BDO USA Finds that Less Than a 3rd of Public Company Boards in Favor of PCAOB's Proposed Changes to Annual Auditor's Report [Professional Services Close - Up]
(Professional Services Close - Up Via Acquire Media NewsEdge) According to a new study by BDO USA, an accounting and consulting organization, less than one-third (27 percent) of public company board members believe the Public Company Accounting Oversight Board's (PCAOB) proposed changes to the annual auditor's report will actually improve the usefulness of the report.
Conversely, almost half (45 percent) of the directors say the changes will not improve the auditor's report, while more than a quarter (28 percent) aren't sure.
When asked about specific components of the PCAOB's proposal, more than three-quarters (78 percent) of board members are in favor of the report disclosing the length of the external auditor's tenure in the report. However, more than two-thirds (67 percent) of board members are opposed to the auditor's report evaluating information beyond the financial statements for potential errors or misstatements that conflict with information obtained during the audit. A smaller majority (52 percent) is opposed to the report containing a discussion of critical audit matters that gave the auditor the most difficulty in forming its audit opinion.
"Clearly, corporate board members aren't sold on the usefulness of the PCAOB's proposal to require external auditors to include much more detailed information in the annual auditor's report that accompanies a business's financial statements. However, when you make changes to something that has been done the same way for more than 70 years, there is bound to be some pushback," said Lee Graul, a Partner in the Corporate Governance Practice of BDO USA.
Close to two-thirds (64 percent) of corporate directors are aware of the new SEC rule that allows companies to disclose material information through postings on social media, but none indicate that their companies have utilized this new channel to do so and only 11 percent anticipate utilizing social media for material disclosures in the future.
When asked what topics they would like to spend more or less of their time on, close to half of the board members cite succession planning (47 percent) and studying industry competitors (45 percent) as areas they would like to spend more time. Risk management (38 percent) and evaluating management performance (32 percent) were the other areas where sizable percentages expressed an interest in spending more time. Perhaps more revealing is how few of these directors expressed a desire to spend less time on any of these areas, with the possible exception of compliance and regulatory issues.
More than two-thirds (69 percent) of public company board members cite regulatory/compliance overload as the greatest risk facing their businesses. Cyber breaches (13 percent), fraud/corruption (9 percent), privacy violations (6 percent) and intellectual property misappropriation (3 percent) are cited by far smaller percentages of the directors.
When asked to identify the greatest risk for fraud at their companies, a large proportion of the directors cite embezzlement or similar crimes against the company (42 percent). Corruption/bribery (20 percent), earnings management (18 percent), insider trading (12 percent) and revenue recognition (8 percent) are cited by smaller proportions.
A majority (55 percent) of board members say they have increased their company's anti-fraud and anti-corruption resources in the past year. When asked where they have devoted the greatest percentage of those increased resources, almost half (46 percent) cite training and more than a third (35 percent) cite personnel. Smaller proportions cite technology (14 percent) and the use of external consultants (5 percent).
"It is not surprising to see that companies are dealing with regulatory overload. The financial services sector, in particular, has been dealing with new regulations in both the U.S. and the E.U.," said Glenn Pomerantz, Partner in Charge of Global Forensics at BDO Consulting. "The directors' focus on training and education to improve compliance and reduce fraud is certainly positive news. Many of the companies we work with perform a comprehensive risk assessment addressing fraud and corruption. The risk assessment results often guide the company towards additional and more strategic training and education. By proactively conducting independent risk assessments, businesses can greatly enhance their risk mitigation efforts."
MANAGING CYBER RISK
Just 11 percent of board members say their company has experienced a cyber breach during the past two years. Nevertheless, cyber security has been a regular topic in the media and corporate directors appear to be paying attention. Close to half (47 percent) of directors say they have completed documenting all of the critical cyber assets of their company and a similar percentage (45 percent) say they are currently in the process of identifying their critical cyber assets. Just 9 percent indicate they have taken no steps to identify these critical assets.
When asked about specific steps their businesses have taken to mitigate cyber security risks, almost all (98 percent) of the board members indicate they have implemented technology to safeguard the company. Approximately half of the directors say they hired cyber security consultants to either advise on risk areas (56 percent) or supplement IT procedures (49 percent). A similar percentage (48 percent) indicate they formed a risk committee to create cyber policies/procedures. Just 18 percent say they have purchased cyber insurance to cover potential losses from cyber crime.
MITIGATING RISK IN FOREIGN MARKETS
A majority (56 percent) of the directors say their company conducts business in foreign locations or with foreign customers or suppliers. Of those conducting business internationally, a majority (55 percent) indicate that they deal with foreign government officials and better than one-third (38 percent) of those believe compliance risks related to bribery of foreign officials have increased over the past two years, compared to just 10 percent reporting a decrease.
When asked to identify what is the most effective tool businesses can use to mitigate corruption risks in foreign markets, almost two- thirds (65 percent) of the directors cite improved training and education of employees. Increased testing of transactions (16 percent), expanded board oversight (8 percent), a change in business model (8 percent) and revamped policies and procedures (8 percent) are other measures cited by the directors.
In recent years, CEO compensation has become increasingly tied to equity in order to link pay to performance and align CEOs with shareholders. However, given the sensational performance of the stock market in 2013, one-third (34 percent) of public company board members are concerned that this focus on equity is leading to a growing gap in compensation between the CEO and other members of the management team. Of those expressing this concern, a majority (56 percent) believe the most approach to address the gap is to expand equity-based compensation to more members of the management team, while one-third (33 percent) suggest moving a larger portion of CEO compensation back to traditional, long-term cash or annual cash incentive programs. Few (11 percent) suggest re-introducing executive perquisites back into the compensation mix for key employees.
"The concern with the gap in compensation between the CEO and other members of management is a subject we are increasingly being asked to address by clients," said Randy Ramirez, a Senior Director on Compensation in the Corporate Governance Practice of BDO USA. "Given the ongoing increase in equity markets and the SEC's current proposal to require companies to disclose the ratio of CEO pay to median employee pay, this issue is only going to get bigger. Boards must decide whether they want to close the gap by expanding equity pay to other members of management, moving more CEO compensation back to traditional compensation or a combination of both of these strategies."
When asked what performance measurement they consider the best substitute for at least a portion of equity-linked pay, board members cite profit growth (39 percent) and free cash flow (24 percent) as the most likely substitutes. Operational efficiency (18 percent), revenue growth (14 percent) and market share (6 percent) are the other alternative measurements cited by the directors.
In a related area, the vast majority (82 percent) of board members at public companies believe proxy advisory firms should be subject to SEC oversight due to the potential for a conflict of interest in providing services to both corporations and institutional shareholders.
These are the findings of The 2013 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA, which examined the opinions of 74 corporate directors of public company boards, with revenues ranging from $250 million to $750 million, regarding financial reporting and corporate governance issues. The survey was conducted in September of 2013 by Market Measurement, an independent market research firm, on behalf of BDO.
BDO USA's Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on a myriad of accounting, tax, risk management and forensic investigation issues.
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