March 14, 2012

Our New “Director Resignation & Retirement Disclosure Handbook”

Spanking brand new. And shiny to boot! If you have a director that is resigning, retiring, not standing for re-election, quitting in disgust, being appointed or dying, we have the Handbook for you. Posted in our “Director Resignations” Practice Area, this comprehensive “Director Resignation & Retirement Disclosure Handbook” provides practical guidance – including numerous hypotheticals – about how to handle these situations including how to prepare in advance for them. In particular, the Handbook focuses on the company’s reporting obligations under Item 5.02 of Form 8-K when these inevitable situations arise…

A “Fresh Eyes” Restatement Report

Ahead of next week’s PCAOB roundtable – on March 21st and 22nd – on whether it should propose an auditor rotation requirement for the largest companies, Audit Analytics prepared this report that examines the restatements disclosed by the Russell 1000 – as well as their auditor changes – in an attempt to determine if auditor changes in any way played a part in the discovery of outstanding accounting misstatements and, if so, to what extent. For the report, Audit Analytics reviewed 1,355 companies (a five-year aggregate), 378 restatements, and 173 auditor departures.

Some of the observations contained the report:

– About 7.5% (4 out of 53) of the Annual Restatements linked to an auditor departure were detected, in part, by the “fresh eyes” of the newly engaged auditor.

– About 64% (34 out of 53) of the Annual Restatements linked to an auditor departure were detected prior to the auditor’s departure (“no fresh eyes”).

– About 15% (8 out of 53) of the Annual Restatements linked to an auditor departure were detected by the companies themselves or their regulators, such as the SEC (“no fresh eyes”).

– About 13% (7 out of 53) of the Annual Restatements linked to an auditor departure were restatements that corrected misstatements that occurred after the new auditor’s engagement (no restatement of work during predecessor auditor engagement).

– About 82% (238 out of 291) of the Annual Restatements disclosed by the Russell 1000 were disclosed by companies that did not experience an auditor departure.

– The total auditor changes experienced by the Russell 1000 since January 1, 2005 had a “fresh eyes” restatement discovery rate of no more than about 3.0%.

Lynn Turner notes: “This report highlights just how poor quality audits really are today and just exactly what are they worth. Of 1335 Russell 1000 companies, 291 or 21.8% had errors in their financial statements that went undetected and had to be corrected. These audits are exclusively done by the Big 4 who are suppose to be the best of the best – one can only wonder then what an error rate for the worst is like.

Not only does these findings call into question the quality (or lack thereof) of audits, it also continues to call into question the competence of the CFO/Controller at these companies, the lack of internal controls, and the continuing unreliability and lack of oversight by the audit committees. Why was it the error was not detected at least by the auditors before the original financial statements with errors in them were released to investors? Were the auditors either incompetent or lacking independence or devoid of skepticism? Was the audit committee members merely going thru the motions and what steps did they take to establish accountability for the problems?

What the report is unable to report, as there is often no transparency in SEC 8-K and other reports, is just exactly what did turn up the errors in each of these instances where the restatement occurred prior or subsequent to a change in auditor. While a few instances are noted, such as the SEC finding three of the 291 errors, in most instances how the error is actually found and by whom is not disclosed.

Using Online Video to Announce a Restatement

Thanks to Howard Dicker of Weil Gotshal for turning me onto this restatement announcement study which used executive MBA students as guinea pigs. The study finds that although text-based press releases have been the norm for years, companies have recently begun using online video for such announcements. And that when a CEO accepts responsibility by making an internal attribution for a restatement, investors viewing the announcement online via video recommend larger investments in the firm than do investors viewing the announcement online via text. Pretty wild…

– Broc Romanek