What changed in this filing

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Item 4. Controls and Procedures

2021-06-08 compared with 2020-12-09 · 33 added, 27 removed, 18 unchanged (77% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of October 31, 2020, the end of the period covered by this Quarterly Report on Form 10-Q.

Management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures as of April 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide

only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of October 31, 2020, due to material weaknesses in internal control over financial reporting at its wholly owned subsidiary, WageWorks, which the Company acquired on August 30, 2019, the Company’s disclosure controls and procedures were not effective.

In accordance with interpretive guidance issued by SEC staff, the Company excluded WageWorks from its assessment of disclosure controls and procedures and internal control over financial reporting during the first year after completion of the acquisition.

As of October 31, 2020, the WageWorks subsidiary is included in the above assessment regarding the effectiveness of the Company's disclosure controls and procedures.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on such evaluation, the CEO and CFO have concluded that as of April 30, 2021, the Company’s disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting at the Company’s wholly owned subsidiary, WageWorks, described below.

Notwithstanding the ineffective disclosure controls and procedures as a result of the identified material weaknesses in its WageWorks subsidiary, management has concluded that the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States of America.

In accordance with interpretive guidance issued by SEC staff, companies are allowed to exclude acquired businesses from the assessment of internal control over financial reporting during the first year after completion of an acquisition and from the assessment of disclosure controls and procedures to the extent subsumed in such internal control over financial reporting.

In accordance with this guidance, as the Company acquired Luum on March 8, 2021, management's evaluation and conclusion as to the effectiveness of the Company's disclosure controls and procedures as of April 30, 2021 excluded the portion of disclosure controls and procedures that are subsumed by

internal control over financial reporting of Luum.

Luum’s assets and revenues represented approximately 1%, excluding the effects of purchase accounting, of the Company's consolidated total assets and consolidated total revenues as of and for the fiscal quarter ended April 30, 2021.

Material Weaknesses in Internal Control over Financial Reporting

Management identified certain deficiencies in WageWorks' internal control over financial reporting that aggregated to material weaknesses in the following components of the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO Framework”):

Risk Assessment - WageWorks did not sufficiently identify and analyze risks arising from changes in the business environment, including risks arising in connection with the integration of acquisitions and financial system implementations.

Information and Communication – WageWorks did not establish cross-functional procedures and policies relating to effective information and communication necessary to support the functioning of internal control over financial reporting.

Monitoring – WageWorks did not implement effective monitoring controls that were responsive to changes in the business or the timely remediation of identified control deficiencies.

Risk Assessment – The WageWorks subsidiary did not sufficiently identify and analyze risks arising from changes in the business environment, including risks arising in connection with the integration of acquisitions and financial system implementations.

Information and Communication – The WageWorks subsidiary did not establish cross-functional procedures and policies relating to effective information and communication necessary to support the functioning of internal control over financial reporting.

Monitoring – The WageWorks subsidiary did not implement effective monitoring controls that were responsive to changes in the business or the timely remediation of identified control deficiencies.

The COSO Framework component material weaknesses described above contributed to deficiencies at the control activity level that aggregated to the material weaknesses described below:

3 unchanged sentences

The WageWorks subsidiary did not have effective controls around the contract-to-cash life cycle of service fees, including ineffective process level controls around billing set-up during customer implementation, managing change to existing customer billing terms and conditions, timely termination of customers, implementing complex and/or non-standard billing arrangements that require manual intervention or manual controls for billing to customers, processing timely adjustments, lack of robust, established and documented policies to assess collectability and reserve for revenue, bad debts and accounts receivable, availability of customer contracts, and reviews of non-standard contracts.

Review of New, Unusual or Significant Transactions

The WageWorks subsidiary did not have adequate controls over the review of the accounting for new, significant or unusual transactions.

Information Technology General Controls

2 unchanged sentences

These material weaknesses resulted in material misstatements of WageWorks' historical financial statements, which preceded the acquisition, and could result in a misstatement of our account balances or disclosures that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.

Integration and Remediation Efforts

Management has assessed the impact of the acquisition of WageWorks on its internal control over financial reporting and continues to assess changes driven by the integration of WageWorks with the existing operations at the consolidated Company.

As part of this assessment, management has continued to evaluate its internal control environment to ensure that it has appropriate controls in place to mitigate the risks of a material misstatement to its consolidated financial statements associated with the WageWorks subsidiary and the Company as a whole.

In response to the material weaknesses in WageWorks’ internal control over financial reporting, management has developed a plan to address the deficiencies associated with the disclosed material weaknesses, continues to utilize a third-party internal controls specialist, and has dedicated certain senior finance and accounting leadership team members to work on remediation efforts.

