The Materiality of Social Media Attacks

VEA Vice Chair Nell Minow is quoted:

Still, consumer-facing companies, which are particularly vulnerable to social controversies, should outline such risks and response strategies in financial filings, said Nell Minow, vice chair of corporate governance consulting firm ValueEdge Advisors. “They need to let their investors know that they’re prepared to deal with it promptly and effectively to prevent a material deterioration of the stock price,” Ms. Minow said. “It’s very much like cyberattacks—it’s a relatively recent phenomenon that every company has to be prepared to deal with.”

Source: United, Pepsi Outcry Unlikely to Hurt Financial Results – WSJ

KPMG scandal highlights problem of auditing’s revolving door

This week Big Four accounting firm KPMG fired six US employees over a scandal that calls into question efforts to ensure that public company accounts are being properly scrutinised.

Here’s what happened: KPMG recruited an employee from the Public Company Accounting Oversight Board, which is charged with overseeing the nearly 2,000 accounting firms that audit US companies. The watchdog inspects the Big Four and other firms annually by taking a random sample of audits and checking them for deficiencies and conflicts of interest.

KPMG says that its new employee received a heads up from someone who still worked at the PCAOB about which audits would be inspected. The new employee then shared the information around. Eventually, five partners, including the head of the US audit practice, “either had improper advance warnings” or were aware that others had received this information and “failed to properly report the situation in a timely manner”, the firm said. All six people have been fired.

Source: KPMG scandal highlights problem of auditing’s revolving door

Sample Sustainability Disclosure: Host

Corporate Responsibility. Our corporate responsibility strategy focuses on a set of complementary objectives across three themes:

Responsible Investment: During the acquisition of properties, we assess both capital investments that may include sustainability opportunities and climate change related risks as part of our due diligence process. During the ownership of our properties, we seek to invest in proven sustainability practices in our redevelopment and ROI projects that can enhance asset value while also improving environmental performance.

Environmental Stewardship: We seek to improve the environmental footprint of our properties. We have established measurable goals to reduce energy consumption, water usage and carbon emissions from across our portfolio and will continue to report on actual performance in our environmental disclosures. In our redevelopment and ROI projects, we may target specific environmental efficiency projects, equipment upgrades and replacements that reduce energy and water consumption and offer appropriate returns on investment.

Corporate Citizenship: We are committed to being a responsible corporate citizen and strengthening our local communities through financial support, community engagement, volunteer service, and industry collaboration. Our approach is reinforced by our Code of Business Conduct and Ethics and periodic engagement with key stakeholders to understand their corporate responsibility priorities.

In March 2016, the Sustainability Accounting Standards Board (“SASB”) issued the provisional standard, Real Estate Owners, Developers & Investment Trusts Sustainability Accounting Standard. The provisional standard outlines proposed disclosure topics and accounting metrics for the real estate industry. The recommended energy and water management metrics that best correlate with our industry include energy consumption data coverage as a percentage of floor area (“Energy Intensity”); total energy consumed by portfolio area (“Total Energy Consumption”); water withdrawal as a percentage of total floor area, or number of units (for our calculation we use occupied rooms) (“Water Intensity”); and total water withdrawn by portfolio area (“Total Water Consumption”). The energy and water data we use is collected and reviewed by third-parties who compile the data from property utility statements. These metrics enable us to track the effectiveness of water and energy reduction ROI projects.

We reference key aspects and metrics of our sustainability efforts through the Global Reporting Initiative (“GRI”) Index, in accordance with the GRI framework and, beginning in 2015, contracted with a third-party to provide further verification of our energy and water consumption data. The charts detail our Energy Intensity, Total Energy Consumption, Water Intensity and Total Water Consumption for 2013 through 2015, the last three fiscal years for which data is available.

Latest Dodd-Frank reversal bill could exempt a third of public companies from giving auditor warning – MarketWatch

ValueEdge Advisors Vice Chair Nell Minow is quoted in this story about a possible proposed change to Dodd-Frank that would make it easier for companies to hide accounting problems from their investors, creditors, and suppliers.

 The sweeping package to reform the Dodd-Frank bank reform law introduced in Congress has a provision that would curtail the reporting of accounting problems from about a third of issuers.

Rep. Jeb Hensarling, the Texas Republican who chairs the House Financial Services Committee, has suggested modifications to his legislation introduced last September, according to a memo leaked last week to journalists, that would uproot Dodd-Frank to raise the limit for companies to comply with the requirement for an outside auditor’s opinion on a company’s internal controls over financial reporting, or ICFR.

That requirement was originally mandated by Section 404(b) of the Sarbanes-Oxley Act of 2002. In the memo, referred to by several new outlets who obtained a copy as Choice 2.0, Hensarling doubles the permanent exemption threshold from the original bill of last September, to $500 million in market capitalization from $250 million. The current exemption is $75 million. In Hensarling’s legislation, the exemption was also extended to depository institutions with less than $1 billion in assets.

Nell Minow, a corporate governance expert and the vice chairwoman of ValueEdge Advisors, told MarketWatch, “This is an outrage. It isn’t just that investors and consumers will not have this information; the more significant problem is that knowing it will not be public, boards will think they do not have to investigate and make corrections.”

The Dodd-Frank exemption threshold of $75 million “is a perfectly acceptable number for establishing materiality,” said Minow. “Raising it allows companies to ignore significant problems until they become too big to fix.”

