Redefining the Accredited Investor
The SEC has proposed amendments to the definition of accredited investor that would allow more investors to participate in private offerings.
According to an SEC press release, the changes would:
- add new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
- with respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund;
- add limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) to the current list of entities that may qualify as accredited investors;
- add a new category for any entity, including Indian tribes, owning “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
- add “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; and
- add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The public comment period will remain open for 60 days following publication in the Federal Register.
Updating Auditor Independence Rules
The SEC is proposing amendments to codify certain staff consultations and modernize certain aspects of its auditor independence framework.
An SEC news release said that the proposed amendments would update select aspects of the nearly two-decades-old auditor independence rule so that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger non-substantive rule breaches or potentially time consuming audit committee review of non-substantive matters.
The proposed amendments primarily focus on relationships with, or services provided to, an entity that has little or no relationship with the entity under audit, and no relationship to the engagement team conducting the audit. In these scenarios the Commission staff regularly observes that the audit firm is objective and impartial and, as a result, does not object to their continuing the audit relationship with the audit client.
“In practice, the proposed amendments also would increase the number of qualified audit firms an issuer could choose from and permit audit committees and Commission staff to better focus on relationships that could impair an auditor’s objectivity and impartiality,” SEC Chairman Jay Clayton said in a press release.
The public comment period will remain open for 60 days following publication in the Federal Register. [Proposed Amendments]
Focus on the Audit Committee
The SEC recently released a public statement: Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities. The statement covers a wide range of issues where the audit committee must interact with many other stakeholders in interconnected roles to provide investors and markets with high-quality, reliable financial information. Several key points include:
When used appropriately in combination with GAAP measures, non-GAAP measures and other metrics used to gauge company performance can provide decision-useful information to investors from management’s perspective. Audit committees, however, should understand whether, how and why management uses non-GAAP, and it should be actively engaged in the review process to assure that those measures are consistently presented from period to period.
Though it is a shared responsibility of the audit firm, the issuer, and the audit committee, it is the audit committee that has a critical role in an auditor’s compliance with the independence rules. Sarbanes-Oxley Act mandates that audit committees be directly responsible for the oversight of the engagement of an independent auditor. Audit committees are encouraged to consider periodically the sufficiency of the monitoring processes and should address corporate changes and events that could affect auditor independence.
Reference Rate Reform (LIBOR)
The expected discontinuation of LIBOR could have significant impact on financial markets and material risk for many companies. Those risks may be exacerbated if the company is not prepared to make an orderly transition to an alternative reference rate. Audit committees should understand management’s plan to identify and address the risks associated with reference rate reform, and specifically, the impact on accounting and financial reporting and issues associated with financial products and contracts that reference LIBOR.
Critical Audit Matters
Starting in 2019, auditors of certain public companies are required to communicate critical audit matters (CAMs) in the auditor’s report. Although the independent auditor is solely responsible for writing and communication of CAMs, audit committees are encouraged to engage in a substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAM and how each CAM is expected to be described in the auditor’s report.
Internal Control Over Financial Reporting (ICFR)
Audit committees are most effective when they have a detailed understanding of ICFR issues and engage proactively to aid in their resolution. If material weaknesses exist they should monitor management’s remediation plans.
As a general observation, audit committees are encouraged to focus on the “tone at the top” with the objective of creating and maintaining an environment that supports the integrity of the financial reporting process.
Source: SEC public statement
Track Candidate’s Tax Plans — hold on to your wallet
Tax policy has become one of the major issues of the 2020 presidential campaign. The Tax Foundation has developed an interactive tool to track every tax plan proposed by each of the presidential candidates. The tracker is continually updated to provide new data and changes as candidates jockey for position in the presidential race.
So hold on to your wallet with one hand and click here with the other.
Goodbye New Jersey, Hello Idaho
According to the results of United Van Lines’ 43rd Annual National Movers Study which tracks customers’ state-to-state migration patterns over the past year, Idaho saw the highest percentage of inbound migration among states experiencing more than 250 moves with United Van Lines: 67.4 percent. It also was the second consecutive year that more residents moved out of New Jersey than any other state: 68.5 percent.
