SEC Company Response from IGATE CORP (CIK 0001024732) — Jul 8, 2005
IGATE CORP (CIK 0001024732)
Date: July 8, 2005 · CIK: 0001024732 · Accession: 0001193125-05-139563
AI Filing Summary & Sentiment
File numbers found in text: 000-21755
Referenced dates: June 17, 2005, June 24, 2005
Letter
Securities and Exchange Commission iGate Corporation Item 4.01 Form 8-K Filed May 25, 2005 File No. 000-21755
Dear Mr. Wilson:
Please find below the responses of iGate Corporation (the “Company”) to the Commission Staff’s additional comments on the above referenced Form 8-K as set forth in its letter dated June 24, 2005 directed to Michael J. Zugay, Senior Vice President, Chief Financial Officer and Corporate Secretary of the Company.
1. SEC COMMENT: Your response to prior comment number 1 indicates that you recorded certain tax adjustments in the second quarter of 2004 which resulted from ineffective controls over the calculation of income taxes. As of December 31, 2004 you considered these ineffective controls to be material weaknesses. We note that your disclosure controls and procedures were effective in the periods ended June 30, 2004 and September 30, 2004. Considering the ineffective controls noted and the adjustments made in the second quarter of 2004, explain to us how you considered your disclosure controls and procedures effective for these periods.
COMPANY RESPONSE: The tax adjustment was a result of the Company’s decision to close its operations in the U.K. during the second quarter of 2004. The issue related to a reserve recorded against certain deferred tax assets due to cumulative prior years net operating losses generated by the Company’s U.K. operation. The significant deficiency arose due to the fact that, because of the complexity of this matter, Company management was unable to determine the amount of the reserve without first consulting with the Company’s independent registered public accounting firm. Subsequent to consultations with its independent registered public accounting firm, the tax adjustment was made. At the time of this adjustment, management was unaware that the significant deficiency would later aggregate into a material weakness in the income tax area when combined with additional significant deficiencies found in the income tax area subsequent to December 31, 2004.
Table of Contents
As a result, management determined the Company’s disclosure controls and procedures were effective as of June 30, 2004 and September 30, 2004. Because the above-referenced additional significant deficiencies found subsequent to December 31, 2004, when aggregated with the significant deficiency related to the second quarter income tax adjustment, resulted in the reported material weakness in the income tax area, they did not impact management’s conclusion regarding the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2004 and September 30, 2004. These additional significant deficiencies were identified only in connection with the more comprehensive work undertaken in connection with the preparation of management’s report on internal control over financial reporting, which was required for the first time to be included in the Company’s December 31, 2004 Form 10-K.
2. SEC COMMENT: You also indicate that you decided a material weakness existed because you were unable to determine “whether the steps taken to remediate these deficiencies were effective because test work for two subsequent periods prior to December 31, 2004 was not available.” Please explain what you mean by this statement.
COMPANY RESPONSE: The statement referenced in the above comment was intended to explain to the Commission Staff that Company management and its independent registered public accounting firm determined that testing over at least two quarters was required to ensure that the deficiencies were properly remediated. The Company became aware of additional control deficiencies in the income tax area very late in the fourth quarter of 2004 and used its best efforts to remediate these matters. New controls and procedures were implemented in late December 2004 to remediate the deficiencies. However, the Company did not have adequate time to adequately test the effectiveness of these remediation efforts because management and the Company’s independent registered public accounting firm determined that testing over at least two quarters was required to determine if the new controls and procedures that were implemented in December 2004 were adequate to effectively remediate the control deficiencies.
3. SEC COMMENT: We note that in addition to the 3 material weaknesses you also had 78 significant deficiencies. These deficiencies were not disclosed in your Controls & Procedures as of December 31, 2004 or any subsequent periods. Tell us how you considered Question 11 of the FAQ on Release No. 34-47986 “Management’s Report on Internal Control Over Financial Reporting and Disclosure in Exchange Act Periodic Reports.” Explain how you determined that these deficiencies in the aggregate did not represent a material weakness that required disclosure. Additionally, tell us whether you have made any material changes to your disclosure controls and procedures or to internal controls over financial reporting to remedy any of these deficiencies.
