Article 1
WASHINGTON—The president of the New York Stock Exchange called Tuesday for lawmakers to scrap an Enron-era auditing rule intended to guard against accounting fraud.
Tom Farley’s support for getting rid of the rule could convince some lawmakers that scrapping or narrowing it would convince more startups to go public. The regulation, long contested by business groups, forces firms to hire an auditor to review their internal controls designed to insure quality accounting. Mr. Farley’s comments also show how Wall Street is leveraging Washington’s renewed interest in deregulation to revive old laments over the 2002 Sarbanes-Oxley law, which expanded the power of corporate boards and enhanced criminal penalties for CEOs and CFOs that signed off on fraudulent accounting statements filed with the SEC.
The growing call from business groups to scale back the rule comes as the Securities and Exchange Commission’s new chairman, Jay Clayton, is crafting an agenda stressing deregulation and meant to encourage more smaller companies to go public. A bill passed by the House last month would broaden an exemption from the auditor rule that is currently available to firms with less than $1 billion in annual revenue.
It “put such a great cost on corporate America, and the benefits are not entirely clear,” Mr. Farley said at a hearing of a panel of the House Financial Services Committee. “The data doesn’t show clearly that we have reduced fraud or greatly inspired confidence. But what is clear is we have far fewer public companies.”
Mr. Clayton has said the drop in initial public offerings means retail investors have fewer good investment opportunities, as the fastest-growing startups increasingly seek capital from private investors. SEC Commissioner Michael Piwowar, a Republican, called yesterday for exempting more companies from the Sarbanes-Oxley provision.
Mr. Clayton’s hasn’t revealed his views on the future of the auditor rule.
Jay Brown, a securities law professor at the University of Denver, told lawmakers that repealing or watering down the rule would have bad consequences for investors. “It better insures the accuracy of financial statements,” Mr. Brown said. “And it benefits officers because they make better decisions when they understand the finances of their own company.”
Article 2
Accounting firm PricewaterhouseCoopers LLP agreed Wednesday to pay $1 million to settle a regulator’s allegations that its audit of Bank of America Corp.’s Merrill Lynch brokerage had been inadequate.
PwC’s 2014 audit of Merrill had failed to find that the brokerage improperly left billions of dollars in customer assets exposed to creditors’ claims, said the Public Company Accounting Oversight Board, which regulates the auditing industry.
Broker-dealers are required to hold certain customer securities in separate, safeguarded accounts to protect them from the claims of creditors if the brokerage failed. But Merrill failed to do so for several years, putting customer assets at risk and violating customer-protection rules, the Securities and Exchange Commission said when it settled with BofA over the matter last year.
PwC reported that Merrill had complied with the rules but didn’t obtain sufficient evidence to support that contention, the PCAOB said.
“Investors should not have to worry that their brokers’ auditors are failing to perform appropriate work in examining the safeguards around their funds,” said Claudius Modesti, the PCAOB’s director of enforcement and investigations, in a statement.
No Merrill customers actually suffered any losses.
In a statement, PwC said it was “pleased to have resolved the matter.” The firm didn’t admit or deny wrongdoing in agreeing to the settlement.
BofA paid a $415 million settlement to the SEC over the customer-protection issues in June 2016. A spokesman for the bank declined to comment on the PwC settlement.
Article 3
TOKYO–A number of creditors and others involved in Toshiba Corp.’s restructuring are pushing for a Toshiba bankruptcy filing as the best path to rebirth after its effort to raise money through a chip-unit sale stalled.
People involved in talks over Toshiba’s workout, including business partners, lawyers and people with ties to the company’s main bankers, said bankruptcy is worth serious study. Some of them said it is the best available option and that they are advocating it in discussions with Toshiba or creditors. They said a bankruptcy filing by Toshiba, the core of an industrial conglomerate, could free it of burdens that include lingering liabilities from the March bankruptcy of its Westinghouse Electric Co. nuclear unit in the U.S.
Toshiba’s chief executive, Satoshi Tsunakawa, said at a recent news conference that seeking debt relief through the courts isn’t an option. A Toshiba spokesman reiterated this week that the company has “no specific plan” to seek bankruptcy protection.
A person familiar with deliberations at one of Toshiba’s main lenders compared the conglomerate to a hole that might have treasure at the bottom but also lurking snakes. Bankruptcy, this person said, could kill any snakes and let the lenders access the treasure.
A filing would be among the largest in Japan’s history and carry drawbacks including possible political backlash in the U.S. Toshiba has committed $3.68 billion to nuclear-plant operator Southern Co. to cover its Westinghouse-related obligations from an unfinished project in Georgia. On Thursday, it reached a deal with Scana Corp. and a partner to pay $2.17 billion to cover obligations on a second half-completed U.S. nuclear project Westinghouse was building, in South Carolina.
Japanese government officials and Toshiba executives are aware of those drawbacks and may be deterred from a bankruptcy filing, people involved in the discussions said.
Toshiba in June estimated that its liabilities exceeded assets by more than $5 billion as of March 31. That followed its warning in April that it had “substantial doubt” about being able to continue as a going concern because of losses connected to Westinghouse.
