practice tips november 2012 number 8 - blank rome
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NOVEMBER 2012 NUMBER 8
© 2012 Blank Rome LLP. Notice: The purpose of this news-letter is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and complete-ness of which cannot be assured. This newsletter should not be construed as legal advice or opinion, and is not a substi-tute for the advice of counsel. Additional information on Blank Rome may be found on our website www.BlankRome.com.
PRACTICE TIPS
CONTENTS
PRACTICE TIPS
Effect of Hurricane Sandy Should ................... 1 Be Analyzed in Form 10-K Filings
NASDAQ NEWS
Annual Fee Increase for ..................................... 2 NASDAQ-listed Companies
NASDAQ May Issue a Press .............................. 2 Release Regarding Your Deficiency in Listing Standards
PROXY SEASON
Caught Between a Rock and............................ 3 a Hard Place
New Staff Legal Bulletin 14G ........................... 4 Addresses Rule 14a-8 Shareholder Proposal Issues
ISS Releases 2013 Updates to......................... 5 Proxy Voting Guidelines
SEC COMMENT LETTER TRENDS
SEC Updates Comment Letter ......................... 3 Process
CORPORATE GOVERNANCE
Advice and Insights for Audit ........................... 7 Committees from the PCAOB Chairman
Effect of Hurricane Sandy Should Be Analyzed in Form 10-K Filings
Some of the SEC filings made in November reflect companies’ efforts to analyze the impact of Hurricane Sandy on their businesses. Given the timing of the hurricane, most companies were still in the process of estimating potential losses related to the Hurricane Sandy and it was too early to fully assess the effect of the hurricane on their financial position and results of operations at the time of filing their Forms 10-Q with the SEC.
Companies are likely to provide more robust analy-sis of the financial effect of business disruptions due to the Hurricane Sandy in their Forms 10-K. Generally, for the purposes of Form 10-K disclo-sures, a public company should evaluate the effect of flooding, the loss of electricity and other busi-ness disruptions on the operations of the company, as well as operations of the company’s customers and suppliers, including third party information technology service providers. Companies should also evaluate increases in the cost of insurance, if they had a significant loss of property or other insurable damage, and inventory delays due to transportation issues if applicable.
We expect the following sections of a Form 10-K to include Hurricane Sandy disclosures: For-ward-Looking Statements, notes to financial statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors. n Return to Table of Contents
NASDAQ NEWS
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This newsletter was authored by:
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The authors wish to acknowledge the assistance of Molly Crane, an associate of Blank Rome.
BLANK ROME LLP 2 • UP TO DATE NOVEMBER 2012 NUMBER 8
Annual Fee Increase for NASDAQ-listed Companies
Recently, The NASDAQ Stock Market LLC (Nasdaq) changed annual fees paid by companies listed on The NASDAQ Capital Market effective January 1, 2013.
The annual fee paid by companies that list securities, other than American Depositary Receipts (ADRs), will increase from $27,500 to $32,000. The fee increase, which is the first since January 1, 2007, is based on Nasdaq’s costs related to companies listed on the Nasdaq Capital Market and the value that such a listing provides to the companies. Nasdaq has noted it has continued to enhance the listing experience and invested in its regulatory and compliance program and that such initiatives are funded through listing fees, including the annual fee.
Additionally, the annual fee for Nasdaq companies that list ADRs will increase from $17,500 or $21,000, as applicable, to $25,000 effective January 1, 2013. Such fees will be raised to $32,000 for all issuers of ADRs effective January 1, 2014. Nasdaq has determined that companies that list ADRs should be charged the same fee as companies that do not list ADRs, noting that other exchanges charge the same annual fee for ADRs as for other securities. Because such companies currently pay lower annual fees than com panies that do not list ADRs, Nasdaq has pro posed phasing in the increase over two years to reduce the impact of the change.
