Increased focus on Non-GAAP Metrics
The number of comment letters SEC sends to filers may be down, but the proportion of letters focused on non-GAAP metrics has significantly increased, according to Audit Analytics and reported by CFO.com.
Through the first six months of this year the SEC sent 1,409 comment letters (of all types) to registrants. That represents a drastic and ongoing drop from the 15,646 comment letters the commission sent in all of 2010. At the same time, however, the percentage of registrants that received at least one comment letter related to non-GAAP matters leaped from 9% to 25%. The increase portrays the extent to which non-GAAP usage is currently dominating the SEC’s enforcement activities.
A prevalent objection cited in the SEC letters continues to be companies giving too much prominence to non-GAAP metrics in their communications. Other SEC letters cited presenting non-GAAP measures on a “net of tax” basis (12% of non-GAAP comment letters); presentation of measures that use individually tailored recognition and measurement methods (12%); presentation of a performance measure that excludes normal, recurring cash operating expenses (9%); presentation of free cash-flow metrics (9%); and reconciliation of EBITDA or EBIT to something other than net income (6%).
SEC Issues Cyber Threats Warning
The SEC issued an investigative report cautioning that public companies should consider cyber threats when implementing internal accounting controls. The report is based on the SEC Enforcement Division’s investigations of nine public companies that fell victim to cyber fraud, losing millions of dollars in the process.
The SEC’s investigations focused on “business email compromises” (BECs) in which perpetrators posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators.
The frauds in some instances lasted months and often were detected only after intervention by law enforcement or other third parties. Each of the companies lost at least $1 million, two lost more than $30 million, and one lost more than $45 million. In total, the nine companies wired nearly $100 million as a result of the frauds, most of which was unrecoverable. No charges were brought against the companies or their personnel.
Stephanie Avakian, Co-Director of the SEC Enforcement Division, said, “In light of the facts and circumstances, we did not charge the nine companies we investigated, but our report emphasizes that all public companies have obligations to maintain sufficient internal accounting controls and should consider cyber threats when fulfilling those obligations.”
The companies, each of which had securities listed on a national stock exchange, covered a range of sectors including technology, machinery, real estate, energy, financial, and consumer goods.
Public issuers subject to the internal accounting controls requirements of Section 13(b)(2)(B) of the Securities Exchange Act of 1934 must calibrate their internal accounting controls to the current risk environment and assess and adjust policies and procedures accordingly. The FBI estimates fraud involving BECs has cost companies more than $5 billion since 2013.
Further reading: SEC Registrants with Poor Cyber Controls (Audit Analytics).
Rubbing SALT in the Mid-year Elections Wound
The Republican bench in the tax-writing House Ways and Means Committee has been decimated by the mid-term elections. Ten of the 24 Republicans on the committee won’t be returning to Congress next year. Two members were from high tax states, two from low tax states and six more Republicans decided to retire or run for other office.
Some analysts partly attribute the loss to voter frustration over the GOP tax law’s new cap on state and local tax (SALT) deductions – a trade-off provision included in order to comply with Senate budget rules. Formerly unlimited, the $10,000 cap effectively raised federal taxes on high earners in high tax states such as New York, New Jersey, Illinois, and California.
Political leaders in those states have shown little interest in reducing their high, top in the nation, state income taxes or local property taxes for their residents. Instead some have brought lawsuits against the federal government, and some states have attempted to create charitable contributions workaround programs. Earlier this year, the IRS issued regulations invalidating such workarounds. Any major change to the SALT cap would likely need to come through Congress.
Companies Race to Meet Lease Accounting Standard Deadline
With a January 1, 2019 deadline just weeks away, an updated poll of public companies found only 4% of respondents had completed implementing the new lease accounting standard. In better news, 76% said they were halfway done.
The survey of finance professionals conducted by accounting firm PwC also found lease accounting systems in flux, with 75% of public company respondents saying that they will either upgrade/modify existing systems (17%) or implement new systems (58%). Nearly one-quarter doubted going live before their effective date for a variety of reasons, including: functionality of new system not ready; data migration challenges; running out of time; still testing; and lacking resources.
