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May 10, 2019

The week in GRC: SEC proposes easing smaller companies’ audit burdens, and Kraft Heinz to restate earnings

This week’s governance, compliance and risk-management stories from around the web

CNN reported that Kraft Heinz disclosed it will restate more than two years of financial results after some of its employees engaged in misconduct. The company said in an SEC filing that an internal probe found employees had fabricated a number of transactions related to suppliers and procurement. The company said it did not believe the amount of the restatement was ‘quantitatively material’ to its finances, although the restatements will total roughly $208 million.

Warren Buffett’s Berkshire Hathaway owns 27 percent of Kraft Heinz. ‘The company has my confidence,’ Buffett said in an interview on Monday. Kraft Heinz had disclosed in February that the SEC was investigating its accounting, and it had received a subpoena from the agency related to its accounting policies, procedures and internal controls.

– Acreage Holdings shareholder Marcato Capital Management said it would vote against the company’s proposed $3.4 billion deal with Canopy Growth Corp, according to Reuters. Canopy Growth said in April it had secured the right to buy Acreage once the US legalizes the production and sale of cannabis.

The asset manager said in a letter to Acreage’s board that the company’s ‘strategic value as one of the few multi-state operators of scale in the US, with leading positions in the most valuable markets, merits a significant premium to any stand-alone cash-flow derived valuation.’ Marcato believes the bid by Canopy undervalues the company.

Canopy Growth and Acreage were not immediately available for comment.

– Occidental Petroleum said its latest effort to take over Anadarko Petroleum was designed to ensure Anadarko’s board considers its offer to be better than one from Chevron, Reuters reported. Occidental has increased the cash component of its $38 billion bid to acquire Anadarko, removing a requirement for any deal to receive the approval of Occidental’s shareholders.

Avoiding a shareholder vote will allow for ‘clarity of closing’, which Occidental CEO Vicki Hollub said was why Anadarko board members think Chevron’s $33 billion offer is preferable to Occidental’s $38 billion bid, which would not require a Chevron shareholder vote. Hollub said it was in the best interest of shareholders to complete a deal without raising the overall price.

– Former SEC member Kara Stein, who left the agency in January after a five-year term, has joined the board of trading platform operator IEX Group, according to Bloomberg. IEX secured SEC approval to start operating in June 2016. The company offers trades with a so-called speed bump, a split-second delay designed to curb high-frequency trading strategies. Stein joins the board as IEX and other trading platforms face the prospect of an SEC revamp of rules that underpin US stock trading.

– The Wall Street Journal said that, according to people familiar with the matter, US bank regulators – facing pressure from Wall Street banks and Republican lawmakers – are considering easing rules that require large lenders to set aside cash for safety in case of certain derivatives trades going bad. The biggest US banks are stepping up their push to secure the reprieve, which they believe will give them access to nearly $40 billion held in reserve under post-financial crisis rules.

At issue is how much collateral, or margin, one unit of a bank is required to collect at the start of a swap transaction with another affiliate of the same firm. Swaps came under greater oversight in the Dodd-Frank Act after such transactions played a key role in the crisis.

Bloomberg reported that Chip Wilson’s right to designate a board nominee at Lululemon Athletica was terminated after he ‘failed to observe the requirements of the support agreement relating to certain contesting stockholder actions,’ the company said in a recent filing. The filing did not specify what prompted the change.

Lululemon and Wilson declined to comment through spokespeople. Wilson ‘informed the board that he did not agree with the board’s conclusions’, according to the April 24 filing. Wilson’s relationship with the company he founded in 1998 has long been fraught. Last October he said he wanted to return to a public board in 2019 and that Lululemon was his first choice.

– The WSJ reported that the SEC voted to release a proposal that would exempt public companies with less than $100 million in annual revenues from regular outside audits. The plan is part of a broader effort to encourage more companies to go public. If approved, the proposal would mean smaller public companies such as those in the healthcare, information technology and biotech industries would not have to have outside audits of their systems for preventing accounting errors and fraud.

SEC chair Jay Clayton has made it a priority to make it more attractive for companies to go public and described the latest proposal as a step toward that. Under Clayton, SEC rule changes or proposed changes include allowing more companies to discuss their IPO plans privately with potential investors before announcing their intentions and allowing companies to file IPO paperwork confidentially with the agency.

– The WSJ also said that, according to Fitch Group, lapses in anti-money laundering (AML) and financial-crimes controls are more likely to affect a bank’s credit rating than almost any other non-financial issue. The findings are part of an analysis of the impact ESG factors have on issuer credit scores. The evaluation categories include energy management, labor relations and management strategy.

‘Financial-crime compliance lapses can be serious, material and can drive credit ratings,’ said Monsur Hussain, senior director in the financial institutions group at Fitch. AML controls are playing a bigger role in credit ratings because regulators around the world are clamping down on banks with weak controls, he added.

Fitch this year began scoring the relevance of ESG matters in its credit ratings. Moody’s and S&P Global also take these issues into account for some of their credit ratings.