The rule change was effec-tive on filing with the SEC on October 18, 2012. n Return to Table of Contents
NASDAQ May Issue a Press Release Regarding Your Deficiency in Listing Standards
Generally, under Nasdaq Rule 5810(b), a company listed on Nasdaq that receives a
notification of deficiency, a Staff Delisting Determination or a Public Reprimand Letter (collectively, a “Deficiency Notice”) from Nasdaq is required to make a public announcement disclosing receipt of such notice and the Nasdaq Rule(s) upon which the Deficiency Notice is based. Generally, a company can satisfy its obligation to make a public announcement by filing a Form 8-K with the disclosure required by Item 3.01. However, if the Deficiency Notice relates to the requirement to file a periodic report, the company is required to issue a press release, in addition to filing any Form 8-K required by SEC rules.
As described in its proposed rule changes filed with the SEC, Nasdaq is concerned that companies are not disclosing information sufficient to allow the public to understand the deficiency that led to the Deficiency Notice and the underlying basis of the deficiency. To address these concerns, Nasdaq proposes modifying Rules 5250(b)(2) and 5810(b) and IM-5810-1 to require that a company receiving a Deficiency Notice describe in its public disclosure “each specific basis and concern identi-fied by Nasdaq in reaching its determination that the [c]ompany does not meet the listing standard.” In addition, Nasdaq proposes modifying IM-5810-1 and adding Rule 5840(l) to provide Nasdaq clear authority to make a public announcement, including by press release, describing a Deficiency Notice or other event involving a company’s listing or trading on Nasdaq. These amendments would permit Nasdaq to make a public announcement of the notice if the company does not do so or the company’s announcement does not include all of the required information. New Rule 5840(l) would permit Nasdaq to make a public announcement even when the company has not failed to do so. n Return to Table of Contents
PROXY SEASON
BLANK ROME LLP 3 • UP TO DATE NOVEMBER 2012 NUMBER 8
SEC COMMENT LETTER TRENDS
SEC Updates Comment Letter Process
The SEC Division of Corporation Finance re-cently provided guidance on its filing review and comment letter process. For reporting companies and those professionals serving them that are not familiar with the review and comment letter process, the guidance provides a useful summary of not only the process, but also the Division of Cor-poration Finance’s views of the purposes of the review and comment letter process. The following is a summary of the guidance provided.
The Division of Corporation Finance selec-tively reviews filings made under the Securities Act of 1933 and the Exchange Act to monitor and enhance compliance with applicable accounting and disclosure requirements. Section 408 of the Sarbanes-Oxley Act of 2002, “Enhanced Review of Periodic Disclosures by Issuers”, requires the SEC to review disclosures made by report-ing companies that have a class of securities traded on a national securities exchange or traded on an automated quotation system of a national securities association on a regular and systematic basis. Under Section 408, the SEC must review each reporting company at least once every three years.
For purposes of scheduling reviews, Section 408 requires the SEC to consider a number of factors, including whether the company: (i) has issued a material restatement of financial results; (ii) has experienced signifi-cant volatility in its stock price as compared to other issuers; (iii) has a large market cap-italization; (iv) is an emerging company that has had a significant disparity in its price to earnings ratio; and (v) has operations that significantly affect any material sector of the economy. The SEC may also consider other factors it considers relevant.
The scope of the SEC’s review varies. The level of review may be: • a full, cover-to-cover review of the ap-
plicable filing in which the Division staff reviews the entire filing for compliance with applicable federal securities laws and regulations;
Continued on Page 4
On November 5, 2012, the Delaware Chancery Court issued an opinion in Rich v. Fuqi Interna-tional, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012) reaffirming the requirement under Section 211 of the Delaware General Corpora-tion Law for Delaware corporations to hold an annual meeting of stockholders for the election of directors, regardless of arguably conflicting provisions of the federal securities laws.
Fuqi International is a Delaware corporation with its operations in China. Prior to its delist-ing, it was publicly traded on NASDAQ. In March 2010, Fuqi announced that it had identified certain historical account-ing errors affecting its 2009 quarterly reports and that it would have to restate the financial state-ments contained in those reports and delay the fil-ing of its audited financial statements for the 2009 fiscal year. In July 2012, Rich commenced an action in the Delaware Chancery Court seeking to compel Fuqi Interna-tional to hold an annual meeting of stockholders to elect directors. Fuqi International argued that it could not hold the stockholders meeting because it was unable to provide audited financial statements for fiscal 2009 and later years as required by SEC rules.
