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.

 

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

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

Tate’s Excellent Audit Committee Guide Sept. 2, 2015 Updated (139 pages)

The following link is to my Audit Committee Guide, updated September 2, 2015, to include additional internal audit materials and links, 139 pages in total. Please read and pass this material to anyone who would be interested, Tate’s Excellent Audit Committee Guide 09022015

Dave Tate, Esq. (San Francisco/California)
Blog, D&O, Audit Committee, Risk Management and Compliance: http://directorofficernews.com
Blog, Trust, Estate, Conservatorship & Elder Abuse Litigation: http://californiaestatetrust.com

Tate’s Excellent Audit Committee Guide – 122 Pages – Updated August 7, 2015

Please click on the following link for the August 7, 2015, edition of Tate’s Excellent Audit Committee Guide (122 pages), Tate’s Excellent Audit Committee Guide 08072015.

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

Tate’s Excellent Audit Committee Guide (July 31, 2015, a work in progress)

For audit committee members and directors, I have attached three links below, the first for my 2007 audit committee chapter for the California Continuing Education of the Bar, the second for the new audit committee guide that is a work in progress but already contains substantial materials, and the third to the cover and table of contents to Accounting and Its Legal Implications.

Using my blog posts, the 2007 audit committee chapter (which is now unpublished, CEB subsequently cancelled the entire Director and Officer binder), and the new audit committee guide you should get a good feel for new developments and guidance about audit committee member functions and responsibilities.

I also ask that you tell other people about this blog and the new audit committee guide.

1. Here is a link to my 2007 audit committee chapter for the California Continuing Education of the Bar (the chapter and the entire D&O publication has been cancelled for some time), CLICK HERE

2. The following is a link to the new audit committee guide which contains substantial materials although it is a work in progress, Tate’s Excellent Audit Committee Guide (July 31, 2015 version), Tate’s Excellent Audit Committee Guide 07312015 CLICK HERE

3. Cover and Table of Contents from Accounting and Its Legal Implications – I expect to scan and post this entire material shortly – although some is outdated, it is still a good read – originally published by Business One/Irwin Publishing, CLICK HERE

Thank you. Dave Tate, Esq. (San Francisco / California).

Tate’s Excellent Audit Committee Guide, Plus Prior 2007 CEB Audit Committee Chapter

For audit committee members and directors, I have attached three links below, the first for my 2007 audit committee chapter for the California Continuing Education of the Bar, the second for the new audit committee guide that is a work in progress but already contains substantial materials, and the third to the cover and table of contents to Accounting and Its Legal Implications.

Using my blog posts, the 2007 audit committee chapter (which is now unpublished, CEB subsequently cancelled the entire Director and Officer binder), and the new audit committee guide you should get a good feel for new developments and guidance about audit committee member functions and responsibilities.

I also ask that you tell other people about this blog and the new audit committee guide.

1. Here is a link to my 2007 audit committee chapter for the California Continuing Education of the Bar (the chapter and the entire D&O publication has been cancelled for some time), CLICK HERE

2. The following is a link to the new audit committee guide which contains substantial materials although it is a work in progress, Tate’s Excellent Audit Committee Guide (July 31, 2015 version), Tate’s Excellent Audit Committee Guide 07312015 CLICK HERE

3. Cover and Table of Contents from Accounting and Its Legal Implications – I expect to scan and post this entire material shortly – although some is outdated, it is still a good read – originally published by Business One/Irwin Publishing, CLICK HERE

Thank you. Dave Tate, Esq. (San Francisco / California).

SEC Issues Concept Release – Audit Committee Disclosures About The External Auditor

This is my third new post about new proposed audit committee duties and responsibilities relating to the evaluation and retention of the external auditor, and the audit committee’s evaluation of the external auditor’s qualifications. It looks like these changes, or some of them, will occur. And they will be game changers.

