Board/Committee oversight and management operations of risk management or ERM – when will regulatory agencies, or others, start looking?

Re the new DOJ Evaluation of Corporate Compliance Programs – looking ahead, when will the DOJ or some other regulatory agencies (there are many possible federal and state agencies), or Judges, start to look at board oversight (or audit committee oversight), and management operations of risk management or ERM and related processes? The issues or investigations are simply waiting there in egregious situations. Or, when will corporate or in-house counsel (who are facing increasing liability and criticism exposure), or the internal or external auditors pick up the ball and run with it? See also my blog post introducing the new DOJ Evaluation of Corporate Compliance Programs at Click Here

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only. I am also the new Chair of the Business Law Section of the Bar Association of San Francisco

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

 

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

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PCAOB – Implementation of Critical Audit Matters Deeper Dive

As I discussed in a prior post re critical audit matters (Click Here), external auditors are required to include a discussion of critical audit matters in their audit opinion reports for large accelerated filers for audits of fiscal years ending on or after June 30, 2019, and for other public companies for audits of fiscal years ending on or after December 31, 2020. I expect that CAMs and the wording of CAMs will in some instances present or cause contentions between the external auditor on the one hand, and the audit committee, board, and executive officers on the other hand.

A Critical Audit Matter or CAM is defined as:

Any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee: and that:

  1. Relates to accounts or disclosures that are material to the financial statements; and
  2. Involved especially challenging, subjective, or complex auditor judgment.

Thus, based on the above definition, simply determining whether a matter is a CAM could be a challenging issue.

For example, in any given audit situation consider:

-What matters were communicated, or were required to be communicated to the audit committee;

-Relating to accounts or disclosures that are material to the financial statements; and

-Involved especially challenging, subjective, or complex auditor judgment?

The PCAOB has issued a more detailed and worthwhile discussion about critical audit matters and the reporting requirements that is entitled Implementation of Critical Audit Matters Deeper Dive. To view the paper, Click Here

In some circumstances critical audit matters will now become important topics for discussion. The Implementation of Critical Audit Matters Deeper Dive paper also identifies many uncertainties that are yet to be resolved relating to CAMs. Indeed, CAMs are principles based, and likely will vary from auditor to auditor based in part on the auditor’s objective, or subjective, evaluation and judgment. I note that the PCAOB’s paper provides a worthwhile discussion and many examples that should be studied. And the PCAOB also notes twice in the paper that they expect that most audits will include at least one or more CAM. And it should also be noted that the existence of a CAM should not automatically be thought of as a negative or detrimental item – it all depends on the nature of the CAM and how it is worded, as not all CAMs are equal.

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

 

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

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Tate – Business Judgment Rule Slides

The business judgment rule provides a director with a defense to personal liability, holding that as a general principle of law, a director, including a director who serves as a member of a board committee, who satisfies the business judgment rule has satisfied his or her duties, standard of care, or responsibilities. Thus, the business judgment rule provides one standard of care, although other standards may very well also apply to specific tasks and responsibilities, or in different circumstances. The business judgment rule provides a standard, and a good overall approach, for directors and audit committee members to follow, although the rule is somewhat lacking in specific detail. In some states the business judgment rule is codified by statute while in other states the rule is established by case law (see, i.e., Cal. Corp. Code §309 for California corporations, Del. Gen. Corp. Law §141 for Delaware corporations, in addition to relevant case law). The rule also applies to directors as board committee members. The business judgment rule also simply makes sense.

Also note that in California the business judgment rule is separately codified at Cal. Corp. Code §5231 for nonprofit public benefit corporations, and at Cal. Corp. Code §7231 for nonprofit mutual benefit corporations, and although those sections are in many respects similar to Cal. Corp. Code §309, the differences can be important.

Click on the following link for my Business Judgment Rule Slides (presented in pdf format): The Business Judgment Rule Slides. The slides are presented in two parts – the first part is focused on the business judgment rule from a mostly legal perspective (slides 1-14), whereas the second part is focused on a non-legal less formal perspective (slides 15-23).

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

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New April 2019, DOJ Evaluation of Corporate Compliance Programs – the word risk is used 49 times, the board 11 times, and the audit committee 2 times

I have provided below a link to the new 19-page, April 2019, DOJ Evaluation of Corporate Compliance Programs guidance. Obviously a tremendous number of law firms will be discussing and advising about this new guidance. I note that the term risk management is used only once in the document but the word risk or words associated with risk are used 49 times, board or board of directors are used 11 times, and audit committee is used twice. With respect to boards or boards of directors, and audit committees, the guidance is looking for oversight by a source that is autonomous from management, and for there to be a means to allow (or encourage) reporting to a source that is autonomous from management. But in that regard I note that autonomy from management can be a complicated issue as some board members might be involved in management, and other board members, although independent from management, might have conflicts or might not truly be independent such as because of relationships, or perceived alliances, influences, or pressures, or other possible situations.