Rule 14a-3(b) under the Securities Exchange Act of 1934, as amended (Exchange Act), pro-vides that if a stockholders meeting is an annual or special meeting at which directors are to be elected, the company’s proxy statement must be accompanied or preceded by an annual re-port to the stockholders. The annual report is required to contain, among other things, au-dited financial statements. Fuqi International asked the SEC for an exemption from the rel-evant proxy rules in order for it to be able to hold its annual meeting, as required by Dela-ware law, but later withdrew that request after informal indications from the SEC staff that the request would be denied. If the company can-not provide the required financial statements, it is caught between a rock (the Delaware state law requirement to hold an annual meeting to
elect directors) and a hard place (the SEC re-quirement that audited financial statements be provided in connection with any such meeting). In Fuqi International, the Delaware Chancery Court followed Delaware precedent, most no-tably Newcastle Partners, L.P. v. Vesta Insurance Group Ltd., 887 A.2d 975 (Del. Ch. 2005, aff’d, Vesta Ins. Group, Inc. v. Newcastle P’rs, L.P., 906 A.2d 807 (Del. 2005), and found that, notwith-standing Fuqi International’s purported inability to produce audited financial statements, it was obligated to hold an annual meeting to elect di-rectors. In reaching its decision, the Court noted that Fuqi International was not seeking “a brief
continuance of the time for the annual meet-ing, pending production of the audited financial statements…or a delay, long or short, of the meeting until a date certain, by which point the financial statements will have been produced.” The Court explained that, instead, Fuqi Interna-tional was seeking “an indefinite suspension of the requirement that the stockholders be al-lowed to exercise their franchise, with no end in sight.”
The Fuqi International decision affirms that a Delaware corporation will not be able to avoid indefinitely the requirement to hold an annual meeting of stockholders to elect directors when it does not have the audited financial statements the company is required to provide under SEC rules. However, it does leave open the possi-bility that the Delaware Courts could find that an annual meeting of stockholders does not have to be held where the SEC actually denies a company’s request for an exemption from the proxy rules. n Return to Table of Contents
Caught Between a Rock and a Hard Place
BLANK ROME LLP 4 • UP TO DATE NOVEMBER 2012 NUMBER 8
SEC COMMENT LETTER TRENDS
SEC Updates Comment Letter Process (continued from page 3)
• a financial statement review in which the staff examines financial statements and related disclosure, such as Man-agement’s Discussion and Analysis of Financial Condition and Results of Operations, for compliance with appli-cable accounting standards and federal securities laws and regulations; or
• a targeted issue review in which the staff examines the filing for one or more specific items of disclosure for compliance with applicable account-ing standards and/or the disclosure requirements of the federal securities laws and regulations.
The Division of Corporation Finance per-forms its primary review function through twelve offices staffed mostly with accoun-tants and lawyers. Each of the twelve offices focuses on particular industries and has specialized industry, accounting and disclosure expertise. Much of the Division of Corporation Finance’s review involves evaluating disclosure from a potential inves-tor’s perspective and asking questions that an investor might ask when reviewing the document. When the staff identifies areas where it believes a company can improve its disclosure or enhance its compliance with applicable disclosure requirements, it provides comments to the company. Typi-cally, the comments are issued via written correspondence to the filing company known as a “comment letter.” Importantly, in addition to a first level examiner, in nearly all cases, a second person reviews a filing and proposed comments (a “reviewer”). This second-level review process helps achieve consistency in comments across filing reviews. Many reviews do not result in the issuance of any comments.
In its comments, the staff may request that a company provide additional or different disclosure in documents already filed with the SEC, or in future filings. As discussed in previous Comment Letter Trends columns, the staff will review not only a company’s filings, but also other publicly available in-formation, such as press releases, earnings calls archives, and company web sites.
