he says. "They have the power to do that."
Still, there's a substantial amount of work to be done to get back into compliance, says Carol Stacey, vice president at training firm SEC Institute and a former chief accountant in the Division of Corporation Finance at the SEC. The first critical task for each company is to find a new audit firm that's independent of the company- meaning one not already providing tax or other consulting services to the company.
With only four major firms, there's not a lot of choice. "Most companies try to keep one audit firm aside and not work with them at all so if something like this happens, they have someone to turn to," Stacey says. "Hopefully they have at least one audit firm leftover. If not, then they're looking at a second-tier firm."
The companies also need to quickly decide what they will do about their first-quarter filings, Stacey says. Both companies are calendar-year filers, so their first quarter closed on March 31, and their filings are due 40 days later. "If you've just lost your auditor and you don't have anyone to review it, you might have to file the 10-Q unreviewed," she says, which has several negative implications. Companies that are deficient in their filings, for example, are severely limited in their ability to raise new capital, Stacey adds. "I got many calls like that when I was at the SEC," she says. "And I would say file as much as you can as soon as you can."
It's possible, Stacey surmises, that a new audit firm might be able to get comfortable enough with a company's firstquarter report to provide a review for filing purposes, but she considers it unlikely. A firm will typically provide a first-quarter review only after it has completed the audit for the prior year, she says.
David Weinberg, CFO and COO of Skechers, said in the company's prepared statement that the timing of KPMG's resignation was "an unfortunate development," as the company prepared its first-quarter results. He said the company believes the first quarter will show significant growth. "We are working diligently to replace KPMG as quickly and efficiently as possible as we look forward to releasing positive results for the first quarter of 2014," he said.
Completing a Do-Over
Once each company selects a new auditor, the work of recreating years of audit reports will get under way quickly, experts say. They differ, however, on the degree to which the new audit firm might rely on KPMG's work. Christopher Davies, a partner at law firm WilmerHale, says the exact nature of the transition can sometimes depend on the reasons for it. "One could imagine in circumstances like this that the outgoing auditor might be more expansive in what it might share with its successor than in the typical change in auditor," he says.
Turner believes it's likely KPMG will be involved in some way to help the companies' transition to new auditors. "They will probably give the auditor coming in all the assistance they need," he says, including providing their work papers. It also helps that the audit profession has just finished its usual busy season, wrapping up year-end audits for calendar-year companies, so the new firm is likely to have plenty of available staffto assign to the task.
The seniority of London before he was fired will also affect the reliability of previous audit work. Confirmation.com's Fox believes the new firm will place little faith in anything produced by KPMG. KPMG withdrew the reports because its engagement partner, who had a heavy influence over the entire audit process, was allegedly tainted by his own self-interest as he engaged in insider trading. "When someone on the audit team is compromised, the new audit firm would not want to rely on anything that team did," he says.
onathan Feld, an attorney with law firm Dykema, says he believes the new audit firm will rely little on KPMG's work. "They don't want to incorporate whatever oversight or alleged mistake was there, so they're going to want to verify everything," he says. "I would think this will be almost starting from scratch."
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