Regulatory agencies may be preparing yet another deluge of disclosure requirements following passage of the Dodd-Frank Act, but corporate compliance executives say enough is enough—that the reporting obligations imposed on Corporate America now overwhelm them, and do more harm than good.
THE PANELISTS
The following executives participated in the Sept. 14 roundtable on emerging topics in disclosure and reporting.
Frank Brod,
CVP, Finance and Administration, Chief Accounting Officer,
Microsoft Corporation
Michelle Burris,
SVP and Chief Financial Officer,
Trubion Pharmaceuticals
Jim Cruckshank,
SVP and Chief Accounting Officer,
The Greenbrier Companies
Colleen Cunningham,
Global Managing Director, Accounting & Finance,
Resources Global Professionals
Kevin Fay,
General Counsel,
PACCAR Inc.
Claire Grace,
VP, Corporate Secretary and Assistant General Counsel,
Weyerhaeuser
Sophie Hager Hume,
VP, Assistant General Counsel - Corporate & Securities and Assistant Secretary,
Starbucks Coffee Company
Kenneth Jones,
Chief Compliance Officer,
Huron Consulting
Michael Maher,
Corporate Controller,
Nordstrom, Inc.
Kasey Reese,
VP Risk Management & Chief Internal Auditor,
TELUS
Anna Tudela,
VP, Regulatory Affairs and Corporate Secretary,
Goldcorp Inc. Canada
Q VanBenschoten,
Regional Compliance Officer, Americas,
Intertek
A dozen compliance, auditing, and financial reporting executives were nearly unanimous in that sentiment during an editorial roundtable in Seattle on Sept. 14, hosted by Compliance Week and Resources Global Professionals. “We’re currently at a very challenging point,” said Anna Tudela, vice president of regulatory affairs and corporate secretary of Goldcorp Inc., Canada. “We’re overwhelmed with disclosure and filing regulations already; this legislation will put that much more pressure on issuers’ compliance resources.&rdquo
Colleen Cunningham, global managing director at RGP (and a Compliance Week columnist) agreed. “There are so many new requirements coming from so many different directions: Congress, the Securities and Exchange Commission, the Financial Accounting Standards Board, just to name a few,” she said. “With so many potential changes coming at once, companies are hard-pressed to provide quality input to the standard-setting and regulatory process.”
Other attendees were frustrated that boards now are propelled by a checklist mentality to assure that they comply with all regulations, when boards should be focused on the company’s strategic operations. “I’m beginning to worry that the regulations are beginning to drive businesses,” said Claire Grace, assistant general counsel of Weyerhaeuser, a pulp and paper manufacturer. “We are now in the position where the tail is wagging the dog.”
Others lamented that the sheer volume of required reporting has actually lessened transparency and hurt corporate governance, since shareholders are overwhelmed with disclosure.
“A lot of the time, what we find is that we get caught up in all the rules and regulations, and what you can and cannot put in your press release, or a financial statement, or a [management discussion and analysis] or an information form,” Tudela said. As a result, board and management are trapped between staying in compliance and providing clear, consistent, and useful information to shareholders, she said.
Several attendees singled out the SEC’s new statement about disclosure of climate change risks as one example. Corporate sustainability is an important goal, they said, but they still weren’t sure exactly what the SEC expects companies to say about climate change. “I think the SEC doesn’t know what they want,” Grace quipped.
The SEC published new guidance in January directing all public companies to disclose in their Form 10-K filings their climate change risks—a move investors and environmental groups have been advocating for years. Some roundtable attendees feared that the SEC adopted its new climate change stance simply to placate activists.
Enter the Dodd-Frank Act
From a practical standpoint, the disclosure requirements most likely to trip up compliance departments are those contained in the Dodd-Frank Act, especially as they pertain to executive compensation, Cunningham said.
The most controversial disclosure will probably be “internal pay equity”—that is, the ratio of the CEO’s compensation compared to the median compensation for all other employees. Questions abound about how to calculate those numbers: Do you include equity compensation such as stock options? Do you include the pay of temporary or part-time employees in calculating the median worker pay? What about foreign currency fluctuations and overseas employees?
The “work and agony” involved in accurately computing the compensation of just a handful of executive officers under current disclosure rules is difficult enough, Grace said. “To do that same calculation for every employee in the company so you can find the median, is just an unbelievable nightmare,” she argued.