Continued on Page 5
PROXY SEASON
The Division of Corporation Finance released Staff Legal Bulletin 14G on October 16, 2012, provid-ing additional guidance for excluding shareholder proposals under Rule 14a-8 based on proof of ownership and references to websites:• The SEC clarified that for purposes of verify-
ing whether a beneficial owner is eligible to submit a proposal under Rule 14a-8, a proof of ownership letter from an affiliate of a DTC participant satisfies the requirement to pro-vide a proof of ownership letter from a DTC participant.
• A shareholder who holds securities through a securities intermediary that is not a broker or bank can satisfy Rule 14a-8’s documen-tation requirement by submitting a proof of ownership letter from that securities inter-mediary. If the securities intermediary is not
a DTC participant or an affiliate of a DTC par-ticipant, then the shareholder will also need to obtain a proof of ownership letter from the DTC participant or an affiliate of a DTC participant that can verify the holdings of the securities intermediary.
• The SEC said that it will not concur in the ex-clusion of a proposal under Rules 14a-8(b) and 14a-8(f) on the basis that a proponent’s proof of ownership does not cover the one-year period preceding and including the date the proposal is submitted unless the compa-ny provides a notice of defect that identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the req-uisite amount of securities for the one-year period preceding and including such date to
cure the defect. The SEC views the proposal’s date of submission as the date the proposal is postmarked or transmitted electronically. In addition, companies should include cop-ies of the postmark or evidence of electronic transmission with their no-action requests.
• If a shareholder proposal or supporting statement refers to a website that provides information necessary for shareholders and the company to understand with reasonable certainty exactly what actions or measures the proposal requires, and such information is not also contained in the proposal or in the supporting statement, the SEC believes the proposal would raise concerns under Rule 14a-9 and would be subject to exclu-sion under Rule 14a-8(i)(3) as vague and indefinite. However, if shareholders and
the company can understand with reasonable certainty ex-actly what actions or measures the proposal requires without reviewing the information pro-vided on the website, then the SEC believes that the proposal would not be subject to exclu-sion under Rule 14a-8(i)(3) on the basis of the reference to the website address.• The SEC will not concur that a reference to a website may be excluded as irrelevant under Rule 14a-8(i)(3) on the basis that it is not yet operational if
the proponent, at the time the proposal is submitted, provides the company with the materials that are intended for publication on the website and a representation that the website will become operational at, or prior to, the time the company files its definitive proxy materials.
• If information on a website changes after submission of a proposal and the company believes the revised information renders the website reference excludable under Rule 14a-8, the SEC may concur that the changes to the referenced website constitute “good cause” for the company to file its reasons for excluding the website reference after the 80-day deadline under Rule 14a-8(j) and grant the company’s request that the 80-day requirement be waived. nReturn to Table of Contents
New Staff Legal Bulleting 14G Addresses Rule 14a-8 Shareholder Proposal Issues
Continued on Page 6
BLANK ROME LLP 5 • UP TO DATE NOVEMBER 2012 NUMBER 8
The Division of Corporation Finance views the comment process as a dialogue with the company about its disclosure. As the Division of Corporation Finance’s guid-ance makes clear, companies should not hesitate to request the staff to clarify or re-consider a comment or a staff member’s view of the company’s response to a com-ment at any point in the review process. The Division of Corporation Finance does not require that any formal protocol be followed in consulting with the staff when seeking reconsideration. However, the guidance does suggest that a company first contact the individual staff member
that reviewed the company’s filings. If a satisfactory resolution is not reached and a company wishes to seek more senior-level reconsideration of a matter, the guidance suggests that the company should then contact the Legal Branch Chief in the ap-plicable Assistant Director Office and then proceed to the Assistant Director, Associ-ate Director and finally the Deputy Director or Director.