Table of Contents
COMPANY RESPONSE: As required by Question 11 of the FAQ on Release No. 34-47986 “Management’s Report on Internal Control Over Financial Reporting and Disclosure in Exchange Act Periodic Reports,” we did consider whether any of these deficiencies, when aggregated, constituted a material weakness. In accordance with the FAQ, the Company disclosed in its Form 10-K/A the material weaknesses and the nature of the significant deficiencies since they were material to the understanding of the disclosure. The remaining significant deficiencies were aggregated as described below, but did not aggregate to any additional material weaknesses and, therefore, the Company did not disclose the existence or nature of the significant deficiencies.
As required by the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 (An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements), paragraph No. 207, “the auditor must communicate in writing to management and the audit committee all significant deficiencies and material weaknesses identified during the audit.” This communication occurred on May 25, 2005 in the form of the PricewaterhouseCoopers “2005 Audit Committee Report” that was presented to the iGate Corporation’s management team and Audit Committee by the Company’s independent registered public accounting firm. Each of the Company’s three material weaknesses and 78 significant deficiencies were detailed in Section IV, Exhibit C of this document. Please note for reference purposes that the Company previously provided a copy of this document to the SEC in its response letter dated June 17, 2005. The Company has added a column titled “Aggregation Reference” and are providing it to the Commission Staff as Appendix I enclosed herewith. It should be noted that both Company management and the Company’s independent registered public accounting firm were in full agreement as to the nature and extent of these weaknesses and deficiencies. Management publicly disclosed each of the three material weaknesses in its December 31, 2004 10-K/A filing.
Each of the 78 significant deficiencies noted above were evaluated both on an individual basis and then in the aggregate by Company management and by the Company’s independent registered public accounting firm.
On an individual basis, management evaluated each of these deficiencies according to “A Framework for Evaluating Control Exceptions and Deficiencies, Version 3, December 20, 2004.” This framework was provided to management by PricewaterhouseCoopers, and the Company utilized this framework as well as other judgmental factors in aggregating its deficiencies. This document is enclosed with this letter as Appendix II. The framework is focused upon the evaluation of deficiencies in four main areas: control exceptions (Chart 1), process/transaction-level control deficiencies (Chart 2), information technologies deficiencies (Chart 3), and other pervasive controls (Chart 4). It is important to note that while the framework provides for a thought process in each of these four
Table of Contents
areas, significant judgment is still required on the part of both management and the Company’s independent registered public accounting firm. Both Company management and the Company’s independent registered public accounting firm separately evaluated each of the 78 deficiencies against the appropriate chart noted above.
On an aggregated basis, Company management and its independent registered public accounting firm agreed to group 34 out of the 78 significant deficiencies into 11 aggregated significant deficiencies. The remaining 44 deficiencies that were not aggregated have remained as significant deficiencies on an individual basis. Company management and its independent registered public accounting firm performed this aggregation by combining those deficiencies that shared either significant account balances, related disclosures, and/or related COSO (Committee of Sponsoring Organizations of the Treadway Commission) components. Unlike the evaluation of deficiencies on an individual basis, a framework for evaluation in the aggregation does not exist. Company management and its independent registered public accounting firm therefore performed their aggregation evaluation using significant levels of judgment while considering the nature and extent of the deficiencies relative to management’s response as to the implications on the effectiveness of the Company’s COSO components. None of the 11 aggregated significant deficiencies were deemed to be material weaknesses.
Management’s efforts to date in 2005 have been primarily directed towards remediation of the three (3) material weaknesses disclosed in the Company’s Form 10-K/A as of December 31, 2004. Because of this, there have been no material changes to management’s disclosure controls and procedures or to internal controls over financial reporting to remedy any of the above significant deficiencies. However, management is in the process of formulating a plan that, upon completion, will address each of the above deficiencies.
If you have any questions regarding the Company’s responses, the enclosures provided herein, or would prefer to organize a conference call to discuss any unresolved matters, please do not hesitate to call me (412-787-9590).
