Back in November we presented a long and technical post about the confusion surrounding how to use “Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure” in Form 10-K. As we discussed in that post, the folks who teach our Form 10-K In-Depth Workshop, Reed Wilson and Rich Alven, find a fair number of mistakes as they prepare for their workshops by reviewing participant’s 10-Ks. At the year-end sessions of the Form 10-K In-Depth Workshop they continued to see this confusion and thought an example might be appropriate to reinforce proper use of Item 9.
The example starts with a change in auditor that was properly reported on Form 8-K.
| Item 4.01 | Changes in Registrant’s Certifying Accountant. |
The Audit Committee (the “Audit Committee”) of the Board of Directors of Medical Properties Trust, Inc. (the “Company”) annually considers the selection of the Company’s independent registered public accountants. On September 8, 2008, the Audit Committee elected to dismiss KPMG LLP (“KPMG”) as the Company’s independent registered public accountants for the year ending December 31, 2008.
No Adverse Opinion or Disagreement. The audit reports of KPMG on the consolidated financial statements and on the effectiveness of internal control over financial reporting of the Company as of and for the years ended December 31, 2007 and 2006 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two fiscal years ended December 31, 2007 and 2006 and the subsequent interim periods through September 8, 2008:
(1) there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG would have caused it to make reference to the subject matter of the disagreements in its audit reports on the consolidated financial statements of the Company, and
(2) there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided KPMG with a copy of the foregoing disclosure.
The Company has requested and received a letter from KPMG, dated September 12, 2008, addressed to the Securities and Exchange Commission. A copy of this letter is attached hereto as Exhibit 16.1 to this Current Report on Form 8-K.
Also on September 8, 2008, the Audit Committee engaged PricewaterhouseCoopers, LLP (“PwC”), effective immediately, to serve as the Company’s independent registered public accountants for the year ending December 31, 2008. During the two fiscal years ended December 31, 2007 and 2006 and the subsequent interim periods, the Company did not consult with PwC regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
This was a very straightforward auditor change, no disagreements or reportable events, and it was appropriately reported on an Item 4.01 Form 8-K.
As our earlier post discusses, this kind of a change should not be mentioned in the following Form 10-K. However, the company’s Form 10-K for the year that included the auditor change ERRONEOUSLY included this disclosure:
| ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
The Audit Committee of the Board of Directors of the Company annually considers the selection of the Company’s independent registered public accountants. On September 8, 2008, the Company notified KPMG LLP (KPMG) that the Company’s Audit Committee, on September 8, 2008, decided not to renew the engagement of its independent registered public accountants, KPMG, and selected PricewaterhouseCoopers LLP (PwC) to serve as the Company’s independent registered public accountants for 2008.
The audit reports of KPMG on the consolidated financial statements of the Company as of and for the years ended December 31, 2005 and 2004 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports of KPMG on the consolidated financial statements and on the effectiveness of internal control over financial reporting of the Company as of and for the years ended December 31, 2007 and 2006 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two fiscal years ended December 31, 2007 and 2006 and the subsequent interim periods through September 8, 2008: (1) there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG would have caused it to make reference to the subject matter of the disagreements in its audit reports on the consolidated financial statements of the Company, and (2) there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
And, to make things even more confusing, the company also included the following disclosure in their Form 10-K for the second year following the auditor change, misunderstanding the two-year look-back requirement in Item 9:
| ITEM 8. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
The Audit Committee of the Board of Directors of the Company annually considers the selection of the Company’s independent registered public accountants. On September 8, 2008, the Company notified KPMG LLP (KPMG) that the Company’s Audit Committee, on September 8, 2008, decided not to renew the engagement of its independent registered public accountants, KPMG, and selected PricewaterhouseCoopers LLP (PwC) to serve as the Company’s independent registered public accountants for 2008.
The audit reports of KPMG on the consolidated financial statements of the Company as of and for the years ended December 31, 2005 and 2004 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports of KPMG on the consolidated financial statements and on the effectiveness of internal control over financial reporting of the Company as of and for the years ended December 31, 2007 and 2006 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the two fiscal years ended December 31, 2007 and 2006 and the subsequent interim periods through September 8, 2008: (1) there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG would have caused it to make reference to the subject matter of the disagreements in its audit reports on the consolidated financial statements of the Company, and (2) there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company has agreed to indemnify and hold KPMG harmless against and from any and all legal costs and expenses incurred by KPMG in successful defense of any legal action or proceeding that arises as a result of KPMG’s consent to the inclusion or incorporation by reference of its audit report on the Company’s past consolidated financial statements included or incorporated by reference in the Registration Statements on Form S-8 and Form S-3.
Clearly this disclosure was not required, and to add even more confusion, for some reason the company decided to leave out Item 4 from their 10-K and renumbered all the remaining items.
They did not follow Exchange Act Rule 12b-13 which requires all item numbers to be included:
12b-13 Preparation of statement or report.
The statement or report shall contain the numbers and captions of all items of the appropriate form, but the text of the items may be omitted provided the answers thereto are so prepared as to indicate to the reader the coverage of the items without the necessity of his referring to the text of the items or instructions thereto. However, where any item requires information to be given in tabular form, it shall be given in substantially the tabular form specified in the item. All instructions, whether appearing under the items of the form or elsewhere therein, are to be omitted. Unless expressly provided otherwise, if any item is inapplicable or the answer thereto is in the negative, an appropriate statement to that effect shall be made.
Given the “red flag” nature of this disclosure and the confusion about this item, it is always good to have a review and a checklist to help get this right! Courtesy of our Form 10-K In-Depth Workshop Leader Rich Alven, here is an easy test you can follow to determine that an Item 9 disclosure is not required.
You know you don’t need an Item 9 when:
- You are only describing what was provided in the 8-K filing or
- You are only referencing the 8-K filing
As a reminder, an Item 9 disclosure is only required when ALL of the following conditions are met:
- You are within two fiscal years of when the new auditors were engaged AND
- You had a disagreement with the previous auditor or other reportable event (as described in Item 304(b) AND
- During the first two years of engagement, an event has come up that is similar to the event that caused the disagreement with the previous auditor AND
- Your current auditor allows you to account for it differently than your previous auditor.
So, to recap – Within the first 2 years of a change in auditor:
- If there was no disagreement with your previous auditor – NO Item 9
- If there was a disagreement with your previous auditor and your current auditor requires the same accounting as the previous auditor – NO Item 9
- If your current auditor agrees with you on an issue that was the subject of a disagreement with your previous auditor (which would have been included in your 8-K filing) – Item 9 is required.
As always, your thoughts and comments are welcome!