The Corporation Finance Division of the SEC has recently updated its compliance and disclosure requirements related to a registrant’s announcement of changes in accountants. The requirements of the Compliance and Disclosure Interpretations (CDI) relate to Regulation S-K and Form 8-K and now include additional disclosures related to circumstances under which a principal accountant resigns, declines to stand for reelection, or is dismissed by a registrant. In such situations, the registrant is required to disclose any disagreements with the principal accountant or reportable events that have occurred during the two most recent fiscal years as well as the subsequent interim period from the end of the most recent fiscal period through the date on which a new accountant is engaged (the “disclosure period”).
This guidance, included in Item 304(a)(1)(iv) requires affirmative disclosure if there are no disagreements with the former principal accountant, however, the registrant does not have to disclose the fact that there were no reportable events.
Item 304(a)(1)(v)(A) poses the following scenario requiring disclosure, which could impact companies. The situation is one in which a registrant has been advised during the disclosure period, by the principal accountant, that a material weakness in internal control over financial reporting exists. The registrant is required to disclose such a fact, even when remediation has occurred prior the end of the disclosure period. According to the CDI, advising the registrant that there is a material weakness in internal control over financial reporting is equivalent to advising that the internal controls necessary to develop reliable financial statements do not exist, thus making this scenario a reportable event.
Significant deficiencies communicated by the former principal accountant do not generally generate a reportable event; however, they could lead to the identification of other factors that could create reportable events. For example, situations where the former principal accountant has been required to expand the scope of the audit could create, in certain circumstances, a reportable event.
Item 304(a)(1)(ii) also includes guidance on the consideration of reportable events as they relate to the issuance of reports on the financial statements. For example, reports on financial statements that contain an explanatory paragraph representing a modification for uncertainty (such as a going concern explanatory paragraph), audit scope, or accounting principles would require disclosure.
While Item 304(a)(1)(ii) is limited to the report on financial statements, Item 304(a)(1)(v)(A) includes requirements to disclose as a reportable event circumstances related to the registrants’ effectiveness of its internal controls that are identified in the report on internal controls over financial reporting (such as an explanatory paragraph, adverse opinion or a disclaimer of opinion).
For more information, please contact Chuck Oshurak, Audit Advisory Senior Manager with the SEC practice.
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