Source: Latest Dodd-Frank reversal bill would exempt a third of public companies from giving auditor warning – MarketWatch

Center for Audit Quality: the First Decade

The Center for Audit Quality celebrated its 10th anniversary with a conference that included assessment of its progress since it was created in response to the Enron-era series of accounting failures and some thoughts about upcoming developments. Unabashedly committed to the notion that accounting is “a force for good,” director Cindy Fornelli emphasized the profession’s commitment to “independence, objectivity, and skepticism.” Many of the participants pointed to more attention to cybersecurity and sustainability (including non-GAAP reporting) and coordination with international standards as increasing challenges, necessary for corporate managers, directors, investors, and other stakeholders. In general, the speakers endorsed the Sarbanes-Oxley legislation, though former SEC Chair Harvey Pitt would have preferred the additional flexibility of making it a part of the 34 Act. Some expressed concern about overloading the board, especially the audit committee, and the consensus was that with issues like cybersecurity, the committee should be responsible for ensuring a system is in place, not for performing the checks itself. Some of the participants expressed concern that the new administration’s more insular, protectionist approach might lead to withdrawal from essential international coordination efforts, leaving a gap in leadership. Pitt said, “If we do not participate, it will diminish our impact…and our ability to compete in a global marketplace.”

How Integrated Reporting Is Changing The Role Of The Accounting Profession

In an interview, Giorgio Saavedra, Integrated Reporting Lead in the Corporate Reporting group of the World Bank, talked about why integrated reporting is a priority and what they hope to achieve.

As the WBG evolves to better position itself to meet the 2030 Development Agenda, having a holistic view of the strategy, governance, performance of the institution against the strategy, and the risks to achieving the strategy is essential to support more informed decision making. Embedding the elements of the IR framework into our corporate reporting can facilitate organizational alignment with our strategic goals and help management understand the linkages between the various factors that affect our strategy and long-term sustainability.We also see significant benefits in our role as a multilateral development institution in promoting the widespread adoption of IR by our clients to improve transparency and accountability. For example, in a time when the public sector is expected to work in partnership with the private sector to address some of today’s key social challenges, adoption of IR can provide the framework for a more holistic approach to decision making, transparency about risks and how these are being managed.

Source: How Integrated Reporting Is Changing The Role Of The Accounting Profession

Bloated Pay Came Before Hain Celestial’s Error – The New York Times

Gretchen Morgenson writes in the New York Times about Hain Celestial, where excessive pay based on a skewed “peer group” should have been a warning sign of investment risk.

The Hain Celestial Group, a maker of natural and organic foods and beverages, has been riding high in the market. But on Monday it came crashing to earth when it disclosed an accounting problem, delayed its full-year financial report and said it probably wouldn’t meet its earnings guidance for 2016….Clearly, investors were stunned by Hain’s statement. Maybe they shouldn’t have been.According to corporate governance experts, clues to oversight problems at Hain have been evident for a while in its excessive executive pay practices and disdain for shareholders’ anger about them.

Source: Bloated Pay Came Before Hain Celestial’s Error – The New York Times

Here’s how investors are duped each earnings season – MarketWatch

But today, according to FactSet, more than 90% of S&P 500 companies use their own metrics in an attempt to make their numbers look better. Some conceal revenue and other key numbers in hard-to-access tables. And a recent NYSE rule change has led some companies to report very early in the morning and pushed others to join the posse reporting after the closing bell, creating bottlenecks.While all this has meant more stress for reporters and analysts, it’s also made things harder for everyday investors trying to do due diligence on the companies they own. Experts say more companies seem to be breaking the most fundamental pact they have with their co-owners: to keep them informed of the true state of their business.“It’s a holographic presentation bubble distorting underlying operational reality,” said analyst Nicholas Heymann at William Blair. “Companies are working all the angles.”

Source: Here’s how investors are duped each earnings season – MarketWatch

Ford Expects (Unjustified) Pretax Profit Boost From Pension Shift – WSJ

We have no objection to the shift in pension fund accounting. But that should have little impact on the company’s overall financials and certainly no impact whatsoever on employee and executive bonuses, which should be exclusively based on contributions to operational productivity.

Ford Motor Co. is changing how it accounts for pension plans, a move that should boost company earnings, makes profitability in Europe more likely and better represents the health of the automotive group’s underlying performance….

The change sweeps away billions of dollars in pension-plan losses from previous years that Ford had yet to factor in to future results, and allows the auto maker to approach coming years with a cleaner slate. Investors tend to largely ignore a company’s historical financial performance once it is too far in the past, instead focusing on future earnings potential.

The move also strips the pension losses out of Ford’s core automotive operating units, giving those units’ earnings a lift. The effect may be most significant in Europe, where the revisions will move the company from a loss to a profit for the first nine months of 2015, putting it in a stronger position to book its first full-year European operating profit since 2010.​

Ford said the move won’t immediately affect the bonuses for company officers tied to the auto maker hitting certain financial benchmarks because it will use pre-revised 2015 results for those calculations. Hourly employees​represented by the United Auto Workers, however, will get bigger profit-sharing bonuses for 2015, because their payouts will be tied to the revised North American results.

via Ford Expects Pretax Profit Boost From Pension Shift – WSJ.

FASB Proposes to Curb What Companies Must Disclose – The New York Times

[W]ith a new proposal, the Financial Accounting Standards Board has lobbed a miniature Molotov cocktail into the usually staid world of audit standards, upsetting investor groups and experts in the field.

The proposal would effectively change the definition of materiality, a mainstay of corporate financial disclosure that determines what a company must tell investors about its operations and results.

Parse the following, which is near-oxymoronic in its absurdity:

In materials describing how its proposal came about, FASB suggested that it was intended to improve the effectiveness of financial statements by reducing the amount of immaterial information in them.

via FASB Proposes to Curb What Companies Must Disclose – The New York Times.

For more information: FASB