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THIS WEEK'S ARTICLES
Whistleblower Ruling Means New Risks for Private Companies
Auditors Draw Some Clients Closer
Falling Audit Fees May Increase Restatements: Study
Under Pressure, Facebook Restricts Gun Promotion on Social Network

Whistleblower Ruling Means New Risks for Private Companies
by: RACHEL LOUISE ENSIGN
Mar 04, 2014
Click here to view the full article on WSJ.com

TOPICS: Business Ethics, Dodd-Frank, Federal Regulations, Supreme Court

SUMMARY: The Supreme Court on Tuesday endorsed a broad reading of whistleblower protections in a decision that could change the way private companies approach internal compliance. Justice Ruth Bader Ginsburg, writing for the court in a 6-3 opinion, said the whistleblower protection provisions of the 2002 Sarbanes-Oxley Act cover employees of a public company's private contractors and subcontractors. That interpretation means that private-company employees who allege they were retaliated against for reporting certain kinds of suspected wrongdoing can potentially bring valid claims against their employer. In the wake of the ruling, "your company's exposure to a [Sarbanes-Oxley] whistleblower claim is no longer governed by whether you're a public company or not," said Lloyd Chinn, partner and co-head of the whistleblowing and retaliation group at Proskauer Rose LLP. "Any private employer who happens to be a contractor of a public company is subject to a suit." The court's opinion cited Sarbanes-Oxley's intent to "ward off another Enron debacle" and empower contractors to report fraud.

CLASSROOM APPLICATION: The Sarbanes Oxley Act (SOX) has the intention of motivating employees to disclose misconduct and protects the employee from retaliation. SOX originally applied to public companies and had been used by many employees who thought they were bringing valid claims against their employer but felt they were retaliated against for their action. Now in a Supreme Court decision, it has been determined that the whistleblower protection covers private contractors, subcontractors, and suppliers who are private company employees reporting wrongdoing against their employer. Since so many private companies are suppliers or subcontractors to public companies, the ruling means new risk for many private companies.

QUESTIONS: 
1. (Introductory) Will private companies become more sensitive to employees' concerns about misconduct now that almost any company can be subject to SOX whistleblower protection?

2. (Advanced) The Dodd-Frank Act went beyond SOX with the whistleblower bounty. Should the whistleblower bounty program be expanded to private companies?

3. (Advanced) Will the whistleblower protection of employees in private companies encourage them to improve their ethics and compliance program?

Reviewed By: OC Ferrell, University of New Mexico


Auditors Draw Some Clients Closer
by: EMILY CHASAN
Mar 03, 2014
Click here to view the full article on WSJ.com

TOPICS: Accounting, Accounting fraud, Audit, Federal Regulations, HSBC, Sarbanes-Oxley Act

SUMMARY: Some companies and their auditors might be getting a little too close for comfort. Since the collapse of Enron and its auditor, Arthur Andersen, more than a decade ago, regulators on both sides of the Atlantic have been cautious about auditors receiving big fees for consulting and other services that could potentially cloud their judgment when reviewing a company's books. Now, they are taking a fresh look at the issue. The U.S. government's audit watchdog says it has started quizzing accounting firms on whether their fast-growing consulting practices could hurt the quality of their audits. Overseas, the European Parliament is expected to vote in April on legislation that would cap nonaudit services provided by a company's auditor at 70% of the audit fee. At least 300 companies in the U.S. and Europe paid their auditors as much for add-on services as they did for audit work, according to public filings from the past two years reviewed separately by data provider Audit Analytics and stock-research firm Exane BNP Paribas SA. Auditing firms say they work to avoid conflicts of interest and that providing extra services can improve audits by enhancing their knowledge of an audit client's business. HSBC Holdings PLC paid its auditor, KPMG LLP, $208 million for "other services" between 2010 and 2012. That's more than five times as much as the U.K. bank paid the firm for checking its books. The added work included "ad hoc accounting advice," consulting on information-technology security, and subsidiary audits, according to a regulatory filing. The filing added that HSBC only uses KPMG for extra services when it can benefit from the firm's historical knowledge of the bank and when its independence won't be compromised.

CLASSROOM APPLICATION: SOX attempted to separate auditing and consulting services from accounting firms. Apparently many accounting firms are providing many non-audit services, in some cases, these services cost more the firm's audit fees. In the case of HSBC Holdings, other services beyond auditing were five times as much as the bank paid for its audit. These developments violate the spirit of separating auditing and consulting services. One reason it is believed that Arthur Andersen failed at its Enron audit was because they were paying over $50 million per year for consulting which created a conflict of interest.

QUESTIONS: 
1. (Introductory) Why is there a conflict of interest when an accounting firm provides an audit of the books as well as consulting services?

