NEW C&DIs re Changes in Accountants and Related Disclosure

By Cydney Posner

Below are some new C&DIs just posted by Corp Fin related to changes in accountants and related disclosure.

Regulation S-K Item 304 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

• If a registrant's principal accountant resigns, declines to stand for re-election or is dismissed, Items 304(a)(1)(iv) and (v) require the registrant to disclose any disagreements and reportable events during the registrant's two most recent fiscal years and any "subsequent interim period" preceding the resignation, declination or dismissal. For purposes of this requirement, the "subsequent interim period" is the period from the end of the registrant's most recent fiscal year through the date of the former principal accountant's resignation, declination to stand for re-election or dismissal. This period is not limited to the end of the most recent fiscal quarterly period. Similarly, the "subsequent interim period" referred to in Item 304(a)(2), which requires disclosure of the engagement of a new principal accountant, is the period from the end of the registrant's most recent fiscal year through the date on which the new principal accountant is engaged.
• Item 304(a)(1)(iv) requires affirmative disclosure if there are no disagreements with the accountant, but does not require affirmative disclosure if a registrant has no reportable events.
• During the two most recent fiscal years and subsequent interim period, the principal accountant advised the registrant that internal controls necessary to develop reliable financial statements did not exist. Even if the remediation of the internal control deficiencies occurs before the end of the subsequent interim period, that fact does not relieve the registrant of its disclosure obligation pursuant to Item 304(a)(1)(v)(A); the registrant is still required to disclose that the former principal accountant advised the registrant that the internal controls necessary for the registrant to develop reliable financial statements do not exist.
• Under Item 304(a)(1)(v)(A), the registrant is required to disclose, as a reportable event, that, during the two most recent fiscal years and any subsequent interim period, the former principal accountant advised that there was a "material weakness" in internal control over financial reporting (ICFR), as defined in Rule 1-02(a)(4) of Reg S-X. A "material weakness" is defined as "a deficiency, or combination of deficiencies, in internal control over financial reporting…such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis." For purposes of Item 304(a)(1)(v)(A), advising the registrant that there is a material weakness in ICFR is equivalent to advising that the "internal controls necessary for the registrant to develop reliable financial statements do not exist." Consequently, if the former principal accountant advised that there was a material weakness, then the registrant has a reportable event under Item 304(a)(1)(v)(A). By contrast, if the former principal accountant instead advised that there were one or more significant deficiencies in ICFR, but not that there was a material weakness, then that would not be a reportable event under Item 304(a)(1)(v)(A). However, the factors that led to a significant deficiency could result in the conclusion that there are other reportable events that require disclosure. For example, the former principal accountant may have determined that, because of the significant deficiency, there was a need to significantly expand the scope of the audit, which could, in appropriate circumstances, create a reportable event under Item 304(a)(1)(v)(C).
• If a registrant's principal accountant issued an audit report on the registrant's financial statements in the last two fiscal years containing an explanatory paragraph regarding a registrant's ability to continue as a going concern, disclosure would be required under Item 304(a)(1)(ii). The explanatory paragraph represents a modification of the principal accountant's audit report for an uncertainty, thereby requiring disclosure under Item 304(a)(1)(ii).
• By contrast, if a registrant's principal accountant issued a report on the registrant's ICFR in the last two fiscal years containing an explanatory paragraph, adverse opinion or a disclaimer of opinion, disclosure would not be required under Item 304(a)(1)(ii) because this item refers only to the principal accountant's "report on the financial statements." Registrants can voluntarily disclose information about reports on ICFR; however, if those reports contain an adverse opinion with respect to the effectiveness of ICFR, then that would be reportable pursuant to Item 304(a)(1)(v)(A).

Form 8-K Item 4.01 — Changes in Registrant's Certifying Accountant

• If a principal accountant resigns, declines to stand for re-election or is dismissed because its registration with the PCAOB has been revoked, the registrant should disclose this fact when filing an Item 4.01 Form 8-K to report a change in certifying accountant. Disclosure of the revocation of the accountant's PCAOB registration is necessary to understanding the required disclosure with respect to whether the former accountant resigned, declined to stand for re-election or was dismissed.
• If a registrant engages a new principal accountant that is related in some manner to the former principal accountant (e.g., the firms are affiliates or are member firms of the same network), but the new principal accountant is a separate legal entity and is separately registered with the PCAOB, the registrant should file an Item 4.01 Form 8-K to report a change in certifying accountant because the new principal accountant is a different legal entity from the former principal accountant and is separately registered with the PCAOB.
• If a registrant's principal accountant enters into a business combination with another accounting firm, whether an Item 4.01 Form 8-K is required will depend on how the combination is structured and on other facts and circumstances. Accounting firms that enter into business combinations are encouraged to discuss their transactions with the Division's Office of Chief Accountant.

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