Compliance Blog

With so much concern about the global economy right now, executive pay is a hot topic. What seems to be out of sync, is the high levels of executive pay when earnings or share prices of companies are collapsing. Investors wonder whose interests are being looked after.


2007 was the first year that US companies begin filing new Executive Compensation Disclosure and Related Person Disclosure information in the form a new section to the annual reports called Compensation, Discussion and Analysis (CD&A). The SEC has expressed displeasure at the filings and has requested improved reporting.


Canada has proposed similar legislation for 2008 for Canadian public companies which will put a bright light on this topic "up north".


An article from HR Executive Resource Online " Doubting Executive Pay" released yesterday sheds light on this topic and the investor and employee discord surrounding it. Here is an excerpt:

"Directors and investors say exorbitant executive compensation causes resentment and harms corporate America's image, but the SEC's disclosure rules are not the answer. One expert says the problem stems from short-term thinking, rather than greed. By Kristen B. Frasch
With the nation's attention focusing ever more intently on CEO salaries -- most recently in the form of congressional hearings before the House Committee on Oversight and Government Reform -- two different surveys suggest boards of directors and shareholders remain at odds over just how broken the system is and what they can and should be doing to fix it.
In one study, by Heidrick & Struggles and the University of Southern California's Marshall School of Business, about one in three directors of U.S.-based public companies said CEO pay is "too high in most cases."

The 2007 Corporate Board Survey of 210 respondents also found widespread unhappiness among directors over the latest disclosure rules about executive compensation mandated by the U.S. Securities and Exchange Commission.

Most directors (about 90 percent) said they doubt the rules -- designed to give investors and corporate watchdogs better, timelier information about pay and other compensation for top executives -- are meeting investors' needs.
"Executive compensation and how that information is disclosed have been controversial for some time," says Ed Lawler, distinguished professor of business at USC Marshall and founder and director of the university's Center for Effective Organizations.

"But what this survey unmistakably shows is that the issues are a growing concern, even among the people most responsible for dealing with them: the board members of public companies," he says.

Board members' dissatisfaction in the study centers on the type of information reported in the new SEC-mandated proxy statements.
Only one in 10 said they believed the information did a good job of explaining how compensation decisions are made and fewer than three of 10 agreed the statements provide valuable information about the amount a CEO actually makes.

"A major advantage [of the new rules] is to see the top five salaries, but even these are often obscured with descriptions of things [boards] can't fully understand," Lawler says.
A problem contributing to hard-to-decipher information and continual salary increases, according to respondents, is the role compensation consulting firms play in the creation of new incentive-compensation programs.

"It is interesting that even though it is boards that determine the level of executive compensation, they still point to the important role consulting firms play," says Ted Dysart, managing partner for the Americas with Heidrick & Struggles' global board of directors practice.
In a separate study by Watson Wyatt Worldwide, corporate directors and institutional investors disagree over whether the U.S. executive-pay model is changing for the better, but both groups say the current model has hurt corporate America's image.

The study, 2008 Report on Directors' and Investors' Views on Executive Pay and Corporate Governance, which surveyed 163 directors and 72 investment and pension-fund managers, found 63 percent of directors think the pay system is improving, compared to just 36 percent of investors.

It also found 65 percent of directors believe the current pay model has helped to improve company performance while only 39 percent of investors feel that way.
"While directors believe the system generally works, institutional investors ... feel the model's flaws run deeper and require more substantial changes," says Ira Kay, global director of compensation consulting at Washington-based Watson Wyatt. "Clearly, more work needs to be done."

Most of the respondents (75 percent), however, believe the model has tarnished the nation's image, has led to resentment among the rank-and-file and has resulted in excessive executive pay..."


Clearly this disclosure meets with objections from those who have to report and administer it. But no one can argue that investors should be prevented from transparent information from the companies they invest in. Is the legislation perfect? Probably not, but you have to start somewhere. And starting with some disclosures about an important topic is important.

If your company has to comply with Executive Compensation Disclosure regulations, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information.

Both the Securities and Exchange Commission (SEC) and the Ontario Securities Commission (OSC) have filed charges against Biovail for fraudulent accounting and a host of other items.

It took five years for that little "I missed my revenue forecast because my truck crashed on the way to the warehouse" story to finally cause some really big investigations and charges. I have to admit when I heard that story many years ago, I could not figure out how that had affected revenue but who knew?

It sounds like Eugene Melnyk and fellow Execs are going to have to come up with some pretty good answers for what the two agencies are alleging as fraud and undisclosed errors. Some serious charges of intentionally misleading investors.

Who knows, maybe Eugene will join the hallowed halls of prison in Florida with the likes of Conrad Black. According to an article today in the Globe and Mail, Conrad is quoted in the article, "I am doing fine," Mr. Black said in an e-mail to the Canadian Press from his Florida prison. "This is a safe and civilized place and I don't anticipate any difficulty."

According to a Globe and Mail article today , the Patriot Act may cause many organizations to wonder about using Google's free office productivity software. The issue is that the organization's data is stored on Google's servers. Therefore, they are potentially subject to search and review by US government law enforcement services. This could occur without the knowledge of the end user. This is due to the expanded powers granted to the US government after 9/11 in the law known as the Patriot Act.

The concern becomes that any company who houses another company's data, hosting services for example, may be subject to requests from the US federal government to view confidential data. The organization housing the data may not be able to deny the requests.

