Biden Nominees Signal Stronger Regs-
President-elect Joe Biden’s nominees for the Securities and Exchange Commission (SEC) and the Consumer Financial Protection Bureau (CFPB) are anticipated to push for some of the strongest regulations aimed at Wall Street, financial institutions and public companies in over two decades.
On January 18, Biden nominated Gary Gensler to replace Jay Clayton as Chair at the SEC and Rohit Chopra to replace Kathleen Kraninger as head of the CFPB. If confirmed, it is believed that both nominees would push for an agenda that is a stark contrast to the deregulatory stance of the prior administration.
Gensler, a former Goldman Sachs banker and most recently Chairman of the Maryland Financial Consumer Protection Commission, is expected to be the most active, pro-regulatory SEC chairman since William Donaldson led the SEC following the financial scandals of the early 2000s. In 2001, Gensler joined Senator Paul Sarbanes’ team to work on legislation that became the Sarbanes-Oxley Act. In 2009, he became the Chairman of the Commodity Futures Trading Commission, where he pushed for more stringent rules governing derivatives.
Chopra worked with Senator Elizabeth Warren during the creation of the CFPB, at first becoming the agency’s Student Loan Ombudsman, and later its Assistant Director. In 2018, he was confirmed by the Senate for the US Federal Trade Commission.
Update: PPP Loan Expenses Now Deductible
When the December issue of Simply Stated went to press, it wasn’t clear whether Congress would overturn an IRS ruling denying deductibility of 2020 business expenses paid with Paycheck Protection Program (PPP) loans.
Since then, Congress passed, and the President has signed, the Consolidated Appropriations Act 2021 which both provides for this year’s government funding, and includes provisions allowing for those deductions.
The Act notes that “no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”
Expenses paid with PPP loans are now deductible, regardless of whether the borrower applied for loan forgiveness.
CFOs and CEOs Most Often Charged In 3 Top Frauds
The Anti-Fraud Collaboration (AFC) has issued a report revealing that improper revenue recognition, reserves manipulation and inventory misstatement are among the three most prevalent financial statement fraud schemes that trigger SEC enforcement actions.
The report also noted that CFOs and CEOs topped the list of company personnel charged in these types of SEC enforcement actions, with CFOs topping the list at 54%, followed by CEOs at 31%.
In its January report the AFC, a collaborative effort of the Center for Audit Quality, Financial Executives International, the National Association of Corporate Directors, and the Institute of Internal Auditors, provided an overview of the types of fraud schemes, the industries, perpetrators and company sizes that were most often subjected to enforcement action. It also provided insights into how to deter and detect financial report fraud that might have been influenced by the COVID-19 pandemic.
Improper revenue recognition topped the reasons for financial reporting fraud at 43%, followed by reserves manipulation at 24%. Inventory misstatement and loan impairment issues tied at 11%.
The report found that technology services companies were the most frequently charged with financial reporting fraud at 17%, followed by finance at 13% and manufacturing at 9%.
Although the SEC took enforcement actions against issuers of all sizes, 74, or 39%, were filed against companies under $250 million in market capitalization. While 44, or 22%, of the charges were against small-cap companies, only 22 were filed against mid-and large-cap issuers.
In trying to understand the circumstances under which the fraud was conducted, the report noted contributing factors included the tone set by the company management, a high-pressure environment, and inadequately experienced personnel.
“These findings are consistent with what we often see with micro-and small-cap companies,” said Corey Fischer, Weinberg Managing Partner, who highlighted these issues at last December’s OTC webinar for CEOs and CFOs.
“Being a public company CEO and CFO requires a unique set of skills; quite different from the skills needed to run a private company. We caution clients on the need for sound corporate governance, the urgency of setting in place the right financial infrastructure, as well as recruiting a management team that understands the financial reporting and compliance needs of a public company,” he said.
For a comprehensive review of the report, called Mitigating the Risk of Common Fraud Schemes: Insights from SEC Enforcement Actions, please see: AFC Report
“Cooperation Credit” for Wayward Companies
The SEC ended its 2020 fiscal year with more than 700 enforcement actions against companies, levying record fines of $4.7 billion, and delisting 130 companies. As 2021 begins, it appears that the SEC will continue its strong enforcement stance, with the announcement on January 7 that it had gave out more than $1.1 million to five whistleblowers who assisted in successful enforcement actions.
And, as reported in the December issue of Simply Stated, the related oversight agency, the PCAOB, has signaled an increase in inspections of the audits of companies most affected by the COVID-19 pandemic, particularly those in retail, manufacturing, entertainment, hospitality and transportation.
The SEC, however, may reduce, or even eliminate fines for companies that cooperate with its investigations. Known as the “cooperation credit,” CFODive notes the primary considerations that may lead to the SEC’s leniency toward a company:
- Self-policing: How much does the company try to head off trouble before discovering misconduct? Has it established effective compliance procedures, and does it use an appropriate tone at the top?
