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So I've Got Some Bad News ...

Key Takeaways

Recent headlines motivated Steve and Catherine to think about considerations organizations have when revealing not-so-great news. Brandon Ziegler returns to field their serious (and not-so-serious) questions about SEC investigations, disclosures, and more!

Season 3, Episode 24: So I’ve Got Some Bad News… | Transcript


Steve Soter: Hello, and welcome to Off the Books, where we surf the unchartered waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the risk, reporting, ESG, and compliance platform that simplifies your complex work and puts a spring in your step. Check it out at My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I'm looking forward to debiting a great conversation, and I'm very happy to have you with us. I'm also happy to have Catherine Tsai joining me. Catherine, please tell the fine folks who you are.


Catherine Tsai: I'm not an accountant or Diet Coke aficionado, but I like asking questions, learning new things and writing about them later. So, I'm here to learn.


Steve: Well, today we're talking about when to disclose not so great news about your company. Public companies have obligations to disclose many different types of news, including bad news, but when to disclose it can be tricky, especially when regulators like the SEC get involved.


Catherine: Steve has thoughts. I have questions. And we asked Brandon Ziegler, Chief Legal Officer at Workiva, to explore this topic with us.


Steve: Well, Brandon, welcome back to the podcast. We are so glad you agreed to return. So we're talking about disclosing bad news, and we're wondering first, when should you disclose news about your company that might not be so great?


Brandon Ziegler: Well, the first thing I think about are what do the actual SEC rules on disclosure say, and whether it's a good thing or a bad thing, you've got an 8-K, which is a list of items that investors might find important or the SEC might find important. And for those types of events, you've got black and white rules about when to report: four business days. You've got other rules, like Section 16 reports where you've got two business days to report from the transaction. And these are all sort of set forth in securities laws. That's the first place I would turn to if I was thinking about disclosure, whether I needed to disclose anything.


Steve: And that certainly makes sense. I think, you know, definitely an SEC reporting team, internal securities counsel, right, I mean, they're going to be watching for those things that have checklists of processes and so forth. Let's pivot that just a little bit. What if you get a letter or a phone call from a regulator? And given the context of this discussion, let's assume that regulator is the SEC, how does that change it?


Brandon: Well, it certainly makes you sit up and take notice. I have received emails from the SEC in my career, and they've asked questions where it seems clear that somebody or some entity is under investigation. Not necessarily me or the company that I work for, but you can tell that something's going on. But it's always a bit unclear. They don't like to tip their hand very early. But when you do receive a letter like that or an email, first thing is you always want to be candid, transparent, and forthright with any regulator. But at the same time, you have to know that nothing with the regulator is off the record. So usually in those circumstances I receive the request and I will contact outside counsel to give them a heads up that I've received something like this. And then I'll think about what my initial response would be to indicate to the regulator that I've received their request or their question or request for information, and we are thinking about it, and we'll come back to them as soon as possible with a response so that they know that we've received it.


Catherine: How much time do you normally get to respond? And is it a fire drill? Do you drop everything to respond?


Brandon: To answer your first question first, it really depends on the facts and circumstances, what they're asking for. It's not often that you get some sort of an immediate deadline to respond to a regulator. I think in the recent case we've seen that you alluded to, it's unusual to have such a quick turnaround time of 24 hours. That's facts and circumstances. But to the second part of your question, I would always take those requests as urgent. Even if I don't respond as such, I would always take them very, very seriously and be very careful in terms of of how I would respond.


Steve: The SEC has a knack for seemingly sending those requests always on Friday afternoons, right about as you're ready to wrap up your week and transition to the weekend. At least that's been my experience.


Brandon: They do sometimes have a flair for the dramatic. And these types of requests are designed to elicit a certain type of response. But the important thing is to understand they're doing their job. They're looking to protect the investor community. And, you know, we're here as a publicly traded company where we're doing the same thing for our investors and our stakeholders. And so we just want to make sure that we are responsive or respectful, but also making sure that we are taking the appropriate amount of time to understand the request and to investigate and gather information appropriately.


Steve: So Brandon, I completely agree with the need to be very, very careful in your response. You obviously want to have all the facts and circumstances together. You want to have your story straight simply because it's not off the record. It is going to be on the record. That's going to need to withstand additional questions or scrutiny. So let's go back to again the situation we have alluded to. What happens if you're learning something new? And this happened recently to two of the Big Four accounting firms. The SEC settled with those firms over alleged cheating, but in both instances, there was some form of either internal investigation or ongoing information gathering that was underway. So the SEC asks you a question, but you've got a current investigation that is revealing new information. How do you manage those two disclosures? In one of these cases, the SEC asked under a voluntary basis, one of these firms if they're aware of any cheating going on. They said that they weren't, at least not with any significance. But right at that same time, that firm had received a tip that there was ongoing cheating on the very same day that they were going to be responding to the SEC. That tip didn't make it into the investigation, or excuse me, into the response to the SEC. And I completely understand why. Why in the world would I say something to the SEC unless I had fully investigated it? But again, you're learning new information, so how do you manage that when you're trying to respond to these kind of requests to somebody like the SEC?


