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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 8 - K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 15, 1995
SERVICE CORPORATION INTERNATIONAL
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(Exact name of registrant as specified in its charter)
TEXAS
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(State or other jurisdiction of incorporation)
1-6402-1 74-1488375
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(Commission File Number) (IRS Employer Identification No.)
1929 Allen Parkway, Houston, Texas 77019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 522-5141
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ITEM 5. OTHER EVENTS
On September 15, 1995, the Securities and Exchange Commission
("SEC") ordered the institution of administrative proceedings involving the
disclosure by Service Corporation International (the "Company") relating to its
change of accountants in its Current Report on Form 8-K, as amended, filed in
April 1993. Simultaneously, with the institution of proceedings, the Company,
without admitting or denying the SEC's facts, conclusions or findings,
consented to the entry of a Cease and Desist Order by the SEC ordering the
Company not to violate the provisions of Section 13(a) of the Securities
Exchange Act of 1934 and Rules 12b-20 and 13a-11 thereunder. Attached is a
copy of the SEC's Order filed as an Exhibit to this Form 8-K. The SEC staff
has advised the Company that, with the entry of this Order, the staff's
investigation in this matter has been concluded.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) The following exhibit is filed as part of this report
on Form 8-K:
Exhibit 99.1 - Securities and Exchange Commission Order Instituting
Proceeding Pursuant to Section 21C(a) of the
Securities Exchange Act of 1934, Making Findings and
Cease and Desist Order dated September 15, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SERVICE CORPORATION INTERNATIONAL
Date: September 18, 1995 By: /s/ James M. Shelger
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James M. Shelger
Senior Vice President
General Counsel and Secretary
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INDEX TO EXHIBITS
Exhibit
No. Description
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99.1 - Securities and Exchange Commission Order Instituting
Proceeding Pursuant to Section 21C(a) of the
Securities Exchange Act of 1934, Making Findings and
Cease and Desist Order dated September 15, 1995.
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UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Release No. 36237 / September 15, 1995
Accounting and Auditing Enforcement
Release No. 710 / September 15, 1995
Administrative Proceeding
File No. 3-8813
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In the Matter of : ORDER INSTITUTING PROCEEDING PURSUANT TO
: SECTION 21C(a) OF THE SECURITIES
Service Corporation International,: EXCHANGE ACT OF 1934, MAKING FINDINGS
: AND CEASE AND DESIST ORDER
Respondent. :
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I.
The Commission deems it appropriate and in the public interest to
institute a public administrative proceeding pursuant to Section 21C(a) of the
Securities Exchange Act of 1934 ("Exchange Act") against Service Corporation
International ("SCI").
In anticipation of the institution of this administrative proceeding,
SCI has submitted an Offer of Settlement that the Commission has determined to
accept. Solely for the purpose of this proceeding and any other proceeding
brought by or on behalf of the Commission or in which the Commission is a
party, and prior to a hearing pursuant to the Commission's Rules of Practice,
17 C.F.R. Section 201.100 et seq, and without admitting or denying the facts,
conclusions or findings set forth herein, except as to jurisdiction, which it
admits, SCI consents to the entry of this Order Instituting Proceeding Pursuant
to Section 21C(a) of the Exchange Act, Making Findings and Order of the
Commission ("Order") as set forth below.
Accordingly, IT IS ORDERED that a proceeding pursuant to Section
21C(a) of the Exchange Act be, and hereby is, instituted.(1)
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(1) The facts, findings and conclusions herein and the entry of this order
are solely for the purposes of this proceeding.
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II.
On the basis of this Order and the Respondent's Offer of Settlement,
the Commission makes the following findings:
A. Facts
1. Summary
On April 1, 1993, SCI filed with the Commission a Current Report on
Form 8-K disclosing a change in its certifying accountant that had occurred on
March 25, 1993. SCI had dismissed the firm that had served as its independent
auditor since 1968 (the "former auditor"). Item 304 of Regulation S-K, Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
("Item 304"), 17 C.F.R. Section 229.304, required SCI to disclose in its Form
8-K any disagreements with the former auditor concerning "any matter of
accounting principles or practices . . . ." However, as discussed below, SCI
did not disclose the existence of a disagreement within the meaning of Item
304. The disagreement, which existed at the time the former auditor was
dismissed, concerned accounting and prearranged funeral services, an important
segment of SCI's business. SCI's omission in the April 1, 1993 Form 8-K
violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11
thereunder.
2. Respondent SCI
SCI, a Texas corporation headquartered in Houston, is the largest
publicly-held owner and operator of funeral homes and cemeteries in the world.