With respect to accounting and finan-cial disclosure matters, the guidance suggests that after discussion with the examiner, a company may wish to speak with the Accounting Branch Chief in the applicable Assistant Director Office. There-after, the company may wish to contact the Senior Assistant Chief Accountant for the applicable Assistant Director Officer and then the Associate Chief Accoun-tant for that office and then the Division’s Chief Accountant. The guidance also sug-gests that the company should feel free
SEC COMMENT LETTER TRENDS
SEC Updates Comment Letter Process (continued from page 4)
PROXY SEASON
ISS Releases 2013 Updates to Proxy Voting Guidelines
On November 16, 2012, ISS released its final 2013 Updates to its U.S. Corporate Governance Policy. ISS also will release FAQ document in December 2012 for further guidance. The Updates will be effective for meetings on or after February 1, 2013.
Highlights of the 2013 Updates include:
Stock Pledges/Hedges: In response to comments, ISS will be taking a case-by-case approach in determining whether pledging of company shares rises to a level of serious concern for share-holders. Also in response to comments, ISS is including significant pledging of company stock as a failure of risk oversight and thus considered a governance failure for which directors should be held accountable (rather than communicating concern through a say-on-pay recommendation as origi-nally proposed). However, hedging of company stock through covered call, collar or other derivative transactions, will be considered a problematic practice warranting a negative voting recommenda-tion on the election of directors.
In determining vote recommendations for election of directors of companies who currently have executives or directors with pledged company stock, the following factors will be considered:• presence in the company’s proxy statement of an antipledging policy that prohibits future pledg-
ing activity;• magnitude of aggregate pledged shares in terms of total common shares outstanding or market
value or trading volume;• disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares
over time;• disclosure in the proxy statement that shares subject to stock ownership and holding require-
ments do not include pledged company stock; and• any other relevant factors.
Failure to Act on Shareholder Proposals: ISS will keep its current policy in effect for 2013, with some modifications: ISS will recommend a negative vote for individual directors, committee mem-bers or the entire board, if the board fails to act on a shareholder proposal that received the support of either (i) a majority of the outstanding shares, or (ii) a majority of the votes cast in the last year and one of the two previous years. Beginning in 2014, ISS will recommend a negative vote if the board fails to act on a shareholder proposal that received the support of a majority of shares cast in the previous year. Under the Update, ISS now has the flexibility to recommend a negative vote on members of the board as deemed appropriate, not necessarily the full board.
ISS also has included more guidance on the case-by-case examination of the sufficiency of a company’s action in response to a majority-supported shareholder proposal. Responding to the shareholder proposal will generally mean either full implementation of the proposal or, if the matter requires a vote by shareholders, a management proposal on the next annual ballot to implement the proposal. Responses that involve less than full implementation will be considered on a case-by-case basis, taking into account: • the subject matter of the proposal;• the level of support and opposition provided to the resolution in past meetings; • disclosed outreach efforts by the board to shareholders in the wake of the vote;• actions taken by the board in response to its engagement with shareholders;• the continuation of the underlying issue as a voting item on the ballot (as either shareholder or
management proposals); and• other factors as appropriate.
Peer Groups: ISS’ pay for performance evaluation begins with a preliminary quantitative screen of company pay and performance relative to an ISS-selected peer group. For ISS’ purposes, these peer groups are designed not for pay benchmarking or stock-picking, but rather to compare pay and
Continued on Page 6
BLANK ROME LLP 6 • UP TO DATE NOVEMBER 2012 NUMBER 8
to involve the SEC’s Office of the Chief Accountant (distinct from the Division’s Of-fice of Chief Accountant) at any stage in the review process. Generally, the SEC’s Office of the Chief Accountant addresses ques-tions con cerning the application of GAAP and the Division’s Office of Chief Accoun-tant addresses concerns regarding the age, form and content of financial statements. The Commission’s Office of the Chief Accountant has issued its own guidance with respect to the review process.
When the Division of Corporation Finance completes its review process with respect
to a company’s filing or filings, it makespublicly available its comment letters and the company’s response letters via EDGAR. The Division makes the correspondence available no earlier than 20 business days after it has completed its re-view or declared a registration statement effec tive. In making correspond ence publicly avail-able, the Division redacts any information sub ject to a confidential treatment request without evalu-ating the substance of the confidential treatment
request. If, however, a request is made for that redacted information, the Division will then undertake a substantive review of the confidential treatment request.
