February 1, 2008

PCAOB Approves Auditing Standard No. 6

Earlier this week, the PCAOB announced the adoption of Auditing Standard No. 6, Evaluating Consistency of Financial Statements. The Board also adopted related amendments to its interim auditing standards. Now, the new auditing standard and amendments are off to the SEC for its approval.

The new auditing standard and the related amendments were adopted in the wake of the FASB’s issuance of FAS 154, Accounting for Changes and Error Corrections, as well as in light of the FASB’s impending issuance of The Hierarchy of Generally Accepted Accounting Principles.

Since FAS 154 established retrospective application as the required method for reporting a change in accounting principle (in the absence of explicit transition guidance in a newly adopted accounting principle), and redefined the term “restatement,” it was necessary for the PCAOB to revisit AU Section 320, Consistency of Application of Generally Accepted Accounting Principles, which reflected the provisions of the now superceded APB 20. Under the new Auditing Standard No. 6, auditors will be required to evaluate the consistency of a company’s financial statements and report on any inconsistencies. The standard will require an auditor’s report “to recognize a company’s correction of any material misstatement, regardless of whether it involves the application of an accounting principle.”

With respect to the GAAP hierarchy, the PCAOB seeks to remove the hierarchy from the auditing standards, based on a belief that the hierarchy is more appropriately located in the accounting standards. The effective date of the FASB’s Statement of Financial Accounting Standards setting forth the GAAP hierarchy is expected to coincide with the PCAOB’s changes.

To find out more about what is going on at the PCAOB, be sure to check out our just announced webcast – “The PCAOB Speaks: Latest Developments and Interpretations” – on March 27th.

The Tellabs Remand

Last month, the Seventh Circuit Court of Appeals issued its decision in Makor Issues & Rights, Ltd. v. Tellabs, which had been remanded by the Supreme Court in June 2007.

On remand, the Seventh Circuit addressed whether the plaintiffs’ securities fraud allegations created a “strong inference” of scienter – as defined by the Supreme Court in its opinion – so that the complaint could survive a motion to dismiss under the pleading standards established by the Private Securities Litigation Reform Act. In adhering to its prior decision and reversing the lower court’s dismissal of the suit, the Court concluded that it was “exceedingly unlikely” that the material misrepresentations allegedly made by the corporate defendant were “the result of merely careless mistakes at the management level based on false information” provided by lower level employees. The Court found that the defendants asserted “no plausible story” to indicate that Tellabs senior management, who were involved in “authorizing or making public statements,” did not know the statements were false.

You can find additional analysis of this case in the memos posted in the Pleading Requirements section of our “Securities Litigation” Practice Area.

Alan Dye’s Section 16 Webcast: Transcript Posted

We have posted the transcript from Alan Dye’s popular and webcast – “Keeping Yourself Out of the Section 16 ‘Hot Water.’” Among the questions Alan answered on the webcast were:

– What is the current practice regarding average price reporting now that the Staff has issued its interpretation saying it isn’t permissible?

– We missed a Form 4 filing deadline by minutes – is there any way to avoid treating the missed deadline as a late filing, so that we don’t have to disclose the delinquency in the proxy statement?

– Do you see any reason to prohibit executives from electing, during a quarterly blackout period, tax withholding of shares upon exercise of an option or vesting of restricted stock?

– What is the best practice to follow when preparing a Form 4 to report a transaction that does not affect the insider’s other holdings? That is, is it best to report all of the insider’s other holdings, even though there was no activity involving those holdings?

– Dave Lynn