According to the study, retirement was a major reason cited for outbound New Jersey residents (33.18%). New Jersey’s taxes on individual income is among the highest in the nation, though still lower than California. Adding to the burden, the federal deduction for state and local tax (SALT) is now capped at $10,000 under the recently enacted Tax Cuts and Jobs Act.
According to just released U.S. Census Bureau population estimates, approximately 203,000 California residents left the Golden State last year. As a result, California is now on track to lose a congressional seat.
On the other side of the nation, Florida was a top destination for retirement-minded residents. Florida imposes no tax on individual income, no estate or inheritance tax.
Simply Stated Thoughts…
Judged By the Company You Keep
Corey Fischer, CPA
Firm Managing Partner
Your mother was right. If she told you once, she told you a hundred times: “You will be judged by the company you keep.” Back then the company she was talking about, of course, were the weird friends with whom you were hanging out. Little did she know that one day you’d be hanging out with a different kind of company–a publicly traded company, and that you’d be doing it from the C-Suite. Still, mother was right. It’s all about reputation.
A new study has found that a company’s reputation has become a major factor in engaging and retaining an audit firm. Company misconduct that results in a public scandal and negative media coverage often involves brand damage, investor concern, litigation, even consumer boycotts. Researchers at University of Colorado Denver, Bentley University, and Northeastern University found that when a company suffers negative media coverage the damage often spills over and lands on the shoulders of financial auditors as well.
As reported in CU Denver Today, the researchers used a new dataset called RepRisk and examined auditor response to negative media coverage related to Environmental, Social and Governance (ESG) scandals. Negative media was defined as coverage that exposes misconduct or is critical of a company’s ESG practices. Examples included such things as overuse and wasting of resources (environment issue); impacts on communities, social discrimination, and child labor (social issues); corruption and bribery, and anti-competitive practices (governance issues).
Researchers found that when a company moved from 25th to 75th percentile of negative media coverage, it resulted in a 19.5% increase in likelihood of auditor resignations and 4.68% increase in audit fees.
Public companies have always been selective in choosing an audit firm. And, rightly so. When an audit firm fails or suffers reputational damage, the company is damaged as well. It may involve restatement of financials and loss of investor confidence. Companies, however, have tools to easily check the performance and reputation of an audit firm thanks to the Public Company Accounting Oversight Board (PCAOB).
The PCAOB was created as a private-sector, nonprofit corporation by the Public Company Accounting Reform and Investor Protection Act, commonly known as Sarbanes Oxley for short, or just SOX for even shorter.
Don’t let the “private-sector, nonprofit” description fool you into thinking the PCAOB is some warm and fuzzy group with a Facebook page. Well actually they do have a Facebook page, but they also have very sharp teeth.
If this sounds a lot like the SEC, it should. The PCAOB is governed by a five member board that is appointed by the SEC. Its annual budget is approved by the SEC. It is headquartered in Washington D.C. just like the SEC. It has about 800 employees.
The PCAOB has four major functions overseeing audit firms: 1) registration 2) inspection 3) standard-setting and 4) enforcement. It is the inspection function that offers an important tool for companies to check the performance and reputation of audit firms.
The inspection process involves a team of PCAOB auditors spending several days thoroughly examining the working papers of selected audits done by an audit firm. Think of it as auditors getting audited.
Upon completion, a report is generated that will cite any insufficiency found. More serious violations may institute an enforcement action, loss of license, and worse. Because the PCAOB posts all inspection reports online, it is an important tool that companies can use to periodically review the inspection records of their current audit firm, and one they should use as part of their due diligence prior to an audit engagement.
The research study points out how client misbehavior can adversely affect their audit firms. Unfortunately there is no easy tool for audit firms to assess whether a client company will become embroiled in a negative media episode, especially when it comes to the brave new world of ESGs.
The reputations of companies and their audit firms have become ever so entwined. Media coverage can provide needed and deserved exposure to misdeeds. Too often, unfortunately, that coverage provides more heat than light, and serves as no more than an accelerant.
As first published in MicroCap Review Magazine