2015 SEC Filing Highlights, Part 2 of 2

This is part two of our SEC filing review where we take a look back at notable disclosures and outliers from our auditor changes, out-of-period adjustments, changes in accounting estimates, and director and officer change data sets.

Auditor Changes
1,007 SEC registrants changed their auditor in 2015, which is down slightly from last year. In 2014, Clone Algo changed their auditor three times. At the time, that seemed like a feat that would likely never be surpassed. But ICON Vapor, Inc. raised the bar by changing their auditor four times in 2015 alone. The first departure was Terry L Johnson CPA, who was followed by Danielle Adams, Cutler & Co LLC, and Anton & Chia LLP, before KWCO PC was ultimately engaged in September.

Interestingly, Terry L Johnson CPA was the last auditor Clone Algo engaged in 2014 and was the first auditor to depart from ICON Vapor. Given Terry L Johnson CPA was charged by the SEC in 2015 for performing deficient and fraudulent audits it perhaps isn’t surprising ICON Vapor had such turnover.

Of all departing auditors during calendar 2015, EY’s tenure at Smith & Nephew PLC was the longest at 78 years. KPMG was engaged in March 2015 as the first new auditor to take a look at Smith & Nephew’s books since 1937.

Out-of-Period Adjustments
In 2015, 279 registrants filed 307 out-of-period adjustments. Of these, the largest negative one belonged to Merck & Co., Inc. which cited a “discrete” $75 million dollar adjustment in their 8/6/15 10-Q:

…as well as the unfavorable effects of foreign exchange losses related to Venezuela for which no tax benefit was recorded and a $75 million out of period discrete adjustment related to deferred taxes associated with prior year restructuring activities.

Out of the top five largest negative out-of-period adjustments, three were due to corrections of tax-related amounts.

Changes in Accounting Estimates
455 registrants filed 622 changes in their accounting estimates in 2015. The largest disclosed was by Fannie Mae which negatively impacted pre-tax income by $2.524 billion. Despite being the largest negative change disclosed in 2015, Fannie Mae suggests that it only affected a “relatively small subset.” From their 5/7/15 10-Q:

The provisions of the Advisory Bulletin led us to re-evaluate our estimate of when a loan is deemed uncollectible. For the vast majority of our delinquent single-family loans, we will continue to charge-off the loan at the date of foreclosure or other liquidation event. For a relatively small subset of delinquent loans deemed to be uncollectible prior to foreclosure based upon our historical data, we charge off the portion of the loan deemed to be uncollectible prior to the date of foreclosure or other liquidation event, which given our current credit analytics and historical data, is when the loans are excessively delinquent and the outstanding loan balance exceeds the fair value of the underlying property. This change in estimate resulted in the recognition on January 1, 2015 of (1) $1.8 billion in charge-offs of HFI loans, (2) $724 million in charge-offs of preforeclosure property taxes and insurance receivable…

The second largest negative change in accounting estimate was posted by Fannie Mae’s brother organization, Freddie Mac, which similarly charged-off $1.9 billion in its allowance for uncollectible loans. Fannie Mae and Freddie Mac’s changes in estimates ($4.424 billion) are larger than the next seven negative changes combined.

D&O Changes
935 companies disclosed 1,080 CEO departures and 1,067 companies disclosed 1,225 CFO departures in 2015.1 These figures do not represent a significant change from the prior year and are well off of the peak figures seen around 2008.

While the vast majority of companies disclosed only one CEO change, three companies disclosed 3 departures of their CEOs in 2015; KaloBios Pharmaceuticals Inc, Zonzia Media, Inc., and Winnebago Industries Inc. One notable departure from these companies was “pharma bro” Martin Shkreli, who, after replacing interim CEO Herb Cross at KaloBios on 11/19/15, was subsequently terminated less than a month later. KaloBios went on to file Chapter 11 Bankruptcy on 12/30/15.


1. The total departure count includes departures from possible interim positions, business segments, and subsidiaries.