How the New 8-K Rules Impact Your Upcoming 10-Q
You know how I love practical guidance – that is why I love this interview with Bob Hayward, John Jennings and Mike Manos on Form 10-Q Changes for Third Quarter 2004, as it includes a checklist of how the new 8-K rules impact the upcoming 10-Q filings.
For those waiting for the 8-K webcast transcript, thanks for your patience as posting it is beyond my control – hopefully it will be ready soon.
SEC Flushes Out Qualitative Materiality in Enforcement Action
Last week, the SEC settled charges with KPMG LLP, two former partners, and a current partner and senior manager for “improper professional conduct” as auditors for Gemstar-TV Guide International. KPMG was not fined by the SEC – but it did agree to compensate Gemstar shareholders in the amount of $10 million, the largest payment ever made by an accounting firm in an SEC action.
According to a Floyd Norris column in Thursday’s NY Times, “The standard is what is important to investors,” said Kelley Bowers, an assistant regional director of enforcement in the Los Angeles office of the S.E.C. “A growing part of the business can be important to investors even though it is a small part of the business.” Audit firms have long taken the position that they did not need to challenge errors in company accounts if the amounts involved were “immaterial,” often defined as being perhaps 5 or 10 percent of a company’s revenues or profits.
From 1999 through 2002, Gemstar-TV Guide was promoting to analysts the prospects of its interactive program guide, which customers could navigate through and select television programs. Because the guide provided a small part of the company’s total business, the SEC said, the auditors considered the amounts of some questionable transactions involving it to be immaterial, including transactions where advertisers in the print edition were given an equal amount of free advertising in the interactive guide. The revenues were then attributed to the interactive division, helping it to show rapid growth.
The auditors should have considered “qualitative materiality,” the SEC said in its administrative order, saying the revenue in question “related to business lines that were closely watched by securities analysts and had a material effect on the valuation of Gemstar stock.”
According to the settlement, KPMG has agreed to conduct additional training for its partners and managers on qualitative materiality – and adopt a policy that requires more-effective consultation between audit engagement teams and KPMG’s national office in connection with possible restatements.