California LLC Member and Manager Duties to the LLC and to Each Other

California LLC Member and Manager Duties to the LLC and to Each Other

In a member-managed LLC, each member owes a duty of loyalty and a duty of care to the LLC and to the other members.

In a manager-managed LLC, each manager owes a duty of loyalty and a duty of care to the LLC and to the members. Members who are not managers do not owe the duty of loyalty or the duty of care.

Note however that you also must read (and understand) the operating agreement to determine if any of these duties are expanded; to determine if any of these duties are reduced or purportedly eliminated (they cannot be eliminated); and, in a member-managed LLC, to determine if any of these duties are shifted from one member to one or more other members.

Issues, questions and disputes about legal responsibilities/duties and rights pursuant to these duties usually don’t arise or usually are relatively uncomplicated while the LLC members and managers are dealing with each other honestly, openly, and fully, as in most businesses and situations. In my practice I handle situations and represent clients where legal responsibilities and rights and the actions and inactions of the people who are involved are seriously at issue. And you can see from the wording and definitions in these materials that there can be significant uncertainty and vagueness about exactly what the responsibilities and rights are and can be in different situations.

Duty of Loyalty. The duty of loyalty is limited to the following unless the operating agreement provides otherwise (again, you must read and understand the operating agreement):

Account and Accounting. An LLC member in a member-managed LLC, or a manager in a manger-managed LLC must account to the LLC and hold as a trustee any property, profit, or benefit, that the member or manager, respectively, derives in the conduct of the LLC or in the winding up of the LLC’s activities, or from the use of the LLC’s property including but not limited to the appropriation of an LLC opportunity.  Also take note whether a specific member or a specific manager is tasked with the function of accounting for the LLC.

Adverse Interest. Each member (in a member-managed LLC) and each manager (in a manager-managed LLC) must not deal with the LLC, or on behalf of a person with respect to the LLC, as an interest adverse to the LLC.

Competing with the LLC. Each member (in a member-managed LLC) and each manager (in a manager-managed LLC) must not compete with the LLC in the conduct of the LLC or in the winding up of the LLC’s activities.

Duty of Care. The duty of care in the conduct of the LLC or in the winding up of the LLC’s activities is limited to not committing gross negligence or reckless conduct, intentional misconduct, or a knowing violation of law. However, you must read and understand the operating agreement as it is permissible for the agreement to expand the standard of culpability to ordinary or simple negligence.

Duty of Good Faith and Fair Dealing. In both a member-managed and in a manager-managed LLC, members and managers have a duty of good faith and fair dealing to the LLC and to the other members – for example, to not obtain an advantage or benefit by any misrepresentation or concealment or other means. And this is true whether the duties arise under the California Revised Uniform Limited Liability Company Act (CRULLCA) or the LLC’s operating agreement. A duty of good faith and fair dealing is a duty of care; however, you can also see that it is a duty of care that is separate from the culpability standards.

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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 post. 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. And please also subscribe to this blog and my other blog (see below), and connect with me on LinkedIn and Twitter.

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

I am also the 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

My law practice primarily involves the following areas and issues:

Probate Court Disputes and Litigation

  • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries and beneficiaries; elder abuse; power of attorney disputes; elder care and nursing home abuse; conservatorships; claims to real and personal property; and other related disputes and litigation.

Business and Business-Related Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; and Nonprofit Entities

  • Business v. business disputes including breach of contract; unlawful, unfair and fraudulent business practices; fraud, deceit and misrepresentation; unfair competition; breach of the covenant of good faith and fair dealing; etc.
  • Misappropriation of trade secrets
  • M&A disputes
  • Founder, officer, director and board, investor, shareholder, creditor, VC, control, governance, decision making, fiduciary duty, conflict of interest, voting, etc., disputes
  • Buy-sell disputes
  • Funding and share dilution disputes
  • Accounting, lost profits, and royalty disputes
  • Access to corporate and business records disputes
  • Employee, employer and workplace disputes, discrimination, whistleblower and retaliation, harassment, defamation, etc.

Investigations and Governance

  • Corporate and business internal investigations
  • Board, audit committee and special committee governance and processes, disputes, conflicts of interest, independence, etc.

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:

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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Forwarding two posts by Priya Cherian Huskins, Esq of Woodruff Sawyer: Delaware Supreme Court in Marchand discusses board-level monitoring, and director independence

I am forwarding two posts by Priya Cherian Huskins, Esq. of Woodruff Sawyer – Ms. Huskins’ posts highlight recent Delaware Supreme Court holdings in  Marchand which are or should be important considerations for all boards and board committees.