Audit committee members will have more specific required duties in these areas, and audit committees and external auditors will be even more under the spotlight. These changes would require more specific audit committee oversight of the external auditor, they will change the relationship between the audit committee and the external auditor, and they may force the external auditor to perform better audits, and to provide better services (I say “force” but in fact this also creates good opportunities for auditors who embrace the changes and want to highlight the quality and extent of their services).

Here is a link to the SEC website page, and the following link is to the SEC Concept Release: SEC Concept Release on Audit Committee Disclosures About External Auditor.  Enjoy.

Dave Tate, Esq. (San Francisco / California)

PCAOB Issues Concept Release On Audit Quality Indicators – Important For Audit Committees And External Auditors

The PCAOB has released a concept release on audit quality indicators. You can find the release HERE, and the relevant PCAOB page HERE. These will be important for audit committees, external auditors, and other people.

As the PCAOB states:

“The indicators are a potential portfolio of quantitative measures that may provide new insights about how to evaluate the quality of audits and how high quality audits are achieved. Taken together with qualitative context, the indicators may inform discussions among those concerned with the financial reporting and auditing process, for example among audit committees and audit firms. Enhanced discussions, in turn, may strengthen audit planning, execution, and communication. Use of the indicators may also stimulate competition among audit firms focused on the quality of the firms’ work and, thereby, increase audit quality overall. Issues raised by the release include: (i) the nature of the potential indicators, (ii) the usefulness of particular indicators described in the release, (iii) suggestions for other indicators, (iv) potential users of the indicators, and (v) an approach to implementation over time of an audit quality indicator project.”

Dave Tate, Esq. (San Francisco / California)

What Really Matters For Audit Committee Member Actions – Considering Updating & Publishing My Audit Committee Guide

I have been considering updating and publishing again my audit committee guide. The most recent publication was as a new chapter to the 2007 California Continuing Education of the Bar publication Advising and Defending Corporate Directors and Officers, which was an excellent publication with 17 chapters on the various topics. Unfortunately for whatever reason the sales were not sufficient and CEB later discontinued the publication. I have attached a copy of my initial 2007 chapter HERE.

A lot has changed from 2007 to now. And the materials that I cover in my blog have also changed considerably. But as I have been considering a possible update and the table of contents it strikes me how much of the material consists of lists of qualifications, issues and topic areas that an audit committee and its member are required to consider. And the list is growing as we speak. Considerable detail is being added as to how an audit committee member should evaluate the sufficiency of the external auditor – in other words, a deliberate evaluation where perhaps before in many cases there might not have been any significant evaluation. This will also change how the external auditor goes about performing the audit, the value that the external auditor might provide to helping the audit committee member perform his or her oversight duties, and somewhat the relationship between the audit committee members and the external auditor. On the whole I believe the change is good. But I have also written for some time that I have concern about the long list of issues and topic areas that an audit committee member is required to consider, and that all audit committee members really do need to understand what their duties are, including what is in the audit committee charter (e.g., if the charter says “risk management” that description is simply too broad – risk management of what?).

It strikes me, however, that at the end of the day, the performance of an audit committee member’s oversight responsibilities requires:

Audit committee member understanding and competency;

Agenda;

Timely and active diligence;

Putting in the time;

Reasonable reliance on competent other people (the CEO, the CFO, internal audit if there is one, the external auditor, culture, reputation and tone at the top, the accounting and financial reporting functions and professionals, legal counsel and others);

Sufficiency of information;

Deliberative decision making; and

Anticipation and thinking ahead.

In other words, we are primarily talking about the business judgment rule.

I’m not sure that I will put in the time to update the audit committee guide. If I had a crystal ball that decision would be easy – if the guide will be read and used by enough people, or if I could find a law firm that is interested in these topics, then it is worthwhile. If I do the update, most likely I will post the updated materials in blog posts and then add to the materials as they progress. That will get the materials out considerably earlier. I doubt that I will use a publisher – in addition to many published articles I have previously formally published two audit committee related materials. The process takes longer than I prefer. And, on my blog the materials also will be free and available to everyone.

Those are my thoughts this July 3, 2015, morning. More to follow on this.

Dave Tate, Esq. (San Francisco / California)