CFOs Could Look to Change Disclosure Practices Following Volkswagen Scandal
October 03 2019 - 06:12PM
Dow Jones News
By Mark Maurer
The legal aftermath of Volkswagen AG's emissions-cheating
scandal could teach a lesson to finance chiefs about the right time
to disclose critical information, particularly in the U.S., which
differs from Europe in its disclosure requirements.
German prosecutors last week charged three executives at the
Wolfsburg, Germany-based car maker in a 636-page indictment with
allegedly misleading shareholders in the months before the 2015
scandal. The indictment said then-Chief Executive Martin Winterkorn
became aware of the cheating at least four months before U.S.
authorities disclosed in September 2015 that Volkswagen had rigged
millions of diesel-powered vehicles to cheat emissions tests for
nearly a decade. Volkswagen and the three accused have denied the
charges filed last week.
Executives at some U.S. companies are following the case closely
for guidance to determine whether to revise the timing of their own
disclosures of critical matters, lawyers said.
Several U.S. businesses have already taken action. Automotive
companies such as Bloomfield Hills, Mich.-based Penske Automotive
Group Inc. and Charlotte, N.C.-based Sonic Automotive Inc. have
revised their annual reports over the past few years to explicitly
reference the Volkswagen scandal in warning shareholders that a
comparable issue could hurt their profitability and brand
reputation.
Companies based in the European Union, of which Germany is part,
are subject to a continuous disclosure regime. Companies have an
obligation to immediately inform the market of any inside
information that could have an effect on the price of financial
instruments, according to articles in European Market Abuse
Regulation, known as MAR. The EU's MAR, which went into effect in
2016 and is designed to improve financial disclosure, has strict
rules about disclosing inside information so that it can be quickly
and accurately assessed by the public.
Disclosure rules in the U.S. are different. A U.S. Securities
and Exchange Commission form known as an 8-K contains nine
sections, including a fixed set of material events. A company is
required to file an 8-K within four business days of most events.
The material events could include a bankruptcy, shareholder
director nominations, completion of an asset acquisition or
disposition, entry into or termination of a material agreement, and
changes in control. The SEC doesn't explicitly include fraud in its
criteria.
The SEC in August proposed changes to the disclosure standard to
discourage repetition and the disclosure of immaterial information,
while simplifying compliance efforts.
As the Volkswagen case unfolds, U.S. companies could start
thinking more about evaluating compliance issues sooner in the
process, said Peter Welsh, co-head of Ropes & Gray LLP's
corporate and securities litigation practice.
Not all attorneys advise disclosing critical matters that aren't
subject to the 8-K at the earliest point. Disclosing early could
create an unfortunate precedent for a company, said Karen Hsu
Kelley, partner and head of the public company advisory practice at
Simpson Thacher & Bartlett LLP.
"Once you get into the habit of making disclosures early, you
put yourself into a hole," Ms. Kelley said. "What is material in a
company changes over time, by size for example. Companies need to
weigh the probability versus magnitude of the risk."
A paradigm shift in how disclosure counsel advises companies is
unlikely, Mr. Welsh said. Ms. Kelley too said she sees the
Volkswagen case as a one-off example of pervasive risk.
"Operational risk may need to be more of a focus and critical
matters should be discussed at a risk or audit committee meeting if
they are not already," Ms. Kelley said.
Additional guidance from the SEC could help nudge companies to
take a closer look at their disclosure practices, Ms. Kelley
said.
The SEC declined to comment.
Some accounting and legal advisers recommend that chief
financial officers of U.S. companies disclose all material
information quickly, even though they can largely wait until a
quarterly report if the information doesn't qualify as an event
that would trigger them to file an 8-K.
"Not disclosing mission-critical factors rapidly and fully is an
exposure that boards and registrants are not prepared to take any
longer, " said Kevin Hyams, partner in charge of accounting firm
Friedman LLP's governance, risk and compliance services
practice.
Companies also have a responsibility to protect employees.
Sitting on information for months could increase the risk that
employees could be accused of having traded or exercised options
with that knowledge, lawyers said.
U.S. companies stand to learn from the case in Germany because
the U.S. is a much more litigious environment, Mr. Hyams said.
In its criminal and civil cases, Volkswagen accrued fines and
penalties totaling around $30 billion. The company and the three
accused rejected the recent indictment as groundless. A trial in
German courts is months, if not years, away.
Volkswagen is also facing a lawsuit from the SEC, which in March
accused the company of defrauding U.S. investors. The lawsuit is
ongoing.
A Volkswagen spokesperson didn't immediately respond to requests
for comment.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
October 03, 2019 17:57 ET (21:57 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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