An excerpt from the article is here:
"The privacy issue goes far beyond academia. In Toronto, at SickKids Foundation, which has the largest endowment of any Canadian hospital, employees have been keen to use Google tools. But the foundation's IT department blocked access for two reasons.

"Wherever possible, we keep our donor and patient records in Canada, as trying to enforce privacy laws in other jurisdictions is complex and expensive," said Chris Woodill, director of IT and new media at SickKids Foundation. Second, free hosted software offers limited support and no formal legal contract, limiting an organization's ability to demand additional privacy or security measures, he said.

Google says it has a strong track record in regard to protecting customers' data. The firm cites a court case it fought in 2006 against attempts by the U.S. Justice Department to subpoena customer search records. "We will continue to be strong advocates on behalf of protecting our users' data," said Peter Fleischer, Google's global privacy counsel.
But the Mountain View, Calif.-based company will not discuss how often government agencies demand access to its customers' information or whether content on its new Web-based collaborative tools has been the subject of any reviews under the Patriot Act."

Even if data is not housed in the US, if a hosting company for example, does business in the US, there could be such a request made to the hosting company, citing national security. It does bring interesting questions into play about allowing any outside organization to house and safeguard your data.

The SEC is making great strides in taking the vast amount of financial data stored and filed on its website by beginning the conversion and usage of XBRL (eXtensible Business Reporting Language). This is great news for investors who need to compare and evaluate this data in an easy and understandable way. The XBRL in use by the SEC called Financial Explorer.

An excerpt from a recent article is here:


"XBRL is fast becoming the universal language for the exchange of business information and it is the future of financial reporting," said Cox. "With Financial Explorer or another XBRL viewer, investors will be able to quickly make sense of financial statements. In the near future, potentially millions of people will be able to analyze and compare financial statements and make better-informed investment decisions. That's a big benefit to ordinary investors."
The SEC already offered investors two other online viewers: the Executive Compensation viewer and the Interactive Financial Report viewer. The Executive Compensation can compare what 500 of the largest U.S. companies are paying their top executives, while the Interactive Financial Report viewer helps investors gather, analyze, and compare key financial disclosures filed voluntarily by public companies using XBRL. (To date, there have been 307 such filings from 74 companies, the agency said.) "

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

You know it has been a bad day when the third government entity is now investigating the subprime mortgage disaster. First it was the SEC, then the Attorney General's office of New York and now the FBI's Economic Crimes unit.

Fraud and insider trading allegations abound. One thing is for sure, some new regulations will come of this one.

Investment Banks and the banks around the world do not look too swift right now. First it was subprime mortgages with no rails and regs and now it is the French bank Societe Generale with the complete failure of controls and key performance indicators.

All I want to know is where were all these regulators before all this happened. There certainly was evidence before the whole thing blew up.

An excerpt from Business Week online: "Fall Guys?
It's not just public company executives who may need to worry about their sales. If, for example, a hedge fund manager pulled his own money out of a fund when he became aware of valuation problems, but left customers in, that, too, could be a problem. "That's not exactly insider trading, but it could involve fraud in connection with the sale of a security," says the investigator.
While there's no way of knowing yet what the probes will turn up, or whether any actions will rise to the level at which criminal intent can be established, Frenkel points out that the involvement of the FBI is not good news for executives at firms where wrongdoing is suspected.
"As we saw in the corporate fraud cases, companies have an incentive to resolve these investigations; that may include the sacrifice of corporate personnel," he says. "People often forget in the early stages of an investigation, their interests and those of a company can diverge. Companies can settle. They don't go to jail, people do."

The PCAOB has released Audit Standard #6 for review. If adopted by the SEC, it will become effective within 60 days - end of March 2008.


An excerpt is here: " The Board also removed the hierarchy of generally accepted accounting principles (GAAP) from its interim auditing standards. The GAAP hierarchy identifies the sources of accounting principles and the framework for selecting principles to be used in preparing financial statements. The Board believes that the GAAP hierarchy is more appropriately located in the accounting standards. Because the FASB intends to incorporate the hierarchy in the accounting standards, it no longer will be needed in the auditing standards. The Board has coordinated with the FASB and understands that the FASB intends to coincide the effective date of its GAAP hierarchy standard with that of the PCAOB."


As the world moves more toward one standard, these incremental moves make one accounting standard more possible. This will change the face of internal controls and their references as accounting standards change.


If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.

With all of the non-stop complaining about SOX 404, smaller public companies have received five years of delays on Section 404.


All during this time, the AICPA (American Institute of Public Accountants) was working on accounting standards regarding internal controls for NON-PUBLIC companies. These standards, SAS 107-112 require auditors to review internal controls over financial reporting for NON-PUBLIC companies. The affects companies with fiscal periods ending on or after December 15, 2006.

With the current deadline for public companies under 404(b) fiscal years on or after December 15, 2008 (possibly delayed to 2009), the public company standards are now lower than private companies. Interesting since internal controls are basic good business.

It is now difficult to make the case that smaller public companies cannot comply with ICFR standards when their private brethren will comply this year and be audited with a top down risk based approach.

Sound familiar? More detail on the unintended consequences of these delays can be reviewed in Lord Benoit's recent study.

If your company has to comply with SOX 404 or NI 52-109, and wants to do it in a sensible and cost effective way, contact http://www.issuescentral.com/ for more information on Compliance Playbook® for companies based outside of Canada. For Canadian based companies, see http://www.compliancepartner.ca/ for more information on Compliance Partner™ from Thomson Carswell.