Update on the current board issues: November 2015

Audit committee issues

FASB: New leases standard to be effective in fiscal 2019

In mid-November, the FASB decided the effective date of a new accounting standard that would require companies and other organizations to include lease obligations on their balance sheets. The rule will be effective for public companies’ fiscal years beginning after December 15, 2018. For private companies, the standard will be effective for fiscal years beginning after December 15, 2019.

The project was added to the FASB’s joint agenda with the International Accounting Standards Board (IASB) in response to concerns from investors, other financial statement users, and the SEC regarding the lack of transparency relating to material lease obligations that have been reported off-balance sheet. 

With the standard expected to be issued in early 2016, companies will have three years (or less if they adopt early) before they begin reporting under the new guidance. Companies will need to think through the potential impact, particularly in light of the requirement to retrospectively apply the standard to previously issued financial statements. [For more information, read PwC’s In brief.]

Study says clawback policy rules may affect restatements

As the SEC prepares to issue final rules on clawback policy disclosure, an academic paper finds that when a CFO’s pay is heavily tied to incentives that could potentially be clawed back, that executive is more likely to push back when an external auditor recommends a restatement.

Miami (Ohio) University Professor Jonathan S. Pyzoha concluded that a potential unintended consequence of clawback rules could be that executives with significant influence on the decision to restate may have an incentive to avoid amending the financial statements.

Pyzoha believes his research shows that executives are less likely to agree with amending the financial statements when their incentive-based pay makes up a higher percentage of their total compensation. 

One takeaway Pyzoha suggests from his findings is that regulators may want to consider limiting executives’ restatement decision-making power and responsibilities when they are subject to a clawback. He believes it may make more sense for the audit committee financial expert to assume a formal role during the restatement process.

The SEC’s proposed rules would require the disclosure of policies that would claw back incentive-based compensation that is based on financial information filed by the company in the event there is a material accounting restatement. Previously, the Sarbanes-Oxley Act only addressed clawbacks regarding CEOs and CFOs that had committed fraud.

The proposed rules would also require disclosure of listed companies’ recovery policies and their actions under those policies. [Read BoardroomDirect August 2015 (Issue in focus: Compensation committees facing wave of Dodd-Frank disclosures).]

Number of whistleblower tips up 30% in FY2015

The SEC’s Office of the Whistleblower awarded more than $37 million to whistleblowers after receiving more than 3,900 tips in fiscal year 2015. This total was 30% higher than the 3,001 received in 2012.

Whistleblower awards are paid to those providing original information that leads to a successful enforcement action. In total, eight awards were granted, with one whistleblower receiving $30 million, according to the 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program. The SEC whistleblower office also reported that 80% of whistleblowers reported internally to their companies before coming to the SEC.

The most common complaint made by whistleblowers related to disclosure issues, followed by fraud and stock manipulation, the report stated. 

SEC extends deadline to vote on NYSE related parties share issuance amendment

The SEC has set a December 31, 2015 deadline to vote on a proposed NYSE rule amendment that would exempt early-stage companies from getting shareholder approval before issuing shares to related parties. The Commission extended its original deadline of November 2, 2015      after receiving some comment letters, including one against the rule change from the SEC’s investor advocate.

“The Commission maintains a thorough review process for exchange filings, and the Commission staff carefully scrutinizes each filing under the federal securities laws,” said SEC’s Investor Advocate Rick A. Fleming. “However, given the general lack of awareness of such filings among investors, the exchanges may have come to expect little scrutiny from investors of their routine proposals. Those days are now over.”

In its own comment letter, the NYSE wrote the following in defending the amendment: “Under the proposed amendment, all Early-Stage Company related party transactions exempt from shareholder approval would nonetheless remain subject to approval by a company's Audit Committee or comparable committee comprised solely of independent directors. … The Exchange continues to believe that independent committee review and approval of related party transactions is an appropriate safeguard to protect shareholder interests.”

Also, the NYSE stated that having the independent audit committee address the issuance of such shares would provide sufficient safeguards to "prevent fraudulent and manipulative acts and practices" and to "protect investors and the public interest." Which is why the exchange believes these transactions should be exempt from shareholder approval, the exchange stated.