Click on the following link for the Evaluation of Corporate Compliance Programs guidance: DOJ – Evaluation of Corporate Compliance Programs April 2019, 

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

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New Supreme Court Ruling on Antifraud – Woodruff Sawyer

I am forwarding the following link to a Woodruff Sawyer post by Priya Cherian Huskins discussing Lorenzo v. Securities and Exchange Commission and the application of the securities anti-fraud law provisions to a defendant who arguably only passed along misleading information and was not the “maker” of the misleading information. This post also is somewhat of a test as I am posting it from my Samsung phone. David Tate

https://woodruffsawyer.com/do-notebook/supreme-court-ruling-antifraud-could-doom-messenger/?utm_source=newsletter&utm_medium=email&utm_campaign=blog-management-liability

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

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I am now the new Chair of the Bar Association of San Francisco Business Law Section

Just a brief update – I am now the new Chair of the Bar Association of San Francisco Business Law Section. BASF is a very active and worthwhile organization. I am looking forward to this opportunity, helping to provide benefit to the members of the Section, and helping to grow the Section. This opportunity also fits well with my practice as an attorney.

Over the years, in the past I have been active with many organizations including as a board member of two nonprofits, and as the independent audit committee chair of another large nonprofit, and many leadership positions with the California Society of CPAs including at the statewide and local chapter levels.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

New Musk / SEC Agreement – Will It Work? – Red Flags – If I Were The Judge

At this point most reasonable people would not dispute that Mr. Musk has difficulty wording his communications (tweets) in a manner that is acceptable or more likely to be acceptable under the securities laws. Greatly summarizing the law, ask yourself if the wording and information that Mr. Musk has communicated or is proposing to communicate is or would be (1) viewed as being material to the average investor, (2) vague puffery, (3) a statement or assertion of current fact, (4) a statement or assertion of forward-looking wording and information, or (5) a mixed combination of any of (1)-(4)?

Vague puffery should not be actionable. Information that is not “material” also should not be actionable; however, whether information is material (quantitatively or qualitatively) can be a slippery slope question of fact, and you might ask why Mr. Musk would be communicating the information if he did not consider the information to be important as to Tesla? Regarding (3), well . . . is the statement or assertion of current fact true and accurate as expressed? Regarding (4), well . . . even if the statement or assertion includes forward-looking warnings or disclaimers (which it should/must), is there a reasonable factual basis for making and believing the truth and accuracy of the forward-looking statement or assertion?

The players involved at least include Mr. Musk, the SEC, the Board, the Audit Committee, the Disclosure Controls Committee, and the new experienced securities attorney who is supposed to review, fix/modify, and authorize Mr. Musk’s communications before Mr. Musk makes them. Obviously, this has been, and will be a challenge for Ms. Musk. Presumably, he views Tesla and Tesla’s further future success, or not, as his creation, and rightly so. Mr. Musk has accomplished an amazing task thus far. But public companies have rules of communication that must be followed. And it is arguable that at this point his manner of communications might be hurting Tesla as much as they help. Assertions of current fact, and assertions of forward-looking statements certainly can be made, and it is arguable that they are supposed to be or at times must be made or disclosed, but they need to be made in an appropriate manner.

Where has the Board been in all of this? We don’t know, because the Board has not said. The Board is overall responsible for risk management.

These certainly are risk management, governance, and internal controls issues.

Where has the Audit Committee been in all of this? We don’t know, because the Audit Committee has not said. The Audit Committee Charter in part states that the Audit Committee assists the Board with oversight of the Company’s compliance with legal and regulatory requirements, and also assists the Board with oversight of the Company’s risk management. The Charter further states that the Audit Committee also is involved in the oversight of internal controls and at least some of Tesla’s corporate communications.

Tesla also has a Disclosure Controls Committee. Where has the Disclosure Controls Committee been in all of this? We don’t know because the Disclosure Controls Committee has not said.

And, assuming that the Court approves the new Musk / SEC agreement, going forward where will then be the experienced securities attorney who is supposed to review, fix/modify, and authorize Mr. Musk’s communications before Mr. Musk makes them?

Thus far, oversight has not worked. And, there are red flags all over the place. Although Boards, and Board Committees (e.g., the Audit Committee), and in-house legal and compliance professionals usually are not personally liable for unlawful activities of the company or its officers, that is a changing environment, and cases also do hold that liability can attach when red flags are ignored or not remedied.

This is really easy to resolve if Mr. Musk wants to modify how he does his communications, as frustrating as that might be for him.

What will/should the Judge do? I would approve the new agreement, perhaps with a few minor changes. I would put in place a process for meet and confer between the parties, and then also quick Court involvement if there is a perceived new violation of the new agreement, and I would schedule a new status hearing in the not-to-distant future, such as 30 days.

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

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