PCAOB – SEC – Grant Thornton – ALC/Broadwind – Game Changers, If It Continues

The PCAOB is causing a change in the auditing profession, and for those in the auditing profession who aren’t changing, they really must change or eventually they will be out of a job. The change, however, will only continue as long as the PCAOB continues to seriously evaluate auditing firm practices and diligence, and publish its findings or opinions. In a very specific area, auditing firm practices and diligence in specific audits, the PCAOB has been very hard-hitting by traditional standards. While you might agree or disagree with some of the PCAOB’s findings or opinions in certain audits, it must be, or should be embarrassing for the auditing firms and the auditors involved and also career and business impacting.

After many years of being involved in lawsuits and issues relating to liability, litigation, duties and responsibilities, I have concluded that in most circumstances people simply don’t change their practices or the way in which they do things unless they are in some manner forced to change. For example, they might be forced to change because of the serious and actual possibility of punishment (jail time or high dollar liability), a new specific law, statute, regulation or rule change, a professional organization that sets a new specific leading standard, serious impact upon business getting, or strong public or community expectations (which also might cause a serious impact on business getting or personal reputation). Take risk management, for example, only relatively recently there are now requirements that boards, or audit committees, or other committees and people perform risk management, and there are starting to be public or community expectations in that regard. Yes, those are changes that have effect. On the other hand, the changes aren’t “specific,” and we haven’t seen the serious and actual possibility of punishment for failure to perform – the liability exposure is still for an accident that occurs, not for the specific failure to perform or try to perform reasonably prudent, business judgment rule, risk management.

Let me get back to the specific situation at hand, the recent SEC action against Grant Thornton and two of its partners for their audits of ALC and Broadwind. And to settle the matter the SEC obtained an admission of fault from Grant Thornton. That admission of fault is a big deal.

The SEC has not traditionally required an admission of fault. Typically the order or finding says something like “without admitting liability or fault . . . . “ I contend that the SEC really only should bring cases where they have sufficient evidence of significant wrongdoing and they really believe that they can obtain in settlement or at trial an admission or a finding of fault. This business of bringing and settling cases where the SEC extracts a settlement without fault, simply for payment of money or probation, is unimpressive and is a waste of governmental time and resources, as is also a finding that there was a violation of accounting or internal controls as that violation can be found or argued in every case that the SEC brings. It’s like the SEC is simply perpetuating its own existence, and isn’t really helping stockholders – instead, it’s just the SEC going through the paces. I would argue that the SEC much better overall serves stockholders by actively prosecuting serious cases, fully, on serious charges and evidence.

So, let me get back to the specific situation at hand. The PCAOB has set a new standard and tone with the manner in which it investigates and then publicly reports its findings and opinions. That new standard and tone will only continue, however, as long as the PCAOB continues with this approach. The SEC might now be setting a new standard if it concentrates its resources on bring cases where they have sufficient evidence of significant wrongdoing and they really believe that they can obtain in settlement or at trial an admission or finding of fault. That would force a game change. In addition to the actions of the PCAOB, the SEC would cause, or force, the auditors to up their game, significantly. The result will impact audit quality and reliability to the benefit of the investing public. Those actions also will or should cause boards and audit committees to up their games. Notice that I did not say that it will “force” boards and audit committees to up their games, and I also did not say that those actions will or should cause boards and audit committees to up their games “significantly.”

The obvious truth is that in the underlying facts in these cases there are many players who are, or who could be, or perhaps should be involved, including, for example, internal audit and the chief internal auditor, the board, the audit committee, the risk committee if there is one, in-house general counsel, the chief risk officer and the risk management function, the CFO, possibly the CEO, possibly the COO, the external auditor, possibility the regulators, possibly external legal counsel, et seq. And this is also why the SEC really should concentrate its resources on serious cases that will cause or force everyone to up their games. There will be an effect throughout, not simply for the direct entities involved.

Some people won’t like what I am suggesting, i.e., that the SEC should expand the players that it looks at, but in fact I’m also advocating for the SEC to stop with the patsy or less serious cases, and instead concentrate on the serious ones and then really look at the involvement of lack thereof of everyone. That also doesn’t mean that everyone is at fault or liable, or that an admission can be or should be obtained by everyone. That would be a ridiculous position – of course not everyone is at fault. But, there should be a discussion about more of the players and what they did or did not do. Ok, Grant Thornton admits that it did not properly perform the two audits in question – Grant Thornton is a good auditing firm, and you can bet that they will up their game – but Grant Thornton is only the external auditor, it had no involvement in the actual wrongdoing – so the SEC should also be looking at the extended list of players that I have listed above, and by doing so the SEC, and the PCAOB, will cause or force everyone to up their game. No one in those positions wants to be embarrassed or liable for wrongdoing. You can bet that if I’m on a board, or on an audit committee, if something unexpected occurs, and, yes, things that are unexpected do occur even without fault, I don’t, however, want to be embarrassed in hindsight if it looks like I did not perform or try to perform prudent oversight, or prudent business judgment, processes and practices.