Toshiba has said it plans to recover financial health by selling its memory-chip business, which has been booming recently thanks to demand for chips in smartphones and servers. On June 21, Toshiba designated a consortium led by a Japanese government-backed investment fund as the preferred bidder for the unit.
But the sale talks have bogged down since The Wall Street Journal reported earlier this month that the consortium’s bid could include an equity stake for SK Hynix Inc. of South Korea. A role for SK Hynix could raise antitrust issues and contradict the government’s stance that Toshiba’s technology shouldn’t fall into foreign rivals’ hands. Also, Toshiba’s joint-venture partner in the chip business, Western Digital Corp., has filed suit in California to block the sale , arguing that its joint-venture contract with Toshiba gives it veto power over any sale. Toshiba, which rejects that interpretation, is contesting the suit; a hearing is scheduled for Friday in San Francisco.
The stalemate and Toshiba’s long battle with its auditors–who have refused to approve financial statements this year–are eroding trust among creditors. Japan’s three largest banks have taken reserves for a portion of their Toshiba loans, according to bank officials.
Japan has far fewer bankruptcies annually than the U.S., especially among major corporations, in part because of the stigma attached to failure.
Nonetheless, people involved in the discussions described Toshiba as a classic case of a company burdened by obligations with large and uncertain costs that could be lessened under bankruptcy protection. Those obligations include a multibillion-dollar 20-year contract involving liquefied natural gas in the U.S.
One person directly involved in a portion of the Toshiba recovery plan said “everyone thinks” bankruptcy has to be looked at–but it is difficult to say so publicly.
Two other people familiar with deliberations at one of Toshiba’s main lenders said that even if the memory-chip sale were completed, the company would still be likely to run short of funds.
The Toshiba spokesman rejected that view, saying that if the company can sell its chip unit in line with current expectations, “We believe we will be able to secure sufficient funds.”
Mitsubishi UFJ Morgan Stanley Securities credit analyst Nobuhiko Ambiru wrote in a July 12 report, “We cannot entirely rule out the possibility that financial institutions will retreat from their supportive position and [Toshiba’s] ability to raise funds will be severely impacted, propelling a decision to seek a workout through the courts.”
Still, Mr. Ambiru said he expects Toshiba’s lenders to continue their support for now. Since it has thousands of suppliers, any halt in payments by Toshiba could have broader economic effects.
There are other potential downsides to a filing for bankruptcy protection.
Southern Co., the U.S. utility for which Westinghouse has been building two nuclear reactors, is counting on the $3.68 billion Toshiba pledged. A Southern spokesman said, “We continue to monitor Toshiba’s financial position.” The company says it is reviewing whether to go ahead with the reactors.
A Japanese government official said a Toshiba bankruptcy is an option but not a leading choice because of fears Japan would be criticized for breaking its promises over U.S. nuclear projects.
Several people also expressed fears about possible delays at the Fukushima Daiichi nuclear plant because Toshiba’s technology is needed to clean up reactors that suffered meltdowns after Japan’s 2011 earthquake and tsunami.
Article 4
With luck, it may soon become a little harder for companies to keep investors in the dark.
The Securities and Exchange Commission is considering whether to adopt a rule proposed by the Public Company Accounting Oversight Board that would require companies’ annual reports to include information about some of the most important issues raised by accountants in the annual audit.
Similar rules are already in force in the United Kingdom and Europe and other parts of the world; all told, 124 countries have adopted or are adopting those standards, says Matt Waldron, technical director at the International Auditing and Assurance Standards Board, a global accounting organization based in New York.
Should the U.S. join them?
Corporate audits have long been conducted in a kind of twilight. An independent accounting firm confidentially pores over a company’s books and records and other aspects of the business, and then gives a terse thumbs-up or thumbs-down in the company’s annual report.
A thumbs-up states that the accounting firm obtained “reasonable assurance” that the financial statements are “free of material misstatement” and represent the company’s condition “fairly.” A thumbs-down casts doubt on whether the company can “continue as a going concern.”
That’s it. These certifications — a handful of paragraphs typically indistinguishable from one company to another — offer no further information for investors.
The new rules would make auditors describe any significant issues they raised with the audit committee of the company’s board of directors. The auditors will have to explain any “challenging, subjective or complex” judgments.
Auditors in other countries are already disclosing the areas where they have challenged management’s assumptions and where estimates are conservative or optimistic.
So companies whose shares trade both overseas and in the U.S. may have the same auditor but two drastically different reporting formats.
The 2016 U.S. annual report for Aegon N.V ., the Dutch insurer and asset manager, has a cookie-cutter communiqué of less than 650 words; the international version is more than seven times as long and delves into the potential risks of specific assets and transactions. (Both were prepared by the Amsterdam affiliate of PricewaterhouseCoopers.)
After years of negotiating, the biggest accounting firms have been generally supportive of the new rules in their recent comments on the rule.
Some companies have argued that the rule could prompt their audit firm to disclose sensitive information about them that could be exploited by competitors. “I find that argument bizarre,” says Linda de Beer, an accountant and corporate director in South Africa who helped develop the international standards. “All investors are asking auditors for is, ‘We want to see a little of the detail, through your eyes, of what you drove deeper on.’ That doesn’t involve giving away any competitive edge.”
