A “Little-r” Adjustment – Spreadsheet Complications and Disclosure Control Reporting

By George Wilson

In this Form 10-Q for the quarter-ended May 31, 2021, Pure Cycle reflected a “little-r” prior-period adjustment related to public improvement reimbursables and related interest.  The Form 10-Q includes this footnote:

The Company discovered certain errors in the amounts previously reported for the three and six months ended February 28, 2021, which if these errors though immaterial in the given periods, were corrected in the three months ended May 31, 2021, management believes these corrections would have a material impact on the current reported three month consolidated statement of operations, specifically the recognition of Public improvement reimbursables including interest income - related party. The Company’s President and the Chief Financial Officer evaluated the effects of the errors on the consolidated financial statements for the three and six months ended February 28, 2021, which each concluded that the errors were not material to those presented results. Based on this evaluation, the errors did not rise to the level of requiring a restatement of the financial information for the three and six months ended February 28, 2021, contained in the Form 10-Q as previously filed. Accordingly, management has corrected these errors by adjusting opening accumulated deficit for the three month period ended May 31, 2021 and has retrospectively adjusted the cumulative periods for the impact of such errors in the financial statements presented for the three and nine months ended May 31, 2021. The errors were a result of ineffective controls related to management’s preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record the transactions related to the recording and tracking of the public improvement reimbursable amounts. Please see Item 4 in this Quarterly Report on Form 10-Q for our remediation plans.

As required by SAB 108 (Topic 1-N), even though no individual period was misstated by a material amount, the company still adjusted all periods because the cumulative amount was considered material to the current period.  This is the “roll-over” versus “iron-curtain” analysis required by SAB 108 (Topic 1-N).

Perhaps the most interesting aspect of this adjustment is controls over the use of spreadsheets, an on-going and complex issue.  It provides a timely reminder to be sure we establish appropriate controls over the creation, maintenance and use of spreadsheets in the accounting process.

As you would expect, there is an ICFR impact from this financial statement adjustment.  While a full report on ICFR is not required in a Form 10-Q, the company included this disclosure of a material weakness in Part I – Item 4:

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. The President and the Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of May 31, 2021, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the President and the Chief Financial Officer each concluded that, during the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective due to a material weakness in internal controls over financial reporting resulting from ineffective controls related to the management preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record transactions related to the public improvement reimbursable amounts and related interest income. 

To address this material weakness, management has devoted, and plans to continue to devote, significant effort and resources to the remediation and improvement of its internal control over financial reporting by implementing additional steps in the review process of various complex schedules that support accounting entries on a monthly and quarterly basis or moving these manual tracking and reconciliation processes to a purchase software system.

This disclosure is a great reminder that Disclosure Controls and Procedures include ICFR and a material weakness in ICFR likely means that Disclosure Controls and Procedures are not effective.

As always, your thoughts and comments are welcome!

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