Before the SEC shutdown, the Office of the Investor Advocate published the annual report on its activities during 2018. The report addresses non-GAAP financial measures and key performance indicators. The report notes that some investors find value in non-GAAP financial measures; however, others are troubled by inconsistent and changing disclosures and would like to see greater standardization that would permit comparisons to be more easily made. The report suggests continue attention be paid to the metrics used by public companies, and I how these are prepared and presented period to period. The report also addresses the Advocate’s focus during the year on problematic investment products, such as initial coin offerings, and increasing use of margin debt. The full report can be accessed here:


In a recent cease and desist order accompanied by a $100,000 civil penalty, the US Securities and Exchange Commission (SEC) gave a strong reminder of the importance of providing equal or greater prominence to the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP) in disclosures containing non-GAAP financial measures, including earnings releases. This Legal Update discusses SEC rules and guidance applicable to this order.

To learn more, read our Legal Update.

In a recent cease and desist order accompanied by a $100,000 civil penalty, the US Securities and Exchange Commission (SEC) gave a strong reminder of the importance of providing equal or greater prominence to the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP) in disclosures containing non-GAAP financial measures, including earnings releases. This Legal Update discusses SEC rules and guidance applicable to this order.

To learn more, read our Legal Update.

On December 10, 2018, Representative K. Michael Conway introduced H.R. 7234, a new bill entitled “Holding Foreign Companies Accountable Act” that seeks to amend the Sarbanes-Oxley Act of 2002.  The bill requires each “covered issuer” to disclose annually to the SEC the (1) provisions of laws or rules in foreign jurisdictions that prevent the PCAOB from performing its inspections of auditors located in such foreign jurisdictions and (2) date when such provisions no longer prevent said PCAOB inspections.  A “covered issuer” is a reporting company with a registered public accounting firm that (i) is located in a foreign jurisdiction and (ii) the PCAOB is unable to inspect because of the applicability of laws or rules of such foreign jurisdiction.  If the PCAOB is prevented from carrying out an inspection of the auditor for three consecutive years, the SEC is authorized to prohibit the covered issuer’s securities from being traded on a national securities exchange, unless such covered issuer certifies to the SEC that it will retain a registered public accounting firm that the PCAOB is able to inspect.

The bill follows a joint statement issued earlier this month by SEC Chairman Jay Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William Duhnke that highlighted the significant challenges the SEC and the PCAOB currently face in overseeing the financial reporting for U.S.-listed companies whose operations are based in China.  See our earlier post on this topic here.

A copy of H.R. 7234 is available here.

On December 18, 2018 the Commission published a Request for Comment on Earnings Releases and Quarterly Reports (the “Request”), which solicits public comment on both earnings releases and the frequency of periodic reporting. In the Request, the Commission notes that it is seeking to reduce administrative and other burdens for U.S. public companies without compromising investor protection.

To learn more, read our Legal Update.

As we previously posted, the Securities and Exchange Commission had announced that at tomorrow’s open meeting the Commission would, among other things, consider a request for comment regarding earnings releases and the frequency of periodic filings.  Well, today, the Commission released the Request for Comment.

This is not the first time that the Commission has considered the frequency of periodic reporting.  In fact, from time to time, Commissioners and representatives of the Commission’s Division of Corporation Finance have questioned whether quarterly or semi-annual reporting is more appropriate for public companies.  However, following comments earlier in the year regarding the burdens placed on reporting companies as a result of the quarterly reporting requirement and the focus on short-termism that may result from quarterly earnings announcements, the Commission had been urged to conduct a study on these matters.  The Request for Comment solicits information regarding the frequency of reporting; suggestions regarding simplifying the process by which investors access quarterly information; an option for companies that issue earnings releases to meet their quarterly report requirements through an enhanced release; and whether quarterly reporting or quarterly guidance fosters a short-term outlook.

A more detailed legal update will follow.

Here is a link to the Commission’s Request:

In 2017, the Public Company Accounting Oversight Board (“PCAOB”) adopted a new standard for auditor’s reports that requires a description of critical audit matters (“CAMs”) designed to provide investors with information that relates to accounts or disclosures that are material to a company’s financial statements and involve especially challenging, subjective or complex auditor judgment. The CAM standard will be required for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers.

On December 10, 2018, in anticipation of the implementation of the CAM standard, the Center for Audit Quality released a paper titled “Lessons Learned, Questions to Consider, and an Illustrative Example” highlighting observations made from practice dry runs of the CAM standard. The paper seeks to identify and provide clarity on the numerous factors that can influence an auditor’s CAM decision. The paper reminds audit committees that the determination of CAMs, and resulting disclosure, is not meant to be indistinguishable between companies but rather unique to each particular audit and company. Nonetheless, the following early themes noted in the paper from the practice dry runs should be valuable for audit committee members, auditors and financial executives as compliance becomes mandatory:

  • As the PCAOB standard requires a CAM to be material to a company’s financial statements, a relationship must exist between the CAM communicated in the auditor’s report and the accounts or disclosures in the financial statements to which the CAM relates.
  • An auditor may determine that certain critical accounting estimates or assumptions meet the definition of a CAM. The paper identifies legal contingencies as a critical accounting estimate that may be considered a CAM depending upon the facts and circumstances of the particular audit.
  • Not every significant risk will be subject of a CAM. The paper notes that fraud risks are considered significant but may not involve especially challenging, subjective or complex judgment and therefore may result in a CAM.
  • CAMs are most likely to relate to areas that involve a significant degree of estimation or assumptions that necessitate management judgment. The paper identifies auditing goodwill, impairment, intangible asset impairment, business combinations, aspects of revenue recognition, income taxes and fair valuation of financial instruments as areas that are likely to result in a CAM.
  • Most audits will identify at least one CAM, although the paper notes it is possible that an auditor may determine that no CAMs are present.

