Our video discussed three important topics that are currently getting a lot of attention from the SEC Staff (“Staff”). Let’s discuss two more potential flash points for which you and your accountants should be in sync—and early in the process—to make sure you are addressing any potential SEC reporting issues on the front-end.
Avoid the Backdraft of Material Misstatements
Material errors being reported as “reclassifications” or “immaterial errors” are on the rise – something the Staff deems a “stealth restatement.” Keep in mind that management and its auditors should consider all relevant circumstances (both quantitative and qualitative), and ensure errors are accounted for appropriately—even if that means the dreaded “R” word. If restatement is necessary due to a material error, be sure to include the required restatement disclosures. Management will also need to determine if any previous financial statements included in interim filings require restatement.
In addition to presentation and disclosure issues, remember that material errors generally necessitate a Form 8-K triggering event (i.e., non-reliance on previously issued financial statements) – and the fuse is short, as Form 8-K is required to be filed within four business days. Pouring gas onto the flames, material errors and/or restatement often also constitute a material weakness of internal controls that should be disclosed, as well. Whether deemed material or not from an internal control perspective, management will want to contemporaneously assess the impact of the error in relation to their internal controls and document its assessment.
Drive the Engine Away from These Potential Auditor Issues
There are two potential fire starters of which to be aware—before they become fully engulfed. First, the Staff is seeing a lot of irregularities in audit and attestation reports. You and your auditors need to make sure that the issued reports follow the requirements laid out in S-X Rule 2-02 to ensure that the appropriate opinion(s) is/are provided. Having an inappropriate report included can ignite a comment letter from the Staff and slow down or delay your filings—or, even worse, cause your filing to be considered not timely filed.
The second potential fire starter is independence considerations. You obviously need to confirm that your auditors have ensured their independence and communicated that to you, but there are also other considerations. If you’re a new issuer, keep in mind that the independence rules for the PCAOB do somewhat differ from those established by the AICPA, and you may encounter some issues with accounting assistance or other non-audit services that your auditors provide. For a first-time issuer, the auditor must be independent with respect to all financial information reported—which means three years of income statements. Be sure your auditors have not performed an unpermitted (based on SEC and PCAOB rules) non-attest service during that period. It is important for your auditors to be on top of these issues and make adjustments to your services accordingly.
Triage Your Current SEC Reporting Compliance Situation
Proper planning and ongoing communication are two of the keys for proactive avoidance of any issues stemming from these topics.
If you would like more general information on these topics, then the SEC provides auditor independence FAQs. Or, call CRI’s SEC auditor team with questions specific to your company and situation; we can help you climb the ladders of SEC and PCAOB compliance.