Tanner has filed with the bankruptcy court in Delaware a motion [PDF] asking the court to approve an expansion of its work for SCO. It projects for the year ahead that it will do SCO's annual report, its 4 quarterly 10Qs, and the required Sarbanes-Oxley Act Section 404 audit statements.
Exhibit A [PDF] is the October 3, 2008 letter from Tanner to the Audit Committee of the Board of Directors of SCO, and specifically to Dan Campbell, its Chairman. It memorializes the understanding between the two companies, and in it Tanner outlines exactly how unlikely it is to find any fraud or other illegal activity in its audit, Sarbanes-Oxley or no Sarbanes-Oxley, and how it's SCO's responsibility to inform Tanner about any such misbehavior. On its honor.
That's my reading anyway. Well, if you can't trust SCO, who *can* you trust?
I can just imagine how glowingly SCO will find it has done its job, I'm sure. And then Tanner will attest to it, and then they'll submit the bill, and presto, change-o, mo' money. No wonder Wall Street is collapsing, if this is how it's regulated.
Let me show you the part of the letter that has me thinking that not much is expected of such an audit, according to Tanner's description:
We will conduct our audit of the consolidated financial statements in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, a material misstatement may remain undetected. Also, an audit is not designed to detect errors or fraud that are immaterial to the financial statements.
An audit of financial statements also includes obtaining an understanding of internal control sufficient to plan the audit and to determine the nature, timing and extent of audit procedures to be performed. An audit is not designed to provide assurance on internal control or to identify significant deficiencies or material weaknesses....
So Tanner will look for mistakes or worse, but they don't have to lift every stone, I gather, in their "reasonable" but not "absolute" pursuit. SCO is presumed to be the source of info about any skullduggery, since they are in the best position, one assumes, to know precisely where to find it:
Management is responsible for identifying and ensuring that the Company complies with laws and regulations applicable to its activities, and for informing us of any known material violations of such laws and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the Company involving (a) management, (b) employees who have significant roles in internal control and (c) others where the fraud could have a material effect on the financial statements. Management is also responsible for informing us of its knowledge of any allegations of fraud or suspected fraud affecting the Company received in communications from employees, former employees, analysts, regulators, short sellers or others.
I'm sure SCO will get right on that.
I confess that reading this letter had me grinning from ear to ear.
Here's the summary of Section 404, if it's new to you, as it was to me:
Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting. This statement shall also assess the effectiveness of such internal controls and procedures. Love the number. So that's what Tanner will be doing.
The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.
I guess they could start with the letter [PDF] from the ex-employee who told the bankruptcy court that another ex-employee told her that SCO was in violation of the Older Workers Benefits Protection Act regulations, and when she pointed it out, that they owed her more, SCO found a way to pay her at a high rate for very little work, so as to avoid asking the bankruptcy court for approval. Remember that letter? I wonder if it qualifies? Here's what it alleged:
After Janet pointed out to SCO that the company was in violation of the OWBPA regulations, SCO devised a plan to pay Janet for her comp/vacation time without proper approval from the court trustee. SCO contracted Janet at a high rate in return for minimal work to pay her the amount that was owed to her. Janet told me that despite this contract, SCO again tried to wiggle out of paying her. Thus, she was forced to use tough means to make SCO comply with the agreement to pay her the amount owed her. The bankruptcy court seems to have blown it off, which is what I expected, but I wonder if it merits Tanner's attention? Or if it's not material enough to count? And of course, fairness requires that I point out we have no idea if it's even true. There was no affidavit from the ex-employee who supposedly told the story.
If they find anything major, will Tanner blow the whistle? Not necessarily to the public, if I've understood the letter. They list on page 4 some more tactful options: "declining to express an opinion or issue a report, or withdrawal from the engagement". They'll tell management about any serious deficiencies or material weaknesses that they find, along with any errors, fraud or illegal acts that come to their attention.
So, with a perfection of irony, SCO is on its honor to report on itself to Tanner, should there ever come such an unlikely day when anyone inside SCO stumbles across some fraud or other illegal acts it has committed.
Given the low expectations expressed, it may surprise you to learn how much Tanner plans to charge: $198,000 more or less, mainly more, including travel and other expenses. It could be even more, if a partner or professional employee "leaves the firm and is subsequently employed by or associated with a client". What is that saying? That if SCO hires a Tanner employee, Tanner gets to charge more? I believe so. Also, it will cost more if Tanner gets dragged into any litigation. Well. I'm thinking *that* could happen, now that you mention it.
And Epiq has filed an affidavit of mailing, showing it served notices on all the folks whose claims SCO is trying to toss overboard, who now have the joy of tangling with SCO in court in Delaware if they want their claims honored, with the added pleasure of having to pay a lawyer to represent them properly, presumably. For many of them, the amounts owed are so low, it's probably cheaper to let it go than to pay for a lawyer and for service of their papers.
Here are the filings :
Filed & Entered: 10/09/2008 And here's the SEC's rule and summary of what Section 404 of Sarbanes-Oxley requires:
Affidavit/Declaration of Service
Docket Text: Affidavit/Declaration of Service of Epiq Bankruptcy Solutions, LLC Regarding Debtors' First (Non-Substantive) Omnibus Objection to Claims Pursuant to 11 U.S.C. Section 502(b) and Bankruptcy Rule 3007 (related document(s)) Filed by The SCO Group, Inc.. (O'Neill, James)
Filed & Entered: 10/11/2008
Motion to Approve (B)
Docket Text: Motion to Approve the Expansion of the Scope of Retention of Tanner LC to Perform Audit of Debtors' Consolidated Financial Statements for Fiscal Year Ending October 31, 2008 and Quarterly Financial Statements in 2009 Nunc Pro Tunc to October 3, 2008 Filed by The SCO Group, Inc.. Objections due by 11/13/2008. (Attachments: # (1) Notice # (2) Exhibit A # (3) Proposed Form of Order # (4) Certificate of Service and Service List) (Makowski, Kathleen)
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, we are adopting rules requiring companies subject to the reporting requirements of the Securities Exchange Act of 1934, other than registered investment companies, to include in their annual reports a report of management on the company's internal control over financial reporting. The internal control report must include: a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company; management's assessment of the effectiveness of the company's internal control over financial reporting as of the end of the company's most recent fiscal year; a statement identifying the framework used by management to evaluate the effectiveness of the company's internal control over financial reporting; and a statement that the registered public accounting firm that audited the company's financial statements included in the annual report has issued an attestation report on management's assessment of the company's internal control over financial reporting. Under the new rules, a company is required to file the registered public accounting firm's attestation report as part of the annual report. Furthermore, we are adding a requirement that management evaluate any change in the company's internal control over financial reporting that occurred during a fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. Finally, we are adopting amendments to our rules and forms under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 to revise the Section 302 certification requirements and to require issuers to provide the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits to certain periodic reports.
So, of course the court will approve the expense, since someone has to do it. I confess I find it depressing to read about Tanner projecting to the end of SCO's 2009 fiscal year. Would it be too much to hope that the Wall Street meltdown has the unexpected but welcome side effect of bringing this saga to an end long before then? The judge in the bankruptcy seems to want SCO to pick up the litigation baton and start swinging again, but, personally, I find my appetite for that was satiated long ago.