2. (Advanced) If accounting firms continue to sell extra services based on their knowledge of the company they are auditing, will independents related to the audit be compromised?

3. (Advanced) Are there situations where accounting firms should be able to offer additional services such as attending meetings related to mergers, tax advice, inventory accounting, etc.?

Reviewed By: OC Ferrell, University of New Mexico


Falling Audit Fees May Increase Restatements: Study
by: Saranya Kapur
Feb 28, 2014
Click here to view the full article on WSJ.com

TOPICS: Accounting, Accounting Industry

SUMMARY: Audit fees have sagged since the recession, and that trend may increase the possibility of misstatements going undetected, according to a study by researchers at Texas A&M University and University of Nebraska-Lincoln. Financial restatements are more likely among high-risk clients where risk appears not to be incorporated into audit fees, the study found. Since the financial crisis, fees have fallen approximately 10% for all companies between 2006 and 2010, and companies that don't fully pay their auditor for risk have a 29% higher risk of restatement. "Lower fees are hindering auditors' ability to be compensated for the risk they incur," said Nathan Sharp, a professor at Texas A&M University and one of the authors of the paper. Before the financial crisis, higher risk companies typically had higher audit fees, but that was no longer true by 2010. In 2007,, the gap between the highest and lowest risk companies' audit fees stood 10.2%, but three years later the gap was not significant. "It's not sustainable to have this level of fee pressure for audit firms," said Brant Christensen, a doctoral student at Texas A&M and another author of the study. "At some point, something's going to give." "Our research begs the question, are we going back to where we were before Sarbanes-Oxley?," Mr. Sharp said. "Is audit once again becoming a commodity?"

CLASSROOM APPLICATION: Accounting audit fees declined during the last recession. According to a recent study this may have led to misstatements in earnings that have been undetected. While auditing fees have declined 10 percent between 2006 and 2010, the lower fees hinder auditors' ability to be compensated for assessing risk. While higher risk companies typically had higher audit fees, that was no longer true by 2010.

QUESTIONS: 
1. (Introductory) If auditors' fees are reduced, will this have an impact on their assessment of risk and earnings restatements?

2. (Advanced) What is the most logical reason for auditing fees declining during the recession?

3. (Advanced) Should auditors maintain high ethical standards and refuse to do audits when they are not being adequately compensated?

Reviewed By: OC Ferrell, University of New Mexico


Under Pressure, Facebook Restricts Gun Promotion on Social Network
by: JEFF ELDER
Mar 05, 2014
Click here to view the full article on WSJ.com

TOPICS: Business Ethics, Facebook, Social media, social networking sites

SUMMARY: Facebook announced Wednesday new restrictions on promoting guns on the social network, amid pressure from groups favoring gun control. In a blog post, Facebook said it will remove offers to sell guns without background checks or across state lines illegally. Facebook will notify users offering to sell guns of relevant laws and limit the visibility of posts and pages about gun sales to users 18 and older. The company also announced that searches for guns for sale on Instagram will prompt messaging reminding users of gun laws. Facebook said it would rely on users to report posts and pages offering to sell guns. It said the changes will be implemented over the next few weeks. The changes come after a six-week campaign by the advocacy groups Mayors Against Illegal Guns and Moms Demand Action for Gun Sense in America, which posted a video in February depicting illegal gun sales on Facebook. The groups planned to deliver more than 130,000 petitions seeking a crackdown on posts about illegal gun sales to Facebook headquarters before the company agreed to the new policies. Facebook also cited ongoing talks seeking new gun policies with New York Attorney General Eric Schneiderman, Americans for Responsible Solutions, and Sandy Hook Promise. Last week, technology news site VentureBeat reported that it arranged to buy a gun illegally on Facebook in 15 minutes, and The Wall Street Journal reported assault-weapons parts and concealed-carry weapon holsters have been advertised to teens on Facebook.

CLASSROOM APPLICATION: Facebook is implementing new restriction for promoting guns on its social networking site. A number of special interest groups that are opposed to guns have been putting pressure on Facebook to restrict advertising and communication that permits people from selling guns without background checks. The nature of social media has allowed individuals to sell guns because there is not adequate monitoring of the communication. For example, documentation of sales of various types of firearms attracted a community with 213,000 likes. Now Facebook is committing to try to remove illegal gun sale posts.

QUESTIONS: 
1. (Introductory) Why is it so easy for people to sell guns on Facebook?

2. (Advanced) Will Facebook be effective in prohibiting offers to sell guns without background checks or across state lines illegally?

3. (Advanced) Are social media platforms inherently conducive to illegal transactions?

Reviewed By: OC Ferrell, University of New Mexico


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