Very truly yours,
/s/ Michael J. Zugay
Show Raw Text
CORRESP 1 filename1.htm Letter of Correspondence Table of Contents 1000 Commerce Drive, Suite 500, Pittsburgh, PA 15275 tel: 412. 506.1131 fax: 412. 494.9272 www.igate.com July 8, 2005 Craig Wilson Senior Assistant Chief Accountant Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: iGate Corporation Item 4.01 Form 8-K Filed May 25, 2005 File No. 000-21755 Dear Mr. Wilson: Please find below the responses of iGate Corporation (the “Company”) to the Commission Staff’s additional comments on the above referenced Form 8-K as set forth in its letter dated June 24, 2005 directed to Michael J. Zugay, Senior Vice President, Chief Financial Officer and Corporate Secretary of the Company. 1. SEC COMMENT: Your response to prior comment number 1 indicates that you recorded certain tax adjustments in the second quarter of 2004 which resulted from ineffective controls over the calculation of income taxes. As of December 31, 2004 you considered these ineffective controls to be material weaknesses. We note that your disclosure controls and procedures were effective in the periods ended June 30, 2004 and September 30, 2004. Considering the ineffective controls noted and the adjustments made in the second quarter of 2004, explain to us how you considered your disclosure controls and procedures effective for these periods. COMPANY RESPONSE: The tax adjustment was a result of the Company’s decision to close its operations in the U.K. during the second quarter of 2004. The issue related to a reserve recorded against certain deferred tax assets due to cumulative prior years net operating losses generated by the Company’s U.K. operation. The significant deficiency arose due to the fact that, because of the complexity of this matter, Company management was unable to determine the amount of the reserve without first consulting with the Company’s independent registered public accounting firm. Subsequent to consultations with its independent registered public accounting firm, the tax adjustment was made. At the time of this adjustment, management was unaware that the significant deficiency would later aggregate into a material weakness in the income tax area when combined with additional significant deficiencies found in the income tax area subsequent to December 31, 2004. Table of Contents As a result, management determined the Company’s disclosure controls and procedures were effective as of June 30, 2004 and September 30, 2004. Because the above-referenced additional significant deficiencies found subsequent to December 31, 2004, when aggregated with the significant deficiency related to the second quarter income tax adjustment, resulted in the reported material weakness in the income tax area, they did not impact management’s conclusion regarding the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2004 and September 30, 2004. These additional significant deficiencies were identified only in connection with the more comprehensive work undertaken in connection with the preparation of management’s report on internal control over financial reporting, which was required for the first time to be included in the Company’s December 31, 2004 Form 10-K. 2. SEC COMMENT: You also indicate that you decided a material weakness existed because you were unable to determine “whether the steps taken to remediate these deficiencies were effective because test work for two subsequent periods prior to December 31, 2004 was not available.” Please explain what you mean by this statement. COMPANY RESPONSE: The statement referenced in the above comment was intended to explain to the Commission Staff that Company management and its independent registered public accounting firm determined that testing over at least two quarters was required to ensure that the deficiencies were properly remediated. The Company became aware of additional control deficiencies in the income tax area very late in the fourth quarter of 2004 and used its best efforts to remediate these matters. New controls and procedures were implemented in late December 2004 to remediate the deficiencies. However, the Company did not have adequate time to adequately test the effectiveness of these remediation efforts because management and the Company’s independent registered public accounting firm determined that testing over at least two quarters was required to determine if the new controls and procedures that were implemented in December 2004 were adequate to effectively remediate the control deficiencies. 