HR, CSR or ESG . . . Non-Financial Skills

Posted on June 28, 2019 by David Tate, Esq.

I found the following interesting from D&O Compass, as reported by Institutional Shareholder Services, Inc. – perhaps desired director skill sets are including or starting to include culture or HR, corporate social responsibility or ESG, and other non-financial skills and backgrounds.

But I am a bit curious about one of the comments: “. . . there is an ongoing director-level shift away from ‘traditional’ skills such as financial expertise, audit expertise, and CEO experience.” I would argue, however, that financial expertise, audit expertise, and CEO experience also can relate and be pertinent to culture or HR, corporate social responsibility, and ESG.

In fact, as you might know from my other posts and materials, it is not uncommon for the audit committee to be delegated initial risk management oversight (although in my view overall oversight of risk management remains as a board responsibility), and it has been my view that culture, corporate social responsibility and ESG, including governance, offer potential opportunities for internal audit and external audit to provide new and enhanced value-added services that could be helpful to management including executive management, the board, and audit or risk committees, and that those services could also benefit the organization as a whole and the shareholders. Please excuse the less-than-fantastic quality of the D&O Compass materials, as that was the best that could be done. Best to you, David Tate, Esq., San Francisco/California.

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. 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

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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MITSloan online tool to measure and compare company cultures – you should be aware – comments and screenshot FYI

Posted on June 26, 2019 by David Tate, Esq.

This came to my attention – MITSloan online tool to measure and compare company cultures. I have previously written about culture, which, for example, is also an element of the COSO ERM framework, and was considerably in the news in 2018, including at the board level. But as I noted: will culture continue to be in the news, and will executive management and boards really take active interest? Culture also is, or could be a component of ESG.

Now apparently, and coming soon I suspect, proposals for different ways to measure culture. One or possibly two standards that are widely accepted would be helpful. Too many possible standards are not helpful, except to argue that there is no recognized standard. Business leaders, executive management, HR, directors, audit and risk committees, internal and outside auditors, in-house counsel, etc., should take note and be aware.

Regarding internal and outside audit, I have thought for a long time that they could (if they wanted to) become involved in auditing, or in auditing certain aspects or components of or processes relating to culture, governance, risk management, fraud risk, etc. I could argue that the value of internal audit and of outside audit are being passed by others who are taking the lead.

And if you are on a board, or on an audit or risk committee, where you are significantly reliant on other people to report to you, might this type of information be helpful to you in your oversight capacity? I have no explicit knowledge about how MITSloan goes about measuring and comparing company cultures, and I don’t know whether I would consider the criteria and processes that they use to be reliable and helpful; however, might it be interesting to search to see if your company is listed and evaluated? Dave Tate, Esq., San Francisco/California

Every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. 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.

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

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

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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ESG – SEC Commissioner Comments – And Who At Your Board Has Oversight?

Posted on June 26, 2019 by David Tate, Esq.

Is ESG, or some version of it here to stay? There isn’t agreement on this. My view is that, yes, ESG or some version of it is here and will remain, either by market forces and expectations, or by statute, regulation or rule. However, for example, click on the following link to a recent June 18, 2019, speech by SEC Commissioner Peirce and her discussion and some criticism of ESG – https://www.sec.gov/news/speech/speech-peirce-061819. If you follow ESG developments you already know that ESG or aspects of it and related disclosures are slowly being mandated internationally, while in the U.S. market forces and expectations are more at play.

My view also is that at least some of ESG is already covered by risk management or enterprise risk management. “Environmental,” yes that’s a risk management issue. “Social,” yes certain aspects of “social” are or can be risk management issues, including, for example, culture, reputation, and perhaps some aspects of safety. “Governance,” yes that’s a risk management issue. But I agree with the comments or criticisms or warnings of the risk that under the heading of ESG, or risk management, or enterprise risk management, or sustainability, or corporate social responsibility, and the list goes on, anyone could at least argue that their particular special or particular interest fits somewhere under those headings, and that business or a particular business must take action with respect to that particular special or particular interest. The ability to make such an argument also has increased exponentially, and we are seeing it played out, as everyone has or can have an opinion on anything and everything through social media and other opportunities.

So . . . my view is that one way or another these issues are here to stay, and management must address and deal with them as appropriate for each individual business (and the industry in which the business operates). You can also see in the news that by different means different businesses are dealing with or handling these issues, and the ways of doing so will continue to develop.

One might ask, within a particular business (because businesses are separate and individual and should not be lumped as a whole), are there people at the board level who are exercising some oversight of the business’s procedures and processes for handling ESG or aspects of ESG, or risk management or enterprise risk management over environmental, social and governance matters?

People should remember, or should learn, that for most but not all matters, issues and tasks the board’s role is oversight not day-to-day management or involvement, such as, for example, under the business judgment rule. See my prior post with business judgement rule slides at https://wp.me/p75iWX-fm. But director proxy voting recommendations are also becoming more widely disseminated and vocalized about individual directors.