In the post immediately below (click the link) Ms. Huskins discusses the court’s holding that the board (and its committees) must have monitoring processes in place. As an example, whereas it is a management responsibility to design, implement, monitor, and update risk management (or ERM) and compliance processes, and it is often said that it is the responsibility of the board (or of a committee of the board in conjunction with the board) to oversee that management has done so (i.e., a duty to oversee), Marchand makes it clear that the board/board committee oversight responsibility is an active and diligent oversight responsibility and that the board/board committee must also itself have oversight processes in place – both management and the board/board committee must design, implement, monitor and update processes to satisfy their different responsibilities, and the board/board committee can be found to be in breach of its oversight responsibilities if it fails to do so.

Here is the link to Ms. Huskins’ post pertaining to Marchand and board/board committee oversight and monitoring processes: Delaware Supreme Court Underscores the Importance of Board-Level Monitoring in Marchand (Duty of Loyalty) https://woodruffsawyer.com/do-notebook/board-level-monitoring/

In the second post (click the link below) Ms. Huskins discusses the holding in Marchand pertaining to director independence, and as I often refer to independence as situational independence. You might be aware that whether or not a director is independent in a particular situation can be extremely important as it can impact whether or not the board/board committee has properly performed its responsibilities, the burden of proof or standard that will apply in evaluating whether or not the board/board committee has performed its responsibilities, whether or not the business judgment rule will or might apply, and whether or not the action, decision or vote by the board/board committee in the particular circumstance is valid and enforceable.

The issue of independence is determined by the court on a legal and factual basis depending on the law, facts and admissible evidence in the particular situation. For example, as you might be aware (and you should be aware), when evaluating whether a director is sufficiently independent from the CEO for the purpose of that director making a decision pertaining to that CEO, or when evaluating whether a director is sufficiently independent for the purpose of making a decision pertaining to a control or M&A transaction, or whether a director is sufficiently independent when making a decision pertaining to an evaluation or investigation pertaining to the actions of or an accusation against an executive officer, the courts do in fact also look at not only the direct and extended family relationships and connections between the director and the person(s) involved in or benefiting from the transaction, but also variously can consider their direct and indirect social and business groups, clubs, friends and activities; the co-ownership of assets; and whether the director might feel hesitant to act with independence for any particular reason including, for example, the importance of that directorship to the director, the extent to which the director and the other person(s) have children in the same schools or school classes together, spousal and significant other connections, and other similar relationships and connections, etc.

You get the point – whereas not too many years ago, whether or not a director is sufficiently situational independent was a much less potentially complicated evaluation and issue, those times have changed and are now long gone. Here is the link to Ms. Huskins’ post pertaining to Marchand and the evaluation of director independence: Delaware Supreme Court Further Clarifies Its View of Director Independence in Marchand https://woodruffsawyer.com/do-notebook/delaware-supreme-court-marchand-director-independence/?utm_source=newsletter&utm_medium=email&utm_campaign=blog-management-liability

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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 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:

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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The California business judgment rule statutes for corporations, nonprofits, and religious organizations, for your ease of reading and reference

For your ease of reading and reference, the following are the California business judgment rule statutes for:

Corporations – Cal. Corp. Code §309;

Nonprofit public benefit corporations – Cal. Corp. Code §5231;

Nonprofit mutual benefit corporations – Cal. Corp. Code §7231 (and see also §7231.5); and

Nonprofit religious corporations – Cal. Corp. Code §9241 (and see also §9240(c)).

The business judgment rule is state specific – see, for example, Del. Gen. Corp. Law §141 for Delaware corporations, in addition to relevant case law.

Also note that the statutory business judgment rule differs some for corporations, nonprofit public benefit corporations, nonprofit mutual benefit corporations, and nonprofit religious corporations.

Why am I posting this information? Because the business judgment rule is a good rule for people to follow, and to consider, in public company, private business, nonprofit organization, and governmental entity settings and situations. And in this context, when I refer to “people,” I am not referring only to directors, but also to officers, managers and all people throughout the organization. Note: I am not representing that all of these people are legally required to follow the business judgment rule – indeed, the rule is merely a possible defense to liability and possibly relevant to the burden of proof for the people to which it applies and who fact follow the rule – for other people, in the context of this post I am merely suggesting that all people should consider following the rule, or at least keep it in mind as possible guidance in a multitude of public company, private business, nonprofit organization, and governmental entity settings and situations.

Also note that I underlined the provisions below that are underlined (that is, the wording below that is underlined is not underlined in the actual statute).

