United States: Three Things US Audit Committee Members Should Consider In 2015

Keywords: US Audit Committee, re-election, concept release

Audit Committees are facing increased demands from many quarters heading into 2015, which expand their responsibilities, expose them to greater regulatory scrutiny and potential liabilities, and provide the basis for proxy and shareholder activists to oppose the re-election of Audit Committee members to the board of directors of the company.

Regulatory focus on Audit Committees is likely to increase in 2015, as the Securities and Exchange Commission ("SEC") is expected to issue a Concept Release in early 2015 that will propose changes in Audit Committee disclosures in public company proxy statements. Those additional disclosures may cover reporting on Audit Committee oversight of annual and quarterly company reports as well as assessments of the effectiveness of the Audit Committee. Explaining the background of these proposed changes in 2014, SEC Chair Mary Jo White stated "You can't overstate the importance of the audit committee functioning at the highest possible level." Expanded SEC mandated disclosure by and about Audit Committees could, of course, effectively expand the scope and scrutiny of their responsibilities.

This Legal Update focuses on Tax, Whistleblower and Revenue Recognition issues that should be considered by Audit Committees of public companies in 2015. It follows our 2014 Legal Update in which we addressed Auditor Independence, Cybersecurity and FCPA/Bribery Risks.1 Companies that may not initially consider "public company" type corporate governance requirements, including US private companies considering an initial public offering ("IPO") or a "junk bond" financing, or foreign private issuers considering accessing the US capital markets, also need to be mindful of these considerations for Audit Committees.

Tax Risks in Financial Reporting

In 2015, Audit Committees should be vigilant about understanding the tax strategies and judgments that are reflected in the tax rates and contingencies presented in company financial statements. Tax risks will likely increase due to three factors: (i) corporate tax strategies are considered newsworthy; (ii) companies are focused on structuring their operations for tax efficiency; and (iii) governments across the globe are chasing tax revenues.

Increasing tax risks. Corporate tax planning is often front page news. For instance, over the last few years, corporate inversions garnered significant public attention as many USheadquartered companies considered or undertook strategic combinations resulting in the relocation of their headquarters to a lower tax jurisdiction. In late 2014, public scrutiny, even if misplaced, led to calls for legislative and Internal Revenue Service ("IRS") action. This culminated with the IRS and US Treasury Department issuing a Notice in September 2014 announcing their focus on curtailing certain tax benefits associated with inversions. Future tax guidance may also address various "earnings stripping" transactions where US companies increase their intercompany debt levels, which has the effect of increasing deductions for US tax purposes.

Tax authorities across the globe, including in many industrialized locations, are focused on corporate tax revenue and corporate tax planning. These tax authorities have a particular focus on perceptions that multinational companies are shifting taxable earnings from high tax jurisdictions to low or no tax jurisdictions through transfer pricing, intercompany funding and other arrangements. In September 2014, the Organization for Economic Co-operation and Development ("OECD") released its Action Plan on Base Erosion and Profit Shifting ("BEPS"). BEPS, among other things, focuses on the allocation of profits to lower-tax jurisdictions and the deduction of expenses in jurisdictions with higher rates.

Prior Practice, Prior Understandings, May Not Stand. From an enforcement perspective, the IRS has increased its examination and scrutiny in areas of typical corporate tax planning. The IRS has placed an increased emphasis on intercompany transactions—intercompany debt, transfer pricing, employee compensation—at all tax jurisdiction levels. Matters where tax risks were once considered routine are now facing a heightened degree of focus and inquiry from taxing authorities, which are now more likely to share information collected during an examination with other tax authorities.

Moreover, as two cases currently pending in the US Tax Court demonstrate, the IRS can back out of certain types of agreements that taxpayers used to consider as resolving the tax matters they addressed. European tax authorities, too, are back-tracking on prior tax understandings with multinationals. Audit Committees need to understand the extent and nature of any such agreements that supposedly resolve future or current tax disputes.

