The Obama administration has re-launched an initiative dating back to the George W. Bush era that aims to lessen some of the restrictions on companies that report their finances. In mid-October, the Securities and Exchange Commission proposed some subtle changes to one rule in particular on the disclosure of errors in financial accounting. The current regulations state that a company has to report on all errors, unless they are able to prove that they are immaterial to a company’s overall operations. The proposed change to corporate securities law, however, would allow businesses to avoid disclosing errors unless auditors could prove that the issue had “material” consequences.
This, say critics, is actually more difficult for auditors in the financial sector to prove. The Huffington Post reported that the Investor Advisory Committee recently grilled the SEC on more clearly defining what is or isn’t “material.” After all, some companies’ budgets can go into the multimillion (or even multibillion)-dollar range, so what may seem “immaterial” to the SEC may still result in million-dollar errors for large corporations.
Yet the aim, according to SEC Chair Mary Jo White, is to avoid “disclosure overload.” In fact, looser grip on regulations has been the goal for some time now in Congress. In January of this year, the House of Representatives passed H.R. 37, a bill known as the “Promoting Job Creation and Reducing Small Business Burden Act.” Among other things, the bill would have allowed for fewer reporting requirements for smaller businesses and startups, also called “Emerging Growth Companies” or EGCs. Under this corporate securities law, businesses wouldn’t have to worry about reporting on the things that won’t matter to shareholders.
This doesn’t necessarily mean that the SEC won’t take more enforcement actions. Last year, the commission saw a record 755 enforcement actions, according to its 2014 fiscal year enforcement report. This obtained about $4.1 billion in disgorgement and penalties paid by companies found in violation of U.S. regulations. They also charged more than 135 parties with violations relating to reporting and disclosure last year. The new proposal could mean fewer charges regarding reporting and disclosure, but only time will tell what the effect will be.
In the meantime, it may be best for corporations and other organizations to visit with the securities lawyers at corporate securities law firms to ensure everything still meets federal guidelines. If you’re in need of some guidance on issues surrounding reporting, be sure to give us a call.