SEC Trends & Developments - Winter 2012 - News

The SEC has released a Small Entity Compliance Guide, Listing Standards for Compensation Committees and Disclosure Regarding Compensation Consultant Conflicts of Interest. This guide summarizes and explains the new rules to implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection ("Dodd-Frank") Act.  This new rules involve new disclosures concerning compensation consultant conflicts of interest. Included in this Guide is a discussion of the new rules regarding: (a) disclosure about conflicts of interests of compensation committees; and (b) listing requirements for compensation committees. A copy of this Guide can be found at

The Office of the Chief Accountant ("OCA") released its final staff report (the "Work Plan") which provides information to the Commission on whether to incorporate International Financial Reporting Standards ("IFRS") into the SEC's financial reporting system for U.S. issuers. The purpose of the Work Plan was to consider specific areas and factors relevant to the decision as to whether, when, and how such incorporation could take place.  Observations by the Staff included in the Work Plan included:

  • Outright declaration of IASB standards as authoritative was not supported by the vast majority of participants in the U.S. capital markets.
  • The IASB has made significant progress in developing a comprehensive set of accounting standards, but gaps still exist.
  • The IFRS Interpretations Committee must do more to address issues related to maintaining IFRS standards on a timely basis to keep those standards up-to-date.
  • The IASB needs to understand the intricacies of a number of distinct domestic reporting and regulatory systems. Accordingly, the IASB should rely more on national standard-setters.
  • While certain financial statements reviewed by OCA generally appeared to comply with IFRS, global application of IFRS could be improved to narrow diversity.
  • It may be necessary to put in place mechanisms specifically to consider and to protect the U.S. capital markets (e.g., through the FASB endorsement process).
  • The IASB's parent, the IFRS Foundation, needs to increase its funding and broaden the base from which its membership is gathered.
  • Investor education on accounting issues and changes in the accounting standards is not uniform.

The SEC will use the Work Plan to help it arrive at a decision on whether to permit the use of IFRS for U.S. companies. The final report also states that the SEC has not made any decision regarding the incorporation of IFRS. The Work Plan states: "The Commission believes it is important to make clear that publication of the Staff Report at this time does not imply -- and should not be construed to imply -- that the Commission has made any policy decision as to whether International Financial Reporting Standards should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to occur, should be implemented."

According to a recent Gallup poll, only 20% of Americans have much trust in banks, which is about half the level that existed in 2007.  In addition, over 60% of Americans believe corruption across corporate America is widespread. According to Transparency International, nearly 75% of Americans believe corporate corruption has increased over the last three years.

The North American Securities Administrators Association ("NASAA") released its list of the top investment scams.  At the top of this list was crowdfunding, which is new (and according to the NASAA, these scams are just beginning).  Also high on the list were concerns about mid-sized investment advisors, who are now supervised by state authorites rather than the SEC, and oil and gas drilling schemes, precious metals schemes, fraudulent investment in distressed real estate, abuse of promissory notes, investment for visa schemes, and unlicensed salesmen giving liquidation recommendations.

The SEC approved disclosure rules to increase transparency of "conflict minerals."  Conflict minerals include gold, columbite-tantalite (an ore from which tantalum is extracted), cassiterite, and wolframite (which is an important source of tungsten).  The Dodd-Frank Act requires yearly reporting by U.S. public companies that use conflict minerals originating in the Democratic Republic of the Congo ("DRC") or neighboring countries.   The Dodd-Frank Act also requires U.S. public companies that extract resources to disclose in an annual report how much they pay the U.S. and foreign governments around the world for access to oil, natural gas and minerals. The conflict minerals statute in the Dodd-Frank Act was intended to cut off funding for warlords in the DRC. Armed groups in the DRC have been accused of atrocities against local populations and supporting their activities with the use of forced labor. The requirement to document the chain of custody of the minerals a company uses is a mechanism to try to reduce the market for raw materials produced in mines using forced labor.

In a recent survey, approximately 68% of board members said they were opposed to mandatory rotation of external audit firms.  Additionally, 78% said they were opposed to requiring that the audit be put out for bid.  The survey also identifies corruption and bribery, revenue recognition and earnings management as some of the more significant fraud risks facing their companies.