3. SEC COMMENT: We note that in addition to the 3 material weaknesses you also had 78 significant deficiencies. These deficiencies were not disclosed in your Controls & Procedures as of December 31, 2004 or any subsequent periods. Tell us how you considered Question 11 of the FAQ on Release No. 34-47986 “Management’s Report on Internal Control Over Financial Reporting and Disclosure in Exchange Act Periodic Reports.” Explain how you determined that these deficiencies in the aggregate did not represent a material weakness that required disclosure. Additionally, tell us whether you have made any material changes to your disclosure controls and procedures or to internal controls over financial reporting to remedy any of these deficiencies. Table of Contents COMPANY RESPONSE: As required by Question 11 of the FAQ on Release No. 34-47986 “Management’s Report on Internal Control Over Financial Reporting and Disclosure in Exchange Act Periodic Reports,” we did consider whether any of these deficiencies, when aggregated, constituted a material weakness. In accordance with the FAQ, the Company disclosed in its Form 10-K/A the material weaknesses and the nature of the significant deficiencies since they were material to the understanding of the disclosure. The remaining significant deficiencies were aggregated as described below, but did not aggregate to any additional material weaknesses and, therefore, the Company did not disclose the existence or nature of the significant deficiencies. As required by the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2 (An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements), paragraph No. 207, “the auditor must communicate in writing to management and the audit committee all significant deficiencies and material weaknesses identified during the audit.” This communication occurred on May 25, 2005 in the form of the PricewaterhouseCoopers “2005 Audit Committee Report” that was presented to the iGate Corporation’s management team and Audit Committee by the Company’s independent registered public accounting firm. Each of the Company’s three material weaknesses and 78 significant deficiencies were detailed in Section IV, Exhibit C of this document. Please note for reference purposes that the Company previously provided a copy of this document to the SEC in its response letter dated June 17, 2005. The Company has added a column titled “Aggregation Reference” and are providing it to the Commission Staff as Appendix I enclosed herewith. It should be noted that both Company management and the Company’s independent registered public accounting firm were in full agreement as to the nature and extent of these weaknesses and deficiencies. Management publicly disclosed each of the three material weaknesses in its December 31, 2004 10-K/A filing. Each of the 78 significant deficiencies noted above were evaluated both on an individual basis and then in the aggregate by Company management and by the Company’s independent registered public accounting firm. On an individual basis, management evaluated each of these deficiencies according to “A Framework for Evaluating Control Exceptions and Deficiencies, Version 3, December 20, 2004.” This framework was provided to management by PricewaterhouseCoopers, and the Company utilized this framework as well as other judgmental factors in aggregating its deficiencies. This document is enclosed with this letter as Appendix II. The framework is focused upon the evaluation of deficiencies in four main areas: control exceptions (Chart 1), process/transaction-level control deficiencies (Chart 2), information technologies deficiencies (Chart 3), and other pervasive controls (Chart 4). It is important to note that while the framework provides for a thought process in each of these four Table of Contents areas, significant judgment is still required on the part of both management and the Company’s independent registered public accounting firm. Both Company management and the Company’s independent registered public accounting firm separately evaluated each of the 78 deficiencies against the appropriate chart noted above. On an aggregated basis, Company management and its independent registered public accounting firm agreed to group 34 out of the 78 significant deficiencies into 11 aggregated significant deficiencies. The remaining 44 deficiencies that were not aggregated have remained as significant deficiencies on an individual basis. Company management and its independent registered public accounting firm performed this aggregation by combining those deficiencies that shared either significant account balances, related disclosures, and/or related COSO (Committee of Sponsoring Organizations of the Treadway Commission) components. Unlike the evaluation of deficiencies on an individual basis, a framework for evaluation in the aggregation does not exist. Company management and its independent registered public accounting firm therefore performed their aggregation evaluation using significant levels of judgment while considering the nature and extent of the deficiencies relative to management’s response as to the implications on the effectiveness of the Company’s COSO components. None of the 11 aggregated significant deficiencies were deemed to be material weaknesses. Management’s efforts to date in 2005 have been primarily directed towards remediation of the three (3) material weaknesses disclosed in the Company’s Form 10-K/A as of December 31, 2004. Because of this, there have been no material changes to management’s disclosure controls and procedures or to internal controls over financial reporting to remedy any of the above significant deficiencies. However, management is in the process of formulating a plan that, upon completion, will address each of the above deficiencies. If you have any questions regarding the Company’s responses, the enclosures