Foamex Case Study

1. The final responsibility for the integrity of an SEC registrant’s internal controls lies with the management of the company in question. The company reports financials of which the management makes assertions on. The external auditors are hired by the audit committee and are tasked with validating management’s assertions. While the audit committee is charged with the oversight, maintaining the quality and integrity of internal controls lies with management.
2. The auditors have a responsibility to identify any and all significant deficiencies and material weaknesses that exist in regards to the client company’s internal controls. The findings are to be reported to the client’s management in writing. With private companies there is no requirement for external auditors to report separately on internal controls.
3.  A client may dismiss an audit firm whenever it choices. An audit firm may resign from an audit whenever they want as long as it has “genuine grounds” to do so. This may be if threats to audit independence become known only after commencement of the engagement, and they are unable to be reduced to an acceptable level through the application of appropriate and effective safeguards. Or if the auditor is unable to obtain sufficient appropriate audit evidence, and the possible effects on the financial statements of undetected misstatements could be both material and pervasive.

In any case, when a client switches audit firms it triggers Item 4.01 of Form 8-K, which requires disclosure of detailed information enumerated in Item 304(a) of Regulation S-K. This requires the company to disclose whether the auditor resigned or was dismissed and the date of that event, if the auditor provided an adverse opinion or qualifications within the two most recent fiscal years and any subsequent interim period, if the company’ audit committee recommended or approved the change in accountants; and if there was a disagreement between the company and the auditors within the two most recent fiscal years and any subsequent interim period.