Tag Archives: SEC

CAQ calls for ESG standards and frameworks – my view: start small and reasonably certain, but just get started now, and then move forward from there . . . .

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David W. Tate, Esq., San Francisco and California – dave@tateattorney.com

I have written about ESG in prior posts. The Center for Audit Quality has now also called for the development of standards and frameworks that present ESG, and, presumably will allow (and lead to?) the auditing of ESG.

In one form or another ESG and concepts similar or relating to ESG have been discussed for years – for how many years, I don’t know, maybe 10, or 20, or 30 years in one form or another.

And it is entirely possible that these concepts will be discussed but will remain in some form of limbo for another 5 to 10 years, or longer. Or, ESG, including the auditing of ESG can start essentially immediately.

Standards exist already.

When you are looking at auditing or an audit you naturally can get into discussions about numbers or amounts that are presented on the financial statements, or notes to the financial statements, or management’s discussion and analysis, and for public companies (of which size?), private businesses (of which status and size – family owned, pre-IPO, small, mid-, or large, or simply regular closely held, etc.), nonprofits, and governmental entities, etc. As the CAQ mentions, you can also get into jurisdictional scope issues, such as statewide, countrywide, or worldwide, etc., standards.

In concept, anything and everything can be discussed, disclosed, and audited. Here’s my recommendation: start small and reasonably certain, but just get started now, and then move forward from there . . . .

I view this from an “A,” “B,” “C” approach (similar to how I view evidence in a case). “A” – this is what you already have in hand. “B” – this is what you reasonably believe exists, and that you reasonably believe you can obtain from a specifically identifiable source, but that you do not now have. “C” – this is essentially uncertain or speculative – it might well exist or should exist but don’t count on getting it.

For ESG, start with standards that exist that generally are recognized by the most influential stakeholders or authorities within a jurisdictional location whether it be local, statewide, countrywide or worldwide. Currently you might only have 8-10 “A” generally recognized standards for “E” environmental, 6-7 “A” standards for “S” social, and 3-4 “A” standards for “G” governance – and that’s fine. ESG will be developing and changing for the next 100+ years. The point is to get going with this, now, and it is possible to do so.

The following is a partial snapshot from the CAQ online discussion.

Best to you, Dave Tate, Esq. (San Francisco and California) – dave@tateattorney.com

Litigation, Governance, Administrations, Investigations, Mediator & Conflict Resolution

Mediation and Conflict Resolution Hexagon Matrix to Help Achieve Resolution and Settlement – Dave Tate, Esq.

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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 and governance committee, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

My law practice primarily involves the following areas and issues:

Trust, Estate, Probate Court, Elder and Dependent Adult, and Disability Disputes and Litigation

      • Trust and estate disputes and litigation, and contentious administrations representing fiduciaries, beneficiaries and families; 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, Business-Related, and Workplace Disputes and Litigation: Private, Closely Held, and Family Businesses; Public Companies; Nonprofit Entities; and Governmental Entities

      • Business v. business disputes including breach of contract; unlawful, unfair and fraudulent business practices; fraud, deceit and misrepresentation; unfair competition; licensing agreements, breach of the covenant of good faith and fair dealing; etc.
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Mediator Services and Conflict Resolution

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

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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.

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:

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

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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.

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

 

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

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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.

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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)

 

 

 

 

Elon Musk / Tesla – purported SEC settlement, but corporate governance and board member judicial independence questions also remain

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To say the least, it must have been a stressful couple of months for Tesla board members – how do you get your undisputed CEO leader and visionary to control himself, to take care of his mental and physical health, stop doing stupid or ill-advised things and making stupid or ill-advised public communications, and stop causing self-inflicted wounds? Or, at this point, how much do you need Mr. Musk to be the CEO of Tesla – can’t some other person take the helm – someone who is better qualified to build cars, and who also is an electric/battery power visionary? And where was the board in all of this? Well . . . we don’t know because they were silent to the public.  