 

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Click on my updated Audit Committee Guide – 172 pages – includes SSARS 21 discussion – Free PDF – dtd Oct. 24, 2015

Below I have provided a link to a pdf of my updated Audit Committee Guide, 172 pages, includes a SSARS 21 discussion, dated Oct. 24, 2015. Please do pass the guide to anyone who would be interested. And I will continue to update and add to the guide in the future. Here is the link to the Guide, Tate’s Excellent Audit Committee Guide 10242015

Dave Tate, Esq., San Francisco and throughout California, civil and trust, estate, conservatorship and elder abuse litigation; contentious administrations; business, D&O, real estate and audit committees, http://californiaestatetrust.com and http://directorofficernews.com

Risk Management – Is Anyone Doing It, Yes Some Are – Is There An Agreement On How It Should Be Done, No Definitely Not


Here is a link to a discussion by Matt Kelly of Compliance Week about risk management, suggesting or perhaps stating that risk management is being done by financial institutions and some other public corporations, but it is a mixed bag, and, in my words, risk management and how to do it really have not caught on. And then below the link to Matt’s discussion, I have pasted in this post my response to Matt. Here is the link to Matt’s very interesting discussion – please read it, CLICK HERE.

And here’s my response to Matt’s post. Good discussion Matt. I’m not sure everything in the discussion correlates, but I believe the underlying points are true. Your discussion caused me to think about all of the many, many emails that I receive about new risk management discussions and posts, and some of them are by me. But have they done much good? I question whether they have. I’m not being critical, just truthful. Hordes of risk management, and internal control, and governance discussions and posts are created monthly, and for many, many years. But I have come to believe that people most often take action only if they are presented with a specific situation that they know demands that they take action, or they are required to by law, statute, or regulation, or they are required to by rule, sometimes (such as stock exchange rules), or it becomes an expected practice, sometimes (such as an expected practice in the community or perhaps by a professional organization such as the NACD, etc.). Otherwise, the requirement that the organization, or the board, or the audit committee, or the risk committee is responsible for risk management is simply too vague and indefinite. And that’s the way it is.

Dave Tate, Esq., San Francisco and throughout California, http://directorofficernews.com

 

Ethical imperatives for every board | Listed Magazine

I recently moderated an address by Andrew Fastow, the former CFO of Enron, and followed up by delivering a keynote on the role of the board in ethics, tying in aspects of Mr. Fastow’s speech. What f

Click on the following link for the article: listedmag.com

Dave Tate, Esq. comments. I usually don’t find lists useful – there are just too many of them that lack detail. For unknown reason, nevertheless, I decided to real this article by Richard Leblanc. I recommend that you also read the article, at least for the purpose of stimulating serious thought. You might also consider providing the article to your executive officers, board, audit committee, internal audit and legal counsel.

“Ethics” is kind of one of those vague areas that lacks specifics. It is easier to focus on prudent business judgment (including the business judgment rule) and legal and regulatory mandatory requirements. Factually, Richard’s 10 points actually do that, but under the heading of “ethics.” Also consider the comments at various of the 10 areas about the need for independent evaluation and representation, the ability to obtain independent outside assistance, and the use, oversight and hiring of the internal audit function – these comments are all very worthwhile for consideration.

Thank you for reading. Dave Tate, Esq., San Francisco and throughout California, civil, trust, estate, conservatorship and elder abuse litigation, and contentious administrations, blogs: http://directorofficernews.com and http://californiaestatetrust.com

Guest Post: Access to Internal Investigation Records by Shareholders | The D&O Diary

Mary Gill Courtney Quirós In many instances when allegations of wrongdoing surface at a company, the appropriate course for the company’s board will be to

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

Dave Tate, Esq. comment: A good discussion. Additionally, in any internal investigation, officers, directors, audit committee members and others need to keep in mind that the investigation might be ordered produced or there might be a decision to voluntarily produce the results (which most likely would also put at issue the background information). The fact that there was an investigation, if properly performed, tends to show diligence and business judgment, both of which are required by directors.

Dave Tate, Esq., San Francisco and California, business, real estate, D&O, trust/estate, elder abuse, injury, and professional liability litigation, http://directorofficernews.com and http://californiaestatetrust.com

The Yates Memo: What Is It and What You Need to Know

Click on the following for the article: www.wsandco.com

Dave Tate comment: here’s a very good discussion by Priya Cherian Huskins of Woodruff Sawyer about the recent, September 2015, Yates memo and what it means for the Attorney General’s office and prosecution of individual people, not just corporations, for alleged corporate misconduct.

Dave Tate, Esq., San Francisco and throughout California – litigation for business, real estate, injury, insurance, trusts/estates/conservatorships/elder abuse, and professional liability (including accountants, D&O, fiduciaries, brokers and agents)

Fraud: Is Your Nonprofit Ripe for the Picking?

Fraud has always been a concern for nonprofit organizations, and it’s not going away. A recent Association of Certified Fraud Examiners report shows the median loss is more than $100,000.

Click on the following link for the article: armaninollp.com

Dave Tate’s Comments. Internal controls and the potential for fraud are very real issues for nonprofits, their management and officers, and their boards. If you are a nonprofit board member you cannot simply assume that internal controls, the accounting function, and the external audit, review or compilation are taking care of everything. Are these issues that the board has on its agenda, and that the board discusses and evaluates? Have you requested that these issues be put on the agenda? You should.

Dave Tate, Esq. and licensed CPA (inactive) in California.

Blogs: http://directorofficernews.com and http://californiaestatetrust.com

See also Tate’s Excellent Audit Committee Guide, which you can find at http://directorofficernews.com