provided herein, or would prefer to organize a conference call to discuss any unresolved matters, please do not hesitate to call me (412-787-9590). Very truly yours, /s/ Michael J. Zugay Michael J. Zugay cc: Sunil Wadhwani J. Gordon Garrett James J. Barnes, Esq. Christine Davis Table of Contents Appendix I iGate Corporation Significant Deficiencies - Aggregation December 31, 2004 SAD Ref Description Business Unit Process Individual Conclusion Aggregation Reference 8 PwC noted that closing checklists appeared to be properly completed by the manager of financial reporting indicating that all recurring entries and trial balance uploads were made into PeopleSoft, however, there appears to be no indication of review of the checklists by the treasurer nor does there appear to be review by the manager of financial accounting or the treasurer prior to upload. Corporate Financial Accounting & Reporting Significant Deficiency 9,10,11,12,13,14,15,16,18,19 9 There was no formal documentation of review or formal documentation of the process of review of the journal entries by the manager of financial reporting or the treasurer prior to posting although it appears that the treasurer has initialed each journal entry as reviewed after posting. Corporate Financial Accounting & Reporting Significant Deficiency 8,10,11,12,13,14,15,16,18,19 10 It was noted that with respect to the transactions posted to U.S. non-operating entities and the resulting trial balances that are uploaded, there is no formal documentation of review of the transactions prior to upload by the manager of financial reporting or by the treasurer. Corporate Financial Accounting & Reporting Significant Deficiency 8,9,11,12,13,14,15,16,18,19 11 Based upon the results of our testing and discussion with the manager of financial reporting, there was no evidence of the validation of the PeopleSoft currency translation. It was noted, based upon our discussion with the manager of financial reporting that he performs this query once a month on-line only and did not maintain any evidence of the query or the results for the year except for December 2004. Corporate Financial Accounting & Reporting Significant Deficiency 8,9,12,13,14,15,16,18,19 12 Based upon our review of the financial reporting responsibility matrix that included responsibilities for both the quarter and year end procedures, there was no indication either by initialing, sign-off or other notation that any of the responsibilities or activities as annotated on the list had been carried out. Corporate Financial Accounting & Reporting Significant Deficiency 8,9,11,13,14,15,16,18,19 13 Based upon our inquiries and evidence received, we noted that no reporting log is maintained and all significant reporting issues are not documented but rather discussed with senior management and the audit committee. The treasurer provided, on a summary level, a reporting and disclosure template that provides some points on a very high level to consider as well as a high level summary of matters discussed. It was noted that there was no signoff as reviewed by either the manager of financial reporting, the treasurer, CFO or CEO or evidence that the matters were discussed (meeting notes, comments of financial statements, etc.) Corporate Financial Accounting & Reporting Significant Deficiency 8,9,11,12,14,15,16,18,19 14 Management did not assess, evaluate, and ensure there was adequate design and operational effectiveness with respect to financial statement footnote disclosures. Consolidated iGate Corporation Financial Accounting & Reporting Significant Deficiency 8,9,11,12,13,15,16,18,19 15 There is a lack of comprehensive oversight of the financial results and developments of IGS at the iGate Corporate level. Instances such as the failure to record certain external auditor adjustments were noted. Corporate Financial Accounting & Reporting Significant Deficiency 8,9,10,11,12,13,14,16,18,19 Table of Contents iGate Corporation Significant Deficiencies - Aggregation December 31, 2004 SAD Ref Description Business Unit Process Individual Conclusion Aggregation Reference 16 Instances were noted whereby the completeness of the Company’s Intercompany Eliminations process was not evident. As a result of this lack of completeness, 2 year-end audit adjustments were recorded to eliminate the impact of these transactions. Corporate Financial Accounting & Reporting Significant Deficiency 8,9,10,11,12,13,14,18,19 18 Although there is some limited review by the CFO of goodwill, it appears based upon discussion and review of the process with the treasurer, a goodwill analysis is performed annually and has not been reviewed quarterly for any triggering events which would need to be considered in analyzing the Company’s goodwill for impairment. Corporate Financial Accounting & Reporting Significant Deficiency 8,9,10,11,12,13,14,15,16,19 19 One instance was noted during FY 04 whereby management was late in filing an SEC document form 8k, Report of unscheduled material events or corporate event. ALL Financial Accounting & Reporting Significant Deficiency 8,9,10,11,12,13,14,15,16 IND APP 20 Market rate information is used for transaction processing when converting currency rates. 55 OPRID’