As we move towards the end of the third-quarter and begin preparations for year-end reporting we are presenting a series of posts focused on common questions and problems in quarterly and annual reports.
One of the interim reporting issues we emphasize in our Workshops deals with the timing of the auditor’s review of the financial statements in Form 10-Q. Regulation S-X Article 10-01(d) states:
(d) Interim review by independent public accountant. Prior to filing, interim financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must be reviewed by an independent public accountant using applicable professional standards and procedures for conducting such reviews, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements.
While this requirement may seem fairly innocuous, and it is simple to confirm that the auditors have completed their review, in September 2018 the SEC actually enforced against five companies for not having their reviews performed prior to filing Form 10-Q’s. You can read the details here. All five of the companies paid substantial fines. It is clear that the SEC believes the protections that investors get from interim reviews are very important.
As you read the cases you might begin to wonder “how did the SEC find out that Forms 10-Q had been filed without review?” In the release the SEC says:
These actions are the Commission’s first enforcement proceedings against an issuer for violating the Regulation S-X interim review requirement and resulted from a review of filings, staff comment letters and other metrics that indicated potential violations.
It would be interesting to know what the “other metrics” are!
As always your thoughts and comments are welcome!