As previously disclosed, the WageWorks subsidiary had a material weakness related to an ineffective control environment, which was driven by the tone at the top of WageWorks.

Due to the tone at the top, there was inadequate or ineffective senior accounting leadership, an insufficient complement of qualified resources with an appropriate level of knowledge, experience and training important to the Company’s financial reporting requirements, and inadequate mechanisms and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities.

This material weakness has now been remediated.

The following steps were executed by the Company to remediate the ineffective control environment driven by the tone at the top:

• replacement of WageWorks Audit Committee, Board of Directors, senior managers and executives, and organizational realignment;

• incorporation of WageWorks into the Company's training programs, led by the CEO and reinforced by executives throughout the combined Company, on the Company's Code of Business Conduct and Ethics, which included raising awareness and understanding of the importance of financial reporting integrity;

• incorporation of WageWorks control environment into the oversight of the Company’s Internal Audit function and management’s certification of internal controls,

• realignment of the WageWorks annual employee performance process to include consideration of employees’ demonstration of the Company’s values, including accountability for performance of internal controls;

• incorporation of WageWorks into the Company’s process to attract, develop, and retain a sufficient complement of qualified resources with appropriate and relevant competencies.

Additionally, in partial response to the other material weaknesses discussed above, management has incorporated certain WageWorks processes into the Company’s existing entity-level and process-level controls, including, but not limited to, those that address the identification, review and assessment of new, unusual or significant transactions, those that address the monitoring of the accounting close cycle and the evaluation of accounting policies, and those that address certain ITGCs.

Management is in the process of testing the operating effectiveness of these controls.

Ongoing Integration and Remediation Efforts

Management has assessed the impact of the acquisition of WageWorks on the Company’s internal control over financial reporting and continues to assess changes driven by the integration of WageWorks with the existing operations at the consolidated Company.

As part of this assessment, management has continued to evaluate the Company’s internal control environment to ensure that it has appropriate controls in place to mitigate the risks of a material misstatement to its consolidated financial statements associated with the WageWorks subsidiary and the Company as a whole.

In response to the COSO Framework component material weaknesses in the WageWorks subsidiary’s internal control over financial reporting, management has taken the following actions:

• performed a risk assessment and scoping of key systems and business processes, including a risk assessment at the financial statement assertion level to ensure that the level of precision of relevant controls is adequate to address the identified risks;

• dedicated certain senior finance, accounting, operational, and IT leadership team members to work on remediation efforts and appointed a third-party internal controls advisor to assist with such efforts;

• developed and have begun to execute a plan to implement a periodic assessment to monitor business changes impacting accounting processes and controls;

• incorporated certain WageWorks processes into the Company’s existing entity-level controls;

• established periodic reporting of the remediation plan progress to the Audit and Risk Committee of the Company's board of directors;

• developed and have begun to execute a plan to formalize documentation underlying processes and controls to promote knowledge and information transfer across functions and upon personnel changes.

In response to the material weakness “A.

Accounting Close and Financial Reporting,” management has taken the following actions:

• incorporated certain WageWorks processes into the Company’s process-level controls, including, but not limited to, those that address the monitoring of the accounting close cycle and enhanced the evaluation of accounting policies;

• redesigned certain processes and controls in conjunction with the enterprise resource planning “ERP” system migration described below;

• developed and have begun to execute a plan to assess the relevancy of information and data used in key controls, including a plan to design or augment controls to incorporate the review of the accuracy and completeness of such items.

In addition to the steps above, specifically to address material weaknesses “B” and “C” above, the Company took the following measures:

• developed and have begun to execute a plan to consolidate service platforms related to the contract-to-cash cycle which will reduce a significant number of manual business process controls;

• enhanced the design and have begun to monitor the operating effectiveness of controls related to logical access and change management for relevant WageWorks applications and systems.

As we continue to evaluate operating effectiveness and monitor improvements to our internal control over financial reporting, we may take additional measures to address control deficiencies or modify the remediation plans described above.

As part of our integration efforts, we have migrated all of our material operations to a single ERP system for the consolidated Company that will enhance our business and financial processes and standardize our information systems.

We have re-assessed risks in response to the ERP system migration and the associated changes to underlying processes.

We have redesigned certain controls in response to the current risks and continue to monitor the operating effectiveness of the redesigned controls.

Changes in Internal Control Over Financial Reporting

Other than as described in the Integration and Remediation Efforts section above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended October 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Other than as described above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended April 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II—Other Information

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 4. Controls and Procedures