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Selection of Filings for Review
Audit Report No. 229
August 1, 1996
We reviewed the Division of Corporation Finance's (the Division) screening process used to select filings for review by its staff. Overall, controls over the screening of filings for review, and management's overrides of initial review determinations, appeared effective. Moreover, during our audit, the Division independently took actions to review and improve controls over its screening process.
However, we found that nine reports of change in registrants' certifying accountants were not reviewed, as required by Division policy. We did not determine the exact reasons why these filings were not reviewed. We found, however, that controls over these paper filings in the Office of Filings and Information Services (OFIS) needed improvement. Also, reports on these filings, requested by the Division from the Office of Information Technology (OIT), were not useful in identifying filings not reviewed.
We made recommendations (see below) to improve these controls during the audit, which the Division, OFIS, and OIT have implemented. In addition, with the full implementation this year of the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system, reports of change in accountants should generally be filed electronically, rather than on paper, reducing the risk that filings will inadvertently not be received and reviewed.
OBJECTIVES AND SCOPE
The audit objective was to evaluate controls over the process used to select filings for review and the review override process for filings received in fiscal year (FY) 1995.
We reviewed documentation, regulations, policies, and procedures concerning the filing selection process. The documentation included a judgement sample of filing screening determinations from reports generated by the Division's Filing Activity Tracking System (FACTS), and the Commission's official database of filings (the Workload system). We then reviewed correspondence and microfiche files concerning the sampled items, as well as related screening sheets maintained both in paper and those generated from the Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. We also interviewed staff in the Division, OFIS, and OIT.
The audit was conducted between May 1995 and January 1996, in accordance with generally accepted government auditing standards.
The Commission's Rules of Practice and Investigation provide for the processing of filings submitted to the Commission (17 C.F.R. 202.3). The Division reviews filings related to the public offering, trading, voting, and tendering of securities.
The Division reviews issuer filings on a selective basis. Branch Chiefs or senior branch staff select or "screen" filings for review, based on certain financial and qualitative criteria. / The selective review system is intended to concentrate staff resources on filings viewed by the Division as most in need of review.
Division policies and procedures require "full reviews" (reviews of financial information, textual disclosures, and related filings as appropriate) for all registrations of initial public offerings (IPOs) of securities. Also, full reviews are required for all reports of change in registrant's certifying accountants. / Several other types of filings also receive automatic full reviews.
Other filings are selected for "full financial reviews," that is, reviews of the companies' financial statements, related footnotes, and management's discussion and analysis of financial condition and results of operations (MD&A). Still other filings are selected for a "monitor," that is, a review of specific portions of the filing.
Branch Chiefs, with the approval of their Assistant Directors, may review filings that did not "screen" for review, not review filings that did, or change the level of review. This "override" of the initial review determination is most often done when similar filings by the same issuer were recently reviewed. Workload considerations and the significance of potential issues in the filing are also used to determine whether a filing is reviewed.
Overrides give the Division flexibility in allocating staff resources to those filings most in need of review. On the other hand, if override authority is used inappropriately, filings may not receive the appropriate level of review, increasing the risk of inadequate disclosure to the investing public.
A total of 76,500 filings (1933 and 1934 Act) were submitted in 1995. Of that total, 17,700 (23%) received either a full review, full financial review, or a monitor.
Overall, controls over screening filings for review and overrides of initial review determinations appeared effective. In fact, during our review, the Division independently took actions to review and improve its screening process. For example, it issued memoranda to reinforce and simplify current screening procedures and revised its procedures for processing registrants' reports of change in their certifying accountants. Also, the Division updated the format of its Filing Activity Tracking System (FACTS) screening sheets used to select filings for review.
To further enhance controls, the Division and OFIS should improve accountability for reports of change in registrant's certifying accountants received by the Commission and distributed to the Division's branches for review.
Improve Accountability for Reports of Change in
Registrant's Certifying Accountant
Among our audit tests, we selected a judgement sample of 98 reports of change in registrant's certifying accountants received in FY 1995. These reports were selected because they did not have a review code listed in the Workload system, / even though Division policy requires a full review of this type of filing. We found that nine out of the 98 reports were not reviewed.
Reports of change in registrant's certifying accountants are reviewed to ensure companies do not engage in "opinion shopping." "Opinion shopping" refers to the practice of dismissing accounting firms that reported deficiencies in issuers' financial statements, and hiring accounting firms that would not report those deficiencies. Left unchecked, "opinion shopping" would erode the reliability of financial reporting by companies to the investing public.
We did not determine the exact reason why the reports of change in registrant's certifying accountants were not reviewed. However, certain controls over these paper filings need improvement.
Controls over these reports in OFIS did not ensure that filings were received by the Division. OFIS staff in the Document Control Branch placed the filings into in-boxes in two locations for pick up by the Division staff. One location was accessible to the public, while the other was generally accessible to Commission employees only. The filings were not specifically accounted for, and no one in Document Control was specifically responsible for the filings.
The Workload system was not useful as an additional check to identify the reports that were not reviewed. For example, the Workload screen did not include the correct item numbers for three of the filings that were not reviewed. This was due to a computer error in reading item numbers from EDGAR filings in general. OIT was already aware of this problem, and has corrected it.
Also, the Division receives a bi-weekly Workload report from OIT on reports of change in registrant's certifying accountants filed during that period. However, this report did not provide information on filings from previous bi-weekly periods that were not yet reviewed, so that follow-up action could be taken.
OFIS should designate specific staff to maintain control over reports of change in registrant's certifying accountants in the Division's pick-up box. These filings are for the use of the Division, and should not be accessible to the public. OFIS should also develop a manual log for these filings. As the reports of change in registrant's certifying accountants on Form 8-K are received, they should be logged in. Designated staff from the Division of Corporation Finance should sign the log when receiving the reports from the designated OFIS staff.
In response to our recommendation, OFIS designated the receptionist in the Document Control Branch as responsible for tracking the reports of change in registrants certifying accountants. The receptionist will maintain a log book for these reports. Employees from the Division will be required to initial the receptionist's log book upon receipt of the filings.
OFIS should develop written procedures covering the handling of reports of change in registrant's certifying accountants.
In response to our recommendation, OFIS issued a memorandum providing procedures for processing these reports. The memorandum includes procedures for segregating and maintaining control over them.
The Division should designate Division staff who are authorized to pick up reports of change in registrant's certifying accountants and notify OFIS.
In response to our recommendation, the Division's Office of Chief Accountant issued a memorandum to OFIS identifying three individuals authorized to pick up these reports.
The Office of Information Technology should provide the Division with periodic listings of the reports of change in accountants listed in the Workload system without review codes.
In response to our recommendation, the Office of Information Technology informed us that they will provide the listings to the Division upon request.