(Updates with comment from consultant in the seventh paragraph.)
June 25 (Bloomberg) -- Daily Journal Corp., the California publisher that counts billionaire Charles Munger as chairman, was faulted by its auditor for inadequate accounting controls in a delayed annual report to the Securities and Exchange Commission.
“The company has not adequately identified and documented sufficient internal controls,” Ernst & Young LLP said yesterday in the filing for the fiscal year ended Sept. 30. The auditor cited “material weaknesses” tied to accounting for acquisitions and deferred tax provisions.
The publisher delayed the filing last year after a surge in its market value triggered a requirement that it get an assessment of internal controls over financial reporting. The Los Angeles-based firm had said it faced a June 30 deadline to file the annual document and regain compliance with Nasdaq Stock Market standards for financial reporting.
Daily Journal publishes California Lawyer magazine and newspapers that cover legal affairs, business and real estate. The company’s stock surged after Munger, 90, the vice chairman of Warren Buffett’s Berkshire Hathaway Inc., helped invest Daily Journal’s cash in Wells Fargo & Co. and other firms that rallied in the recovery from the financial crisis.
“The likelihood of our many controls failing to detect a material misstatement or a ‘management override’ is extraordinarily unlikely, and well below the threshold of a material weakness,” Daily Journal said in the filing.
While faulting the controls, the auditor said Daily Journal fairly presented its financial position and results. Tu To, who handles media requests for Daily Journal, didn’t immediately return a message seeking comment.
“It sounds like E&Y had to do a lot of work here to get the financial statements up to snuff,” Jason Flemmons, a senior managing director at FTI Consulting Inc., said by phone. “It’s surprising to me that the company would stay firm on the position that they believe their internal controls were effective, given the number of errors.”
The SEC may look into the disagreement between management and the auditors to understand why Daily Journal thinks the internal controls are adequate, Flemmons said. He was previously deputy chief accountant at the SEC’s enforcement division.
Kevin Callahan, an SEC spokesman, declined to comment, as did Ernst & Young’s John La Place.
Daily Journal is led by Chief Executive Officer Gerald Salzman, who is the company’s chief financial officer and principal accounting officer, according to the filing. The publisher said that “as a small company,” it has an accounting department of six employees.
“They are a part of what we believe to be an effective financial reporting and internal control system,” Daily Journal said in the filing. The company said it will consider the creation of additional documentation of its accounting system.
“It’s not like small companies get a pass because of the nature of their business,” Flemmons said. “They may have some more explaining to do.”
The publisher gained 3.4 percent to $217.90 at 9:37 a.m. in New York. The stock has more than doubled in the past 12 months, giving the company a market value of about $300 million.
Daily Journal was designated an “accelerated filer” rather than a “smaller reporting company” after the share surge pushed it above thresholds used by the SEC. That means the company had 75 days from the end of a fiscal year to file its annual report, rather than 90. The new status also required an audit of Daily Journal’s internal controls over financial reporting, the company said in December.
Munger has said that corporate governance should rely on a culture of trust, rather than on strictly enforced rules, an approach “somewhat at odds with regulatory guidelines,” according to David Larcker and Brian Tayan at Stanford University.
“Corporate governance systems have become more elaborate, requiring a long list of regulatory procedures and ‘best practices,’” Larcker and Tayan wrote in a paper dated March 3. “Munger, however, advocates a simplification and reduction in procedures and instead an emphasis on responsible leadership and organizational culture.”