Tax Accounting Issues Could Lead to Financial Restatements. Income tax issues are a major reason for financial statement restatements. The Audit Committee is responsible for overseeing the preparation and audit of the company's financial statements, so the committee members should carefully scrutinize significant income tax issues with management and the auditors in order to avoid restatements risk. This is obviously complicated by the fact that tax law involves a complex and ever-changing set of rules, regulations, court cases, exemptions, exceptions, limits, etc. Additionally, income tax accounting standards require the use of estimates and judgment of many subjective factors, such as forecasts of future profitability and expectations of future investments and cash needs, which themselves are subject to further judgments. Furthermore, these standards apply to the company's operations worldwide, which involve interpreting and applying the tax laws, regulations and court cases of numerous jurisdictions. This complexity and judgmental uncertainty, however, does not provide any real or sympathetic defense to financial restatement risk, emphasizing the importance of Audit Committees closely monitoring evolving tax risks.

Tax Risk Questions for Audit Committees. As they consider overall tax risks confronting the company, as well as the tax positions and contingencies reflected in their financial statements, Audit Committees should evaluate/analyze/assess these growing tax risks from several perspectives: " What checks and balances are in place to assess the impact of any given transaction or structure on the company's overall tax risks?

  • What are the cross-border tax challenges the company could face in internal transfer pricing for assets, royalties and services, and how has the company substantiated its tax positions? Should the company further substantiate its positions in the event tax authorities initiate audits or reviews of the company's positions?
  • What tax challenges might the company face with evolving "earnings stripping" and intercompany debt structures, and how has the company substantiated its tax positions? What analysis is the company doing currently to monitor the changing tax risks?
  • What challenges might the company face with growing requirements for disclosure of income allocation among jurisdictions? How is the company coordinating the global nature of tax authority examinations?
  • What scrutiny might the company face in relation to any business conducted in low-tax jurisdictions?
  • What tax strategies are being challenged within the company's industry, and how might they apply to the company?
  • How might rapidly changing tax legislation and enforcement in the United States, Europe, Latin America and Asia impact the company? What current or upcoming developments could significantly affect the company's effective tax rate?
  • What are the company's most significant risks related to tax positions, and what internal controls are in place to address those risks?
  • What agreements has the company reached with various tax authorities that supposedly resolve certain tax disputes? Are those agreements binding? Has any tax authority attempted to reopen matters related to these agreements?

More Whistleblowers

RisingWhistleblower Awards. In 2011, the SEC created its whistleblower program under the Dodd Frank Wall Street Reform and Consumer Protection Act. That program rewards high-quality original tips to the SEC that result in an SEC enforcement action with sanctions exceeding $1 million. Awards can range from 10 percent to 30 percent of the money collected in a case. In 2014, whistleblower complaints and rewards accelerated.

The SEC's Office of theWhistleblower's 2014 Annual Report (the "2014 Annual Report") to Congress states that whistleblower awards were issued to nine individuals in fiscal year 2014, up from four in 2013. One of the 2014 awards was for $30 million, the largest at the time of the award and the fourth award to someone in a foreign country. The Office of theWhistleblower also reported an increasing number of tips: 3,620 tips in 2014, compared to 3,238 in 2013, and 3,001 in 2012. The most common complaints reported by whistleblowers included corporate disclosures and financials (16.9 percent), offering fraud (16 percent) and manipulation (15.5 percent). In the 2014 Annual Report, the Office of theWhistleblower, after commending the largest award, warned that "we hope that awards like this one will incentivize company and industry insiders, or others who may have knowledge of possible federal securities law violations, both in the U.S. and abroad, to come forward and report their information promptly to the SEC."

Audit Committee Oversight of Whistleblower Issues. Audit committees are responsible under the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") for establishing procedures for the receipt, retention and investigation of complaints regarding the company's accounting, internal accounting controls or auditing matters, as well as for the confidential, anonymous submission by company employees of concerns regarding questionable accounting or auditing matters. Often, a company establishes a hotline for these purposes. Company whistleblowers should be able to access this company hotline, in addition to the separate whistleblower programs of the SEC and other government agencies. Audit Committees are generally responsible for oversight of company whistleblower concerns by virtue of their general fiduciary duties of oversight, as well as Sarbanes-Oxley Act, New York Stock Exchange and the NASDAQ Stock Market requirements/mandates that Audit Committees oversee compliance, risk management and internal controls over financial reporting of the company. Whistleblower complaints may expose shortcomings in all of these oversight areas.