You might have heard the news that the SEC filed suit against Mr. Musk last week as a result of an ill-advised and possibly unlawful public comment that he made. Yesterday (Saturday) I read two articles about possible settlement or actual settlement with the SEC. The following earlier-in-the-day article represents that Mr. Musk had rejected a settlement offer made by the SEC.  But please be aware that I never simply accept a news or other article as being correct – the article might be correct, or some of it might be correct, or none of it might be correct, you can be reasonably certain that the article is not entirely complete, and I also watch for the adjectives used and the opinions and conclusions reached as opposed to facts and whether or not those facts are supported with objective, credible evidence and sources. Thus, although I am using articles below, I am not representing or suggesting that they are correct or entirely correct. 

I found the first, earlier-in-the-day article interesting because of its discussion about the terms (presumably only some of the terms) of settlement purportedly offered by the SEC, and more interesting for the purported reasons why the settlement offer was rejected. The reasons for rejection, for example, do not include whether or not acceptance of the settlement would be in the best interests of Tesla and its stockholders. The reasons suggest that the settlement was rejected based on reasons personal to Mr. Musk, the reasons suggest a desire to maintain and not lose board control, and the reasons suggest a lack of board member involvement in whether or not the settlement should be accepted, and a lack of board member active diligent governance, oversight, and independence. Of course, obviously there are additional facts about which we are not aware.

In terms of board member independence, I am talking about possible lack of judicial independence, not independence as defined by stock exchange or similar rules, or whether or not the board member is an officer of Tesla. Board member judicial independence is an evolving and increasingly important attribute and evaluation – for example, does the board member truly diligently and prudently evaluate the issues at hand in the best interests of the stockholders and the company, and make decisions that are independent of the director’s self interests and independent of the director’s relationships with the executive officers and with the other directors. As you might be aware, judicial independence, for example, also takes into consideration business, financial, social, family, and friend interactions, relationships, and influences or pressures.

The following is the earlier-in-the-day article representing that settlement with the SEC was rejected and at least some of the purported reasons for the possible rejection – see a picture from the earlier-in-the-day first article below or  Click Here For Article

Musk reportedly doesn't settle with SEC

A later-in-the-day article then represented that settlement with the SEC had been accepted, and at least some of the purported terms of the settlement. I would view acceptance of the purported settlement as a good decision in the right direction for Tesla and its stockholders, and also for Mr. Musk. I will be interested in hearing who the two new directors will be, the process for and who nominates/selects the new directors and what Mr. Musk’s involvement will be in that process, and who the independent directors will be and whether they will be and are judicially independent as they should be judicially independent after taking into consideration that matters, issues and people over which they will have specific oversight and responsibility. See a picture from the later-in-the-day second article below or Click Here For Article

Musk reportedly settles with the SEC

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation http://californiaestatetrust.com, D&O, boards, audit committees, governance, etc. http://auditcommitteeupdate.com, workplace http://workplacelawreport.com

David Tate, Esq., Overview of My Practice Areas (Royse Law Firm, Menlo Park, California office, with offices in northern and southern California. http://rroyselaw.com)

  • Civil Litigation: business, commercial, real estate, D&O, board and committee, founder, owner, investor, creditor, shareholder, M&A, and other disputes and litigation; and investigations
  • Probate Court Litigation: trust, estate, elder abuse, and conservatorship disputes and litigation
  • Administration: trust and estate administration and contentious administrations representing fiduciaries and beneficiaries
  • Workplace (including discrimination) litigation and consulting
  • Board, director, committee and audit committee, and executive officer responsibilities and rights; and investigations

Royse Law Firm – Overview of Firm Practice Areas – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation as this is my primary area of practice)
  •             Business & Commercial
  •             IP – Patent, Trademark, Copyright, Trade Secret, NDA
  •             Accountings, Fraud, Lost Income/Royalties, Etc.
  •             Internet Privacy, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, D&O, Board/Committee, Shareholder
  •             Lender/Debtor
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, and Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions, Including AgTech and HealthTech, Etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.