California Corporations Code Section 309, for corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented.

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence.

(3) A committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as, in any such case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director. In addition, the liability of a director for monetary damages may be eliminated or limited in a corporation’s articles to the extent provided in paragraph (10) of subdivision (a) of Section 204.

(Amended by Stats. 1987, Ch. 1203, Sec. 2. Effective September 27, 1987.)

California Corporations Code Section 5231, for nonprofit public benefit corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner that director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within that person’s professional or expert competence; or

(3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause that reliance to be unwarranted.

(c) Except as provided in Section 5233, a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which a corporation, or assets held by it, are dedicated.

(Amended by Stats. 2009, Ch. 631, Sec. 14. (AB 1233) Effective January 1, 2010.)

California Corporations Code Section 7231, for nonprofit mutual benefit corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;

(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence; or

(3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.

(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which assets held by a corporation are dedicated.

(Amended by Stats. 2009, Ch. 631, Sec. 24. (AB 1233) Effective January 1, 2010.)

See also Cal. Corp. Code §7231.5:

(a) Except as provided in Section 7233 or 7236, there is no monetary liability on the part of, and no cause of action for damages shall arise against, any volunteer director or volunteer executive officer of a nonprofit corporation subject to this part based upon any alleged failure to discharge the person’s duties as a director or officer if the duties are performed in a manner that meets all of the following criteria:

(1) The duties are performed in good faith.

(2) The duties are performed in a manner such director or officer believes to be in the best interests of the corporation.

(3) The duties are performed with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

(b) “Volunteer” means the rendering of services without compensation. “Compensation” means remuneration whether by way of salary, fee, or other consideration for services rendered. However, the payment of per diem, mileage, or other reimbursement expenses to a director or executive officer does not affect that person’s status as a volunteer within the meaning of this section.

(c) “Executive officer” means the president, vice president, secretary, or treasurer of a corporation or other individual serving in like capacity who assists in establishing the policy of the corporation.

(d) This section shall apply only to trade, professional, and labor organizations incorporated pursuant to this part which operate exclusively for fraternal, educational, and other nonprofit purposes, and under the provisions of Section 501(c) of the United States Internal Revenue Code.

(e) This section shall not be construed to limit the provisions of Section 7231.

(Amended by Stats. 1990, Ch. 107, Sec. 5.)

California Corporations Code Section 9241, for nonprofit religious corporations:

(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as is appropriate under the circumstances.

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, in each case prepared or presented by:

(1) One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;

(2) Counsel, independent accountants, or other persons as to matters which the director believes to be within that person’s professional or expert competence;

(3) A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence; or

(4) Religious authorities and ministers, priests, rabbis, or other persons whose position or duties in the religious organization the director believes justify reliance and confidence and whom the director believes to be reliable and competent in the matters presented, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances, and without knowledge that would cause that reliance to be unwarranted.

(c) The provisions of this section, and not Section 9243, shall govern any action or omission of a director in regard to the compensation of directors, as directors or officers, or any loan of money or property to or guaranty of the obligation of any director or officer. No obligation, otherwise valid, shall be voidable merely because directors who benefited by a board resolution to pay such compensation or to make such loan or guaranty participated in making such board resolution.

(d) Except as provided in Section 9243, a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge his or her obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat any purpose to which the corporation, or assets held by it, may be dedicated.

(Amended by Stats. 2009, Ch. 631, Sec. 33. (AB 1233) Effective January 1, 2010.)

See also Cal. Corp. Code §9240(c):

(c) A director, in making a good faith determination, may consider what the director believes to be:

(1) The religious purposes of the corporation; and

(2) Applicable religious tenets, canons, laws, policies, and authority.

(Amended by Stats. 1987, Ch. 923, Sec. 1.4. Operative January 1, 1988, by Sec. 103 of Ch. 923.)

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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 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:

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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FASB proposes to delay accounting standards implementation – why? – my views, because the changes are significant, and sometimes difficult and disruptive, including on legal issues

The FASB has proposed delaying the implementation of some of the new accounting standards. Here is a link to the news release, and at the bottom of this post I have pasted the news release:

https://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176173179331&d=&pagename=FASB%2FFASBContent_C%2FNewsPage

New revenue recognition rules in 2018. New leasing rules in 2019. The change in standards back to a more principle-based approach (such as when I became a CPA) v. the rule-based approach that developed over time. Plus, all of the new standards, some of which have been enacted in part, and some of which are still to come (see below). There is a sea change of accounting standards occurring, not to mention changes to auditing standards, communications with management, boards and audit committees, changing and increasing topics and issues for disclosure, and the increasing expectations upon management, boards, audit committees, internal auditors, outside auditors, and in-house compliance professionals and legal counsel, etc. These and other changes are impacting not only public companies, but also private business entities, and nonprofits. The FASB and other sources acknowledge that significant difficulties and disruptions are occurring.