Audit Committees should request periodic reports of all whistleblower complaints received, including the substance of the compliant and how the allegations were addressed. Anecdotally, in 2014, Audit Committees appeared to be experiencing some compliance fatigue, including with whistleblower oversight. Perhaps sensing this fatigue, the 2014 Annual Report cautioned that "two other whistleblower awards made this year drive home another important messagethat companies not only need to have internal reporting mechanisms in place, but they must act upon credible allegations of potential wrongdoing when voiced by their employees." The 2014 Annual Report also emphasized that whistleblower complaints and responsibilities can arise fromthe non-US entities of US companies.

Third Party Administrators? In an effort to curb fraud, some companies have retained thirdparty administrators to operate their whistleblower hotlines and investigate the complaints or allegations of fraud third-party administrators. From a compliance perspective, the ability to ensure employee anonymity is one of the most important perceived benefits of such hotlines and third-party administrators. However, the oversight responsibilities of Audit Committees for whistleblower programs do not compel the utilization of third-party administrators.

Whistleblower Questions For Audit Committees.With growing SEC enthusiasm for whistleblowers and their awards (and some Audit Committee compliance fatigue), as we move along in 2015, it is an appropriate time to review the basics of company whistleblower monitoring:

  • Has the company received whistleblower complaints in the past year (or relevant reporting period)? If so, has the company provided the Audit Committee with information about the whistleblower complaints and how they were addressed?
  • Are company employees, including those outside of the United States, adequately informed as to how they can report whistleblower concerns? How do these concerns filter through internal audit, internal and financial controls, and compliance functions and to the Audit Committee for oversight?
  • When the company engages in acquisition or joint venture activity abroad, are acquired businesses integrated into the company whistleblower procedures? (Whistleblower programs must be available to non-US employees, and the increasing SEC reliance on off-shore whistleblower tips highlights the importance of these programs being available to employees outside the United States)
  • Would the company and the Audit Committee benefit, considering the costs, from utilizing a third-party administrator for whistleblower complaints?
  • If received, do whistleblower allegations indicate a deficiency in internal control over financial reporting, which could be relevant to the company's financial statement presentation and the Audit Committee's assessment of internal control over financial reporting?
  • Do the whistleblower procedures in place ensure the confidentiality of the whistleblower?
  • If received, do whistleblower allegations have potential legal implications for the company?

Revenue Recognition Changes

New global standards on revenue recognition, issued jointly by the Financial Accounting Standards Board and the International Accounting Standards Board, comprehensively overhaul existing revenue recognition rules for companies.2 In general, the new standards are more principles-based than the existing US generally accepted accounting principles and will require US companies to make more estimates and subjective judgments as to when revenues should be recognized under contracts for goods and services. For many companies, adapting to these revenue recognition rules will be one of the most comprehensive changes in accounting practices implemented in many years.

These new revenue recognition rules are currently scheduled to take effect for reporting periods beginning after December 15, 2016 for US public companies (with retrospective adoption requiring three years of comparative financial statements) and for reporting periods beginning on or after January 1, 2017 for companies that use International Financial Reporting Standards (with two years of financial statements for retrospective adoption).

2015 Focus. Subject to possible delays in implementation, in 2017, public companies reporting three years of historical, comparative financials will need to assess the impact of these 2015 revenue recognition changes. Tracking and assessing contracts associated with revenue will have a significant impact across the company, including systems, data, and accounting processes, internal financial controls and business contracting terms and processes in order to assess and document proper recognition of contract revenues.

Revenue Recognition Questions For Audit Committees. In assessing the impact of these pending revenue recognition changes, Audit Committees should begin to assess their impact on the company and the company's readiness to change its revenue recognition process and reporting:

  • What will be the impact on the company of the proposed revenue recognition rules? Is the company evaluating contracts and revenue recognition changes? Will any basic changes in company contracting practices be necessary to document in light of the changing revenue recognition standards?
  • Does the company have an implementation plan for the revenue recognition rules? Does the company have sufficient information to satisfy the new disclosure requirements or must new systems, processes and controls be implanted to gather such information and ensure its accuracy? "
  • What is the company's chosen transition method for revenue recognition and how will that affect its implementation plans?

Originally published January 23, 2015

Learn more about our Corporate & Securities practice.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.