Mergers _and_amp; Acquisitions 681

  • A question about acquisitions obtained before year-end that are scoped out. It is my understanding that you get until the end of your next fiscal year to make them SOX compliant - HOWEVER you need to let your auditors know by the end of your 1st quarter if the new subsidiary has any deficencies. Is this true?
    This would mean we would have to do narratives and at the very least walk-thrus in order to identify the issues.
    Can someone point me in the right direction?

  • M-and-A is not the same after Sarbanes-Oxley.
    Buyres are no more interested in an acquisition if there is a chance to have a material weakness in internal controls, even because it is difficult to integrate the acquisition quickly .
    The requirements of Sarbanes-Oxley have an effect on mergers and acquisitions:

    • Certifications required under Sections 302 and 404 must cover the whole company, including acquisitions.
    • Before approaching a target company, buyers must assess the impact of weak internal controls within that company. The revelation of a material weakness of the target company has an adverse affect on the acquiring company’s worth.
    • If there is a metarial weakness and the deal is completed, the acquiring company must immediately announce the material weakness in the target company.
      The buyers must have an integration plan in place before the deal closes. And it is not ‘one size fits all’. Speed is critical, a key factor to succeed. You must bring the acquired company onto your financial systems immediately. More than 3 months is a serious problem, as you must not have two different finance structures.
      By far the most difficult situation: A public U.S. company that has been complying with Sarbanes-Oxley, wants to buy a private or foreign company.
      And, here is the reason that Sarbanes Oxley is important for private companies also. Private companies try hard to comply with SOX requirements as they position themselves as acquisition targets.

  • Here is the SEC’s response -
    Published by Securities and Exchange Commission, October 6, 2004. Made available in PDF format by Compliance Week.
    Q: If a registrant consummates a material purchase business2 combination during its fiscal year, must the internal control over financial reporting of the acquired business be included in management’s report on
    internal control over financial reporting for that fiscal year?
    A: As discussed above, we would typically expect management’s report on internal control over financial reporting to include controls at all consolidated entities. However, we acknowledge that it might not always be possible to conduct an assessment of an acquired business’s internal control over financial reporting in the period between the consummation date and the date of management’s assessment. In such instances, we would not object to management referring in the report to a discussion in the registrant’s Form 10-K or 10-KSB regarding the scope of the assessment and to such disclosure noting that management excluded the acquired business from management’s report on internal control over financial reporting. If such a reference is made, however, management must identify the acquired business excluded and indicate the significance of the acquired business to the registrant’s consolidated financial statements. Notwithstanding management’s exclusion of an acquired business’s internal controls from its annual assessment, a registrant must disclose any material change to its internal control over financial reporting due to the acquisition pursuant to Exchange Act Rule 13a-15(d) or 15d-15(d), whichever applies (also refer to the last two sentences in the answer to question 9). In addition, the period in which management may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the registrant’s internal control may not extend beyond one year from the date of acquisition, nor may such assessment be omitted from more than one annual management report on internal control over financial reporting.

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