Six Compliance Events to Watch in 2016

Welcome back to the grind, everyone! Before we all get sucked back into the world of audit committee meetings, proxy season preparation, and committing your travel budget now before the CFO implements a freeze, let’s pause to contemplate some potentially significant events in 2016 for compliance, audit, and risk professionals. Lord knows we have plenty to choose from.

Without any further delay, then, here are six issues I’ll have on my radar screen this year.

Rising interest rates. Yes, corporate finance departments should watch the Federal Reserve to see how often it keeps raising interest rates throughout 2016—but the real risk lurks in the high-yield bond market. If rising rates there choke off companies’ access to cash, that will carry all sorts of repercussions.

For starters, financial reporting executives will need to review what they might need to disclose in corporate filings about hidden liabilities or debt covenants that could go haywire in a world of rising rates. Merger plans could be jeopardized, which might carry consequences for compliance officers who have been planning for changes to their own programs or been performing due diligence on deals that suddenly vanish into the breeze. More broadly, rising interest rates mean companies need to be more disciplined about strategic decisions, and pressure to grow and meet financial targets will be greater. Think about how that pressure might change your corporate culture, because it will.

Assessing systemic risk. Just before Christmas, the Fed published its first thinking on how it might impose new capital reserve requirements on financial firms if the Fed decides that systemic risks are reaching abnormal proportions. Which brings up the question: how are we going to define and assess what “abnormal” systemic risks look like, anyway? Would that be risk in packaged auto and student loans sold into the secondary debt market? Would it be recession in China, or depressed oil prices? And when did we articulate what a normal amount of systemic risk is?

The longer our current economic expansion continues, the more regulators will worry that somehow they are missing some huge systemic risk that will ruin everything, like they did in the 2000s before the financial crisis. The result is one part fierce policy debates (generally led by people such as Sen. Elizabeth Warren on the left, and Daniel Piwowar of the Securities and Exchange Commission on the right); and one part policy pronouncements unpopular with the banking world. I expect more of both in 2016.

The Walmart probe. I have predicted a settlement in the long-running Walmart FCPA probe for two years, and been proven wrong both times. Now the important element to watch with Walmart is whether the settlement will be much ado about nothing—that maybe using local agents in Mexico didn’t qualify as the huge bribery scandal we all expected three years ago. This might be more about facilitation payments rather than bribery.

Any settlement like that would be an embarrassment for the Justice Department. Walmart has spent hundreds of millions of dollars dealing with this probe, and compliance chief Jay Jorgensen has done admirable work there overhauling Walmart’s compliance program. Improving compliance for its own sake is a good thing. Still, for years most people in the compliance community believed Walmart was going to be A Big Deal. Maybe this year we’ll see whether that’s the case.

The EU and international data transfers. The European Court of Justice’s decision in October to invalidate the long-standing safe harbor agreement for cross-border data transfers was simply shocking; I never believed that a court would be so dismissive of how modern business works. Still, the Safe Harbor agreement is gone, and now we need to forge some next-generation agreement through the lens of the EU Data Privacy Directive completed in December.

I put this issue in the “watchful waiting” category, since EU politics moves so slowly. The question is whether some EU member state does prohibit data transfers to the United States now that they can (none has so far), and whether that will happen before some greater resolution to the problem is found. Meanwhile, expect more angst about your data collection and handling policies, with no easy solutions. This situation is a mess.

Who chairs the PCAOB. James Doty has done a solid job running the Public Company Accounting Oversight Board since 2011. He and his fellow board members took a moribund agency and whipped it into a force that matters in the audit and securities world.

Now comes the question of whether Doty has been too good. His term formally ended in October, and gossip abounds that Republicans—and possibly his boss, SEC Chairman Mary Jo White—want to replace him with someone else. Suspicion runs deep enough that the usual shareholder activists sent White a letter last fall insisting that Doty be reappointed.

Will White reappoint Doty, or name someone more politically suitable to Republicans in Congress who want him gone? Or will White let him linger as an acting chairman until new leaders take over Washington in 2017? My bet is on the latter, since naming a new chairman will provoke a fight White doesn’t need.

Revenue recognition rule. By now every corporation of any size should be hip-deep in implementing the Financial Accounting Standards Board’s new rule for revenue recognition, which goes into effect with financial reports filed in 2018. We will pause here for readers in compliance and legal departments to wonder, “Are we doing that?” and readers in accounting or financial reporting departments to look at their shoes.

The bite for 2016 could be felt in corporate disclosure about your implementation efforts—companies trying to avoid admitting they are behind schedule, and the SEC staff starting to post comment letters tut-tutting companies that aren’t disclosing enough. We’ve already seen senior SEC officials tell filers that the agency expects disclosures this year, and we’ve seen studies showing many companies remain unclear on how well implementation is going. That combination does not portend well for the most significant financial reporting shift in years.

Those are my six predictions for 2016. Let us know your predictions for what will occupy your time and Radical Compliance posts for this year.


  1. […] up a compliance story. Matt Kelly offers up some compliance issues to watch in 2016 in his new Radical Compliance […]

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