After all the hubbub over the PCAOB inspection report that was brought to light by Bloomberg’s Jonathan Weil, including two recommendations by proxy advisors Glass Lewis and Institutional Shareholder Services Inc., Alterra Capital Holdings has recommended to its shareholders that they vote “FOR” the ratification of KPMG as the company’s independent auditor.
From the SEC Filing dated April 19th (all emphasis is original):
TO THE SHAREHOLDERS
We are writing to bring your attention to a disagreement between Alterra Capital Holdings Limited (the “Company”), on the one hand, and each of ISS Proxy Advisory Services and Glass Lewis (each, a “Proxy Advisor”), on the other hand, with respect to the recommendation by each of the Proxy Advisors to vote “against” the Company’s proposal to ratify the appointment of KPMG Bermuda as the Company’s independent auditors for fiscal year 2011 and authorize the Company’s board of directors (the “Board”) to set the remuneration of the independent auditors at the Company’s Annual General Meeting of Shareholders scheduled to be held on May 2, 2011. The Proxy Advisors’ recommendations are primarily related to a report issued by the Public Company Accounting Oversight Board (the “PCAOB”) regarding the Company’s auditors, KPMG Bermuda. The PCAOB is a nonprofit corporation established by the U.S. Congress to oversee the audits of public companies. One of the principal roles of the PCAOB is to perform inspections of the audit files of accounting firms that conduct public company audits. Each audit firm is selected by the PCAOB for inspection at least once in every three years.
In November 2009, the PCAOB reviewed KPMG Bermuda’s 2008 audit files of a public company client located in Bermuda in connection with a routine periodic inspection. In March 2011, the PCAOB publicly issued its findings in a report dated January 28, 2011 (the “PCAOB Report”). Although the PCAOB Report did not identify the public company by name, an article posted on Bloomberg News on March 30, 2011 alleged that the public company client at issue was the Company (formerly Max Capital Group Ltd.). The Company confirmed that it was the client referenced in the PCAOB’s Report in a Current Report on Form 8-K dated March 31, 2011.
The Proxy Advisors’ recommendations also cite concerns that certain of the Company’s directors and officers previously worked at KPMG.
For the reasons set forth below, the Board disagrees with the Proxy Advisors’ recommendations to vote “against” the Company’s independent auditor proposal. The Board unanimously recommends that you vote “FOR” the ratification of KPMG Bermuda as the Company’s independent auditor.
Since this decision by the Board might not sit well with a few people, they’ve carefully laid out the case as to why sticking with the House Klynveld is the right thing to do. They are as follows:
1. The PCAOB Report did not question the Company’s valuations that are reflected in its financial statements.
2. The PCAOB Report did not impact KPMG Bermuda’s unqualified opinions on the Company’s financial statements in 2008, 2009 and 2010; there was and is no restatement issue.
3. The PCAOB made similar findings regarding all four major accounting firms.
4. The Audit and Risk Management Committee was aware of the PCAOB review and made an informed decision in recommending KPMG Bermuda as the Company’s Independent Auditor for 2011.
5. KPMG Bermuda is independent from the Company.
6. The Audit and Risk Management Committee will reassess KPMG Bermuda’s qualifications and suitability in 2012.
Just a few thoughts on some of these:
• It’s not the job of the PCAOB to question the Alterra’s valuations. That’s what KPMG was supposed to do. The PCAOB said KPMG did a lousy job of getting enough evidence to support those valuations.
• Just because there wasn’t a restatement doesn’t mean the auditors did their jobs correctly.
• Admitting that “all four major accounting firms” had similar findings says a lot about what the Board thinks of auditors.
• Is point #5 supposed to be a reminder for the shareholders that have no business acumen whatsoever?
• Point #6 could be better stated as “Our Board is getting good at jumping through hoops. See you next year.”
Any other thoughts? Leave them below.