On January 14, 2011, the Division of Corporation Finance issued new CDIs regarding change of accountants.
The Division issued new CDIs 111.01-111.07 covering interpretations under Item 304 of Regulation S-K – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. The following is a summary of the new CDIs:
- Companies must disclose disagreements and reportable events during the company’s two most recent fiscal years and any “subsequent interim period” preceding the resignation, declination or dismissal. The CDI clarifies that any “subsequent interim period” is the period from the end of the most recent fiscal year through the date of the former 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.
- If a company has no reportable events, it is not required to disclose that fact.
- A company must disclose if the former accountant advised that the company’s internal controls necessary to develop reliable financial statements did not exist, even if remediation occurred before the end of the subsequent interim period.
- If the former accountant advised the company that there was a material weakness, then the company has a reportable event. By contrast, if the former accountant advised that one or more significant deficiencies in internal control over financial reporting existed, but did not also advise that there was a material weakness, then that would not be a reportable event.
- A company must disclose if the accountant issued an audit report on the financial statements in the last two fiscal years containing an explanatory paragraph regarding the company’s ability to continue as a going concern.
- A company is not required to disclose if the accountant issued a report on the company’s internal control over financial reporting in the last two fiscal years containing an explanatory paragraph, adverse opinion or a disclaimer of opinion. However, if such report contains an adverse opinion with respect to the effectiveness of internal control over financial reporting, then that would be reportable.
- Disclosure is required if an accountant resigns, declines to stand for re-election or is dismissed because his or her registration with the Public Company Accounting Oversight Board (PCAOB) has been revoked.
The Division also issued new CDIs 114.01-114.03 addressing whether an Item 4.01 Form 8-K is required if a new accountant is engaged that is related in some manner to the former accountant, but the new accountant is a separate legal entity and is separately registered with the PCAOB, or the accounting firm enters into a business combination with another accounting firm.