Nasdaq this month notified a Colorado company that it may be delisted from the exchange because its external auditors provided no opinion about management’s internal control over financial reporting—the first time that delisting has been threatened for such a “disclaimed opinion.”
Advanced Energy Industries, a technology company based in Fort Collins, Colo., revealed the delisting letter from Nasdaq in a press release dated May 9. Advanced Energy said it believes that the inclusion of the independent auditor’s report in the Form 10-K complied with the law, even though the auditor’s report expressed no opinion.
On the same day as the Advanced Energy announcement, a second company, Cray, also disclosed in a press release that it had received a delisting notice from Nasdaq because its auditor expressed no opinion about management’s assessment of internal controls. However, in case of Cray—which is a high-performance computing company headquartered in Seattle—the auditor did provide a negative opinion on the company’s internal control over financial reporting.
Both Advanced Energy and Cray have vowed to fight delisting and said they would be requesting hearings with Nasdaq Listings Qualification Panel.
SEC Has “Remained Silent”
Pergola
Anthony Pergola, a partner in the Somerville, N.J., office of the law firm Lowenstein Sandler, told Compliance Week that he wasn’t “completely surprised” that Nasdaq might seek delisting over disclaimed Sarbanes-Oxley Act opinions, but that he didn’t think it was what was generally expected. “I’m not flabbergasted, but I would have thought there would have been more process before [taking this action],” he said, noting that it wasn’t unexpected that the Nasdaq would respond to the 10-K filing before the Securities and Exchange Commission had acted. “A lot has been left to the exchanges,” he said.
Wilson
Faith Wilson, who is of counsel with the law firm of Perkins Coie in Seattle, told Compliance Week that “it’s a really interesting issue” because “you can walk through very easily the language of [the law] and cite statements by the SEC and make a compelling case that a disclaimed opinion is an opinion and that a 10-K [containing a disclaimed opinion] is fine.”
Wilson noted that the SEC “hasn’t said otherwise—it’s remained silent and declined to informally comment on it.” But she also said that, from a policy standpoint, Nasdaq's position “makes a lot of sense” because including a disclaimed opinion in a 10-K “does not accomplish what Sarbanes-Oxley is trying to accomplish—which is putting in the hands of management the responsibility of testing its processes and allowing an independent auditor to come in and review what they’re doing.”
Nasdaq may be telling companies that, rather than file a 10-K on time including a disclaimed opinion, the better course is to file the 10-K late and accept the negative ramifications that come from doing so, Wilson said, noting that the exchange is free to take a tougher stance with its members than the SEC might take.
As for a company’s chances of thwarting delisting, Pergola said they’re far from hopeless. “There will be plenty of letter-writing and phone calls and attempts to comply … There certainly are many examples of companies that have been notified that they would be delisted if they didn’t fix X, that then fixed X and stayed listed.”
Unable To Form An Opinion
Nasdaq Marketplace Rule 4310(c)(14) requires listed companies to file copies of all reports and other documents filed or required to be filed with the SEC “on or before the date they are required to be filed with the Commission or appropriate regulatory authority.”
In the Advanced Energies case, the company filed a 10-K on May 2 that contained the following statement from Grant Thornton, the external auditor: “Management was unable to complete their assessment of internal control over financial reporting as of Dec. 31, 2004, in a timely manner, and due to that scope limitation we were unable to perform the procedures required to enable us to express, and we did not express, an opinion on management’s assessment or on the effectiveness of the Company’s internal control over financial reporting in our report dated March 30, 2005.”
In the case of Cray, the company filed an amended Form 10-K on March 31 that included the following conclusion from auditor Deloitte & Touche: “Because of [a] limitation on the scope of our audit … the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on management’s assessment [of the effectiveness of the company’s internal control over financial reporting]. In our opinion, because of the effect of [certain] material weaknesses … on the achievement of the objectives of the control criteria and the effects of other material weaknesses, if any, that might have been identified if we had been able to perform sufficient auditing procedures, the Company has not maintained effective internal control over financial reporting as of Dec. 31, 2004 …”
In describing the limitations on the scope of its audit, Deloitte & Touche noted that the company’s management “did not complete its assessment of the effectiveness of the Company’s internal control over financial reporting … because the Company did not complete the testing of controls over all relevant assertions related to significant accounts and disclosures in the financial statements. Examples of controls that were not tested include (1) controls over initiating, authorizing, recording, processing, and reporting of certain significant accounts and (2) controls, including information technology general controls, on which other controls are dependent. Accordingly, we were unable to perform auditing procedures necessary to form an opinion on management’s assessment.”
The Securities and Exchange Commission would not comment on this story, but Compliance Week will continue to monitor Nasdaq actions in coming weeks. In addition, Compliance Week publishes a weekly Internal Control Report Scorecard, which tracks auditor opinions on SOX 404. The Scorecard is available in Microsoft Excel spreadsheet format in the column above, right, as are other related documents and resources.
Other Delisting Notices
Nasdaq has sent out a number of delisting notices in recent weeks relating to Sarbanes-Oxley, including the ones issued to Advanced Energy and Cray For example, recent notices were sent out to:
Silicon Image of Sunnyville, Calif., which, according to a press release, “inadvertently did not comply” with certain SOX certification requirements and then made an amended filing that failed to “include the body of the entire Form 10-K with the corrected certifications.”
Embarcadero Technologies of San Francisco, which filed a 10-K that did not include the management report and auditor attestation report concerning internal control over financial reporting. Embarcadero has since corrected the problem to Nasdaq's satisfaction.
CompuDyne Corp., of Annapolis, Md., which failed to file a timely amendment to it Annual Report providing management’s report on internal controls and the related auditor’s report.
New Horizons Computer Learning Centers, of Anaheim, Calif., and Crown Media Holdings, of Greenwood Village, Colo., both of which failed to file timely 10-Ks, citing an inability to complete an assessment of the company’s internal controls within the required framework. Crown Media has since been given an extension until June 15 by Nasdaq to file its report.
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