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AUDIT MEMORANDUM No. 32
September 29, 2003
To: Alan Beller
From: Walter Stachnik
Re: Report of Changes in Independent Accountants
The Office of Inspector General (OIG) reviewed the internal controls of the Division of Corporation Finance (CF) and the Office of the Chief Accountant (OCA) that ensured the timely receipt and review of corporate reports of changes in independent accountants (change reports) on Form 8K.
The Securities Exchange Act of 1934 and Commission rules require public companies (registrants) to file change reports disclosing information about the ending of their relationship with their accountants. Registrants must file these reports within five business days of the end of the relationship. Also, the American Institute of Certified Public Accountants (AICPA) requires accountants to submit a letter to the registrant and the OCA within five business days to announce the end of the accountant/registrant relationship (notification letter).
The Division's Office of Chief Accountant (DCA) oversees change report reviews for CF. Accountants in CF's industry groups perform the reviews. The Division tracks change report receipt and review information with its Filing Activity Tracking System (FACTS).
Delinquent Change Reports
CF's follow-up procedures for delinquent change reports did not provide specific timeframes for the steps in the process (e.g., when to telephone the registrant, send letters, consult with DCA). Specific timeframes would improve the timeliness of follow-up.
Consequently, time periods for follow-up of delinquent change reports varied widely. For example, nineteen of 75 registrants on a January 2003 FACTS list of notification letters did not appear to have filed their change reports. Most of these registrants were small companies with little or no market activity or assets. After unsuccessful attempts to obtain change reports from 16 of these registrants, CF "cleared," or assigned final disposition dates and codes to their records to note that no further action would be taken. Time periods from filing receipt to final disposition for these registrants ranged from 26 to 136 days (average 82 days).
CF should consider including specific timeframes in its procedures for follow up on delinquent change reports.
Change report reviews did not always appear timely. We reviewed a judgment sample of 142 (of a total of approximately 2800) FACTS change report records from a 2002 list. Of the 142 FACTS change report records we reviewed, 55 (38.7%) indicated that reviews took longer than five days (average 17 days). CF required review within three business days (in our test, we added two days for weekends).
At least two factors appeared to affect timeliness. One, CF did not include change reports in its Division-wide review goals because the reports did not include financial statements. Consequently, accountants tended to place a higher priority on filings that counted toward their review goals. Two, the review accountants did not report directly to DCA. DCA depended upon the cooperation of the eleven industry groups when following up on change report reviews.
CF managers indicated that they were considering ways to develop review goals for change report reviews. Also, CF plans to consider other approaches to organizing the change report review and oversight functions, including possibly consolidating them as part of a centralized "risk assessment" function. In the meantime, however, CF should clarify the priority of change report reviews as compared to filings with financial statements.
CF should continue its efforts to develop review goals for change reports, consider alternative ways to organize the change report review and oversight functions and clarify the priority of these reviews.
Change Report Data In FACTS
FACTS records selected data from change reports, including whether the reports disclosed disagreements or reportable events. However, it does not provide specific information on the nature of the disagreement (e.g., over accounting principles or disclosure issues) or reportable event (e.g., material internal control problems).
Analysis of this information would prove useful to CF in carrying out its oversight responsibilities, particularly in light of the financial reporting requirements in the Sarbanes/Oxley Act of 2002.
Also, FACTS records the date of the notification letter, but not the date the accountant/registrant relationship ended (action date). We selected a judgment sample of 119 (of approximately 2200) notification letters received by OCA in 2002. We found that 69 (57.9%) of the notification letter dates differed from the corresponding action dates by an average of approximately seven days.
Timeliness requirements for filing change reports are based on the action date. Therefore, recording action dates in FACTS would allow more accurate monitoring of timeliness.
In addition, FACTS allowed entry of final disposition dates and codes without corresponding filing receipt dates. CF used this feature to clear registrants who failed to file their change reports. To clarify these records, CF proposed adding a data field to note that the change report was not received but was cleared anyway.
CF should consider ways to improve change report data in FACTS, as discussed above.
cc: Thomas McCool