The SEC has already said it will hold off rulemaking on the internal pay equity disclosure until next summer, meaning companies probably won’t need to report that number until 2012 at the earliest. The pay equity ratio is only one of many, many other rules yet to come, Cunningham warned.
“Although the Dodd-Frank Act comes in at more than 2,000 pages, in many cases, the details are yet to come through additional regulation and standard setting,” she said.
The cost of compliance with disclosure rules is also starting to pile up. Ken Jones, chief compliance officer at Huron Consulting, said his company’s biggest challenge around new executive compensation disclosure are the costs of having to reconstruct data in the MD&A and hiring outside attorneys and compensation specialists to help comply. “We spend three times as much money … on executive compensation reporting than we did two years ago,” he said.
“It’s becoming more expensive to be a properly compliant company,” said Kevin Fay, in-house counsel for truck manufacturer PACCAR. “It used to be, back in the day, you could be a little public company. You can’t be a little public company anymore.”
Accounting rules were another source of frustration. FASB has proposed new rules for disclosing loss contingencies—that is, money a company sets aside for possible expenses, such as lawsuits. That disclosure would come in tabular form, listing liabilities and payments. Combine those numbers with accompanying qualitative disclosure, critics say, and plaintiff lawyers will be able to guess how much money you’re putting aside for possible legal settlements.
The idea has left legal and accounting departments alike unhappy. “The thing that concerns us the most—that I’ve been most involved with—is accounting for contingencies,” said Frank Brod, chief accounting officer at Microsoft.
“With so many potential changes coming at once, companies are hard-pressed to provide quality input to the standard-setting and regulatory process.”
—Colleen Cunningham,
Global Managing Director, Accounting & Finance,
Resources Global Professionals
CEOs and CFOs know the risks to their companies; the issue, Brod said, is how to disclose those risks in ways that make sense to investors but don’t cause undue harm to the company and its shareholders. “Managing the litigious nature of our country has taken on so much importance,” he added.
And how does Microsoft meet that goal? The company has a disclosure team of about 25 employees, made up of compensation professionals from the business, finance, human resources, IT, and legal departments, and the team meets once a month. “It’s a very interactive group,” Brod said. Microsoft also seeks the help of outside consultants as well, he added.
“I would encourage everyone to get involved in the process,” Brod said, so the company can make its disclosures as user-friendly as possible rather than run on for pages and pages in fine print.
XBRL and IFRS
Two projects intended to improve investors’ ability to compare financial data from multiple companies—convergence of U.S. accounting rules and International Financial Reporting Standards, and adoption of the XBRL data language for financial filings—also met plenty of skepticism.
Michelle Buriss of Trubion Pharma (left), Claire Grace, assistant general counsel for Weyerhauser, and Nordstrom, Inc.’s Michael Mayer share a laugh during the usually serious discussion on new disclosure requirements.
Anna Tudela of Goldcorp makes some critical points, while Kenneth Jones, Huron Consulting’s CCO, looks on.
Paccar’s General Counsel Kevin Fay provides more insight on the challenges small companies face in terms of XBRL and IFRS.
Brod warned that IFRS is not some shangri-la of universal comparability, since each country using IFRS (more than 100 at last count) can tailor the standards to its specific needs. “The changes can be mammoth,” he said. “The tidal wave will come from implementation and conversion.”
Cunningham agreed. “Convergence projects are such major projects that, in and of themselves, they are more work,” she said. “There is a lot of effort that will be required around implementing them.”
FASB is barely halfway through its goal of converging all major U.S. accounting standards and IFRS by next June, and companies can get ahead of disclosure by “just staying up to speed on what is going on,” Cunningham advised. “It is critical that companies and investors engage in the standard-setting process, since so many changes are coming our way.”
The irony in moving to XBRL and IFRS is that “the goal of both is to give people the ability to compare companies on an apples-to-apples basis,” Grace said. And yet, they actually will “distort an investor’s ability to compare one company against another.”
Grace contended that most XBRL tags don’t fit a company’s operations exactly, so anyone who compares one company’s XBRL-tagged disclosures to another company’s tagged items isn’t likely to get an accurate comparison. “The worse part of it is that you will have people who are not sophisticated shareholders, who will have no clue that this veneer of comparability is an illusion,” She said.
In addition, Fay said, many small public companies don’t have the resources to do XBRL and IFRS correctly, “so the disincentive to be a public company is going to go way up.”
At a time when companies are struggling in the current economy, the additional cost of complying with the new regulatory framework “won’t be an easy pill to swallow,” Cunningham said.
No comments yet