Hurricane Sandy had many effects on the U.S. economy.  One of them was on Halloween.  Halloween 2012 was expected to be the biggest ever and according to 24/7 Wall Street was expected to add more than $10 billion dollars to the U.S. gross domestic product.  It was also expected that 71.5% of Americans were participating in Halloween 2012 in some manner.  Despite many nightclubs and bars starting their parties the weekend before Hurricane Sandy arrived, all of those numbers should decrease dramatically.

SplashData has released its list of the year's worst passwords.  The Top 3 are unchanged from last year – "password," "123456" and "12345678."  New on the list are, "password1," "123123," "welcome" and "111111."  The CEO of SplashData said "Even though each year hacking tools get more sophisticated, thieves still tend to prefer easy targets.  Just a little bit more effort in choosing better passwords will go a long way toward making you safer online."

With the U.S. economy sluggish and a deepening recession in Europe, some of the largest companies in the world are firing thousands of workers.  North American companies have announced plans to eliminate almost 63,000 jobs since September 1.  According to Bloomberg, firings thus far in 2012 total 158,000, up from 129,000 during the same period in 2011.  The sector with the most announced job reduction is technology hardware and equipment.  Job eliminations have occurred or been announced at Ford Motor, Dow Chemical, Colgate-Palmolive and DuPont, to name a few.  Many of the reductions are due to sales failing to reach expectations, and management's attempt to show their shareholders how responsive they are to the situation.  Over half of the 235 S&P 500 companies that have released third quarter earnings have reported sales that trail analyst's expectations.

Elisse Walter, a current SEC Commissioner, will replace Mary Schapiro as Chairman of the U.S. Securities and Exchange Commission. Ms. Schapiro announced she was stepping down effective December 14, 2012.  One of Ms. Walter's major responsibilities will be to complete the 95 rule makings required by the Dodd-Frank Act of which, to date, only 32 have been completed; over 50 are late.  Some of the more contentious rules still to be completed are those governing derivative trading and the requirement that bonuses be reclaimed after an accounting scandal. "It has been an incredibly rewarding experience to work with so many dedicated SEC staff who strive every day to protect investors and ensure our markets operate with integrity," Schapiro said in a statement. "Over the past four years we have brought a record number of enforcement actions, engaged in one of the busiest rule-making periods, and gained greater authority from Congress to better fulfill our mission."

Many U.S. companies are approving larger dividends and accelerating the payment of those dividends due to the potential for tax increases on dividends in 2013. The 15% top tax rate on dividends is scheduled to expire in January and most companies believe that the rate will go up, even though no one can be sure of the exact amount. 

The new SEC whistleblower program resulted in approximately 3,000 tips regarding alleged wrongdoing in its first full year ended September.  The SEC's first award under the whistleblower program was given to an anonymous informant in August 2012 and totaled approximately $50,000. According to a report, tips came from every state in the country. In a news release, SEC Chairman Schapiro said "In just its first year, the whistleblower program already has proven to be a valuable tool in helping us ferret out financial fraud. When insiders provide us with high-quality road maps of fraudulent wrongdoing, it reduces the length of time we spend investigating and saves the agency substantial resources."  The most common complaint pertained to corporate disclosures and financials (18.2%), followed by offering fraud (15.5%) and manipulation (15.2%).

Companies will more than likely include additional disclosure regarding how their businesses were affected by Hurricane Sandy rather than classifying those damages as extraordinary.  From an accounting standpoint, neither the September 11 terrorist attacks in 2001 or Hurricane Katrina in 2005 were considered extraordinary pursuant to accounting rules.

There are now 10 CPAs in the House of Representatives and 12 CPAs and accountants in Congress.

A recent study of 347 global companies, all with revenue in excess of $5 billion, indicated that approximately 41% of audit committee chairmen had current, or prior, experience as a Chief Financial Officer.  That number, 10 years ago, was approximately 19%. 

SEC Trends & Developments - Winter 2012 Issue

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