- Self-reporting: Did it call out its own misconduct when discovered? Did it conduct a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely and effectively disclose the misconduct to the public? Did it disclose it to regulatory agencies and to self-regulatory organizations?
- Remediation: After a problem is found, did it dismiss or appropriately discipline wrongdoers? Did it modify and improve internal controls and procedures to prevent recurrence of the misconduct? Did it appropriately compensate those adversely affected?
- Cooperation: Did it try to work productively with law enforcement authorities, including providing SEC enforcement staff all information relevant to the underlying violations and the company’s remedial efforts?
The SEC’s 113-page Enforcement Manual outlines the conditions for receiving Cooperation Credit, but it is important to note that as staffers and administrations change, so might the interpretation.
For a full overview, please see: https://www.sec.gov/divisions/enforce/enforcementmanual.pdf
FASB Tentative Decision May Change Goodwill
In its final meeting of 2020, the Financial Accounting Standards Board (FASB), in a tentative decision, adopted changes to goodwill amortization periods and methods for an impairment-with-amortization that would affect public companies. The Board’s tentative decision said that:
- An entity should amortize goodwill on a straight-line basis; an evolving amortization model would not be permitted.
- An entity should amortize goodwill over a 10-year default period, unless an entity elects and justifies another amortization period based on the facts and circumstances of the acquisition.
- An entity that elects another amortization period would be subject to a cap.
- An entity would not be required to reassess the amortization period.
The Board directed staff to investigate factors and criteria that would justify a company from deviating from FASB’s decision.
FASB notes that tentative Board decisions are provided for those interested in following the Board’s deliberations. All the reported decisions are tentative and may be changed at future Board meetings.
For more on FASB tentative Board decisions: FASB Tentative Board Decisions
SPACs Roar Into New Year
It appears that last year’s record-setting pace of capital raised through the Special Purpose Acquisition Company (SPAC) is continuing into 2021. SPACInsider.com reports that 53 SPAC IPOs were filed by the end of the second week in January.
The year 2020 closed with a record 248 SPAC IPO filings, which was more than four times the previous high of 59 such filings in 2019, according to SPACInsider.com. 2020 also was the first time that the number of SPACs exceeded the number of traditional IPO filings, which closed the year at just over 200.
The $83 billion dollars raised in 2020 through SPACs significantly outpaced the $12 billion raised in 2019. Thanks to five SPAC filings which topped the billion-dollar range, with one grossing $4 billion in proceeds, the average 2020 SPAC raised over $300 million.
A SPAC is a company with no commercial operations that is formed to raise capital through an IPO for the purpose of acquiring an existing company or companies. The SPAC team has up to two years to make an acquisition.
Once a target is identified, SPACs must file an S-4 which contains disclosure information similar to what is in the S-1 which is filed in a traditional IPO. If an acquisition is not found within the two-year period, the capital, which was being held is returned to investors, minus bank and broker fees.
Q4 M&A Rebound May Hint at What’s to Come
A surge in global M&A activity in the last quarter of 2020 may be an indicator that 2021 will be one of the biggest M&A years on record, according to research by international global advisory firm Willis Towers Watson (WTW).
WTW’s Quarterly Deal Performance Monitor, which tracks deals valued at over $100 million, reported that of the 674 global completed deals, 246 were completed in Q4, with 136 of those deals completed in North America.
“While the world in 2021 remains a volatile place, pent-up demand, ample funding, ultra low interest rates and confidence returning to boardrooms indicate conditions are ripe for one of the biggest M&A years on record,” said Duncan Smithson, Senior Director, M&A at WTW.
Suppressed by the pandemic and economic uncertainty, last year’s 674 worldwide transactions were well below the 774 deals completed in 2019, and the lowest annual volume since 322 deals were recorded in 2009, during the financial crisis.
For an in-depth look into the report, please see: Willis Towers Watson Press Release
Weinberg in the News…
Corey Fischer Leads Webinar on Capital Raising
Weinberg Managing Partner Corey Fischer was the featured speaker in a year-end OTC Educational webinar which focused on “Raising Money on the Capital Markets: An Auditor’s Perspective.”
In the live session attended by CFOs and CEOs, Corey provided useful information based on his nearly three decades of experience as an auditor for companies going through IPOs, Follow-on Offerings, M&As and other capital raising events. He discussed the challenges micro and small cap companies face in raising capital, and discussed the importance of companies strengthening their financial reporting systems before looking for investors.
Corey also outlined the accounting essentials that must be in place for a successful capital raise, including:
- Developing A Financial Infrastructure to Generate Accurate and Timely Financial Statements
- Assembling the Financial Compliance Team
- Changing Role and Mindset of Management
- Developing Sound Corporate Governance
- Top 7 Pitfalls That Can Sink a Capital Raise
- How to Select the Right Auditor
Read PowerPoint of the presentation here.
Watch video of webinar here.
An Audited Legacy of Quality
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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.”