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A number of firms (see, e.g., Simpson, Cooley, Wachtell Lipton) reported on a recent SEC enforcement action against Diageo plc that reinforces the disclosure expectations imparted by the SEC's new MD&A guidance (reported on here) concerning key performance indicators and metrics, and spotlights the remit of companies' internal disclosure committees that are responsible for promoting the accuracy of the company's financial reporting disclosures.

According to the SEC's Order, Diageo's undisclosed "channel stuffing" or overshipping of inventory to meet certain key performance indicators (organic net sales growth and organic operating profit growth) masked declines in demand and the corresponding likely adverse impact on the company's future sales and financial performance. The company's disclosure committee reportedly was informed of the inventory build-up, but lacked procedures that would have enabled it to evaluate this information in the context of disclosable material trends or uncertainties.The SEC's release notes: "The order finds that Diageo failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the overshipping had on sales and profits, and the negative impact that the unnecessary increase in inventory would have on future growth. The order further finds that investors were instead left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for Diageo's products."

The new MD&A guidance addresses both the expected disclosure around key performance indicators and metrics, as well as effective disclosure controls & procedures with reference to the SEC's 2002 "Certification of Disclosure in Companies’ Quarterly and Annual Reports" release, which prompted most companies to create disclosure committees (see FN 60 and corresponding text). The guidance notes:

As we have stated before, a company’s disclosure controls and procedures should not be limited to disclosure specifically required, but should also ensure timely collection and evaluation of “information potentially subject to [required] disclosure,” “information that is relevant to an assessment of the need to disclose developments and risks that pertain to the [company’s] businesses,” and “information that must be evaluated in the context of the disclosure requirement of Exchange Act Rule 12b-20.”