Accounting Leadership Conference · Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates...

1 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

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June 28, 2017

Accounting Leadership ConferenceCorporate Finance Reform in the Trump Administration

Andrea Nicolas


Contents

Financial CHOICE Act

CEO Pay Ratio Disclosure

Relaxation of Conflict Minerals Rule

Repeal of SEC Payment Disclosure Rule

Non-GAAP Reporting Lessons for Energy Companies

SEC Has No Patience for Fake News on Stocks

Additional Topics of Note

Carbon Capture Financing

President Trump’s Views on the SEC and Financial Regulation


President Trump’s Views on the SEC and Financial Regulation

•Presidential Executive Order on Core Principles for Regulating the United States Financial System (February 3, 2017)

Trump signed an executive order directing the Treasury Secretary to identify laws and regulations inconsistent with the Trump Administration’s “core principles”, which has been widely reported to be an initial step in dismantling Dodd-Frank.

“We think we can cut

regulations by 75%”

- President Trump’s statement to a meeting

of business leaders (January 23, 2017)

Presenter

Presentation Notes

Executive Order states that “The Treasury Secretary shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.” These core principles include: (a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; (b) prevent taxpayer-funded bailouts; (c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; (d) enable American companies to be competitive with foreign firms in domestic and foreign markets; (e) advance American interests in international financial regulatory negotiations and meetings; (f) make regulation efficient, effective, and appropriately tailored; and (g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework. Chief of Staff Reince Priebus issued a memo to “the Heads of Executive Departments and Agencies” instructing them to: Send no new regulation to the Federal Register until a Trump-appointed or Trump-designated agency head has had an opportunity to review the regulation; Immediately withdraw any regulation already sent to the Federal Register but not yet published; and Postpone for 60 days any regulations that have been published in the Federal Register but have not yet taken effect * By its terms, memo does not appear to apply to “independent regulatory agencies” (e.g., SEC, CFPB, FTC, FCC, FRB, FDIC and OCC)


President Trump’s Views on the SEC and Financial Regulation (cont’d)

•“Jay Clayton is a highly talented expert on many aspects of financial and regulatory law,

and he will ensure our financial institutions can thrive and create jobs while playing by the rules

at the same time”

•- President Trump

Sworn in as chairman of the SEC on May 4, 2017

Partner at Sullivan & Cromwell LLP Has not been a litigator or held public office Some speculate that the SEC will pursue a

more balanced approach, instead of overemphasizing enforcement, or that the SEC’s focus will shift to capital markets to ease fund-raising efforts by companies

Nomination of Jay Clayton

Presenter

Presentation Notes

Clayton has been a corporate partner at a New York law firm for over 20 years representing clients such as Goldman Sachs and Barclays unlike his predecessor, he is not a litigator or a member of the white-collar defense bar Clayton’s positions on many issues facing public companies today are unclear, although he has criticized the consequences of FCPA enforcement on domestic business


SEC Enforcement Under the Trump Administration

•Division of Enforcement Vacant director position Unlikely to impact current cases Will directly impact the direction of the division going forward Broken windows approach of SEC Chair Mary Jo White at risk Likely to shift focus from FCPA cases, which is a major component of current enforcement

agenda Renewed debate regarding waivers Unclear impact on whistleblower office; but aggressive position regarding retaliation likely to

be reviewed Decrease in corporate penalties


Financial CHOICE Act

The Financial CHOICE Act is a republican led effort to undo much of Barack Obama’s signature financial regulatory reform law, Dodd-Frank.

In a 233-186 vote, the Financial CHOICE Act cleared the House.

Passage seems unlikely in the Senate; however it is possible that provisions with a positive impact on the federal deficit may be added to budget legislation later in the year.

“We expect to be cutting a lot out of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.”

