Tax Reform, Sustainability Disclosures and Complying with Historic Accounting Changes Among Topics of BDO USA’s 2017 Board Survey

September 2017

Jerry Walsh

Chicago, IL – According to a new survey by BDO USA, LLP, one of the nation’s leading accounting and advisory organizations, more than three-quarters (78%) of public company board members anticipate tax reform will be achieved during President Trump’s current four-year term, but just 22 percent believe it will occur in 2017. Directors were split when asked about President Trump’s decision to withdraw the United States from the Paris Climate Accord earlier this year, with a slight majority (54%) indicating they were against the decision.  An identical proportion (54%) believe that disclosures of sustainability matters are important to inform investors – a marked turnabout from a year ago when less than a quarter (24%) took that position. When asked about a planned change to the annual auditor’s report that will require disclosure and discussion of critical audit matters (CAMs), only one-third (36%) of directors believe this will benefit investors and half (50%) are concerned it will make their job more difficult.

“The 2017 BDO Board Survey shows corporate directors are eagerly awaiting the tax reform promised by President Trump, but they seem resigned to the fact that it may not happen in 2017. They also have a high degree of confidence in their internal compliance programs, despite some widely publicized examples of businesses failing to respond to whistleblowers,” said Amy Rojik, Partner in the Corporate Governance Practice at BDO USA. “Directors are also focusing more fully on engaging with management in addressing major accounting changes that will be implemented over the next several years and are much more favorable towards disclosures of sustainability matters than they were a year ago.”

Tax Reform
More than three-quarters (78%) of public company board members anticipate tax reform will be achieved during President Trump’s current four-year term, but just 22 percent believe it will occur in 2017. Of those predicting tax reform, an overwhelming majority (94%) anticipate that it will have a favorable impact on their business, with 20% believing the impact will be “highly favorable’. When asked to identify the most important goal for tax reform legislation, sizable proportions of board members cite reduction of the current corporate tax rate (45%) and simplification of the tax code (37%). Fewer communicated the need for tax incentives to repatriate foreign earnings (12%) or lowering the capital gains tax rate (5%).

Financial Reporting Changes
The Public Company Accounting Oversight Board (PCAOB) recently approved changes to the annual auditor’s report that accompanies a business’s financial statements. One of the major changes is a requirement for the auditor’s report to discuss “critical audit matters” (CAMs) – elements of the audit, discussed with the audit committee, where the auditor had to make the most challenging, subjective or complex judgements on material matters.

When asked their opinion of this change, close to half (48%) of corporate board members do not feel the discussion of CAMs is an improvement to the transparency and usefulness of the auditor’s report for investors.  Just over one-third (36%) of the directors believe it is an improvement and 16 percent were not sure. Directors were evenly split (50%) on whether the discussion of CAMs in sensitive areas could make their job as a board member more difficult.

Better than three-quarters (82%) of directors indicate that their board or audit committee is actively working with management to meet historic accounting changes to revenue recognition, lease accounting and credit loss standards that are going into effect over the next few years. Almost as many (74%) say they are engaged with management on the need to communicate with shareholders, regulators and other stakeholders on the potential impact of these accounting changes in order to avoid unpleasant surprises when they appear on the financial statements.

Sustainability Matters
In a major reversal from a year ago, a majority (54%) of board members believe that disclosures regarding sustainability matters (e.g. climate change, corporate social responsibility, etc.) are important to understanding a company’s business and helping investors make informed investment and voting decisions. Last year, just one-quarter (24%) of directors maintained this stance. 

On a related matter, directors were split when asked about President Trump’s decision to withdraw the United States from the Paris Climate Accord earlier this year, with a narrow majority (54%) indicating they were against the decision. 

Activist Investors
When asked about the rise of “activist investors” seeking to control board seats and impact corporate strategy, directors are clearly unified in their opposition to such efforts. The vast majority (95%) feel activist investors are too focused on short-term returns to secure their investments. Only 5 percent believe that these activists are trying to unlock long-term shareholder value as they may claim. 

Whistleblower/Compliance Programs
Despite some major news stories in recent months about corporations allegedly failing to act when whistleblowers communicated concerns through internal compliance programs, the vast majority (93%) of board members say they receive regular reports from management, or an internal compliance executive, on whistleblower complaints and how they are being addressed. An almost identical percentage (92%) indicate they ask management what they are doing to communicate with employees throughout the organization about the importance of adherence to ethical standards.

When asked whether the SEC’s widely publicized whistleblower bounties - enacted in 2011 – have undermined their internal whistleblower/compliance program, only a third (32%) agreed. This is a major shift from 2012 when a slight majority (51%) of the directors believed the SEC’s newly enacted bounties could undermine internal anti-fraud and compliance programs.

Board Composition
The SEC has begun to look into existing company disclosures of the ethnic, racial and gender composition of public company boards and could make such disclosures a mandatory requirement in the future. Two-thirds (66%) of directors believe their board is already proactively addressing the issue of board diversity, but one-third (34%) admit they are falling short in this area.

BDO Board Survey
The BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA in August 2017, examines the opinions of 130 corporate directors of public company boards regarding corporate governance and financial reporting issues. 

BDO USA's Corporate Governance Practice is a valued business advisor to corporate boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad of accounting, tax, risk management and forensic investigation issues.

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