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A publication of the Professional Standards Group

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SEC Chairman Mary Jo White takes the reins of the Securities and Exchange Commission at a time of unprecedented challenges and complexities. This Messenger welcomes Chairman White and provides highlights of other current events and trends that may affect boards of public companies and may warrant discussion with independent auditors in the coming months.

1. New leadership at the SEC

A former federal prosecutor and securities lawyer, Chairman White will need to step up to a formidable agenda of complex and controversial rule-making initiatives that were mandated by the Dodd-Frank and JOBS Acts and that remain works-in-process amidst intense lobbying efforts.

She also faces demands for more disclosure requirements related to cybersecurity risks and a rethinking of all the SEC’s disclosure requirements as financial reporting requirements and use of social media continue to evolve. But perhaps the most interesting test of her leadership will revolve around issues related to audits, including obstacles to inspections by US regulators of audits in China.

April 2013

Boardroom Briefing for SEC Clients: Looking Ahead for 2013 and Beyond

Chairman White joins a dedicated group of Commissioners and senior staff members, some of whom are new in their roles and brimming with new ideas and fresh approaches. The senior staff members include Paul Beswick, who was named Chief Accountant in December 2012 and Lona Nallengara, who was named Acting Director of the Division of Corporation Finance in December 2012, as well as George Canellos and Andrew Ceresney, who were named co-directors of the Division of Enforcement in April 2013. We welcome Chairman White and look forward to working with the staff in 2013 and beyond.

2. Use of social media

A recent announcement by the SEC clarifies the guidelines for use of social media outlets such as Facebook and Twitter. The SEC’s announcement indicates that companies can use social media outlets to announce information, and that announcement will be considered compliant with Regulation Fair Disclosure (Reg FD) so long as investors have been alerted about which social media will be used to communicate the information.

As a reminder, the purpose of Reg FD is to ensure that all investors have the ability to gain access to material information at the same time. Although each case must be evaluated on its own facts, the announcement cautions companies about the risks of releasing material nonpublic information on the personal social media site of an individual corporate officer. Such disclosure is unlikely to qualify as an acceptable method of disclosure under the securities laws unless there has been advance notice to the investors that the site may be used for this purpose.

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Many boards of directors and audit committees are well aware of the risks of using social media outlets for dissemination of financial information. As a result, they are reviewing, improving, or establishing corporate policies to ensure appropriate guidance and enforcement mechanisms are in place and integrated with the company’s code of corporate conduct or business ethics policy. Consultation with your company’s auditor may be helpful in this area.

3. Rethinking SEC disclosure requirements

Speaking at a conference in February, SEC Commissioner Troy Paredes spoke about “information overload.” He said there is a risk that investors will become overwhelmed or distracted and misplace their focus on information that is only marginally useful. He suggested that shorter, more manageable SEC filings might be more useful to investors and that social media and mobile devices may allow the Commission to “think differently” about how disclosures can be packaged and distributed to investors. He also urged a “top-to-bottom” review of the SEC’s disclosure regime to help empower investors make better decisions.

SEC Chief Accountant Paul Beswick provided an indication of how the SEC might proceed to overhaul its disclosure requirements at the same conference. He said the SEC staff has heard concerns about a trend toward requiring more disclosure in the financial statements of forward-looking information that previously had been reported in the Management Discussion and Analysis section of periodic reports filed with the SEC. As a result, the SEC staff is working on a paper about “What is the dividing line?” between US GAAP and SEC reporting requirements. At the time, Mr. Beswick predicted the paper would be released in the next couple of months, which would mean April or May 2013 and a related disclosure roundtable is expected in “late spring or early summer.”

The rethinking of the SEC’s disclosure requirements is expected to focus on audit considerations as well as

other aspects of disclosures. Currently, the disclosures in the MD&A are unaudited, while the notes to the financial statements are covered by the independent auditor’s opinion. A possible middle ground considered by the Public Company Accounting Oversight Board (PCAOB) might involve the establishment of new requirements for an “auditor’s discussion and analysis.” MHM is monitoring developments in this area and may issue another Messenger as this initiative progresses.

4. PCAOB’s proposal for a reorganization of auditing standards

In March 2013, the PCAOB proposed a framework for a reorganization of its audit standards. The framework is expected to be the first step in a multi-year effort to reorganize and, where needed, substantively amend its auditing standards for independent auditors.

Speaking at a public meeting on the subject, PCAOB Chairman James Doty explained that the PCAOB’s standards currently exceed 2,000 pages, and auditors of some public companies also need to use the international auditing standards of the IAASB (standards that amount to another 1,000 pages). One purpose of the reorganization is to make it easier for audit practitioners to read and consult the PCAOB standards. Another is to provide what Mr. Doty called a “crosswalk” to the preexisting or interim standards and to the more recent international standards. PCAOB member Jay Hanson added his hope that a more organized set of auditing standards will enable the overseers of audits, including audit committees of public companies, to better understand the audit process and its requirements.

The proposed framework would include a separate section on the auditor’s responsibilities regarding filings under Federal securities laws, including responsibilities for filings for securities offerings and reviews of interim financial information. But it would not go beyond the standards issued by the PCAOB to include related information, such as the SEC’s

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.

requirements that apply to audits. Comments on the proposed framework are due by May 28, 2013.

5. Nasdaq’s proposed internal audit rule

The role of internal auditors is getting increased attention too, particularly in growing companies including those whose securities are traded on the Nasdaq Exchange. In March, the Nasdaq filed a proposed rule that would require an internal audit function for listed companies. This proposal has proven controversial. Many comment letters expressed concerns about the costs relative to the benefits.

Designed to help ensure the needs of management and audit committees are met, the proposed rule would require that each Nasdaq-listed company establish and maintain an internal audit function. The role of this function would be to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Outsourcing of the function would be permitted to third-party service providers other than the company’s independent auditor. The proposed effective date for companies listed on Nasdaq on or before June 30, 2013 would be to establish an internal audit function no later than December 31, 2013; the proposed effective date for companies listed after June 30, 2013 is prior to listing.

As initially proposed, the Nasdaq rule would apply across-the-board and would not allow for exceptions. After considering the comments, however, Nasdaq may consider carving out exceptions similar to those permitted in the internal audit rule adopted by the New York Stock Exchange. These exemptions include certain funds registered under the Investment Company Act, foreign companies, and companies that list only debt or preferred stock. Regardless of what happens with the Nasdaq’s proposed internal audit rule, audit committees of companies that do not currently have internal audit functions may wish to discuss with their independent auditors the pros and cons of establishing one.

For more information

If you would like more information about the topics discussed in this Boardroom Briefing, please contact Rich Howard of MHM’s Professional Standards Group or your MHM service professional. You can reach Rich directly at rhoward@cbiz.com or 949-450-4402.