Corporation REPORTING DELAYS ta unstal imperief i DISMISSAL OF EY APPOINTMENT OF BDO USA, LLP SEC COMMENT LETTER APPOINTMENT OF BDO USA, LLP On Jaly 3, 2014. Daily Joarnal announced the appointment of BDO LSA. L.LP as anditot to replace EY. Sbortly following BDO's appointment, Daily Journal filed its Farmu 10Q for the first (filed on August 13, 2014), second ifiled od August 15, 2014), and third (filed on August 18, 2014) quarters of 2014 , hringing Daily Joumal current with respect to its SEC filings. SEC COMMENT LETTER Almost on ctue, the Division of Finance at the SEC sent a letter of comment to Gerald Salmas (CEO of Daily Journal) that raised concems with the 2013 Fonm 10- K. This letter (daiad September 25. 2014) referenced Daily Journal's disclosure of intangible assets from an acquisition, the effectiveness of Daily Journal's internal cootrols, and discrepancies between preliminary financial filings on Form 8.X and subsequent filings en Form 10.Q. With respect to the intangible assets, Salz. man's response to the SEC noted the following: At the time of the New Dawn acquisition, the Company diveussed the purchase price allocation with EY. Accotdingly, the Company was surprised when EY first raised the [accounting] issue after the original filing deadline. As further discussed below, the Company does not believe that the adjutments were necksary ander GAAP, but EY required them as a condition to the delivery of its audit report. The Company did not view this as a disagreemen with EY, but rather a matter of the parties making differeat jadgment calls ahout the requirements in these specific circumstances regarding a matter the Conpany believed was not material to investen. Accepting EY's position was a practical docision on the part of the Company, and not the result of deficiencies in the Company's close process or in the areas where the adjustmens were made." In the midst of these distractions, Daily Joursal notified the SEC that it would not meet the filing deadline for its 2014 Farm 10.N (which was ultimately filed 28 days after the December 31 . 2014 deadline). BDO issucd an analified opinion on Daily Joumal's finuncial statements and an adverse opinion on its internal conirol, citing in part issues noted in the 5EC-s letier of comment in this latter opinion: The Company does not have sulficient technical expertive in assessing and applying accounting standards to non-routine transactions, reviewing the quarterly and annual tax antyais and provision, and assessing the adequacy of disclosures in the quarterly and annual consolidated financial statements, The Company amended its Form 10 . Q for the third quarter of fiseal 2014 to restale amoants to correct a misstatement in the acounating for income taxes in connection with one of its acquisitions. This resulted in material aadit adjustments the Company recorded to primarily offset the previously recorded income tax benefit as well as additional dinclosares in the cubwlidated fiaancial atatensents., ANOTHER AUDITOR CHANGE BDO's opinios on Daily Journal's 2015 financial statements and inernal control over financial teporting was issued on Decenter 14, 2015 (ahead of the December 31, 2015 deadline). As in the previous two years, Daily Journal reccived an unqualified opinion on its financial statements and an adverse opinion on internal cootrol aver financial reperting: in this latter report, BDO ciled a material audit adjustment that was required in the fouth quarter of fiscal 2015. In Febraary 2016, Daily Jeurnal annoanced the dismissal of BDO and the appointment of Squar Milner LL.P, a regional accounting firm with offices in Califonnia that provides avidit or tax services to 30 public companies. 3 Ironically, Iess thain one week earlier. Daily Joarmal shareholders ratified the appointment of BDO as its auditor with a positive vole of 95 percent of all shares voted. 6 CONCLUSION Over a three-year period, Daily Journal engaged the following austitoes? Acadcuric research" examiniag auditce changes has coochaded that clicats receiving adverse internal control opinions are mixe likely to dismiss their incumbent anditors and choose a highterquality roplacement (represented by the sise and level of firm. wilh Big foer being bighent quality): this decisien may reffect a dewire of dicets to impeove their finacial repoetiag quality. A mone recent study" found that clients engrape in "epinich-shopping- by drumisuing auditoes prior to potentially fecciving an adverse opiaion en intemal control and ofien do se laeer it the fixcal year, in response to anticipoting a nceative repect vo their internal coatrol. DISCUSSION QUESTIONS 1. Froen the SEC wetrite ot other searoes, locate Datly Joemal's 2013 Ferm 10K and neview EY"s report eo Daily Journal's internal ceetrol ever fiausial reporting. What were sone of the weaknesses noted in this report? 2. Review the eccerpt (geoceted in the case) of Daily Journal's Form 8F (filed wirt the SEC Jane 26. 2014) related to the disminal of EY. What type of disclosures are provided in this excerpt? What are wome teacoas that Daily Journal would provide these diseloweres? 3. Review the eccerpe (genested in the case) truen Gerald Salman's revpoese to the SEC. Do you beliceve this fevponse is coesistent with the Fann 8 - X filiag related to the divmisual of EY ? What implications might this reyponse have with teipect te Daily Joural's ieterzal coetrol over financial repotting? 4. From the SEC website or eeher scerces, locate Daily Journal's Ferm 8R~ (filed Jaly 3. 2014) related to the appointmeat of BDO. What type of disclesures are prosided in this filing? What are sotne reasoas that Daily Journal woeld peovide these divelosures? (Note: Daily loarnal filed twe differeat Form 8. K's en July 3. 2014.) 5. Referring to the profeivioul atandards (AU-C 210), what it BDO's respoesibulity with respect to communicating with EY? 3016) that anocuaced the diumisul of BDO asd eagagement of Squar Milser, Compare the disclosures in this filing to those in questions (2) and (4) related to the dismissal of EY and engagcment of BDCO. 7. Why might adverse opinions on imternal control over financial reporting proepe Daily foernal to change auditoes? Are Daily Joumal's auditoe chasge activities coenistent with the revults of the academic studies vammurined in this case? Why of why nod