On the one hand, changes are what they are – my job or task is to deal with them. But these changes to accounting standards are very significant, as are the ramifications.

From a risk management perspective, I suggest that the FASB should continue to evaluate changes that have been implemented, enacted and proposed, and make its views public on an ongoing basis, even just as a reminder, why changes are being proposed and enacted, the pros, cons and costs, and the positive and negative impacts that are being caused upon businesses and job protection and creation, investors, lenders, borrowers, and other stakeholders, and whether the changes are truly necessary and worthwhile compared to the pains or negatives that are being caused.

Consider, for example, to what extent are the rules that were in place for decades deficient? If the then existing rules were deficient, why were those deficiencies allowed to exist? Due to the rule changes, some industries and businesses will see disruption or deterioration to their on-paper financial statements, whereas others will see improvements, all the while they are still the same industries or businesses that they already were. As a result of on-paper rule changes, some industries and businesses will now have an increased risk or difficultly of raising capital or of obtaining loans, and might also be less attractive, or more attractive, as M&A targets, whereas in fact there have been no operational changes in the impacted industries or businesses.

Consider, for example, if the rule changes cause an increase in restatements, such as due to difficulties understanding or implementing the rule changes, or as a result of vagueness in the rule (principle-based approach v. rule-based approach), or, perhaps, the rule fails or omits to include sufficient and necessary detail or scope, will those conditions impact possible liability exposure, standards of care, and the evaluation of possible wrongdoing including level of culpability or wrongful intent, resulting internal investigations, or the applicability of possible clawback provisions, job performance reviews, and other impacted matters?

As said above, my job or task is to deal with those ongoing activities and changes. This post merely discusses some issues for possible consideration resulting from the FASB’s ongoing activities.

Here is a copy of the FASB news release:

FASB SEEKS PUBLIC COMMENT ON PROPOSAL TO DELAY EFFECTIVE DATES FOR PRIVATE AND CERTAIN PUBLIC COMPANIES AND ORGANIZATIONS

Extends Implementation Deadline for Credit Losses, Leases, and Hedging Standards

Norwalk, CT, August 15, 2019—The Financial Accounting Standards Board (FASB) today issued a proposed Accounting Standards Update (ASU) that would grant private companies, not-for-profit organizations, and certain small public companies additional time to implement FASB standards on current expected credit losses (CECL), leases, and hedging. Stakeholders are encouraged to review and provide comment on the proposed ASU by September 16, 2019.

The proposed ASU describes a new FASB philosophy that extends and simplifies how effective dates for major standards are staggered between larger public companies and all other entities. Those other entities include private companies, smaller public companies, not-for-profit organizations, and employee benefit plans. Under this philosophy, a major standard would first be effective for larger public companies.  For all other entities, the Board would consider requiring an effective date staggered at least two years later.  Generally, it is expected that early application would continue to be permitted for all entities.

“Based on what we’ve learned from our stakeholders, including the Private Company Council and the Small Business Advisory Committee, private companies, not-for-profit organizations, and some small public companies would benefit from additional time to apply major standards,” stated FASB Chairman Russell G. Golden.  “This represents an important shift in the FASB’s philosophy around effective dates, one we believe will support better overall implementation of these standards.”

Based on that philosophy, the Board proposes to amend the effective dates for CECL, leases, and hedging as follows (chart assumes calendar-year end):

The proposed ASU and a FASB In Focus overview document are available at www.fasb.org.

About the Financial Accounting Standards Board

Established in 1973, the FASB is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut, that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP). The FASB is recognized by the Securities and Exchange Commission as the designated accounting standard setter for public companies. FASB standards are recognized as authoritative by many other organizations, including state Boards of Accountancy and the American Institute of CPAs (AICPA). The FASB develops and issues financial accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to investors and others who use financial reports. The Financial Accounting Foundation (FAF) supports and oversees the FASB. For more information, visit www.fasb.org.

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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 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:

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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D&O Compass/ISS – Trends in Director Skill Sets – Starting to Include culture/HR, CSR or ESG . . . Non-Financial Skills

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:

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:

* * * * *

 

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

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.

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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