The SEC Rules

  Financial reporting for America's small businesses

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5 July 2007 SEC proposes consolidation of Regulation S-B rules into Reg. S-K

27 June 2007 SEC proposes reducing holding periods under Rule 144

15 Dec. 2006 SEC again extends Section 404 compliance date for non-accelerated filers

Archives: 2005



Illustrative Discussion Cases


Case 1 – Moderate Size Multi-National Reporting Company:                              ________Overseas Divisional President and Records Gone

Case 2 – Foreign Private Issuer Reverse Acquired By Domestic Public Shell

Case 3 – Bulletin Board Small Business Issuer:                                                         ________Debt with Magic Warrants, Never Booked


Case 1 – Moderate Size Multi-National Reporting Company:                              ________Overseas Divisional President and Records Gone

You are a partner in a registered accounting firm and are asked to advise/assist an old college friend, who has just accepted an assignment as Acting CEO of a moderate sized ($250 million annual revenues) international financial services SEC registrant.  Recently an anonymous employee whistle-blower informed the SEC that there was massive fraud at this company in the European Division.  The division’s president has disappeared without a trace along with the division’s financial records.  The Final Four audit firm has just resigned, but did review the third quarter Form 10-Q.  The Company has not yet filed its Form 10-K from December 31, 2004.  The Acting CEO tells you the Company has $25,000,000 in cash, is still operating domestically, has necessarily ceased all European operations, wants to have their 12/31/04 financial statements audited and their 10-K filed, and continue life as a public company in good standing with the SEC and NASDAQ.  You can assume the prior auditor will not reissue any audit reports on this client, which was an audit client for five years.

 Question:  Is there a practical solution for this company?


Case 2 – Foreign Private Issuer Reverse Acquired By Domestic Public Shell

 You are asked by the control person of a public shell company to be their auditor.  You are further told that they have a letter of intent to merge with a Ugandan privately owned diamond mining company, which will get the majority of shares in the post merged company. 

 Question: What are the accounting and auditing implications of this proposed transaction, if:

A)   The shell is current with its SEC filings;

B)   The shell stopped reporting, but filed a Form 15;

C)  The shell hasn’t reported in three years.


Case 3 – Bulletin Board Small Business Issuer:                                                         ________Debt with Magic Warrants, Never Booked

You recently joined a small registered firm as a principal, to be their QC reviewer to replace a partner who just retired.  The firm has a few SEC Small Business Issuers as clients.  Last year the firm merged with a sole practitioner, who had one S-B client.  Prior to your joining them, the firm reviewed two quarterly filings on Form 10-QSB for this company.  You are now reviewing the year-end financials.  You notice that for the last four years, the company has been issuing warrants in connection with loans borrowed from officers/stockholders.  After the last interim period the outstanding loans total $2,000,000.  No expense has been recorded for the warrants.  The Company’s stock has a volatility of 175%.  Earlier this year, the company had a proxy, in which shareholders approved a one for 100 reverse split, reducing outstanding shares from 50,000,000 to 500,000.  The reverse split went into effect in the fourth quarter of the current year and the market price of the stock immediately changed from $.10 to $10.00.  The company disclosed in the proxy, that these particular warrants, of which there were 5,000,000 outstanding, exercisable at an average price of $.20, were immutable in the event of a reverse split and therefore there would still be 5,000,000 of them outstanding at the same average exercise price of $.20 after the reverse split.  The management group, that holds the warrants, owned ninety percent of the company’s outstanding shares before the reverse split, without giving any beneficial ownership effect to the warrants.  The attorney, who wrote the warrant agreement, is no longer the company’s attorney.  Your reading of the warrant agreement indicates that though poorly written, it was meant to convey that the warrants had the usual anti-dilutive characteristics.  The company’s president and the current attorney who drafted the proxy are both certain that the warrants were intended to be immutable, but you are certain that they are both wrong.  The partners in your firm are not sure!

What are the accounting and reporting implications for the company?

What are the practice implications for you and your firm?