Update on the current board issues: March 2013

Issues in brief


PCAOB releases portions of Part II from PwC’s 2008 and 2009 inspection reports

The Public Company Accounting Oversight Board (PCAOB) on March 7 publicly released portions of Part II from PwC’s 2008 and 2009 inspection reports, which relate to 2007 and 2008 audits, respectively. While the board informed PwC that it believed the firm had satisfactorily addressed the majority of its criticisms, the PCAOB determined that PwC did not address certain criticisms to the board’s satisfaction during the 12-month period following issuance of the reports to PwC.

In its release, the PCAOB stated, “Any Board judgment that results in later public disclosure is a judgment about whether the firm made sufficient effort and progress to address the particular criticisms articulated in the report on that firm in the 12 months immediately following the report date. It is not a broad judgment about the effectiveness of a firm's system of quality control compared to those of other firms, and it does not signify anything about the merits of any additional efforts a firm may have made to address the criticisms after the 12-month period.”

In a statement accompanying the PCAOB’s release, PwC said “[w]e believe that our actions in response to the Part II comments were significant, but we acknowledge the Board’s determination with a view toward continued cooperation with the Board and in furtherance of our commitment to audit quality.”

In a release issued by PwC, the firm explained some of the actions it has taken since the 2008 and 2009 inspections:

“The Part II comments relate to some of the most complex, judgmental and evolving areas of auditing. Our actions relating to those areas, during the 12 months following issuance of the comments and thereafter, have included providing our audit professionals with enhanced audit tools, training and additional technical guidance to promote more consistent audit execution. We believe that these efforts have been important positive contributors to audit quality at our firm. We are proud of our focus on continuous improvement and of the dedication and high quality audit work performed by our partners and other professionals.”

Part I of its two inspection reports, which are public, discusses engagement-specific observations that the PCAOB believes were of such significance that, at the time the audit opinion was issued, a firm had not obtained sufficient appropriate audit evidence to support the opinion. Part II discusses the PCAOB’s observations and criticisms regarding a firm’s quality control system, including those resulting from the Part I findings. Under the Sarbanes-Oxley Act of 2002, those portions of Part II that a firm has addressed to the PCAOB’s satisfaction within the remediation period remain non-public. However, the remaining portions, if any, are publicly released.


SEC using high-tech tools to catch fraud schemes

SEC Chair Elisse Walter made it a clear in a February speech that the commission has started using some new technological tools to scan company filings for possible fraud.

“These new tools are giving us the ability to examine the way our markets function with greater precision and detail than we have ever seen,” Walter told an audience at the American University School of Law. “They allow us to plumb routine filings for irregularities and aberrations that might signal illegal acts or suspect accounting.”

Walter acknowledged that the SEC is making a concerted effort to keep up with the fast-paced technology that drives today’s equity market exchanges. “Our goal is to protect investors with technology whose precision and sophistication reflects the markets in which they invest today,” she said. “And we’re closer to that goal than we have ever been.”

Regarding the SEC’s core functions, Walter pointed out that the SEC is making progress in the following areas:

  • Examination of firms – Using a risk-based targeting algorithm, the SEC’s National Examination Program can analyze information from SEC filings and other sources to identify the companies most likely to put investors at risk.
  • Aberrational Performance Inquiry – The SEC is using this analytical model that uses performance data to identify hedge fund advisors worthy of further review.
  • Review of filings – The Division of Risk, Strategy and Financial Innovation is designing a set of quantitative analytics that helps identify earnings management.
  • Enforcement – Tips, Complaints and Referrals system is SEC’s first automated system for handling tips and matching them to other tips obtained through phone calls or emails.

The use of these and other high-tech analytical tools are described in the SEC’s Office of Compliance Inspections and Examinations National Exam Program priorities for 2013.


Petition to shorten beneficial ownership filing deadline

The NYSE/Euronext, Society of Corporate Secretaries and Governance Professionals, and the National Investor Relations Institute have petitioned the SEC to shorten the beneficial ownership reporting deadline to two days after a quarter ends from 45 days.

Under Rule 13f-1(a)(1), every institutional investment manager who exercises investment discretion of more than $100 million must file a Form 13F within 45 days after the last day of each calendar quarter. This rule has been in place for more than 30 years, and does not take into account the technological developments in trading, the petitioners argue.

It has been reported that shortening the reporting deadline would give retail investors better information about the names and positions of the largest investors in corporations, including the activity of one or more activist hedge fund managers. [Read MarketWatch -- Companies urge SEC to reveal big investors faster, February 7, 2013.]

The petitioners argue that under existing rules, an institutional investment manager who made an investment on January 1 is not required to report the holding until May 15, more than 19 weeks after the transaction, by which time the information may very well be stale.

The petition makes four arguments for shortening the deadline:

  • The length of the current 45-day delay period keeps material information from reaching investors and public companies on a timely basis.
  • The objectives underlying Section 13(f) support reducing the delay period.
  • The arguments in support of retaining a 45-day delay period are unpersuasive.
  • A substantial reduction in the 45-day delay period would align Rule 13f-1 with public company best practices.

Regarding the best practices argument, the petitioners cite a September 2010 New York Stock Exchange Commission on Corporate Governance that includes a principle that investors should be held to “appropriate levels of transparency and be required to disclose their holdings on a timely and equal basis.”