- President Trump during a meeting with business leaders

Presenter

Presentation Notes

Dodd-Frank was enacted in July 2010 to create financial regulation processes to decrease risk in the financial system. Passage in House: No Democrat voted in favor of the legislation and one Republican opposed it Some provisions could be passed: It is important to note that while the Act is unlikely to advance in the Senate in toto, the Congressional Budget Office determined that eliminating the Orderly Liquidation Authority and restructuring the Consumer Financial Protection Bureau will reduce the federal deficit. It is possible that provisions with a positive impact on the federal deficit may be added to budget legislation later in the year that would not be subject to a filibuster or an approval threshold greater than a simple majority. Consequently, with Republican majorities in the House and Senate, it is possible these provisions could be enacted later in the year as part of the budget process known as reconciliation.


Financial CHOICE Act (cont’d)

Financial CHOICE Act outlines potential reform, including: Repeal pay ratio rules, hedging disclosure requirements, limit say on pay vote to material

compensation changes, modify clawback rule requirements.

Changes to facilitate securities offerings, including lower requirements for accredited investors, prohibit SEC rules imposing requirements on Reg D offerings.

Creates Small Business Capital Formation Advisory Committee.

Repeal conflict minerals, resource extraction and mine safety disclosure requirements.

Repeal SEC authority to adopt proxy access rules.

Repeal split chairman/CEO disclosure rules.

Require proxy advisory firm registration.

Prohibit DOL from taking further action on fiduciary rules.

Presenter

Presentation Notes

Under the Financial Choice Act, defendants in SEC administrative proceedings would have the right to demand instead to go to federal district court, where their cases are governed by the Federal Rules of Civil Procedure and not the SEC’s house rules. The Financial Choice Act is designed to steer the SEC away from imposing penalties on corporations and toward bringing actions against individual offenders. The bill proposes increasing the statutory penalties for violations of securities law, up to double the current limit for the most serious offenses, and triple for repeat violators.


Item 402(u) of Reg S-K would require certain SEC reporting companies to publicly disclose:– Median annual total compensation of all

employees– Annual total compensation of the CEO;

and– Ratio of the median annual total

compensation of all employees to the annual total compensation of the CEO

Became effective January 1, 2017; disclosures required in 2018 annual meeting proxy statement

•On February 6, 2017, acting SEC chairman Michael Piwowar directed the staff to reconsider the implementation of the rule based on unexpected challenges that issuers have experienced.

CEO Pay Ratio Disclosure

Presenter

Presentation Notes

About the rule: Was designed to implement and comply with Section 953(b)(1) of Dodd-Frank. For purposes of calculating the pay ratio, companies would be required to determine annual total compensation of “all employees” (other than the CEO) of the registrant and its consolidated subsidiaries – would capture all employees employed as of a date selected by the company within the last three months of the company’s last completed fiscal year, including all worldwide full-time, part-time, seasonal or temporary workers. Certain exceptions including independent contractors and “leased” workers who are employed by a third party (but confusion over whether to include independent contractors who contract directly with the registrant) and employees of joint ventures and unconsolidated subsidiaries. Challenges: Republicans have criticized the rule as representing an effort to shame companies for high CEO pay without any investor protection justification, and have raised objections about the way corporations are supposed to calculate median pay. GOP lawmakers say it could unfairly penalize businesses with lots of workers spread out in low-income areas. Based on comments received during the rulemaking process, the Commission delayed compliance for companies until their first fiscal year beginning on or after January 1, 2017. Piwowar announced in his Feb. 6, 2017 public statement that “it is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline” and invited comments for a 45 day period.


Relaxation of Conflict Minerals Rule

Pursuant to 1.01(c) on Form SD, some companies must complete extensive and costly due diligence on the source and chain of custody of conflict minerals and to prepare a “Conflicts Minerals Report” describing their findings.

On April 7, 2017, the Division of Corporate Finance put out a public statement concluding that it will not recommend enforcement action against companies who only comply with 1.01(a) and (b).

This means companies are still are required to make a good faith effort to determine the country of origin of those minerals and to briefly describe their efforts and findings in a Form SD filed with the SEC and made available on the company's website.

