SEC Proposes New Public Company Cybersecurity Disclosure Rules
By Alan J. Wilson, WilmerHale
On March 9, 2022, the Securities and Exchange Commission (“SEC”) proposed rules that are intended to enhance disclosures about cybersecurity risk management, strategy, governance, and incident reporting by public companies. If adopted as proposed, the rules will dramatically impact the way public companies, boards, and management disclose cyber incidents and matters relating to their cybersecurity oversight (including board and management expertise). The proposed rules represent a significant expansion of current SEC guidance, which dates back to 2011 and 2018, and if adopted as released, will likely lead to operational and governance changes for many businesses. For more detailed information about the proposed rules, see this post on WilmerHale’s Focus on Audit Committees, Accounting and the Law blog.
SEC Issues Climate Disclosure Proposal
By Alan J. Wilson, WilmerHale
On March 21, 2022, the Securities and Exchange Commission (“SEC”) proposed rules intended to enhance and standardize climate-related disclosure requirements for public companies. The proposal would amend non-financial and financial disclosure requirements in Regulation S-K and Regulation S-X, respectively, as well as the related SEC forms, to require mandatory disclosures on a number of climate-related metrics, including quantified disclosures of annual greenhouse gas emissions. For more information about the proposed rules, see WilmerHale’s client alert.
Assessing Materiality: Focusing on the Reasonable Investor When Evaluating Errors
By Brian E. Saleeby, Mayer Brown
On March 9, 2022, the Office of the Chief Accountant (“OCA”) released a statement regarding assessing the materiality of financial reporting errors. The OCA used this statement to rehash guidance on the concept of materiality and the correction of material errors, evaluate methods of performing an objective assessment of materiality, and state observations from recent interactions with registrants and auditors on materiality. The concept of a material fact as one that “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made has long been established by the Supreme Court. When an error is determined to be material to previously issued financial statements, the error can either be corrected by a reissuance or revision of the relevant financial statement in line with U.S. GAAP. The OCA noted that an objective materiality analysis combines both quantitative and qualitative considerations, taking into account all relevant facts and circumstances relating to the error and putting aside the personal bias of the registrant, auditor, or audit committee. In circumstances where a quantitatively small error could be material because of qualitative factors (and vice versa), the OCA finds that as the quantitative magnitude of the error increases, it may increasingly outweigh qualitative considerations. Nevertheless, a holistic and objective assessment from a reasonable investor’s perspective is still of the utmost importance. The OCA included some significant observations from recent interactions with registrants and auditors on materiality:
- Accounting Errors and Materiality: The fact that a misstatement may have been unintentional does not negate the possible materiality of the error. Even if an aggregate effects analysis of an individual error finds that its effect is offset by other errors, that should not serve as the basis for a conclusion that individual errors are immaterial.
- Accounting Errors and Internal Control over Financial Reporting (“ICFR”): The OCA notes that management should continue to steadfastly report any material weakness in the effectiveness of ICFR in a holistic and objective manner, noting the magnitude of the potential misstatement that could result from any control deficiencies.
- Other Auditor Considerations: Audit firms should pay special attention to having policies and procedures in place to ensure that any materiality analysis is carried out in compliance with applicable professional standards by the appropriate individuals.