With respect to risk management, the board often delegates to the audit committee the initial oversight of risk management. However, my view is that any committee to which risk management is delegated should still report to the board about its oversight and what it has found, done, and recommended in that regard, and that oversight of overall risk management remains as a board-level matter. See also various stock exchange rules and auditing pronouncements referring and relating to audit committee, or board involvement in the oversight of risk management.

Board and audit committee responsibilities and potential new responsibilities, or at least what some people are arguing those responsibilities should be, also have increased and are greatly increasing. Risk management isn’t new, although what should or might be done to oversee risk management or enterprise risk management is still developing. For the most part, ESG as possibly a separately recognized item is new – and I would argue that “ESG” as a recognized item is vague and ambiguous because there is no agreement about just what criteria or items comprise ESG. I would also suggest that even if it is not specifically legally required, the board and/or its delegated committee should begin, if they don’t already do so, exercising appropriate oversight of management’s procedures and processes relative to ESG and if not of ESG then certainly risk management or enterprise risk management relative to appropriate environmental, social, and governance matters.

These certainly are developing areas of law and possible responsibilities.

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.

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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What Do You Do About The Cease And Desist Order With KPMG As Your Auditor?

Posted on June 19, 2019 by David Tate, Esq.

On June 17, the SEC issued a cease and desist order against KPMG. You can find the order at https://www.sec.gov/litigation/admin/2019/34-86118.pdf.

The order is pretty detailed. Respondent KPMG admits to the facts set forth in Section III, and to certain violations. What do you do about the order if KPMG is your company’s auditor and you are on the audit committee, or if you don’t have an audit committee and you are responsible, or one of the people who is responsible for engaging the auditor for your business?

Everyone would acknowledge that the order discusses truly unfortunate and regrettable past events and actions by the people who were involved, which then reflects poorly upon and can negatively impact KPMG. Other than KPMG, five “Other Relevant Persons” are named or identified in the order. Three of the “Other Relevant Persons” previously worked for the PCAOB. The four “Other Relevant Persons” who worked at KPMG were all separated from the firm in 2017. The order is 21 pages in length, so this is a summary discussion. The order recognizes KPMG for self-reporting the situation, initiating an investigation under the oversight of a Special Committee of the Board, cooperating with the SEC, and undertaking remedial actions. Thus, although the cease and desist order is new, remedial actions started in 2017.

Presumably every audit engagement partner has been prepared to discuss the cease and desist order with audit clients and prospective audit clients. And if I was on the audit committee or was responsible for engaging the services of the auditor, I would raise, and to the extent possible, discuss the issue of the order with the engagement partner, in addition to any other questions that I might have about KPMG as the business’s auditor. Keep in mind that the engagement partner might well have some legal and privacy limitations about what she or he can say about the cease and desist situation and order. If KPMG has already been engaged as the auditor, I would still have those discussions with the engagement partner. Depending on the situation, I would also consider updating and requesting comments from the full board about the order and my discussions with the engagement partner. And to the extent possible, as additional information I would consider having developments and social and business media pertaining to this situation monitored, for example, to know how it is being viewed, and to monitor developments and that this situation involving KPMG doesn’t turn more negative for some unknown reason.

Some of the comments that I have read are already extremely negative toward KPMG as an entity. In that regard, I first view the people who were directly involved including their specific actions or inactions and the titles and authorities that they held within KPMG, while I separately view the actions or inactions of KPMG as an organization including the possible actions or inactions of executive officers, directors and managing agents or representatives, governance, culture and ethics, oversight, risk management, tone at the top, self-reporting and transparency, prompt and active remedial actions, and related processes and procedures.

If you are an audit committee member, or if you are responsible for engaging the outside auditor, you might also want to consider my June 9, post discussing the new PCAOB guidance pertaining to auditor communications with audit committees concerning auditor independence. Although that guidance is on an issue that is different than the KPMG cease and desist order, I believe you might find that guidance helpful during discussions with the engagement partner about the cease and desist order – for example, the guidance might provide some insight or feel as to the detail in which you might expect the engagement partner to be willing or able to discuss the cease and desist order and perhaps actions being taken by KPMG as a result. You can find my June 9, post and discussion at https://wp.me/p75iWX-ge.

The cease and desist order does not state or mean that KPMG cannot be or is prevented from being the auditor of your business. Indeed, pursuant to the order, KPMG self-reported and began remedial actions back in 2017. However, obviously the actions of the people who were directly involved do reflect poorly upon the organization, and some of the people who were involved held important or high or relatively high positions. The order, to which KPMG has agreed, requires the firm to implement significant remedial actions, training and oversight, all of which would be prudent. Obviously, it is important for every auditor, and, similarly, every business and organization including public and private businesses, nonprofits and governmental entities, to prevent judgment and ethical improprieties and shortcomings, and to promptly and appropriately address and remedy any such situation if it does occur.

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.

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

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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New PCAOB Guidance Re Auditor Communications With Audit Committee Concerning Independence – These Are Serious Discussions That Require Careful Analysis And Decision Making

Posted on June 9, 2019 by David Tate, Esq.