Brandon: I mean, it's a great question. I think it's very difficult to manage that sort of response, particularly if you are an institution of any or a company of any size. But particularly if you're really a massive, sprawling global institution. I mean, I saw some of the facts of the case we're talking about, and it seemed like the response — the SEC gave the auditing firm 24 hours to respond to their voluntary requests. The auditor actually responded in 24 hours, but at roughly the same time as they were responding, they received a tip through their whistleblower system. And it's really amazing enough that they received that response so quickly. You know, given the size and scale and breadth of this organization. But I think it puts them in a very difficult position where they're trying to be responsive, trying to respond to a very, very tight deadline. And then on top of that to receive and then really assimilate further information to make their response not misleading or to be missing something. I think it's a very difficult situation to put any organization in, but particularly one as exacting and conservative and detail-oriented as a large auditing firm. So for  us here at Workiva, you know, I know how hard it is for us to assimilate information. We're a relatively small company and we think we do a good job of it. We've got really tight reporting lines and we've got a very closely knit group of people in the company that do this all the time. But again, our scale is not the same thing that we're talking about that the SEC is just dealing with.


Steve: One of the other things that occurs to me with this case specifically is that, again, and you alluded to this, when you're talking to the SEC, I mean, it's about as high stakes as it gets, at least, you know, in your securities counsel or in financial reporting. And so just the need to have all of the facts and circumstances, to have your story straight, to have that almost bulletproof to where it can withstand any kind of scrutiny. Because you really don't know in these kind of cases where the SEC is going to go. Is this some Corporation Finance comment letter thing? Could this end up being some kind of an enforcement action which could end up being criminal? That's a whole other kind of ballgame. And so I'm putting myself in the position of this firm, and I'm thinking, "Hey, if I'm continually learning things, if every time I feel like I've got the story straight, I learn something else which opens up a whole other can of worms, as it were, well, boy, it might take me several months, many months for an organization that large until I knew enough to where I was comfortable responding to the SEC." I mean, as you play this out in your mind, do you feel like that timing that the firm had in order to conduct an investigation and then of course, to respond maybe was inappropriate? I mean, I don't want to put you in that position, but I'm just wondering, as you kind of alluded, the timing seems to be the most important element here about how this firm was able to respond.


Brandon: Yeah, well, so I'm not an expert on all these facts right now, but I will say that from the small amount that I've read and what I understand, the key was that this was a voluntary request. And it's unclear that there's any legal obligation to have to update a voluntary request. And then for how long do you, if there is some sort of legal obligation, again, unclear, how long do you have to update the answers to this original request? And I think that it's certainly not unusual for a firm the size of a Big Four accounting firm to take nine months to sort through an investigation into their entire nearly their entire employee base. It doesn't sound unusual to me. But what does seem perhaps unfair is that the penalty is so large, given what appears to be a good faith effort to respond thoroughly and comprehensively to the initial voluntary request.


Catherine: It seems like there's even some disagreement among the SEC commissioners about how soon a disclosure has to take place before it's considered misleading or not misleading. Definitely makes for good conversation to debate.


Brandon: Well, I got that sense, too. I think that the underlying issue about any organization that has ethical lapses where some employees are cheating — I mean, this can happen anywhere. No company is immune to this sort of thing. But the fact that, you know, the auditors have people who are cheating on their ethics portions of their exams is obviously a serious issue. But I think that the importance of that gets lost in the noise of the size of the penalty and the legal issues underlying what the obligation should be or is, in fact, under these circumstances. So I think you're right. It's no surprise to me that the commissioners themselves are engaged in a debate about the process that was done in this particular case.


Steve: And it certainly and most unfortunately, it, again, as you said, just completely diverts the focus of where they should be, which, again, is on the cheating, which I think this firm would say, "Hey, that's the most appalling and disappointing matter of this whole thing, is that, you know, we have staff that was engaging this behavior." And again, due to the logistics or the circumstances of this request with the SEC, we end up getting crosswise, as it were, when I think that firm would agree, "Hey, we would want nothing more than to quickly figure it out, scope it, get to the bottom of it and get it resolved." Because, I mean, they want this least of all right?