For those that are new to the review and comment process, reviewing the Division’s guidance as well at the Office of the Chief Accountant’s Guidance will provide a use-ful guide with respect to the SEC process. For those more seasoned, the guidance is a useful resource to refresh your under-standing of the process and to provide the names of individuals at the Division of Corporation Finance you may wish to con-tact during the review process. n Return to Table of Contents
SEC COMMENT LETTER TRENDS
SEC Updates Comment Letter Process (continued from page 5)
PROXY SEASON
company performance within a group of companies that are reasonably similar in terms of industry profile, size, and market capitalization. ISS’ current peer group methodology focuses on the subject company’s Global Industry Classification Standard (GICS) industry classification, which may not re-flect multiple business lines in which many companies operate. As a result, some ISS peer groups omitted competitors of the target company and/or included firms that did not reflect a connection to the target considered appropriate for performance and pay comparisons.
The new methodology incorporates information from companies’ self-selected pay benchmarking peer groups in order to identify and prioritize GICS industry groups beyond the subject company’s own GICS classification. The methodology draws peers from the subject company’s GICS group as well as from GICS groups represented in the company’s peer group, while maintaining the approximate proportions of these industries in the final peer group where possible. The methodol-ogy additionally focuses initially at an 8-digit GICS resolution to identify peers that are more closely related in terms of industry. Finally, when selecting peers, the methodology prioritizes peers that maintain the company near the median of the peer group, are in the subject company’s peer group, and that have chosen the subject company as a peer. The peer group methodology maintains its focus on identifying companies that are reasonably similar to the subject company in terms of industry profile, size, and market capitalization. Other changes to the peer group methodology include using slightly relaxed size requirements, especially at very small and very large companies, and using revenue instead of assets for certain financial companies.
Realizable Pay: The ISS observed that during 2012 proxy season, more companies disclosed alternative measures of pay beyond the granted pay disclosed in the summary compensation table. Companies are providing a diverse set of “realizable” total compensation, which endeavors to show how executive pay has been affected by performance. While grant date pay in the Summary Compensation Table shows the intent of the pay decisions of the Compensation Committee, it does not necessarily reflect the final payouts of performance-based awards or changes in value due to gains or losses in the company’s stock price.
The ISS concluded, based on its 2012-2013 Policy Survey, that measures of pay that reflect the company’s performance—both standardized calculations and measures of such pay provided by the company—are favored by both issuers and investors as potentially appropriate for consideration in a pay-for-performance evaluation. As a result, realizable pay is being added to the research report for large capitalization companies. Realizable pay will consist of the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights will be revalued using the remaining term and updated assumptions, as of the performance period, using the Black-Scholes Option Pricing model. The realizable pay consideration may mitigate or exacerbate the CEO’s pay for performance concerns.
Voting on “Say on Golden Parachute” Proposals: The Updates (i) include existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements and (ii) place further scrutiny on multiple legacy problematic features (e.g. single trigger equity, tax gross -ups, etc.) in change in control agreements. n Return to Table of Contents
ISS Releases 2013 Updates to Proxy Voting Guidelines (continued from page 4)
ENDNOTES
1. The Association of Audit Committee Members is a non-profit organization formed to assist audit committee members in meet-ing the challenges imposed in today’s regulatory environment through an organization independent of the public companies they serve, independent of any accounting firms, and controlled predominately by chairpersons of audit committees. For more information, go to http://www.aacmi.org. n Return to Article Return to Table of Contents
QUESTIONS: If you have a question regarding the issues raised in this newsletter, you may obtain additional guidance from the authors and other members of our Public Companies Group.