On May 31, 2019, the PCAOB Staff issued Guidance entitled “Rule 3526(b) Communications with Audit Committees Concerning Independence.” The Guidance is written to help auditors with communications pertaining to the auditor’s independence or lack thereof; however, audit committee members also need to know what to expect and require from the organization’s auditor. The Staff also states that its Guidance might be useful to investors.

The following is a link to the Staff Guidance https://pcaobus.org/Standards/Documents/Staff-Guidance-Rule-3526(b)-Communications-Audit-Committee-Concerning-Independence.pdf, and the following is a link to the Staff Guidance with yellow and green highlights that I added plus two short comments Staff-Guidance-Rule-3526(b)-Communications-Audit-Committee-Concerning-Independence with Tate highlights-2. I added yellow highlights to the auditor’s primary responsibilities, which audit committee members also need to know and understand, and I added green highlights to certain provisions that pertain more to specific audit committee member requirements and matters that may also pertain to SEC or legal considerations.

As you know, the auditor’s independence is a key prerequisite underlying the audit. An audit committee oversees the appropriateness and engagement of the auditor and the performance of the audit. An audit committee member needs to know that the auditor is independent, and needs to know that prior to auditor engagement, during the audit planning, and throughout the audit. As the Guidance indicates, even if the Rule 3526 requirements are satisfied, that does not necessarily mean that the SEC or that the PCAOB or that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the auditor was capable of exercising objective and impartial judgment on all issues encompassed within the auditor’s engagement. Thus, depending on the circumstances, also consider whether consultation with the SEC or PCAOB is appropriate.

An audit committee member needs to discuss the auditor’s independence with the auditor, evaluate the auditor’s independence, and satisfy herself or himself that the auditor is appropriately independent (consider also, e.g., the business judgment rule). If an audit committee member has any concerns, uncertainties or unknowns, red flags, or doubts about the auditor’s independence, the committee member should consider seeking professional including legal help, advice and representation. Ultimately, the issue is whether under the circumstances it is appropriate to engage the auditor or to continue engaging the auditor, or to engage a new auditor.

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.

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

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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A Few Comments About Going Concern Uncertainties, CAMs, Etc.

Posted on May 28, 2019 by David Tate, Esq.

I don’t hear or see much in the news about disclosures about an entity’s going concern, but I have a feeling that this is going to become a bigger issue for certain public companies, their boards and audit committees, and their auditors. Evaluating going concern is a complicated topic – thus, in this post I am highlighting one aspect, but an important aspect. See, FASB ASU No. 2014-15, and subsequent materials relating thereto. I suspect that most people would conclude that evaluating a potential issue relating to going concern involves, or depending on the circumstances could involve, especially challenging, subjective, or complex auditor judgment – thus, potentially raising critical audit matters or CAMs. Click on the following link https://wp.me/p75iWX-fr for a prior summary post about CAMs. I digress here for one comment: in regard to CAMs, one might ask, for example, “When are the circumstances of an auditor’s judgment simply ‘challenging’ v. ‘especially challenging’”?

Going concern can generally be defined as an evaluation of the entity’s expected ability to continue as an ongoing viable going concern business entity within one year after the date that its financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). Thus, for example, obviously for some business entities it can become a question of liquidity or liquid assets v. rate of cash burn. For the purpose of this post, I am looking at this issue only from an accounting/auditing viewpoint. Many other issues can arise, such as, for example, possible shareholder, investor, and creditor rights, and possible officer, director, and shareholder or majority shareholder liability relating thereto.

Now to the single point of this post, ASU No. 2014-15 provides that when evaluating conditions and events as to whether there is substantial doubt about an entity’s ability to continue as a going concern, the “initial” evaluation does not take into consideration the potential effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, the initial evaluation might not take into consideration plans to raise capital, borrow money, restructure debt, or dispose of an asset, that have been approved but that have not been fully implemented as of the date that the financial statements are issued). Again, I digress for one comment: in the above discussion, consider, for example, how to evaluate when a matter is “approved” v. “fully implemented.”

Importantly, I note, however, that later in the going concern evaluation process, mitigating factors should be taken into consideration including, for example, the probability that management’s plans will be effectively implemented within one year after the date that the financial statements are issued, and the probability that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Thus, in the evaluation process there is a timing aspect to considering possible mitigating factors: first they are not considered, but subsequently they are considered including their probability of implementation and success. Obviously, the going concern evaluation can be or can become complicated.

With the development of CAMs, I am sensing that issues such as these will be discussed more in public and investor view.

Onward.

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.

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

Posted on May 9, 2019 by David Tate, Esq.

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:

Relates to accounts or disclosures that are material to the financial statements; and
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.

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.

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

Posted on May 9, 2019 by David Tate, Esq.

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).

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.

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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

Posted on May 9, 2019 by David Tate, Esq.

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,

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.

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

Posted on April 29, 2019 by David Tate, Esq.

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.

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.

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