“…it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD”

- Acting Chairman Piwowar (April 7, 2017)

Presenter

Presentation Notes

About the rule: Applies to manufacturers or businesses who contract to manufacture products. Conflict minerals include Cassiterite, Columbite-tantalite, Gold, and Wolframite. Challenge: Division of Corporate Finance’s decision not to enforce came in the wake of April 3, 2017 final judgment by the United States District Court for the District of Columbia in the litigation regarding the conflict minerals rule. The United States Court of Appeals for the District of Columbia Circuit had previously found that the Conflict Minerals rule “violate[s] the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.” In his April 7th public statement, Piwowar stated “The primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.” Result: Given the requirements of 1.01 (a) and (b) are generally less onerous than (c), this move should be beneficial for companies.


Repeal of SEC Payment Disclosure Rule

In February, President Trump repealed a new SEC rule requiring oil and gas extraction companies to file reports publicly disclosing payments of more than $100,000 annually made to the U.S. or foreign governments that are connected to the commercial development of oil, natural gas or minerals.

The final rule passed in June 2016 required companies to file a list of such payments on Form SD, while “a separate public compilation of the payment information submitted in the Form SD filings will be made available online by the Commission’s staff.”

The rule was challenged by business groups and Republican lawmakers, who argued that the requirements are too burdensome.

Presenter

Presentation Notes

Rule History: Rule was passed pursuant to the Dodd-Frank Act. The act directed the SEC to come up with rules requiring resource extraction companies to be more internationally transparent with regard to the commercial development of oil, natural gas and minerals, defining commercial development as “the exploration, extraction, processing and export, or the acquisition of a license for any such activity.” Challenge: Business and trade groups took issue with the public disclosure and sued in 2012. U.S. District Judge John D. Bates vacated the measure in July 2013. In 2014, Oxfam America sued the SEC in Massachusetts to speed up its implementation of the rule, and U.S. District Judge Denise Casper ordered the agency in September 2015 to pick up the pace. The reproposed rules were completed in December 2015, but the SEC extended a subsequent comment period by three weeks after requests for more time. Final rule was passed in June 2016. Repeal: Repeal marked the first time in 16 years that a president utilized the Congressional Review Act to overturn a predecessor’s rule.


Carbon Capture Financing

A coalition of coal industry, labor and climate change groups have urged President Donald Trump and congressional leaders to make carbon capture and sequestration projects part of any broad infrastructure legislative package, as well as to extend federal tax credits for such projects.

On April 5, 2017, senators introduced legislation that would help power plants and industrial facilities finance the purchase and use of carbon capture and storage equipment through tax-exempt bonds.

The bill is drawing support from both industry and environmental groups.

“Carbon capture is a common-sense solution that will allow states like Ohio to continue to utilize our natural resources while protecting our environment at the same time.”

- Senator Rob Portman (R-Ohio)

Presenter

Presentation Notes

More about the bill: The Carbon Capture Improvement Act would amend the federal tax code to allow businesses to use private activity bonds, or PABs, issued by state and local governments to finance carbon capture and sequestration, or CCS, retrofitting projects for their facilities. Businesses would be able to finance 100 percent of their carbon capture equipment with PABs if they can capture at least 65 percent of their facilities' carbon emissions and inject them underground. Anything less than 65 percent would be financeable on a pro-rated basis. Notes on support: Supporters say the bill would help make financing carbon capture plants easier and increase the availability and use of this technology. The bill has received support from unlikely parties: coal giant Peabody Energy Corp. and the Natural Resources Defense Council. “This legislation is a good step toward creating policy parity for use of CCS in the energy and industrial sectors,” Michael Flannigan, Peabody's senior vice president of global government affairs, said in a statement. NRDC Climate Programs Director David Hawkins said carbon capture and storage technology can complement efforts to switch to renewable energy sources and increase energy efficiency.


Non-GAAP Reporting Lessons for Energy Companies

In May 2016, the Division of Corporation Finance added new CDIs regarding “non-GAAP” financial measures.

In 2016, numerous energy companies received SEC staff comments addressing their compliance with the non-GAAP financial measures rules and guidance, including the new CDIs.– Most of these comments addressed non-GAAP measures appearing in companies’

quarterly earnings announcements, further demonstrating the staff’s increasing focus on companies’ disclosures in their press releases and on their websites, in addition to their periodic reports and registration statement filings.

Beginning in August 2016, a number of companies received inquiries from the SEC’s Division of Enforcement regarding their disclosures of non-GAAP financial measures.