SCI's common stock is registered with the Commission pursuant to Section 12(b)
of the Exchange Act and traded principally on the New York Stock Exchange. In
its Annual Report on Form 10-K for its fiscal year ended December 31, 1994, SCI
reported revenues of approximately $1.1 billion, pretax income of approximately
$219 million, and assets of $5.1 billion.
3. SCI's Accounting for Prearranged Funeral Services
In recent years, the sale of prearranged (also known as preneed)
funeral services has been a growing segment of SCI's business. A prearranged
funeral contract is an agreement to provide later, at death, a funeral service
for a price which is generally fixed at the time the contract is signed. In
1993, SCI's prearranged funeral services represented approximately 19 percent
of total funerals performed by SCI. At all times, SCI, consistent with
generally accepted accounting principles ("GAAP"), has
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recognized the fixed price of a prearranged funeral contract as revenue when
the funeral services were actually performed.(2)
4. Disagreement Over Possible Change in Accounting for
Prearranged Funeral Services
Beginning in the 1980's, SCI expressed to its former auditor
dissatisfaction with the method of accounting for its prearranged funerals.(3)
SCI attempted to persuade the former auditor to accept an accounting method
that would provide for earlier recognition of revenue from the sale of
prearranged funerals. This alternative accounting method was identified as the
"sales method" or "full accrual method." Under the sales method, SCI would
recognize revenue from the sale of a preneed funeral, reduced by a reserve for
customer cancellations, at the time the contract was signed, prior to providing
the funeral service. Additionally, SCI would accrue a liability for the
estimated cost of the future funeral service.
The former auditor told SCI that GAAP would not permit recognition of
the fixed price of a prearranged funeral contract as revenue before the
earnings process was complete, and that SCI needed to provide the related
funeral service to complete the earnings process. Although GAAP does not
address specifically revenue recognition of preneed funeral sales, the former
auditor's interpretation of analogous rules and industry practices led it to
conclude that recognition of the fixed price of a prearranged funeral contract
as revenue prior to the delivery of services would not be consistent with GAAP.
SCI and the former auditor could not reach agreement on a change in
accounting for sales of prearranged funerals. A meeting was set up to resolve
the problem. Senior officers of SCI and local and national partners of the
former auditor agreed to meet on April 1, 1992, to explore the accounting issue
and to discuss the advisability of alternative accounting methods.
In anticipation of the meeting, a partner of the former auditor
prepared written materials outlining the firm's bases for its view that, under
GAAP, revenue attributable to the sale of a prearranged funeral service could
not be recognized until the funeral service had been provided. Those materials
were provided to SCI in advance of the meeting. Also included in the materials
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(2) Prior to 1993, investment income from certain formal trust-funded
prearranged funeral contracts was recognized as current income over time as it
was earned.
(3) Among other things, SCI wanted to change to an accounting method that
would provide consistent treatment of prearranged funeral sales funded by
trusts and those funded by insurance.
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provided to SCI were excerpts from Item 304 of Regulation S-K and the
codification of Financial Reporting Polices that discussed the necessity for
disclosing a disagreement in the event that an auditor is dismissed.
The April 1, 1992 meeting resulted in a contentious and heated
discussion. SCI rejected the positions articulated by the former auditor in its
written materials. In addition, SCI management indicated that it was willing to
dismiss the former auditor and to hire another independent auditor that would
approve of a change in revenue recognition for prearranged funerals. The
meeting ended without the parties resolving the issue.
5. Change in SCI's Certifying Accountant
Following the April 1, 1992 meeting, SCI directed the former auditor
not to do any further work relating to a change in accounting for prearranged
funeral sales.(4) SCI engaged an individual consultant to study the matter,
which the former auditor told the Audit Committee of SCI's Board of Directors
was appropriate. SCI then took certain measures to explore adopting the sales
method, including having the consultant "facilitate the implementation of new
prearranged accounting policies for cemetery and funeral operations. . . ."
SCI presented the various measures to the former auditor who continued to
oppose adoption of any version of the sales method. At a meeting held on
February 25, 1993, SCI and the former auditor discussed again the possibility
of changing the prearranged funeral accounting policy. At that meeting, the
former auditor orally informed SCI that a disagreement existed relating to the
dispute over the revenue recognition policy for prearranged funerals. On March
25, 1993, after a proposal process that included the former auditor, SCI
dismissed its former auditor and engaged a different accounting firm to audit
its 1993 financial statements. However, SCI never has adopted any version of
the sales method of accounting.