A copy of the full paper may be obtained using the below link:


The Securities and Exchange Commission announced that it will hold an open meeting on December 19, 2018.  Among other things, the Commission will consider a rule requiring disclosure of hedging arrangements entered into by a reporting company’s directors and employees as required by Dodd-Frank Act Section 955, as well as whether to issue a comment request regarding the content of quarterly reports and earnings releases issued by reporting companies.  The latter has been the subject of significant media coverage since a Presidential tweet suggested that quarterly reporting contributes to short-termism (see our previous blog post).  The proposed package of legislation known as JOBS Act 3.0 contains a bill that would require that a study be conducted by the Commission regarding the requirement for quarterly reporting by smaller reporting companies.  See the meeting notice here:


Accounting Standards

Representatives from the Office of Chief Accountant discussed new accounting standards.  The Staff commented on the implementation of the new revenue recognition standard, which requires companies to provide a comprehensive view of revenue arrangements in their financial statements, including their disclosures.  The Staff intends to continue to monitor, and comment on, the implementation of the revenue standard.  The Staff noted that nearly all companies will be affected by the adoption of the new lease accounting standard, which will soon be effective.  To that end, representatives of the Staff have provided guidance on implementation of the standard, which, representatives of the Staff caution require significant time and effort.  Various representatives noted that steps for lease accounting implementation include:  understanding the accounting and disclosure requirements of the new standard; identifying relevant arrangements and leases within those arrangements; determining appropriate accounting policies, including applicable transition elections; applying the guidance to arrangements within the standard’s scope; preparing transition and ongoing disclosures; and establishing adequate and appropriate processes and controls to support implementing and applying the new standard, including preparing required disclosures.  Representatives noted that “it is crucial for each registrant to ensure its implementation plans include sufficient time to identify arrangements that are leases in their entirety or that include embedded leases….[i]t is also critical for companies to identify and resolve transition, application, and other implementation issues arising from the new leases standard.  A lesson learned from the implementation of the new revenue standard is that entities benefit from an early and thorough discussion of implementation issues with their auditors and audit committees.”

Audit Committee Oversight

Various Staff members noted the important role of the audit committee in connection with the implementation of new accounting standards.  To that end, the Staff noted that the audit committee should exercise oversight over management’s approach to implementation of new accounting standards, should establish appropriate controls and procedures over the transition; maintain appropriate controls and procedures over ongoing application of the new accounting standard; and should understand how the effects of the new standard are communicated to investors at transition and on an ongoing basis.

Internal Control over Financial Reporting

Various speakers addressed internal control over financial reporting.  In this regard, the speakers again emphasized the important role of audit committees.  Audit committees should have discussions of ICFR in all areas—from risk assessment to design and testing of controls, as well as the appropriate level of documentation.  The Staff noted the importance of identifying and communicating material weaknesses before these manifest in the form of a financial statement restatement.  The Staff noted there has been progress in the evaluation of the severity of internal control deficiencies.  The Staff encouraged audit committee training regarding “the adequacy of and basis for a company’s effectiveness assessment, particularly where there are close calls in the assessment of whether a deficiency is a significant deficiency (and reported to the audit committee) or a material weakness (and reported also to investors).”  Speakers also emphasized that the assessment of ICFR is especially important this year-end as a result of the implementation of new accounting standards, which also affects a company’s internal controls.

Material Weakness Disclosures

Representatives of the Staff noted improvement in the disclosures of a material weakness; however, suggestions were offered that are intended to make the disclosures more useful to investors.  One of the speakers suggested considering the following questions in evaluating the proposed disclosure:

  • Does the disclosure allow an investor to understand what went wrong in the control that resulted in a material weakness?
  • Is it sufficiently clear from the disclosure what the impact of each material weakness is on the company’s financial statements?  For example, is the material weakness pervasive or isolated to specific accounts or disclosures?
  • Are management’s plans to remediate the material weakness sufficiently clear?  For example, does disclosure of the remediation plans provide sufficient detail that an investor would understand what management’s plans are and how the remediation plans would address the identified material weakness?

Implementation Activities for Communicating Critical Audit Matters

The Staff also addressed implementation activities related to the CAM standard.  In order to prepare for the CAM standard implementation, the Staff encourages auditors and registrants to conduct a dry run this year with the auditors and audit committees, share implementation questions and issues with the Staff, and begin to focus on the differing disclosure requirements for MD&A critical accounting estimates and CAMs.