Presenter

Presentation Notes

Division of Enforcement inquiries: These inquiries, captioned “Certain Non-GAAP Financial Measure Disclosures Deficiencies,” have stated that there is an indication that the company’s historical disclosure of non-GAAP financial measures may have violated Regulation G and/or Regulation S-K Item 10(e). The Enforcement Staff has requested that the company provide it with information and documents regarding the disclosure of certain non-GAAP financial measures, so that they can determine if there had been any violations of SEC rules. It is not clear what criteria the Enforcement Staff used to select the companies that have received these inquiries or whether the Enforcement Staff’s focus on the potential violations is related to the CF Staff’s new guidance.


Non-GAAP Reporting Lessons for Energy Companies (cont’d)

Comments to Upstream Companies focused on:

requirement to include most directly comparable GAAP financial measure with equal or greater prominence and a reconciliation

what constitutes a “non-GAAP financial measure”

requirement to disclose the reasons why company management believes the presentation of the non-GAAP measure provides useful information to investors

Loss-per-share calculation

Non-GAAP performance measures vs. non-GAAP liquidity measures

Presenter

Presentation Notes

Examples: Comparable GAAP measure: In Occidental Petroleum Corp. (June 23, 2016), the staff’s comment letter noted that the company’s earnings release containing a presentation of its “core earnings,” a non-GAAP measure, had failed to include the most comparable GAAP measure. Definition of “non-GAAP” measure: In Lucas Energy Inc. (May 10, 2016), the staff commented that the term “PV-10,” defined in a proxy statement as “estimated discounted future cash flow before tax expense,” was a non-GAAP measure and that the company should include a reconciliation to its nearest GAAP-basis measure — the standardized measure of discounted future net cash flows. Usefulness of non-GAAP measure: Apache Corp.’s earnings release for its second-quarter 2016 results drew the comment that its explanation of usefulness to investors should be “more substantive and concise” (Apache Corp. (Sept. 22, 2016)). Loss-per-share calculation: Chesapeake Energy Corp.’s first-quarter 2016 earnings release included a presentation of adjusted net earnings (loss) per fully diluted share, a non-GAAP measure. The company had recorded GAAP net losses for fiscal 2015 and the first quarter of 2016. In calculating its adjusted net loss per diluted share for those periods, the staff noted that the company had included in its weighted average shares denominator, diluted potential common shares issuable (e.g., unvested restricted stock and shares underlying convertible securities outstanding). The staff observed that including potential shares for loss-per-share calculation purposes, even in a non-GAAP measure, had not only gone beyond the scope of the definition of non-GAAP measure in Item 10(e)(2), but it was also inconsistent with a fundamental aspect of the calculation of GAAP earnings per share (Chesapeake Energy Corp. (July 1, 2016)). Performance vs. liquidity: In EQT Corp. (July 9, 2015), the staff asked how an adjusted net operating revenues non-GAAP measure provided useful information to investors about the company’s operating results. The measure had excluded the revenue impact of changes in the fair value of derivative instruments prior to settlement, and was net of transportation and processing costs. The company responded that the measure was used by its management to evaluate comparisons of period-to-period earnings and “cash-flow trends.” The staff asked whether the non-GAAP measure was considered by management to be a performance measure or a liquidity measure. The company replied that it was a performance measure, and agreed to remove all references to the term “cash-flow trends” in its related disclosures (EQT Corp. — response (August 13, 2015)).



•Comments to Midstream Companies focused on: non-GAAP measures to quantify midstream companies’ cash generation, such as

distributable cash flow, adjusted EBITDA and adjusted net cash flows

− how “maintenance capital expenditures” were calculated

− distributable cash flows as a useful non-GAAP measure

− distributable cash flows as a non-GAAP performance measure vs. liquidity measure

