Auditing discussion help
Search the Internet (for example, a company’s Web site or the Securities and Exchange Commission Web site) to find an audit report for a company’s audit of internal control over financial reporting, in particular one that expresses an adverse opinion with respect to the effectiveness of internal control.
Compose and post a brief report (250 to 300 words long) presenting your determination regarding the reasons for the adverse opinion.
In several additional paragraphs (up to 200 words), discuss whether or not you agree with the auditor’s adverse opinion.
Listed on the SEC’s website for fiscal year ended December 31, 2011, is Form 10-K for Wave Systems Corp. Wave Systems Corporation is a software company specializing in data protection and security software. In the report of independent registered public accounting firm, KPMG LLP expressed an adverse opinion on the effectiveness of the company’s internal controls over financial reporting due to the effect of a material weakness. (Form 10-K, p. 55)
The assessment of the effectiveness of internal controls performed by management revealed that their internal control over financial reporting was not effective due to “inadequate resources to maintain effective controls over accounting for significant transactions” (Form 10-K, p. 52). These significant transactions included material misstatements in accounting for the acquisition of another company and revenue misstatements related to multiple deliverable arrangements. A multiple deliverable arrangement, or a multiple element arrangement, is when a vendor offers more than one product or services in a contract or arrangement. An example of a multiple deliverable arrangement is when a cellular service provider offers a heavily discounted phone in conjunction with a 2 year service agreement. The revenue on these separate elements are recognized on the financial statements as they occur.
The remediation plan provided by management noted that they would overhaul their protocol for acquiring subsidiaries, ensure they had personnel who would be equipped to deal with non-routine transactions, and hire a financial professional with a technical background who would be experienced in software revenue and multiple deliverable arrangements.
Although they had a remediation plan, they did not make changes to their internal control over financial reporting. This was acknowledged on their remediation plan for FY12 when their auditing firm KPMP LLP again issued an adverse opinion. Their form 10-K for FY12 had the same issues as the previous year, however, they did hire a financial reporting manager for the last quarter of FY12 who contracted a consulting firm that specialized in software revenue recognition.
I am in agreement with the auditor’s adverse opinion for this organization. It is management’s responsibility to ensure their staff is educated and equipped to deal with the financial transactions that occur in an industry with specific revenue reporting requirements such as theirs. It is also the responsibility of management to ensure there is formal management and audit committee oversight in place to deal with the complexities of foreign subsidiary acquisitions and software revenue recognition.
Of particular interest to me is that KPMG had substantial doubt about Wave Systems ability to continue as a going concern in FY11, FY12, FY13, and FY14. The CEO Steven Sprague received compensation in 2013 in excess of $1,000,000 dollars as part of his severance package when he was terminated. Mr. Sprague continued to serve on the board of directors until Wave Systems filed for bankruptcy in February of 2016.
http://www.sec.gov/Archives/edgar/data/919013/000104746912003681/a2208570z10-k.htm
http://www.sec.gov/Archives/edgar/data/919013/000104746913002979/a2213543z10-k.htm
http://www.berkshireeagle.com/local/ci_29485029/wave-systems-lee-files-bankruptcy
