Callaway 2003 Annual Report Download - page 78

CALLAWAY GOLF COMPANY 75
Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure
Dismissal of Arthur Andersen LLP
Arthur Andersen served as the Company’s independent auditors
with regard to the audit of the Company’s financial statements
for the year ended December 31, 2001. Subsequent to the
completion of the 2001 audit, the Board of Directors, upon
recommendation of the Audit Committee, approved the dismissal
of Arthur Andersen as the Company’s independent auditors
effective March 22, 2002. The dismissal was not based upon any
dissatisfaction with the services provided by Arthur Andersen,
but upon concern over the future of Arthur Andersen in light of
the many publicized problems encountered by the firm at that
time. Arthur Andersen served as the Company’s independent
auditor for fiscal year 2001 and not for any prior period. Arthur
Andersen’s report on the Company’s financial statements for the
year ended December 31, 2001, does not contain an adverse
opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
During the term of Arthur Andersen’s engagement, there were
no disagreements with Arthur Andersen within the meaning of
Instruction 4 of Item 304 of Regulation S-K on any matter of
accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
The Board of Directors appointed the firm of KPMG LLP
(“KPMG”) to serve as the Company’s independent auditor for
fiscal year 2002. KPMG’s engagement commenced effective
March 25, 2002.
Dismissal of and Disagreement with KPMG LLP
The Company’s Board of Directors, upon recommendation of
the Audit Committee, approved the dismissal of KPMG as the
Company’s independent auditors effective December 12, 2002.
KPMG had been appointed as the Company’s independent
auditors effective March 25, 2002, and they have never issued
an audit report on the Company’s financial statements.
During the third quarter of 2002, the Company and KPMG had
a disagreement (as such term is defined in Instruction 4 to Item
304 of Regulation S-K) with regard to the applicable periods in
which to record a reduction in the Company’s warranty reserve.
Set forth below is a brief description of this disagreement.
In the third quarter of 2002 the Company completed a review
of its warranty reserves, and concluded that a reduction of
approximately $17.0 million was warranted. This non-cash
adjustment would result in an increase to the Company’s
income in the period in which the adjustment is taken. While
KPMG did not object to the magnitude of the reduction, man-
agement and KPMG could not agree on the proper period or
periods in which to record the adjustment. Management
believed that the reduction was the result of a current change
in the estimation process, and that therefore the entire reduction
should be reflected in the third quarter. KPMG ultimately
advised the Company that a substantial portion of the reduction
related to periods prior to 2002, and the Company’s financial
statements for prior periods should be restated for a correction
of an error to reflect the warranty reserve based upon the best
information available to the Company at the time those prior
period financial statements were prepared. Despite lengthy
discussions between management and KPMG, including
consultation with the staff of the Securities and Exchange
Commission, management and KPMG could not reach agree-
ment on a proper accounting treatment.
The Audit Committee and the Audit Committee Chairman
reviewed the matter with management and KPMG on several
occasions, both informally and at formal meetings of the Audit
Committee. Meanwhile, the Company’s filing of its Form 10-Q
for the quarter ended September 30, 2002 was delayed.
Ultimately, the Audit Committee recommended to the Board of
Directors that a new auditor be engaged to assist in bringing the
matter to a conclusion. The Board agreed that, without regard to
the ultimate resolution of the warranty issue, it would be in the
Company’s best interests to change auditors at that time. The
Company authorized KPMG to respond fully to the inquiries of
the successor accountant concerning the disagreement.
The Company’s Board of Directors, upon recommendation of
the Audit Committee, approved the appointment of Deloitte &
Touche LLP (“Deloitte & Touche”) effective December 12, 2002,
subject to Deloitte & Touche’s customary new client acceptance
procedures which were completed December 17, 2002, as the