The comment letters have been rolling in on the SEC’s proposed amendments to the “accelerated filer” definition – which would make fewer companies subject to the auditor attestation requirement. Predictably, accounting firms aren’t in favor of the change and say that it would weaken the quality of financial reporting. CII has also joined that camp – its letter argues that the amendment may cause investors to lose confidence in the integrity of financial statements.
CII also takes issue with the SEC’s economic analysis of the proposal – by citing to another recent comment letter from four B-School profs. That letter adds data to the assertion that some companies can’t be trusted to report material weaknesses when left to their own devices. Here’s an excerpt from a WSJ article about the letter and its underlying study:
More than 100 companies that could get relief have reported restatements that altered combined net income by $295 million from 2014 through 2018, according to a comment letter from researchers at Stanford University, the University of Pennsylvania, the University of North Carolina and Indiana University. Eleven of the restatements occurred in 2018 and wiped out about $294 million in market value, the researchers wrote.
One company in the group is Insys Therapeutics Inc., said Prof. Taylor, who co-wrote the letter. Insys, an opioid manufacturer whose market value peaked at $3.2 billion in 2015, sought bankruptcy protection in June after pleading guilty to bribing doctors to boost use of its spray version of fentanyl, a synthetic opioid. It agreed to pay $225 million in fines and forfeiture.
Insys effectively failed the internal-controls audits in 2015 and 2016, according to securities filings. The company later restated results for several quarters in 2015 and 2016. The company said at the time that neither fraud nor misconduct caused the errors. Auditors in 2017 and 2018 reported its internal controls were free from material weaknesses.
The comment letter emphasizes that the analysis in the SEC proposal quantifies the cost of internal control audits – but not the potential benefits. Of course, there are two sides to this heated debate – and the WSJ article also emphasizes the high cost of compliance for smaller companies, and that investing that money in the core business rather than compliance could improve returns for shareholders…there are letters supporting the proposal from Nasdaq, the Chamber, Proskauer and a score of life science companies, among others.
–Liz Dunshee, TheCorporateCounsel.net August 6, 2019