− adjustments to EBITDA, total gross operating margin

Comments to Downstream Companies focused on: Similar comments involving measures such as adjusted EBITDA and segment

performance metrics

Presenter

Presentation Notes

A common theme of many of these comments related to identifying the items that had been included or excluded for purposes of calculating the non-GAAP measure. Examples: Maintenance Capital Expenditures: A significant component of some distributable cash-flow calculations was “maintenance capital expenditures,” an adjustment typically reducing companies’ EBITDA. Because there was no standard accounting definition for the term, the staff asked midstream companies to disclose how their maintenance capital expenditures were calculated and clarify specifically what the expenditures were maintaining (Enlink Midstream Partners LP (June 10, 2015)). In response to such a question, TC Pipelines LP said that it defined its maintenance capital expenditures as cash costs and expenses made to maintain, over the long term, the company’s operating capacity, system integrity and reliability, including expenditures for constructing and developing new capital assets to replace or improve existing ones. Examples included expenditures to replace pipelines, fund the acquisition of certain equipment, maintain equipment safety and address environmental regulations (TC Pipelines LP — response (Aug. 14, 2016)). distributable cash flows as useful metric: Companies in true corporate form also made their case for presenting their distributable cash flows as a useful and relevant non-GAAP measure. The staff had noted that non-GAAP measures focusing on cash generated were typically presented for yield-generating MLPs, not corporations, and asked one company (which had previously converted from a partnership to a corporation) why this metric remained meaningful (Kinder Morgan Inc. (June 28, 2016)). The company responded that its distributable-cash-flow measure now quantified its adjusted earnings available to create value to its common stockholders. This value could come in the form of dividends, share repurchases, debt retirement, acquisitions or expansion capital projects (Kinder Morgan Inc. — response (July 12, 2016)). Distributable cash flows as non-liquidity measure: Midstream companies argued that their distributable cash flow and cash available for dividends were non-GAAP performance measures, not liquidity measures — and some did so successfully (contending that its distributable cash flow was an accurate measure of profitability of its operating assets). See, Kinder Morgan — response (Aug. 10, 2016); but see, SemGroup Corp. — response (Aug. 22, 2016). Adjusted EBITDA: A partnership’s adjusted EBITDA featured exclusions for “merger and transition-related expenses” (relating to a 2015 merger), “Constitution Pipeline project development costs” (relating to a certification denial by a state official), and “expenses associated with strategic alternatives” (concerning a terminated merger with Energy Transfer Equity LP). The staff asked the partnership whether these adjustments were in reality normal, recurring, cash operating expenses, and therefore inappropriate adjustments that were contrary to question 100.01 of the C&DIs (Williams Partners LP (Sept. 30, 2016)). The partnership responded that those items were not normal, recurring cash operating expenses necessary for it to operate its business, and that their use was neither misleading nor inappropriate (Williams Partners, L.P. — response (Oct. 14, 2016)). Adjustments to total gross operating margin: The staff observed that a pipeline company’s adjustments to its total gross operating margin, a non-GAAP measure, for “shipper makeup rights” had the effect of accelerating the recognition of revenues that would otherwise be deferred — a treatment inconsistent with question 100.04 of the CD&Is. Question 100.04 disapproves of presenting non-GAAP performance measures adjusted to accelerate revenue that must be recognized ratably over time by GAAP (Enterprise Products Partners LP (June 22, 2016)).



•Takeaways: Adjusting non-GAAP performance measures by excluding recurring items — particularly recurring ordinary

cash operating expenses — may draw comments. Metrics such as “core earnings,” “PV-10” and “operating margin per BOE” are non-GAAP financial

measures requiring presentation of the most-comparable GAAP measures and reconciliations. When presenting numerous non-GAAP measures in a filing or press release, re-examine whether each of

them are accompanied by the most comparable GAAP measures having the appropriate degree of prominence and reconciliation.

The continued use of a complex non-GAAP measure that necessitates a complicated explanation and reconciliation should be re-evaluated in light of the staff’s recent comments on potentially misleading measures.

Adjustments to a non-GAAP performance measure like adjusted earnings per share should not be presented “net of tax”; income taxes should be shown as a separate adjustment that should be clearly presented.

Entities such as MLPs using per-share metrics such as distributable cash flows per unit should take care to describe their use and relevancy as performance measures, and not as liquidity measures.


Scheme

SEC Has No Patience for Fake News on Stocks

In April 2017, the SEC brought actions against 27 individuals, companies and firms over schemes using paid promoters to boost stock prices.