6. The April 1, 1993 Form 8-K
As a result of the change in certifying accountant, SCI was required
to file with the Commission a Current Report on Form 8-K disclosing, among
other things, a disagreement. SCI prepared a draft Form 8-K dated March 26,
1993. The draft Form 8-K was forwarded to the former auditor under a cover
letter, requesting any comment the former auditor might have. That draft
included language disclosing the existence of a disagreement between SCI and
the former auditor concerning the proposed use of the sales method to account
for prearranged funeral sales.
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(4) On August 13, 1992, SCI re-engaged the former auditor for the audit of
SCI's financial statements for fiscal 1992.
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Prior to filing the Form 8-K with the Commission, however, SCI revised
the draft to omit disclosure of the disagreement between SCI and the former
auditor. On March 31, 1993, after learning of this change, the former auditor
sent proposed language for inclusion in the Form 8-K that would again disclose
the existence of a disagreement. Later the same day, during a conference call
between SCI management and partners of the former auditor who were responsible
for the audit engagement, the former auditor repeated its position that there
had been a reportable disagreement and that it would disclose its position that
an Item 304 disagreement had occurred in a separate letter that SCI would be
required to file with the Commission. SCI did not revise its draft Form 8-K
further to disclose the existence of the disagreement.
The Form 8-K SCI filed with the Commission on April 1, 1993 disclosed
that:
there was no disagreement between SCI and [the former auditor]
regarding any matter of accounting principles or practices, financial
statement disclosure which disagreement, if not resolved to the
satisfaction of [the former auditor], would have caused [the former
auditor] to make reference to the subject matter of the disagreement
in connection with its report.
The Form 8-K did disclose that SCI had meetings with the former auditor:
regarding new accounting policies for reporting prearranged funeral
and cemetery sales. SCI and [the former auditor] did not reach
agreement on any new method of accounting for such sales. SCI is
continuing to evaluate various alternatives for the accounting and
reporting of prearranged funeral and cemetery sales.
On April 2, 1993, the former auditor provided a letter to SCI that was
filed with the Commission on April 6, 1993, as Amendment No. 1 to SCI's Form
8-K. The former auditors's letter stated that the disclosure in the Form 8-K
was "not complete as to its description of disagreement" and stated that a
"reportable disagreement" had occurred. The former auditor referred to the
April 1, 1992 meeting during which "SCI management stated that if [the former
auditor] would not support SCI's proposed accounting they would find another
firm that would." On April 8, 1993, SCI filed Amendment No. 2 to the Form 8-K.
In Amendment No. 2, SCI states, among other things, that the former auditor's
reference to a disagreement was not "factually accurate," and that, in its
view, the discussions with the former auditor regarding prearranged funeral
accounting were "customary and normal."
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B. Applicable Law
1. Legal Requirements
Section 13(a) of the Exchange Act requires issuers of securities
registered pursuant to Section 12 of the Exchange Act, among other things, to
file with the Commission such information and documents as the Commission shall
require to keep reasonably current the information and documents filed pursuant
to a registration statement filed pursuant to Section 12 of the Exchange Act as
the Commission by rule prescribes. Rule 13a-11 requires a registrant to file a
Current Report on Form 8-K following the occurrence of certain events.
Item 4 of Form 8-K requires that a Current Report be filed within five
business days of a change in certifying accountant. In addition, Item 4
requires disclosure of the information described in Item 304 (a)(1) of
Regulation S-K and compliance with Item 304 (a)(3) of Regulation S-K pertaining
to changes in and disagreements with accountants on accounting and financial
disclosure. Rule 12b-20 requires registrants to include in reports filed with
the Commission any further material information as may be necessary to make the
required statements, in the light of the circumstances under which they are
made, not misleading.
Item 4(a) of Form 8-K and Item 304 (a)(1)(iv) of Regulation S-K
require registrants to disclose any disagreement with respect to any matter of
financial statement disclosure, which disagreement, if not resolved to the
satisfaction of the independent auditor, would have caused it to make reference
to the subject matter of the disagreement in connection with its audit report.
In disclosing a disagreement, a registrant is required to:
(A) describe each such disagreement; (B) state whether any audit or
similar committee of the board of directors, or the board of
directors, discussed the subject matter of each of such disagreements
with the former accountant; and (C) state whether the registrant has
authorized the former accountant to respond fully to the inquiries of
the successor accountant concerning the subject matter of each of such
disagreements and, if not, describe the nature of any limitation
thereon and the reason therefore.
In determining whether a reportable disagreement exists, Instruction 4 to Item
304 states: "[i]t is not necessary for there to have been an argument to have
had a disagreement, merely a difference of opinion."