Brandon: So unquestionably, they would want to clean up any sort of unethical behavior, systematized unethical behavior inside their company. They would take it, I'm sure, taking it very seriously and will discipline appropriately anyone who is involved. And I think that's what you can ask for from these organizations. You're always going to have a bad apple in a bunch. You can't always protect against everything all the time in your employee base and especially if you're a gigantic organization. So these things happen. But I think that the focus should be on unearthing any of the lapses and remediating them.


Steve: All right. Let's take a quick breather. And we'll be right back with Brandon Ziegler, Chief Legal Officer at Workiva.


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Catherine: OK. We were talking with Branden Ziegler, Chief Legal Officer at Workiva, about when to disclose news that isn't so great. Brandon, how do you go about building a culture of ethics within a company?


Brandon: Well, first of all, it's a team effort from all of executive management and everyone at every rank below down through the hierarchy of a company. And the way that you start to develop this culture is at your town halls, at your meetings, your companywide meetings, having the CEO talk about issues of ethics. Having the CEO allow the general counsel to weigh in a couple of times a year on ethics. That's sort of the first way to get things rolling. And then you back it up with training materials, ethics hotlines for company employees to report ethical violations. Another important component is, and of course, you work with HR as you do this, is to take employee complaints and allegations very seriously, to investigate every allegation that comes in of anything that's a fraud or something like that to be taken very seriously, and to investigate very thoroughly. And so you start showing the employee base that you care about ethics, that it's important to you, and that you back it up with your training and your policies.


Steve: Because presumably, Brandon, well, obviously the goal is to avoid those incidents in the first place, but then if they happen, you can always point back to, "Hey, these were the things that we were doing in good faith in order to prevent that." I mean, that seems like that gives you maybe not protection from the incident itself, but certainly makes it appear as, "Hey, we're not just a, you know, wild and crazy laissez faire organization where this kind of stuff can happen theoretically all the time."


Brandon: Well, that's an excellent point, because what we just described really works on a couple of different levels. One is what we just talked about, where you instill a sense of ethics and integrity among your employee base. But it does, in fact, operate as a means of protecting the company to some extent against liability, or at least against maybe, perhaps if there are ethical lapses that result in some kind of securities law violation, for example, to be able to show the SEC that you do have these policies in place, you do train your people on them, and you do enforce them, really should lead to mitigation or elimination of the penalty.


Catherine: Brandon, thank you for answering our questions on the fly. We do have one more question to ask you on the fly. It's our closing question of the day. Are you ready for this?


Brandon: Ready.


Catherine: You have used up the very last drop of milk or Diet Coke or Lacroix or beer in the fridge. How soon do you need to disclose that to your family, your roommates, or your office mates?


Brandon: Well, I guess it does depend on the liquid. If it's milk, I better disclose it pretty quickly so that my kids get some more of that. And ditto on the beer for my colleagues, because those are the two most important ones. I would say promptly, if not immediately.


Catherine: Steve, you concur?


Steve: I do concur. Now with the specifics, for whatever reason, our family does not go through a lot of milk. And I'm the only one that drinks Diet Coke in the house, with the exception of my wife every once in a while. So with respect to the Diet Coke, the disclosure's immediate because it's me and I'll just go to the store and get some more. So fortunately, the disclosures for these particular liquids don't affect us that much. But I completely agree with Brandon, and Catherine, of course, we can't let you off the hook.


Catherine: It's immediately. Unless, you know, your officemate is already upset about something else and then maybe you have a five minute window to wait. So they're a little bit happier. And then you disclose.


Steve: No, no, no, no. See, it's just like financial reporting. It's the big bath approach, right? If you have one bit of good news, you might as well throw all — excuse me. If you have one bit of bad news, you might as well throw all of the bad news in all at once. So if they're already mad about something, you can't make it much worse then by telling them you're out of beer, so you might as well just tell them. Right?


Brandon: I agree with that. It's better than a steady drip, drip, drip of bad news.


Steve: Eexactly right. Well, Brandon Ziegler, Workiva's Chief Legal Officer, thank you so much for joining us again on the podcast. We really, really appreciate the insights and the other great conversation.


Brandon: My pleasure. I'll see you next time.


Catherine: And thank you, dear listener, for surfing along with us. I'm Catherine Tsai. That was Steve Soter. And this has been Off the Books presented by Workiva. Please subscribe, leave a review, tell your buddies if you liked the show, and feel free to drop us a line at to tell us what you'd like to hear us discuss on upcoming episodes. Surf's up, and we'll see you on the next wave.



Season 3, Episode 24 Off the Presses News: So I've Got Some Bad News...


20 minutes


Steve Soter, Catherine Tsai, Brandon Ziegler

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