Weinberg & Company

Simply Stated Newsletter – March 2021

SEC Reaffirms Climate, ESG Priority; Asks Public Input

 During a March 15 speech at the Center for American Progress, the SEC’s Acting Chair Allison Herren Lee reaffirmed that the SEC is making Climate and Environment, Social and Corporate Governance (ESG) disclosure requirements a top priority for the agency’s enforcement.

 Lee, who stepped into the SEC’s top spot after the early resignation of Jay Clayton, used the speech to formally request comments from businesses, market participants and stakeholders on proposed new rules.

 “Investors are demanding more and better information on climate and ESG, and that demand is not being met by the current voluntary framework,” Lee said. “Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation of capital.”

 Lee outlined a long list of questions that affected parties are being asked to comment on, including,

 1.    Should the Commission consider requiring a certification by the CEO, CFO, or other corporate officer relating to climate disclosures?

2.    How, if at all, should registrants disclose their internal governance and oversight of climate-related issues? For example, what are the advantages and disadvantages of requiring disclosure concerning the connection between executive or employee compensation and climate change risks and impacts?

3.    What are the advantages and disadvantages of establishing different climate change reporting standards for different industries, such as the financial sector, oil and gas, transportation, etc.? How should any such industry-focused standards be developed and implemented?

4.    What information related to climate risks can be quantified and measured? How are markets currently using quantified information? Are there specific metrics on which all registrants should report (such as, for example, scopes 1, 2, and 3 greenhouse gas emissions, and greenhouse gas reduction goals)?

5.    What quantified and measured information or metrics should be disclosed because it may be material to an investment or voting decision?

6.    Should disclosures be tiered or scaled based on the size and/or type of registrant? If so, how?

7.    What are registrants doing internally to evaluate or project climate scenarios, and what information from or about such internal evaluations should be disclosed to investors to inform investment and voting decisions?

8.    How does the absence or presence of robust carbon markets impact firms’ analysis of the risks and costs associated with climate change?

 Lee noted that the SEC’s interest in climate and ESG monitoring is expanding to private companies. It is asking the public to comment on: “What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?”

 Lee’s presentation at the Center for American Progress kick-started a 90-day public comment period, after which the SEC will make its determination.

 SEC Launches ESG Enforcement Task Force

 Prior to receiving public comment on proposed new regulations on Climate and ESG, the SEC’s Division of Enforcement created a Climate and ESG Task Force to develop initiatives to proactively identify ESG-related misconduct. This announcement was made in an SEC press release: https://www.sec.gov/news.

 The task force will be led by Kelly Gibson, Acting Deputy Director of Enforcement, who will oversee a Division-wide effort consisting of 22 members drawn from the SEC’s headquarters, regional offices and Enforcement specialized units.

 The announcement said that the task force is “consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”

 The SEC continued, “The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies. Its work will complement the agency’s other initiatives in this area, including the recent appointment of Satyam Khanna as a Senior Policy Advisor for Climate and ESG. As an integral component of the agency’s efforts to address these risks to investors, the task force will work closely with other SEC Divisions and Offices, including the Divisions of Corporation Finance, Investment Management, and Examinations.

 The SEC directed tips, referrals and whistleblower complaints on ESG-related issues to its Complaints and Whistleblower page.

 Non-Accelerated Filers To Begin Reporting CAMs

 Non-accelerated filers are now joining their larger counterparts, with the Public Company Accounting Oversight Board (PCAOB) now requiring that the audits of smaller reporting companies disclose critical audit matters for fiscal years ending on or after December 15, 2020. Non-accelerated filers are companies with a public float of under $75 million.

 In determining whether a Critical Audit Matter exists, the auditor must determine whether there are any critical audit matters in the audit of the current period’s financial statements. A critical audit matter is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment.

 Some examples of Critical Audit Matters that might be included in an Auditor’s report include:  

·      Goodwill and indefinite-lived tangible asset impairment

·      Revenue Recognition

·      Accounting for acquisitions, including the valuation of intangible assets

·      Tax contingencies, including international assumptions and estimates

·      Fair value of liabilities or equity

·      Inventory valuation and reserves

·      Allowance for loan and lease losses

 Both accelerated filers and large accelerated filers have been required to adopt the new auditing standard since December 15, 2017.

 COVID-Impacted Goodwill Impairment Could Rival 2008

 Early reporting indicates that goodwill impairment (GWI) for U.S. companies in 2020 may be as high as $120 billion, according to a just released report by valuation and consulting firm Duff & Phelps.

 Though the impact of COVID-19 on GWI is yet to be fully reported, the advisory firm said those numbers would place 2020 second only to 2008, when at the height of the global financial crisis, U.S. companies reported a total goodwill impairment of $188 billion.

 The 2020 U.S. Goodwill Impairment Study noted that as of January 28, 2021, the top 10 GWI events reported for 2020 reached a combined $54 billion, far surpassing the top ten events in 2019.

 “Looking at 2020, the COVID-19 pandemic was the biggest challenge for U.S. companies, as the related economic recession is expected to be the most severe since World War II,” reported the survey.

 According to the survey, “Should the final 2020 aggregate GWI figures remain at a level lower than that in 2008, it will be partly a reflection of the unprecedented level of support provided by both the Federal Reserve (with swift implementation of liquidity-enhancing monetary policies) and the U.S. government (with large fiscal stimulus packages) in response to the COVID-19 crisis. By a wide margin, the most impacted industry so far is Energy, a reflection of the collapse in global oil prices following the classification of COVID-19 as a pandemic.”

 The 2020 study, in its twelfth year, captured over 8,800 public companies incorporated in the U.S.

 NY, CA, NJ at Bottom of “Business Tax Climate Index”

 When it comes to the business tax climate, New York, California and New Jersey rank at the very bottom according to the 2021 Annual State Business Tax Climate Index compiled by the Tax Foundation, a leading national independent tax policy research organization.

 According to the Foundation, the annual index is designed to show how well states structure their tax systems and provides a map for improvement. The Index notes that states in the bottom 10 “tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the second highest-rate corporate and individual income taxes in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.”

 The top four best states in this year’s Index include Wyoming (#1), South Dakota (#2), Alaska (#3), and Florida (#4). The Foundation notes that the absence of a major tax is a common factor for the top ten states. Wyoming and South Dakota, for example, have no corporate or individual income taxes.


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