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

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

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

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

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

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

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

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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

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

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.

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.

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.

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

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance, litigation, investigations, liability, and risk management http://auditcommitteeupdate.com

Corporate, Business, Or Entity Culture – The Board’s Role And Knowledge About – From State Street

The following is a link to a January 2019, letter from State Street emphasizing and focusing on the business’s culture and how it adds value. The letter pertains to corporate culture because of the business in which State Street operates – but what we are really talking about is business or entity culture which includes public companies, private businesses, nonprofits, and governmental organizations and entities.

The letter is short and lacks detailed discussion about culture; however, I found interesting the attachment to the letter with possible questions that might be asked of the board members about the state of the business’s culture and the director’s knowledge thereof. I would assume that the majority of directors could not answer those questions with detail.

I also found interesting that the letter differentiates culture from values, and instead focus’ on culture’s impact on value. However, I would say that the business’s values drive and impact the business’s culture.

As culture has become a board topic (and apparently it might be here to stay), I would like to see additional, more specific discussions about how to evaluate and grade, and improve upon the organization or entity’s culture.

This definitely is a topic for the full board, but as it also falls into the category of risk management or ERM, this might also be on the plate of the risk management committee, if there is one, or on the plate of the audit committee to which risk management is often delegated (but let me also add, in my view, risk management is a topic for the entire board – if risk management is delegated to a committee, that committee should, nevertheless, report on risk management to the full board, for the full board’s consideration).

Here is the link to the State Street letter – be sure to read the attachment https://www.ssga.com/investment-topics/environmental-social-governance/2019/01/2019%20Proxy%20Letter-Aligning%20Corporate%20Culture%20with%20Long-Term%20Strategy.pdf

Best to you, David Tate, Esq. (and inactive California CPA)

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance and risk management http://auditcommitteeupdate.com

If you have found value in 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 above), and connect with me on LinkedIn or Twitter.

The following are a few additional materials for your consideration.

Auditor Inclusion of Critical Audit Matters in Audit Opinion – Center for Audit Quality Release to Help Understanding

You might be aware that 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 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?

I will be discussing the good, the bad, the ugly, and the confusing as this upcoming new area of audit opinion report continues to develop. Auditors and audit committees will need to carefully evaluate what to communicate and what is required to be communicated, materiality (qualitative and quantitative), and whether a matter involves especially challenging, subjective, or complex audit judgment.

For additional help with these issues, the following is a link to a June 24, 2018, release by the Center for Audit Quality entitled Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and other Users of Financial Statements – click on the following link https://www.thecaq.org/critical-audit-matters-key-concepts-and-faqs-audit-committees-investors-and-other-users-financial

Best to you, David Tate, Esq. (and California inactive CPA)

 

 

 

 

Tate’s Excellent Audit Committee Guide (02172017) – posted here, and being update

Below I have provided a link to Tate’s Excellent Audit Committee Guide, which I last fully updated February 17, 2017. Since that time developments relating to various of the discussion topics have been posted to this blog. I am starting the process of fully updating the Guide. To be sure there have been changes and developments since February 17, 2017; however, I believe that you will still find the Guide useful.

Click on the following link to the February 17, 2017, Guide Tate’s Excellent Audit Committee Guide 02172017 with Appendix A-2

The following is a screenshot of the Guide’s cover:

 

 

 

Director (Prudent) Note Taking, Discouraged or Not – Forward From Woodruff-Sawyer and Priya Cherian Huskins With Comments

Here is a link to a good discussion by Priya Cherian Huskins, Esq. at Woodruff-Sawyer about director note taking (not minute taking, but note taking), which can also apply to note taking in general in many situations, CLICK HERE. I agree with Ms. Huskins.

There should be policies and procedures or guidelines to be followed, but a director should be allowed to take notes, and should not be told that he or she cannot take notes. It is a matter of the director performing his or her oversight function in the manner that he or she believes is prudent and necessary. If I was told that as a director or audit committee member that I could not take notes that I thought were necessary and helpful to me and my oversight, I would question that instruction or request, and consider declining the position if it was forced.

Best, Dave Tate, Esq. (San Francisco/California)

‘Internal audit is crucial to assessing impact of corporate culture’

Internal audit’s mandate is much broader than external audit’s, says Richard Chambers of Institute of Internal Auditors

Click on the following link for the article: www.thehindubusinessline.com

Dave Tate, Esq. comment.

 

I’m going to disagree with Mr. Chambers on this one. I believe it is better for external audit to be auditing this issue – which is an issue that external audit already should be taking into consideration when designing the audit and the extent to which management and the accounting and internal control functions can be relied upon.

 

Although internal audit could be assigned a task or project relating to culture, on this topic I would keep the task or project very specific. Internal audit does also work and interact with management and executive management – assessing culture might detrimentally impact those relationships. I would however recommend that internal audit be more involved in risk management, which could involve culture but in a different context.

 

Audit committee, D&O, risk management, etc. blog: http://auditcommitteeupdate.com

Website: http://tateattorney.com

Trust, estate, conservatorship and elder abuse litigation blog: http://californiaestatetrust.com