One of my pet peeves is that I believe companies should be demanding that their independent auditors inform audit committees when the PCAOB is reviewing a company’s file during a PCAOB inspection of the auditor (the PCAOB doesn’t require that auditors share inspection reports with their clients, but also doesn’t prohibit them either – the reports are confidential merely in the hands of the PCAOB and SEC). My point is driven home in this recent Bloomberg article.
According to the article, the SEC inadvertently disclosed the fact that the PCAOB is investigating Deloitte & Touche LLP’s 2003 audit of Navistar International Corp. (this would be the PCAOB’s first known formal probe of a Big Four firm). Wouldn’t the Navistar audit committee want to know of this probe before reading about it in the newspapers? Some might argue that a board might even have a duty to be at least asking for this type of information as part of its duty of care, as it should be aware if a regulator is questioning its application of the auditing standards.
Also according to the article, the SEC received a copy of the investigative order from the PCAOB on May 25 and accidentally made the document available in its reference room during the week of June 20, adding that the order was marked “non-public.”
Here is some sample language that companies can seek to include in their engagement letter with their auditor:
“We will promptly notify the Chairman of the Audit Committee and management if we or the Company are selected for inspection by the PCAOB or the SEC and will promptly communicate to the Chairman of the Audit Committee and management any information that we receive about such inspection that has a probability of having a material effect on the company’s financial statements previously reported on by us or that could result in a modification to an audit report issued by us to the company. We will also, at the next regularly scheduled audit committee meeting subsequent to the review, update the audit committee on any significant comments or matters relating to the company stemming from the PCAOB’s or SEC’s review. We will promptly provide the Chairman of the Audit Committee and management with copies of all requests for production of documents or information relating to the company that we receive from the SEC or the PCAOB other than requests for our workpapers. Upon your request, we will provide the Audit Committee and the Company with a copy of any publicly available inspection reports on us issued by the PCAOB, but we will not provide any confidential inspection reports issued by the PCAOB to us, the confidentiality of which is provided for in the Sarbanes-Oxley Act of 2002 and the PCAOB’s inspection rules.”
M&A Boot Camp: Disclosure Issues
On DealLawyers.com, check out the latest installment of the “M&A Boot Camp” – this one relates to “Disclosure Issues” and features the former Chief of SEC’s Office of Mergers & Acquisitions, Dennis Garris, who is now a Partner of Alston & Bird LLP.
If you are not a DealLawyers.com member, try a no-risk trial as we just launched our half-price “Rest of 2005” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!
Nasdaq Issues FAQ on Disclaimed 404 Opinions
On Friday, the Nasdaq posted this new FAQ, which is repeated below in its entirety:
Q: Does a Form 10-K satisfy NASDAQ’s filing requirements if management has not completed its assessment of internal control over financial reporting or the auditor’s attestation report contains an opinion that is disclaimed because the auditor did not have time to complete its internal control work?
A: A Form 10-K does not satisfy NASDAQ’s filing requirements if management has not completed its assessment of internal control over financial reporting or the auditor’s attestation report contains an opinion that is disclaimed because the auditor did not have time to complete its internal control work. Thus, any company filing without a completed assessment by management or with such a disclaimed opinion would ordinarily be subject to being delisted. However, NASDAQ acknowledges that during this first year of implementation of Section 404 it has proven difficult for certain companies to complete their assessment of internal control over financial reporting and file their Forms 10-K without disclaimed opinions.
As a result, NASDAQ, after consultation with the Staff of the Securities and Exchange Commission (“SEC”), has determined that during 2005, management’s failure to complete its assessment of internal control over financial reporting or an auditor’s opinion that is disclaimed based on a lack of time to complete internal control work will not result in delisting of the company, provided the company is taking all steps required by the Staff of the SEC to address these issues. A company in this circumstance should promptly contact NASDAQ’s Listing Qualifications Department. Please keep in mind, however, that no company will be eligible for this relief unless the Form 10-K contains an unqualified audit opinion on the company’s financial statements.
Adopting Release for Penny Stock Rules Amendments Now Available
Way back in April, the SEC adopted amendments to the definition of “penny stock” in Rule 3a51-1 as well amendments to the procedural requirements of Rules 15g-2 and 15g-9. On Friday, the SEC finally posted the related adopting release.