This week’s GAAP Flash discusses the [in]ability of Toshiba to continue as a going concern, SEC scrutiny, the backlash toward United Airlines, the biggest clawback in banking history, and other accounting news provided to help increase business acumen of CPAs.
Toshiba Casts Doubt on Its Ability to Stay in Business (April 11, 2017) – The New York Times (@NYTimes)
In its latest (unaudited) earnings report, which was also two months late, Toshiba warned its investors that it may no longer be able to stay in business. Toshiba traces the source of its economic woes to an accounting scandal from 2015 and its U.S. nuclear subsidiary, Westinghouse Electric, which declared bankruptcy last month. Toshiba is hoping that the sale of shares in its chip division, which is one of its most profitable units, will help alleviate the uncertainty over its future. Analysts have alluded to the fact that even a minority stake in this business could be worth several billion dollars! However, Western Digital, which has a joint venture with Toshiba involving the production of these chips, said that it believes it can block any sale affecting the joint venture. Add that to the fact that the auditors of Toshiba have refused to certify Toshiba’s recent (albeit delayed) earnings release, and it’s not hard to see that Toshiba has a hard road ahead of them!
How It’s Relevant: We’ve seen going-concern issues in the news with a bit more frequency of late, and it’s no wonder why. In August 2014, the FASB issued ASU 2014-15, which addresses management’s responsibilities (not the auditor’s) with respect to evaluating an entity’s ability to continue as a going concern. In fact, it explicitly requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern. If so, management must assess whether or not it is capable of implementing a plan to remediate the issue. Either way, there are increased disclosure requirements, which is why it is popping up in the news! The FASB wants investors to know sooner rather than later if a company is headed toward impending doom, preferably before they are required to implement liquidation accounting.
SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors (April 10, 2017) – SEC (@SEC_News)
In light of its announcement that the Securities and Exchange Commission (SEC) issued enforcement actions against 27 individuals and entities for stock promotion schemes, it issued this press release to remind entities of the disclosure requirements for public companies. According to the Director of the SEC’s Division of Enforcement, a company must disclose if it pays someone to publish or publicize articles about its stock. The director alleges that companies are misleading investors by disguising such promotions as independent analysis.
How It’s Relevant: Accountants and auditors alike should constantly keep a pulse on the various press releases, enforcement actions, and other notifications provided by the SEC throughout the year. While generally only applicable to public companies, announcements such as this have direct impact on financial reporting and can help point the auditors to areas of risk noted by regulators such as the SEC.
Shares of United Fall for Second Day as Controversy Lingers (April 12, 2017) – CNBC (@CNBC)
Shares of United Continental fell for two straight days following a viral video showing a man being forcibly removed from an over-booked United flight. After the initial tumble, United Airlines CEO Oscar Munoz issued public statement apologizing to the customer. Stocks initially rose after the statement, and then continued to fall. Meanwhile, other airlines saw a boost in their share prices after earnings releases.
How It’s Relevant: All hail the power of social media! Companies are now facing the very real potential that bad publicity can come from anyone who owns a cell phone. And the publicity can have very real monetary impacts, coming, in this case, in the form of falling stock prices, refunds to customers, and a tarnished image. And auditors and accountants should recognize this threat and keep an eye on social media channels for any potential accounting backlash from such viral moments. For instance, a dive in stock price could be a triggering event for impairment testing purposes.
Wells Fargo to Claw Back $75 Million from 2 Former Executives (April 10, 2017) – The New York Times (@NYTimes)
Wells Fargo announced that it will claw back an additional $75 million in compensation from two executives who were primarily responsible for the company’s scandal regarding fraudulent accounts. These clawbacks are the biggest in banking history. While the monetary damage of the fraud was small (only $3.2 million has been refunded to customers so far), the damage to Wells Fargo’s reputation has been significant.
How It’s Relevant: A clawback is a forced return of pay and/or stock compensation. While most public companies generally have clawback provisions, most companies are hesitant to invoke them. Wells Fargo is clawing back $75 million in compensation, although there is no requirement to so do. Both the Sarbanes-Oxley Act of 2002 and The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provide rules on when a company is required to clawback compensation paid to executives, and which types of compensation are subject to clawback. Sarbanes-Oxley requires a financial restatement occur in order to trigger a clawback, while Dodd-Frank requires an accounting restatement to occur. To date, Wells Fargo has refunded $3.2 million in unearned income as a result of the account scandal, which is not financially material enough to trigger either type of restatement.
This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.
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