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The focus of the SEC staff’s comments on Internal Control over Financial Reporting (ICFR) has not changed significantly from prior years. They continue to focus on the following areas.
  • The identification and disclosure of material weaknesses. Specifically, the SEC staff continues to question why a restatement or revision did not result in the reporting of a material weakness.
  • Management’s disclosure about the effectiveness of ICFR and disclosure controls and procedures (DC&P). The SEC staff has questioned registrants when there is no explicit conclusion about the effectiveness of DC&P or when management has concluded that ICFR is ineffective while DC&P is effective.
  • Management’s documentation of the changes in ICFR that have materially affected, or are reasonably likely to materially affect, the registrant’s ICFR as required by Item 308 of Regulation S-K. Such changes may include updates to internal controls made in the process of (a) remediating previously identified material weaknesses, (b) as a result of the integration of significant acquisitions, (c) due to the implementation of new information technology systems, or (d) implementation of a new accounting standard.
  • Management’s inappropriate exclusion of their assessment over internal control while filing their second Form 10-K. The SEC staff continues to remind registrants that all newly public companies have a transition period that exempts them from the Section 404 requirements in the first annual report that they file after becoming an Exchange Act reporting company, but that exemption only applies to the first annual report.
Comment examples
Guidance references
  • We note management concluded that your disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by your annual report. Given the fact that you have restated your previously issued financial statements due to errors, please tell us why you did not disclose that these restatements were indicative of a material weakness in your internal control over financial reporting to comply with Item 308(a)(3) of Regulation S-K, and tell us how your officers determined that your disclosure controls and procedures were effective despite such material weakness in your internal controls over financial reporting.
  • Your report states that during your assessment, “management identified no significant deficiencies;” however, your report does not include a statement as to whether or not your internal controls over financial reporting were effective as required by Item 308(a)(3) of Regulation S-K. Please revise management’s report accordingly.
  • Please ensure you clearly provide the conclusion reached upon management's evaluation and assessment of your internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Please explicitly state whether such controls are effective or not effective. Please identify in your report which version, 1992 or 2013, of the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control – Integrated Framework you utilized when performing your assessment of internal control over financial reporting.
  • Please revise to disclose any change in your internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, your internal control over financial reporting. Refer to Item 308(c) of Regulation S-K.
  • We note that management concluded that disclosure controls and procedures were effective as of the end of the fiscal year. We also note management's conclusion that disclosure controls and procedures were not effective as of your fiscal third quarter. The narrative in your Form 10-K, however, states that "during the fourth quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting." Please explain to us how you determined there was a change in the effectiveness of your disclosure controls and procedures, from period-to-period, given that there were no changes in internal controls during your fiscal fourth quarter.
  • We note your conclusions that disclosure controls and procedures were effective but internal controls over financial reporting were ineffective. Please tell us how management was able to conclude that disclosure controls and procedures were effective given the substantial overlap with internal controls over financial reporting.
  • We note your disclosure that this Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting due to a transition period established by the rules of the SEC for newly public companies. Since this is your second 10-K these transition rules no longer apply. Please amend your filing to include management's assessment of internal control and revise your Exhibit 31 certifications accordingly. 

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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