Weinberg & Company

Simply Stated Newsletter – September 2020

By September 18, 2020 No Comments

SEC Overhauls Disclosure Requirements –

In a sustained effort led by SEC Chairman Jay Clayton to roll back regulations, the SEC voted to modify disclosure requirements that public companies are required to make. The changes represent the largest overhaul of Regulation S-K disclosures in over 30 years.

The new disclosure requirements are rooted in materiality and are designed to facilitate an understanding of each registrant’s business, financial condition and prospects, according to the SEC.

Under the amendments based more on materiality, public companies could reframe their disclosures about climate change risks and human capital risks, such as diversity, in a way that Chairman Clayton said would be more relevant.

Companies could include, as a disclosure topic, a description of their human capital resources, but just to the extent those disclosures would be considered material to an understanding of their business. That would refocus the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws, reports Accounting Today.

In a written statement, Clayton explained: “Today’s rules require that, in crafting their human capital disclosure, companies must incorporate the key human capital metrics, if any, that they focus on in managing the business, again to the extent material to an understanding of the company’s business as a whole.”

“Experience demonstrates that these metrics, including their construction and their use, [vary] widely from industry to industry and issuer to issuer, depending on a wide array of company-specific factors and strategic judgments. As I have said previously, I would expect that the material human capital information for a manufacturing company will be vastly different from that of a biotech startup, and again vastly different from that of a large healthcare provider, he continued.

Other amendments modify disclosure thresholds for certain government environmental proceedings, as well as streamlining disclosures of any legal proceedings.

The amendments will take effect 30 days after publication in the Federal Register.

More details: SEC Modernization of Regulation S-K Items 101, 103, and 105

 

SEC Expands Qualifiers for Accredited Investor

In a departure from its historical method that used wealth as a proxy for financial sophistication to qualify an Accredited Investor, the SEC voted to adopt new rules that will create new qualification categories based on knowledge, expertise and ability to assess an investment opportunity.

Formerly, investors needed to pass a minimum income or net worth test to qualify. The change will allow more investors to participate.

Qualifying as an accredited investor is significant because it allows participation in certain investment opportunities, including some investments in private companies and offerings by certain hedge funds, private equity funds, and venture capital funds.

Specifically, the amendments add new categories of natural persons that may qualify as accredited investors based on certain professional certifications, designations or other credentials, such as holding SEC Series 7, Series 65, and Series 82 licenses.

Under the new amendments, additional natural persons and entities that may qualify as accredited investors include:

  • “Family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act.
  • Limited liability companies (LLCs) with at least $5 million in assets.
  • SEC and state-registered investment advisers, exempt reporting advisers, and rural business investment companies.
  • “Knowledgeable employees” in a private fund.
  • Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined under Rule 2a51-1(b) of the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered.
  • “Spousal equivalent” may pool their finances for the purpose of qualifying.

Improper Revenue Recognition Leads SEC Fraud Cases

A review of SEC actions involving public company fraud cases shows that whistleblowers have contributed heavily to the agency’s efforts to combat illegal activity, especially as it relates to improper timing of revenue recognition in public filings.

Accounting Today recently reported that the SEC is crediting whistleblowers with 60 percent of the cases involving companies either accelerating revenue recognition to meet targets, or delaying revenue reporting if the company had already met quarterly revenue targets.

The accounting publication also reported that enforcement action may accelerate in the near term, as companies struggle to put the best face forward in this COVID-19 economic environment.

In addition to companies booking sales from future quarters to close the gap between actual and forecasted revenue, the SEC reports that other common fraud schemes include “recognition of fictitious revenue, channel stuffing, third party transactions and fraudulent management estimates”.

In the case of fictitious revenue, a company inflates its earnings through either creating non-existent contracts or sales. Companies that engage in channel stuffing send excessive amounts of products to their distributors far exceeding consumer demand; often at the end of a reporting period. Fraudulent third party transactions involve bill and hold sales, consignment sales, side letter agreements and contingency sales.

Other fraudulent activity that the SEC is monitoring involves:

  • Fraudulent management estimates
  • Improper capitalization of expenses
  • Misleading forecasts or projections
  • Misleading non-GAAP reporting
  • Inadequate internal controls over financial reporting
  • Improper expense recognition schemes

Although the whistleblower program was launched in 2012 as a way to protect the investing public, it’s also turned out to be a lucrative revenue generator for whistleblowers. Since its beginning, the program has generated more than 33,000 tips and paid off more than $500 million in rewards.

SURVEY SAYS…

 

Voter Confidence in Economy Rises with Job Numbers 

With more people returning to work, voters are expressing increased confidence that the economy is recovering, according to a just-released national tracking poll conducted by Morning Consult, a Washington D.C.-based data intelligence and research firm.

The poll, which included a national sample of 1,989 registered voters and released September 11, showed that 52 percent of ALL voters described the U.S. economy as “recovering”, compared to 33 percent who viewed the economy as “worsening”.

That’s an improvement of 9 points since the end of August, when 43 percent of all voters viewed the economy as recovering. Ten percent of respondents said the economy was “not changing”.

Morning Consult reports that the improved sentiment appears to be “more motivated by unemployment, which has fallen to 8.4 percent, rather than by the ups and downs of the stock market.”

The view on the economy was split on party lines. Republican voters had the highest positive view, with 76 percent saying the economy was recovering. That’s up 11 points from the end of August, when 65 percent of Republicans viewed the economy as recovering.

Only 34 percent of Democrat voters said the economy was recovering; 48 percent said it was worsening, and 13 percent said it didn’t change at all.

Independents saw a brighter picture too, with 46 percent saying the economy was recovering in the September survey, compared to 40 percent in Morning Consult’s August survey.

Americans Blame News Media: Biased and Divisive

The nation is politically split. A lot of people don’t like Trump. A lot don’t like Biden. There’s not much the sides agree on — except, they both don’t like or trust the media.

The viewing, reading and listening public says the media is biased, and their distrust of the media is growing, according to a recent Gallup and Knight Foundation American Views Survey, which reported 86 percent of respondents believing media outlets leaned toward one or the other political party.

On the issue of whether bias existed in reporting, 49 percent believed there was a “great deal” of bias, and 37 percent said there was a “fair amount” of bias.

The study, which polled 20,000 U.S. adults, found that 84 percent said that “the media is to blame for political division in this country.”

Those polled also believed that inaccuracies in reporting are designed to push a specific agenda, with 54 percent believing the reporter is misrepresenting the facts, or making them up entirely (24 percent).

Nearly 8 in 10 Americans (79 percent) say news organizations they distrust are trying to persuade people to adopt a certain viewpoint.

Nearly three quarters of Americans surveyed say they see too much bias in the reporting of news that is supposed to be objective, as a “major problem (73 percent). That’s up from 65 percent in the 2017 study.

Quotable

A different kind of accounting–

“Every generation inherits a world it never made. As it does so, it automatically becomes the trustee of that world for those who come after. In due course, each generation makes its own accounting to its children.” Robert Kennedy

An Audited Legacy of Quality

Weinberg & Company is consistently at the very top when it comes to the quality of our work– just check our legacy of stellar PCAOB inspection reports.

 We thought we were building a leading, international accounting firm by providing Big 4 expertise with personal service at reasonable fees.

Turns out we were also building “An Audited Legacy of Quality.”

“We believe your capital is best deployed for your company’s growth, not for runaway accounting fees.”

DISCLAIMER:
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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