The Practical Corporate & Securities Law Blog

By Broc Romanek

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Auditor Engagement and Request Letters

At the ABA Spring Meeting, one hot topic was the growing struggle between counsel and auditors over audit request letters. Recent issues of The Corporate Counsel have analyzed the latest issues arising in this area - and upcoming issues will continue to address these issues as they evolve.

Along these lines, I have received a lot of emails from members rife with horror stories related to auditor request letters - as well as some success stories in pushing back. Please share your stories with me and then I will try to post a comprehensive (and anonymous) analysis of what appears to be happening in the industry.

Here is an example of a recent horror anecdote I received from a member: "Our company just received an audit request letter with the following language: Please confirm that all information brought to your attention indicating the occurrence of a possible illegal act committed by the Company, or any of its agents or employees, has been reported to [the Auditing Firm] and to the Company's Audit Committee."

By the way, the new edition of the "AICPA Audit and Accounting Manual" suggests the following key ingredients for engagement letters:

- Identification of the client
- Records retention policy
- Description of the services to be provided
- Responses to subpoenas and outside inquiries
- Staffing of the engagement
- Explanation of how fees and costs will be billed
- Description of client responsibilities
- Payment terms
- Designation of client contacts
- Consequences of non-payment
- Timing of the work
- Alternative dispute resolution
- Consequences of extending completion deadlines
- Withdrawal and termination
- Requests for additional services
- Client signature
- Client communications required by the AICPA
- Provisions to resolve potential ethical conflicts
- Any matter or terms unique to an engagement that are agreed upon in advance of rendering services
posted by broc at 8:11 AM

 
Required Disclosure of Issuer Repurchases

March 15 came and went without much fanfare, but it signaled the start of a new disclosure obligation for public companies. Beginning with their first quarterly or annual filing for a fiscal period ending on or after 3/15/04, they must provide a tabular disclosure regarding repurchases of their own securities. This disclosure is set out in Item 703 of S-K and is required by new Items 2(e) of Form 10-Q and 5(c) of Form 10-K.

A number of companies voluntarily complied with this disclosure requirement in their recent 10-Ks. With the 10-Q filing deadline approaching quickly for calendar year companies (for an accelerated filer with a quarter ended March 31, the 10-Q must be filed by May 10 this year), we have posted in our “Disclosure Analysis and Samples” practice area a new “Issuer Repurchases” page with links to some of those early examples.

The Demise of Physical Stock Certificates and T+3?

Last month, the SEC issued a concept release asking for comment regarding various topics relating to securities transaction settlements. In the release, the Commission is seeking comment on shortening the settlement cycle for securities trades from the (in)famous T+3 (so proceeds and securities would have to move more quickly after the trade date, which they often already do in our wired and wireless world) and on the elimination of physical stock certificates, bringing us closer to a paperless world.

The elimination of physical stock certificates has been a long-standing initiative of the Securities Industry Association and could serve to save companies money and administrative headaches if proposed and eventually adopted. Comment letters are due to the SEC by June 16th.

And Now, It's that Much Easier to Submit Comments to the SEC

Recently, the SEC upgraded its website to allow anyone to submit comments on a proposal by filling out an "EdgarFeed" form. If you go to a proposing release on the SEC's website and click the link where it says "Click to Submit Comments," an online form pops up where you can input the relevant contact info as well as your comments - and then just hit "Submit."

Although submitting comments before was fairly easy, this new form should facilitate the process even more (e.g. the commenter no longer needs to remember to include the file number as it's handled automatically). It looks like die-hard commenters can use the new form to submit comments on any rulemaking that was proposed in 2004, not just those that still have open comment periods. Perhaps the shareholder access proposal would have had 20,000 comment letters instead of 13,000 with this form...

posted by broc at 8:25 AM

 
SEC Brings Another Certification Enforcement Action

A week ago Thursday, the SEC's Enforcement Division filed another lawsuit based on false CEO/CFO certifications as well as other fraud offenses. This complaint is entitled SEC v. Cedric Kushner Promotions.

According to Ken Winer of Foley & Lardner, based on the allegations in the complaint, the conduct at issue was egregious. so the case probably would have been brought even without the Section 302 certification.

Nevertheless, Ken points out that the complaint is interesting in one respect. The SEC charged that the CEO "signed [the annual report] and the Sarbanes-Oxley certification without having read either document and without having taken any steps to determine their accuracy or truthfulness, relying instead on nothing more than Angel's representation to that effect." According to the complaint, Angel was a 27-year old executive vice president, whose responsibilities included working hand-in-hand with the issuer's auditors to ensure that filings are complete and accurate, and to review filings for completeness and accuracy prior to presenting them to the CEO and to the executive vice president who was principal finance and accounting officer.

Thus, the enforcement action signals that a CEO must do more than obtain conclusory assurances from a senior officer of an issuer. Certifying officers should not take comfort from the appearance that this case does not break new ground. Ken fully expects that the SOX certification will result in the SEC bringing enforcement actions against certifying officers that would not have been brought absent the certification.
posted by broc at 9:38 AM

 
U.S. Court of Appeals Overturns MONY Decision on Mailing Management Proxy Cards

On Friday, the U.S. Court of Appeals for the Second Circuit unanimously ruled in favor of MONY and directed entry of a preliminary injunction preventing a dissident shareholder, Highfields Capital, from violating the SEC's proxy rules by mailing proxy material that included reproductions of MONY's proxy card to stockholders in connection with MONY's proposed merger with AXA Financial (without complying with the disclosure requirements of the proxy rules). The Court held that "MONY will suffer irreparable harm if [the dissidents] are allowed to enclose duplicates of management's proxy cards in their solicitations to MONY shareholders without complying with the disclosure requirements" of the federal proxy rules.

As previously blogged about on February 16th, the judicial pendulum has swung back to reversing what had been the SEC staff's position (the SEC's now invalid position was that the applicability and scope of Rule 14a-2(b)(1) - the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6 - allowed dissidents to include management proxy cards in their mailings without preparing full blown proxy materials of their own).

IASB Issues New Accounting Standards

Last Wednesday, the International Accounting Standards Board (IASB) issued a number of new standards (and amended other standards). As I blogged a few weeks ago, these standards take effect in 2005 for more than 90 countries. Controversial standards regarding derivatives are still subject to change from what is included in these standards.

U.S. companies are still following U.S. rules, but IASB and FASB are working to create a single set of rules that both can use.

Correlation between Corporate Governance and Corporate Performance?

The latest GMI Governance and Performance Analysis study finds a statistically significant correlation between governance and performance when measured across a number of variables over a multi-year period.

Results of the new analysis are consistent with those of GMI's 2003 report as well as other studies in the field, including "Corporate Governance and Equity Prices" by Paul Gompers, Joy Ishii and Andrew Metrick (Quarterly Journal of Economics, February 2003) and Chapter 5 of The Recurrent Crisis in Corporate Governance by Paul MacAvoy and Ira Millstein (Palgrave MacMillan, 2003).
posted by broc at 8:27 AM