The new leasing standard issued by the Financial Accounting Standards Board (FASB) will require organizations that lease assets – referred to as “lessees” – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.
The survey also found that 47% of respondents with 1,000 or more leased assets or contracts expect implementation of the lease accounting standard to cost $1million or more.
The new lease accounting standard is effective Q1 2019 for most calendar year-end public business entities, and in 2020 for other calendar year-end organizations.
How much government do you want?
For decades Americans have shown a broad tendency to say the government is doing too many things that should be left to individuals and businesses, as opposed to the belief that the government should do more to help solve the nation’s problems.
According to a recent Gallup poll, although the percentage has declined from earlier years, Americans still tilt toward wanting government to be less active. Fifty percent of Americans now say government is doing too much, 44% say the government should do more, with the remaining undecided. Not surprisingly, Republicans and Democrats hold sharply differing views.
The only times over the past quarter century when Americans didn’t think the government should do less was after the 1990-1991 recession and in October 2001 just after 9/11.
“The size of the gap in favor of a less active government role has varied over time — primarily reflecting changes in the party of the president and the resulting changes in government policy, along with real-world events,” according to Gallup.
Americans were most likely to say the government is doing too much during the Bill Clinton and Barack Obama administrations. Americans were least likely to hold this belief at the tail end of the George H.W. Bush administration and near the end of the George W. Bush administration, according to the poll.
The Gallup survey provides quantifying data that Americans’ attitudes are affected by the ideology of the political party in power. Sometimes those party ideologies are subtle. Sometimes it is boldly articulated, as when President Ronald Reagan famously quipped, “The most terrifying words in the English language are: ‘I’m from the government, and I’m here to help.'”
Simple Stated Thoughts
The Death of Quarterly Reporting?
After a newspaper reported that he was dead, author Mark Twain famously said, “The reports of my death have been greatly exaggerated.” So too it seemed of reports that the SEC will do away with quarterly reporting requirements for public companies.
Last August President Trump ignited the issue with a tweet asking the SEC to consider reducing periodic financial reporting:
“In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!”
Proponents also say that moving from quarterly to semiannual reporting would foster longer term thinking by public companies. They contend public companies are managing their businesses to meet quarterly analyst expectations.
Initially responding positively to the president’s tweet, SEC Chair Jay Clayton said that long-term investing was a key consideration for many market participants and that “the Corporation Finance [division] continues to study public company reporting requirements, including the frequency of reporting.”
But on October 11, while speaking to the Bipartisan Policy Center in Washington, Bloomberg BNA reported that Clayton ended speculation about such changes to reporting requirements, telling the audience: “I don’t think quarterly reporting is going to change for our top names anytime soon.”
In an interview after the event, Clayton was more direct. Bloomberg reported Clayton saying that other factors, such as activist investing, caused more companies to be focused on the short term. “I would not say the driving factor is quarterly reporting.”
Less than a week later, however, on October 17, an SEC notice said that it will consider seeking public comment on ways to ease the quarterly reporting burden on publicly listed companies – something the SEC said has been on their radar prior to the president’s tweet.
Last Monday (11/12/18), while at the Financial Executives International’s Current Financial Reporting Issues conference in New York, Clayton confirmed that the SEC is taking the president’s proposal seriously.
“The president was right to raise this issue,” said Clayton. “He touched a nerve because I don’t think any of us want our very important private sector enterprises to be run on a short-term quarter to quarter basis. That’s important. I hope that most management teams have a strategic plan that goes out two, three or four years and are looking to invest over that horizon.”
At the same time, Clayton noted reasons to keep quarterly reporting intact, particularly for investors. “That said, you can see the other side of it, which is that our capital markets thirst for information.”
Thus the issue continues down a circuitous path. Definitely a balancing act. Deregulate where you can, without compromising investor and public protection.
The reports of the death of the Quarterlies may be greatly exaggerated. Or not. But with Clayton’s drive to lighten the cost and burdens of being and becoming a public company, look for some financial reporting relief — at least for smaller reporting companies.