December 13, 2006

First Batch of PCAOB Inspection Reports Released

A few weeks ago, the PCAOB released the first auditor inspection reports of this year; reports for Deloitte & Touche, BDO Seidman and Grant Thornton. These inspection reports were released a bit behind the schedule of reports released in past years (eg. last year, Deloitte’s report was released in late October) – leading some companies to criticize the PCAOB because they want to see how their auditors are performing before re-hiring them for next year.

The reports highlight some serious shortcomings in audits performed by these auditors. In some cases, the problems identified by the PCAOB were so significant that they resulted in the auditor’s clients making changes in their accounting or disclosure practices. Last year, the PCAOB found problems with the audits of 8 Deloitte clients; this year that number rose to 17.

Perhaps one reason it took so long for the PCAOB to issue these reports are the strong objections mentioned in this WSJ article by all three of the auditors. It also appears some of these differences of view arose due to the auditors not having clearly documented what they did do (or conversely, what they did not do). For example, Deloitte disagreed with the PCAOB’s conclusions in nearly two-thirds of the audits cited (their rebuttal is included as part of a response letter included with the PCAOB’s report).

SEC Proposes Changes to Regulation M and Regulation SHO

Last week, the SEC issued a proposing release regarding amendments to Rule 105 of Regulation M. The proposed amendments would prohibit a person that has effected a short sale during the Rule 105 restricted period from purchasing securities in the offering.

The SEC also issued a proposing release that would amend the short sale price test by removing restrictions on the execution prices of short sales as well as prohibiting any SRO from having a price test. In addition, the SEC proposed to amend Regulation SHO to remove the requirement that a broker-dealer mark a sell order of an equity security as “short exempt” if the seller is relying on an exception from a price test.

A Peak at Today’s SEC Commission Meeting?

A lot of last minute conjecture on how the SEC will handle internal controls during today’s open Commission meeting (here is the agenda). FEI’s “Section 404″ Blog does a nice job capturing some of the scuttlebutt, like this speech from PCAOB Chair Mark Olson and yesterday’s WSJ article. We shall soon see how reality shakes out…

IRS Guidance: Section 16 Persons Who Don’t Cure Discounted Stock Options by Year-End

Last week, the IRS issued Notice 2006-100 to provide interim guidance to employers regarding their reporting and withholding obligations for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts includible in gross income under Section 409A. This WilmerHale alert summarizes the effect of the interim reporting and withholding guidance on persons subject to the disclosure requirements under Section 16, including:

– Section 16 persons are required to include the option spread on vested options as of December 31 in income for each such year, to the extent not previously included in income;

– The amount included in income is subject to the 20% Section 409A penalty tax and interest, in addition to regular income and employment taxes; and

– Employers and payers are required to report the option spread on vested options for each such year to the extent not previously reported; however, employers are only required to withhold income and employment taxes with respect to such amounts for 2006. No withholding of the Section 409A penalty tax or interest is required.