Dodd Frank Act and JOBS Act, adopting a final rule on money market funds, enhancing the structure and transparency of our equity and fixed income markets, reviewing the effectiveness of disclosures by public companies, to name just a few. But what you may not be as focused on is the mindset of the agency on some other things that are also relevant to you as directors.
On June 10, 2014, The Public Company Accounting Oversight Board (“PCAOB”) adopted new and amended auditing standards that expand audit procedures required to be performed with respect to three important areas: (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers. The standards also expand the required communications that an auditor must make to the audit committee related to these three areas. They also amend the standard governing representations that the auditor is required to periodically obtain from management.
As we begin 2014, calendar-year companies are immersed in preparing for what promises to be another busy proxy season. We continue to see shareholder proposals on many of the same subjects addressed during last proxy season, as discussed in our post recapping shareholder proposal developments in 2013. To help public companies and their boards of directors prepare for the coming year’s annual meeting and plan ahead for other corporate governance developments in 2014, we discuss below several key topics to consider.
The collective behavior of corporate leaders is often critical in corporate wrongdoing, and the CEO often plays the central role. Yet there is no comprehensive study exploring how CEOs and their influence within executive suites and the boardroom impact corporate wrongdoing. In our paper, CEO Connectedness and Corporate Frauds, which was recently made publicly available on SSRN, we focus on the effects of CEOs’ social influence accumulated during the CEO’s tenure through top executive and director appointment decisions.
In our paper, The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process, forthcoming in The Accounting Review, we examine the impact of audit committee (AC) industry expertise on the AC’s effectiveness in monitoring the financial reporting process. Despite the increased responsibilities, authority, independence, and financial expertise requirements placed on ACs by the Sarbanes-Oxley Act (SOX), ACs may, nonetheless, lack sufficient industry expertise to understand and thus properly monitor complex industry specific accounting issues. For instance, expertise in the retail industry may assist ACs to ensure that companies take an adequate write-down of inventory when their products face potential obsolescence. Similarly, revenue recognition, a prominent area of accounting manipulation (Beasley et al. 2000, 2010), entails an evaluation and understanding of the earnings process, which is tied to a company’s business processes that are often industry specific.
I want to commend the NACD on its mission to “advance exemplary board leadership” with the compelling vision of aspiring to “a world where businesses are sustainable, profitable, and trusted; shareowners believe directors prioritize long-term objectives and add unique value to the company; [and] directors provide effective oversight of the corporation and strive to deliver exemplary board performance.”
Audit committees are instrumental in achieving this vision and maintaining public trust and investor protection through their oversight of corporate financial reporting and auditing. I would also like to recognize the important role and difficult jobs that each of you have as audit committee members in these oversight functions, as well as the many other areas that are being assigned to audit committees during a time of ever increasing business complexity and risk.
While the proxy and annual reporting season for calendar year public companies typically heats up in the winter, by autumn preparations for the 2014 season should be underway. The following key issues for the upcoming season are discussed below:
- Current Say-on-Pay Considerations
- Compensation Committee Independence and Compensation Consultants
- NYSE Quorum Requirement Change
- Pending Dodd-Frank Regulation
- Proxy Access
- Specialized Disclosures
- SEC Interpretations Impacting Reporting
- Iran Sanctions Disclosure
- PCAOB Audit Committee Communications Requirements
- Director and Officer Questionnaires
Achieving optimal board composition and succession planning requires an articulated and clearly communicated enterprise strategy. The ideal mix of director skills and experience depends on a number of company-speciﬁc factors. This report provides a matrix that nominating committees and boards can use to help deﬁne their needs and to provoke discussion about how to improve company-speciﬁc corporate governance.
How do you build the best board for your organization? What attributes and skills are required by law and what mix of experiences and talents will give you the best corporate governance? What commonly required director attributes are a must for each board and how do you customize and fine-tune your search to achieve a high-performing board? Optimal board composition—that is, achieving the best mix of director skills and experience—depends on many company-specific variables. Some of the most important of these include, but are not limited to: (1) stage of company development, (2) the extent to which international markets are mission critical to the company’s future (in which case nominees should have a detailed understanding of target culture, markets and business risk); (3) unique technology dependence; and (4) the need for access to financial and capital markets.
In a Director Note recently published, The Conference Board reviews current corporate practices on risk oversight by members of the board of directors of U.S. public companies. The study is based on findings from a survey of 359 SEC-registered business corporations conducted by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext. Data are categorized and analyzed according to 22 industry groups (using their Standard Industrial Classification, SIC, codes), seven annual revenue groups (based on data received from manufacturing and nonfinancial services companies) and five asset value groups (based on data reported by financial companies, which tend to use this type of benchmarking).
The publication details where the board assigns risk oversight responsibilities, whether it avails itself of dedicated reporting lines from senior management on risk issues, and the degree to which it adopts a standardized framework on enterprise risk management (ERM). Given the correlation between risk and strategy, data on the frequency and forms of strategic reviews is also presented.
The following are the main findings discussed in the study.