The requirements contained in Item 304 are meant to "increase the
level of disclosure regarding relationships between independent accountants and
their clients." Accounting Series Release No. 165 (December 20, 1974) ("ASR
165"). The various amendments to Item
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304 reflect the Commission's efforts to clarify and strengthen this important
disclosure.(5)
2. Analysis
Here, SCI's Form 8-K states that "there was no disagreement between
SCI and [the former auditor] regarding any matter of accounting principles or
practices." As set forth above, the Form 8-K explains that "SCI and [former
auditor] did not reach agreement on any new method of accounting for
[prearranged funeral and cemetery sales]." By characterizing its differences
with its former auditor as other than a disagreement, SCI did not comply with
the requirements of Item 304.(6)
At the time it filed its Form 8-K on April 1, 1993, SCI was aware of
all of the events surrounding the disagreement with the former auditor over
accounting for prearranged funeral services. In addition, on a number of
occasions, the former auditor provided notice to SCI of the fact that a
reportable disagreement had occurred, including: the February 25, 1993 meeting
when the former auditor advised SCI orally that a reportable disagreement
existed, the March 31, 1993 conference call when the former auditor told SCI
that it would not agree with SCI's revised Form 8-K disclosure, and the former
auditor's March 31 draft containing proposed language for inclusion in the
Form 8-K. These notices to SCI qualify as communications of a disagreement
under Item 304 which, generally, requires "an oral communication from the
engagement partner or
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(5) In ASR 165, Form 8-K was amended to clarify the Commission's intent to
require a description of resolved as well as unresolved disagreements as well as
to require a registrant to file a copy of the former accountant's letter as an
exhibit to the Form 8-K. The requirement that the former accountant's letter be
an exhibit to the Form 8-K continued to the present date (see Item 304(a)(3).
ASR 165 also notes:
It is essential that both the fact and the appearance of independence
be sustained so that the confidence of the investing public in the
reliability of audited financial statements and the integrity of the
public accounting profession will be maintained and enhanced. To this
end, the Commission has concluded that it is desirable to increase the
level of disclosure regarding relationships between independent
accountants and their clients.
(6) See Instruction 4 to Item 304, discussed supra.
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another person responsible for rendering the accounting firm's opinion. . . ."
Item 304, Instruction 5.17 C.F.R. Section 229.304.(7)
The fact that the former auditor's letter discussed the disagreement
and was filed as an exhibit to Amendment No. 1 to the April 1 Form 8-K, does
not relieve SCI of its disclosure obligation. In Accounting Series Release No.
247 (May 26, 1978) ("ASR 247"), the Commission addressed the circumstances
involved when, as in this matter, there is a division of opinion between the
registrant and the former accountant concerning the existence of a reportable
disagreement. There the Commission noted that,
[I]n recent Form 8-K filings the practice of reporting disagreements
has deteriorated. Filings have been made in which the registrant has
indicated no disagreements, while the former accountant's letter
concludes that reportable disagreements did occur.
In ASR 247, the Commission again reminded registrants that the term
"disagreements" should be interpreted broadly.(8)
It is clear that the disclosure obligation lies with the registrant,
who cannot rely on the auditor's response to the Form 8-K to fulfill that
obligation. In any event, SCI, in the second amendment to the April 1 Form 8-K
filed in response to the former auditor's letter, once again stated that a
disagreement did not exist. In failing to disclose the existence of a
disagreement, and then denying that a reportable disagreement existed, SCI did
not comply with the requirements of Item 304.
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(7) It is unclear whether the disagreement was reported to the SCI's Audit
Committee by the former auditor. Statement on Auditing Standards No. 61,
Communication with Audit Committees or Others with Equivalent Authority and
Responsibility requires that there be such a report and discussion. However,
the disclosure required in Form 8-K pursuant to Item 304 is separate and
distinct from any obligation under SAS 61 to report a disagreement. Thus,
whether or not the former auditor reported the disagreement to the Audit
Committee, SCI had an obligation to report the disagreement at the time that it
disclosed the dismissal of the former auditor.
(8) See also, Instruction 4 to Item 304.
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III.
FINDING
Based on the above, the Commission finds that SCI violated Section
13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder.
IV.
ORDER
Accordingly, IT IS HEREBY ORDERED pursuant to Section 21C(a) of the
Exchange Act, that SCI cease and desist from committing or causing any
violation, and committing or causing any future violation, of Section 13(a) of
the Exchange Act and Rules 12b-20 and 13a-11 promulgated thereunder.
By the Commission.
/s/ JONATHAN G. KATZ
Jonathan G. Katz
Secretary
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