Issuers would hire promotion companies who in turn would hire writers to publish puff pieces.

The schemes concealed or denied that the promotion was commissioned and paid for by the issuer.

Relevant Law

Section 17(b) of the Securities Act of 1933 prohibits circulating communications without fully disclosing the receipt of consideration, directly or indirectly, from an issuer.

Issuer liability usually attaches when they can prove the issuer had “ultimate authority” or directed the promotion.

Presenter

Presentation Notes

Additional notes: Charges constituted the largest set of actions the agency has brought over violations related to stock touting. Actions targeted several promotional and communications firms, including Lidingo Holdings, LLC, Lavos LLC, CSIR Group LLC, The DreamTeam Group LLC and Dunedin Inc., as well as each firm’s owner. According to the SEC, the promotional firms worked to concel that the articles were commissioned, publishing puff pieces under a variety of pseudonyms and instructing the hired writers to not disclose they had been paid. Lindingo even asked writers on at least two occasions to sign non-disclosure agreements that prevented them from disclosing the compensation they received. Three issuers where charged – Galena Biopharma Inc., ImmunoCellular Therapeutics Ltd. and Lion Biotechnologies Inc. SEC said in administrative settlements that the companies’ CEOs had directed the promotional work and understood that the promotional firms were using writers who weren’t disclosing their payment.


Additional Topics of Note

1• FINRA looks to ease capital-raising rules and disclosure requirements around underwriting

2• The SEC increased the revenue cap for “Emerging Growth Companies” from $1B to $1.07B.

3• New FASB revenue standard concerning revenue from contracts with customers will take

effect for all public companies with reporting periods beginning after December 15, 2017.

4• Auditing Standard 18 (AS 18) regarding “related-party transactions” has forced some

companies to change existing internal controls and procedures.

5• The SEC adopted a rule (effective September 1, 2017) requiring issuers to hyperlink all

exhibits in SEC filings (including those incorporated by reference).

6• The PCAOB has adopted a new auditing standard to enhance the relevance of the auditor’s

report by providing additional and important information to investors.

Presenter

Presentation Notes

FINRA: In mid-April, FINRA sought comments on a broad sweep of its rules about the role of broker-dealers in stock and debt offerings, and proposed simplifying disclosure requirements around underwriting and research published by trading desks. Proposed changes concern three rules in particular: Rule 5110, which applies to underwriting and compels disclosure of how much a FINRA member is paid and what activities they conduct, and Rules 2241 and 2242, which limit commentary on equities and debt that comes from traders instead of analysts. Changes to the underwriting rule would clarify what counts as underwriting compensation and what does not. Proposed revisions to the commentary rule would allow traders to distribute "brief observations" about trading activity, market conditions and company performance to institutional investors who opt in to those communications. EGC: JOBS Act requires the number be adjusted for inflation every five years. FASB revenue: Presently, GAAP has complex, detailed and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions. Under the new guidance, there will be consistent principles for recognizing revenue, regardless of industry or geography. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with useful information about the organization's contracts with customers. Calendar year-end companies that must comply with the new standards will need to commence reporting under the new standard beginning with their Form 10-Qs for the period ending March 31, 2018. Those 10-Qs will need to include the comparable period ending March 31, 2017 based on the revised standard. Auditing Standard: Auditing Standard 18 imposes obligations on independent auditors to evaluate a company’s identification of, and accounting for, related party transactions. As a result, companies have faced pressures from auditors to change existing internal controls and procedures, including their D&O Questionnaires. PCAOB: The new standard and related amendments require auditors to include in the auditor's report a discussion of the critical audit matters (CAMs) which are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. Under the new standard, the auditor's report will disclose, among other things, the tenure of an auditor, specifically, the year in which the auditor began serving consecutively as the company's auditor. The new rules are subject to approval by the Securities and Exchange Commission. Effective dates: New auditor's report format, tenure, and other information: audits for fiscal years ending on or after December 15, 2017 Communication of CAMs for audits of large accelerated filers: audits for fiscal years ending on or after June 30, 2019 Communication of CAMs for audits of all other companies: audits for fiscal years ending on or after December 15, 2020


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