PHILADELPHIA
Yelena Barychev 215.569.5737 • [email protected]
Christin R. Cerullo 215.569.5744 • [email protected]
Frank E. Dehel 215.569.5532 • [email protected]
Barry H. Genkin 215.569.5514 • [email protected]
Timothy French 215.569.5394 • [email protected]
Alan H. Lieblich 215.569.5693 • [email protected]
Frederick D. Lipman 215.569.5518 • [email protected]
Richard J. McMahon 215.569.5554 • [email protected]
Arthur H. Miller 215.569.5544 • [email protected]
Melissa Palat Murawsky 215.569.5732 • [email protected]
Michael E. Plunkett 215.569.5471 • [email protected]
Josh Strober 215.569.5491 • [email protected]
Larry R. Wiseman 215.569.5549 • [email protected]
NEW YORK
Kathleen A. Cunningham 212.885.5175 • [email protected]
Richard DiStefano 212.885.5372 • [email protected]
Pamela E. Flaherty 212.885.5174 • [email protected]
Eliezer M. Helfgott 212.885.5431 • [email protected]
Robert J. Mittman 212.885.5555 • [email protected]
Brad L. Shiffman 212.885.5442 • [email protected]
Jeffrey N. Siegel 212.885.5173 • [email protected]
Kristina Trauger 212.885.5339 • [email protected]
Thomas R. Westle 212.885.5239 • [email protected]
WASHINGTON, D.C.
Edward L. Lublin 202.772.5933 • [email protected]
LOS ANGELES
Dennis P. Codon 424.239.3441 • [email protected]
SHANGHAI
Jeffrey A. Rinde +86.21.2089.3206 • [email protected]
CORPORATE GOVERNANCE
BLANK ROME LLP 7 • UP TO DATE NOVEMBER 2012 NUMBER 8
At the 2012 annual meeting of the Association of Audit Committee Members,1 James R. Doty, the Chairman of the PCAOB, spoke on recent PCAOB initiatives designed to enhance the rel-evance, credibility and transparency of the audit for the sake of investors.
Mr. Doty, with history degrees in his background, connected the dots for the audience to the de-velopment of the modern audit committee, tracing the history from William Penn, through 18th century Quaker Philadelphia and the B&O Railroad to the present.
He noted that the PCAOB had recently adopted Auditing Standard No. 16, Communications with Audit Committees, that will require the auditor communicate to the audit committee, among other things:• complaints or concerns regarding account-
ing or auditing matters that have come to the auditor’s attention during the audit; and
• difficulties encountered during the audit, in-cluding significant delays by management, the unavailability of company personnel, or an unwillingness by management to provide information needed for the auditor to perform audit procedures.
Mr. Doty also discussed PCAOB’s recently released guidance on what audit committees can learn from PCAOB inspections of their auditors. He noted that although the PCAOB is lim-ited in what it can disclose to audit committees, the inspected audit firm is not so limited and may disclose nonpublic information about the PCAOB inspection report to the audit committee. He suggested that audit committees probe an auditor’s response that the firm’s reported failures merely represented a failure to adequately document work performed or a difference of professional judgment. In both cases, the PCAOB inspection staff have considered and rejected such responses. How an audit committee addresses these issues af-
fects the tone of the audit: an audit committee that expresses concern about the auditor’s re-sponses to noted deficiencies tells the auditor that quality matters.
Mr. Doty said that the PCAOB has received 37 comment letters on its proposed auditing stan-dards on related party transactions, which it is now evaluating.
Mr. Doty noted that the PCAOB has released a concept release on the form and content of the standard audit report. Although he did not offer predictions on what the final PCAOB out-come would be, he offered that he is interested in “a better, more transparent reporting model that will align auditors with investors, that will make the audit more relevant, less commod-itized, and that will function to more consistently require auditors to demonstrate the requisite skepticism and provide true insight.”
He also discussed the PCAOB’s concept release on auditor independence and audit firm rota-tion. Mr. Doty believes that some form of term
limits must be explored as a “blunt instrument” to develop a customized, scaled approach to in-dependence concerns.
Finally, Mr. Doty commented on the global nature of auditing today, with engagements often requiring the coordination of audit firms in many countries. Mr. Doty expects that the PCAOB will act in the near future on its proposed requirements to disclose how a multi-firm, international audit was accomplished. n Return to Table of Contents
Advice and Insights for Audit Committees from the PCAOB Chairman