Would accountants be sued more often if they spelled out the reasoning behind their analysis? Lynn Turner, a former chief accountant at the SEC, thinks the opposite: “The obligation to come clean on critical items in the report means that auditors will have more ability to push back on management.”
That won’t prevent notorious frauds like Enron or WorldCom, but it might make them at least slightly less likely.
In surveys by the CFA Institute, a nonprofit group of financial analysts, investors have consistently supported the concept of adding more detail to the auditor’s report. The existing format is “antiquated,” says Kurt Schacht, a managing director there. “Shareholders ought to get more information considering that they pay for these opinions.”
A spokeswoman for the PCAOB declined to comment, citing the board’s policy not to discuss rules while the SEC is soliciting input from the public. The SEC also declined to comment.
Through Friday, you can express your own opinion on the rule at sec.gov/rules/pcaob.htm; the SEC is likely to move on it by the end of October.
When future Supreme Court Justice Louis Brandeis wrote, in 1913, that ” sunlight is said to be the best of disinfectants,” he couldn’t have known how long it would take to part the clouds.
Companies listed on the New York Stock Exchange weren’t required to have their financial statements audited by independent auditors until 1933. In 1939, the SEC’s chief accountant argued that the auditor’s report should itemize “any permissible exceptions or limitations” in a company’s financial statements, along with any “unusual and significant features of the audit” — exactly in the spirit of the rule the SEC is only now considering.
A 1963 study by the SEC found that more than a quarter of all companies whose stocks traded over-the-counter ” did not disseminate any financial information to shareholders at all,” and 23% of their reports weren’t even certified by the auditors.
Under the proposed rule, annual reports, already bulky, will get even fatter. But it will provide valuable information for investors, and it’s a welcome step on the long, slow path toward more transparency.
CORRECTION: Independent accountants audit a company’s financial statements. An “Intelligent Investor” column Aug. 18 incorrectly said independent auditors prepare a company’s financial statements.
1. What are the details of the settlement described in the article? Who are
the parties involved in the settlement?
2. What is the PCAOB? What is its areas of responsibility and authority?
How is its work affected by this dispute and the settlement?
3. The article states PwC did not admit or deny wrongdoing. Why would a
firm settle and make payment if it had done nothing wrong? Why would
the PCAOB agree to that?
4. What was PwC’s part in the wrongdoing? Did the firm commit the act of
failure to follow consumer protection rule? Why was the firm penalized?
1. What is KPMG? What FIFA? What did KPMG announce regarding FIFA?
Why was KPMG involved with FIFA?
2. What is a Big 4 firm? Why was a U.S. Big 4 firm involved with FIFA in
Switzerland?
3. What concerns did KPMG raise about FIFA’s activities? What was the
result of the firm raising these concerns?
4. Was KPMG required to raise these concerns with its client? Must KPMG
notify outside parties of these concerns? Why or why not?
5. Why did KPMG resign? What implications does an auditor resignation
have?
6. After KPMG’s resignation, what should the new auditor do going
forward?
7. What is the Enron :era rule that the president of the New York Stock Exchange
(NYSE) would like to see repealed?
8. Why does the president of the NYSE care about U.S. audit requirements?
9. How is the proposed rule change being considered? In your answer, comment
on the roles of Congress and the U.S. Securities and Exchange Commission in
this process.
10. Professor Jay Brown is quoted in the article as saying the current requirements
benefit not only investors in publicly-traded companies but also the
companies themselves. Explain this position.
11. What is insolvency?
12. Toshiba Corp. insolvent? Explain your answer.
13. What is Toshiba’s relationship to Westinghouse Electric? How did
Westinghouse’s bankruptcy filing lead to Toshiba’s financial difficulties? You
may refer to the related article to assist with this answer.
14. Near the end of the article, the author writes that Toshiba’s auditors “have
refused to approve financial statement this year.” Do auditors “approve”
financial statements? Explain and comment on the concern about public
understanding of the role of an auditor and an audit opinion.
15. Describe the standard form of audit report currently used in the U.S. How long
has this form of report been in use?
16. What changes has the Public Company Accounting Oversight Board (PCAOB)
proposed to audit report? You may access the proposed SEC requirement to
implement the requirement at https://www.sec.gov/rules/pcaob/2017/3481187.pdf Read Parts I and II. A. (Summary). You may also use the links in the
article to access the PCAOB’s process for implementing these new
requirements.
17. In the article, the author describes the current pass/fail audit report. “A
thumbs-up states that the accounting firm obtained ‘reasonable assurance’
that the financial statements are ‘free of material misstatement’ and represent
the company’s condition ‘fairly.’ A thumbs-down casts doubt on whether the
company can ‘continue as a going concern.’ Are these the only two options for
forms of an audit report under current requirements? Explain your answer.
18. There is a correction noted at the bottom of this article and copied here. Why
is this an important distinction? CORRECTION: Independent accountants audit
a company’s financial statements. An “Intelligent Investor” column Aug. 18
incorrectly said independent auditors prepare a company’s financial
statements.
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