In the dispute over misstatements in Credit Suisse's annual report, the US Securities and Exchange Commission bared its teeth. The details of the sparring match are now public.

Credit Suisse and the US Securities and Exchange Commission (SEC) engaged in a months-long debate over the seriousness of reporting deficiencies. The SEC barked, and Credit Suisse turned tail to delay and amend its annual report.

According to correspondence published Tuesday in the SEC's online database and analyzed by «Reuters», the dispute began in July of last year when the SEC asked Credit Suisse questions.

A Swiss Cheese Control System

On March 9, 2023, Credit Suisse postponed the submission of its annual report after a «late call» with the regulator in which questions were raised about previous financial reports. Credit Suisse said it wanted to take a brief time to better understand the issue raised by the SEC which revolved around accounting changes for a number of payment flows.

Share-based payments and foreign exchange hedges were affected. At the same time, the question was whether control deficiencies had to be disclosed to the audit committee or passed on to investors.

Unsettling Delay

It wasn't until March 10 the SEC asked the bank to explain how it concluded «entity-level material weakness did not exist» for fiscal years 2021 and 2022, according to the documents.

The last-minute delay worried analysts and sent Credit Suisse shares plummeting. The back-and-forth between the bank and US regulators dragged on for another week as the financial sector reeled over the banking crisis in the United States.

A Key Vulnerability

Material weaknesses are ranked as the most serious form of deficiencies in controls. In earlier letters to the SEC in August and November, Credit Suisse's former chief financial officer, David Mathers, and his successor, Dixit Joshi, referred to the material weaknesses as less serious «deficiencies».

In the March 10 letter to Joshi, SEC staff acknowledged discussions took place with the bank between March 8-10. On March 12, Joshi responded with a letter saying Credit Suisse took note of the concerns and reassessed its position, according to Reuters.

At that point, Credit Suisse seemed to know the game was up. Joshi wrote to the SEC that «We will report that we have, and have had, a material weakness in internal control over financial reporting,» according to the letter on the SEC database.

SEC Warning

Credit Suisse informed shareholders of the weaknesses in its annual report on March 14, the day before it received liquidity assistance from the Swiss National Bank. A few days later on March 19, the bank's takeover by Swiss rival UBS was announced.

The SEC's top auditor warned publicly traded companies in March 2022 not to unilaterally treat accounting errors as immaterial to investors.

At large and complex companies, material weaknesses are uncommon, Miguel Angel Minutti-Meza, chair of accounting at the University of Miami told Reuters. For top companies, such problems are very rare therefore all the more troubling to investors.