Two items in Section 4 of Form 8-K reach directly into the audit file. Item 4.01 fires when an issuer's auditor leaves or a new one arrives. Item 4.02 fires when previously issued financial statements can no longer be relied upon. A CPA firm that audits an SEC registrant, or that is about to take one over, needs to know what each item forces the issuer to say about the firm.
Timing
Form 8-K instructs registrants to file or furnish a report within four business days after the triggering event, unless an item says otherwise. Both Section 4 items run on that clock. The audit committee and the engagement partner therefore have a very short window between a decision and a public filing.
Item 4.01: a change in the certifying accountant
Item 4.01(a) applies when an accountant previously engaged as principal accountant, or an accountant on whom the principal accountant relied for a significant subsidiary, resigns, declines to stand for re-appointment after completing the current audit, or is dismissed. The registrant must give the information required by Item 304(a)(1) of Regulation S-K, including the former-accountant letter under Item 304(a)(3).
Item 4.01(b) applies separately when a new accountant is engaged. The form's instruction treats the departure and the engagement as separate reportable events, so one change in auditors can require two Forms 8-K. Facts already reported in the first filing need not be repeated in the second.
What Item 304(a)(1) asks about
The disclosure looks back over the two most recent fiscal years and any later interim period. It covers three things.
Opinion history. Under Item 304(a)(1)(ii), the registrant states whether the principal accountant's report on the financial statements for either of the past two years contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. Each one is described.
Disagreements. The registrant states whether there were disagreements with the former accountant on accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Each one is described, even if it was resolved to the accountant's satisfaction. The registrant also says whether the audit committee or board discussed the subject with the former accountant, and whether it authorized the former accountant to answer the successor's questions fully. Item 304 reads disagreements as matters at the decision-making level, and a difference of opinion counts even without a heated exchange. Initial differences based on incomplete facts that were later resolved are excluded.
Reportable events. These are reported even without a disagreement. Item 304(a)(1)(v) lists four categories:
- The accountant advised that internal controls needed to produce reliable financial statements do not exist.
- The accountant advised that it can no longer rely on management's representations, or is unwilling to be associated with the financial statements prepared by management.
- The accountant advised that the audit scope needed significant expansion, or that information came to its attention that, if investigated, might materially affect the fairness or reliability of a prior report or the underlying statements, and the accountant did not expand the scope or investigate, for any reason including resignation.
- The accountant concluded that information materially affects the reliability of a prior report or statements and the issue was not resolved to its satisfaction before it resigned, was dismissed or declined to stand for re-election.
A matter that produced a disagreement is reported as a disagreement and not again as a reportable event.
The former accountant's letter
The registrant must hand the former accountant a copy of the disclosure no later than the day it files. It must also ask the former accountant for a letter addressed to the SEC saying whether the accountant agrees with the statements and, if not, where it disagrees. The letter is filed as an exhibit. If it is not ready at filing, Item 304(a)(3) has the registrant request it promptly, file it within ten business days after the original filing, and, once received, amend within two business days.
The new accountant and pre-engagement consultations
Item 304(a)(2) requires the registrant to name the new accountant and the engagement date. If, during the two-year lookback and before engagement, the registrant consulted the new firm on applying accounting principles to a specific transaction or on the type of opinion that might be rendered, and either a written report was provided or oral advice was given that the registrant treated as an important factor in reaching its decision, that consultation is disclosed. So is any consultation on a matter that was a disagreement or reportable event. The registrant must describe the new firm's views, give the new firm the chance to review the disclosure and offer its own letter, and file any written views as an exhibit.
Item 4.02: non-reliance
Item 4.02 has two triggers.
Item 4.02(a), management concludes. The board, a board committee, or the authorized officers conclude that previously issued financial statements, covering any period for which Regulation S-X requires financial statements, should no longer be relied upon because of an error as addressed in ASC 250. The filing states the conclusion date, identifies the statements and periods affected, briefly describes the underlying facts as known at filing, and says whether the audit committee (or board, or authorized officers) discussed the matters with the independent accountant.
Item 4.02(b), the auditor advises. The registrant is advised by, or receives notice from, its independent accountant that disclosure should be made or action taken to prevent future reliance on a previously issued audit report or completed interim review. The filing gives the date of the notice, identifies the statements, summarizes the information the accountant provided and states whether the audit committee discussed it with the accountant.
Under Item 4.02(c), where the auditor triggered the filing, the registrant gives the accountant a copy of the disclosure by the filing date, asks for a letter to the SEC stating whether the accountant agrees, and files that letter by amendment within two business days of receiving it.
Worked example
Harbor Tool, Inc., a calendar-year issuer, finds, after filing its third-quarter Form 10-Q, that a $2.4 million supplier rebate was recognized in the wrong quarter across the first three quarters of the year and the prior year-end. The audit committee meets on a Tuesday and concludes the quarterly filings and the prior-year annual report should not be relied upon. That Tuesday is the conclusion date. The Form 8-K under Item 4.02(a) is due four business days later. It names the three Forms 10-Q and the prior Form 10-K, describes the rebate timing error, and states that the audit committee discussed it with the auditor.
Two weeks on, the audit committee decides to change auditors for unrelated reasons. A second 8-K under Item 4.01(a) is due within four business days of the dismissal. The former auditor's letter states whether it agrees with the registrant's Item 304 statements, which cover the lookback period in which the rebate error arose.
What belongs in the audit file
- A dated memorandum on the date and substance of any management or auditor conclusion that triggered Item 4.02.
- The audit committee minutes showing the discussion Item 4.02 requires the 8-K to state.
- For a departing firm, a reconciliation of every Item 304 statement in the registrant's draft to the file: opinions issued, disagreements raised and resolved, and any matter in the four reportable-event categories.
- For an incoming firm, the engagement-acceptance and consultation record, with a list of any written accounting views given before engagement.
- Predecessor and successor communications. See predecessor and successor auditor communications under AU-C 510 and error corrections under ASC 250.
For the broader map of where Forms 10-K, 10-Q and 8-K touch the audit, see SEC forms and audit touchpoints.
Where CORAA fits
CORAA prepares ready-to-review audit files for US CPA firms. For an issuer-adjacent engagement it builds the schedules and cross-reference indexes that support the firm's own conclusions. The firm keeps the client relationship, the review and the signature. See /us.
Sources
- SEC, Form 8-K (General Instructions and Items 4.01 and 4.02): https://www.sec.gov/files/form8-k.pdf
- Legal Information Institute, 17 CFR 229.304, Item 304 Changes in and disagreements with accountants on accounting and financial disclosure: https://www.law.cornell.edu/cfr/text/17/229.304
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