PCAOB Adopts New Audit Report-Should Be Interesting-Still Has To Be Adopted By The SEC

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The following is a link to the PCAOB website page discussing the PCAOB’s June 2017 adoption of a new audit report which in part requires the disclosure of critical audit matters (CAM) for certain audits conducted under PCAOB standards. Here’s the link to the PCAOB page CLICK HERE

The new report standard still must be adopted by the SEC. If adopted, some of the new report standards will first apply to annual audits for years ending on or after December 15, 2017; however, the critical audit matter reporting would not apply until 2019 at the earliest for certain entities.

As the PCAOB notes, there is a need to make the audit report more relevant. In fact, there is a need to make both external and internal audit and auditors more relevant.

More will follow on this; however, I usually don’t spend signification time on new laws, statutes, regulations, rules and standards until (1) they are in fact enacted or adopted, and (2) it is near the time of actual use or requirement.

I do note, however, that this new report and the CAM provision is an interesting development, which perhaps should have occurred years ago. If you click on the above link, and then on the actual standard itself, you will also see that the standard contains worthwhile discussions about critical audit matters, materiality and other topics that are relevant to the standard.

Best, David Tate, Esq. (and CPA, California inactive). Royse Law Firm, Menlo Park Office, California.

Royse Law Firm – Practice Area Overview – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation because this is my primary area of practice)
  •             Business
  •             Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  •             Trade Secrets, NDA, Financial & Accounting Issues, Fraud, Lost Income, Royalties, Etc.
  •             Privacy, Internet, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, Board & Committee, Shareholder, D&O, Lender/Debtor, Etc.
  •             Insurance Coverage and Bad Faith
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, Etc., and Contentious Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions Including AgTech, HealthTech, etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

 

What’s up with this – the SEC disclaims a Dodd-Frank Annual Report by its Staff?

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I don’t get this. See the two below screenshots. The first screenshot is of the cover page from the SEC’s annual report about Dodd-Frank. And the second screenshot is from a following page with the SEC disclaiming the report which was prepared by the SEC staff. The SEC issues an annual report, and then disclaims it, alleging that the report was from the SEC’s staff, which isn’t sufficiently reliable? I don’t believe that a company or an individual could get away with that?

sec-annual-report-to-congress-on-the-dodd-frank-cover-page

sec-annual-report-to-congress-on-the-dodd-frank-disclaimer

 

Here is the link for the entire report,

Click to access owb-annual-report-2016.pdf

I’m not criticizing the report, necessarily, just the disclaimer. How can you disclaim a report on your behalf by your own staff? Did the SEC review the report? I hope so.

Best to you, Dave Tate, Esq., San Francisco and California.

 

New ISO Anti-Bribery Standard – Will It Give Companies An Absolute Defense?

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ISO has published its new international anti-bribery standard, ISO 37001. You can find select information about the new standard HERE and at http://http://www.iso.org/iso/home/standards/management-standards/iso37001.htm .

The short PowerPoint presentation in part says:

The Standard benefits an organization by providing:

  • Minimum requirements and supporting guidance for implementing or benchmarking an anti-bribery management system
  • Assurance to management, investors, employees, customers, and other stakeholders that an organization is taking reasonable steps to prevent bribery
  • Evidence in the event of an investigation that an organization has taken reasonable steps to prevent bribery.

SO HERE’S AN INTERESTING QUESTION: will compliance with the standard give the company a free pass on bribery liability with the SEC and other state and federal entities and agencies if in fact a bribery occurs? I bet not. However, consider that generally liability does not result unless the person or entity charged has breached or failed to satisfy the applicable standard or duty of care (except in select situations, e.g., such as strict liability or products liability, etc.), and that breach or failure causes damages. Thus, if the applicable standard becomes ISO 37001, and if that standard is met or satisfied, it certainly is arguable that no fault or liability should result if a bribery occurs.

Best to you, Dave Tate, Esq., San Francisco and California. See also Tate’s Excellent Audit Committee Guide (updated October 2016), tates-excellent-audit-committee-guide-10202016-final-with-appendix-a

The Business Judgment Rule – a short animation (for fun, but also correct):

Audit Committee 5 Lines of Defense 07182016

DTatePicture_Square