8-K/A: Xencor Changes Certifying Accountant, Cites Internal Control Weaknesses

Xencor, Inc. announces the dismissal of RSM US LLP as its independent auditor and the appointment of KPMG LLP, citing material weaknesses in internal control over financial reporting.

Summary

• Xencor filed an amendment to its original Form 8-K to include a letter from RSM US LLP regarding the change in certifying accountant.
• RSM US LLP was dismissed as Xencor's independent registered public accounting firm, effective February 27, 2025.
• The audit reports from RSM for 2023 and 2024 indicated material weaknesses in Xencor's internal control over financial reporting.
• These weaknesses related to the accounting treatment of proceeds from the sale of future royalties and the evaluation of certain tax legislation, leading to a restatement of prior financial statements.
• Xencor identified an additional material weakness in the impairment analysis of its equity investment in Zenas for certain periods in 2024.
• Xencor has implemented a remediation plan to address these material weaknesses.
• KPMG LLP was appointed as the new independent registered public accounting firm, effective March 3, 2025.
• Xencor did not consult with KPMG on accounting principles or auditing matters prior to their appointment.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the disclosure of material weaknesses in internal control and the restatement of financial statements, despite the company's efforts to remediate the issues.

Positives

• Xencor has implemented a remediation plan to address the identified material weaknesses in internal control over financial reporting.
• The company proactively sought proposals from leading national accounting firms to provide audit services.
• RSM agreed with the statements made by Xencor regarding their dismissal.

Negatives

• RSM's audit reports for 2023 and 2024 indicated material weaknesses in Xencor's internal control over financial reporting.
• The material weaknesses led to the restatement of Xencor's audited financial statements for the year ended December 31, 2023, and unaudited financial statements for the quarterly periods ended March 31, 2024, June 30, 2024 and September 30, 2024.
• RSM has recalled its reports, dated February 28, 2024, on the Company's 2023 internal control over financial reporting and the 2023 financial statements.

Risks

• The material weaknesses in internal control over financial reporting could lead to future financial statement errors or irregularities.
• The restatement of prior financial statements could damage investor confidence.
• The transition to a new auditor could create additional challenges in the short term.

Industry Context

Changes in auditors and disclosures of material weaknesses in internal controls are closely scrutinized by investors and regulators, particularly in the biotechnology industry where complex accounting treatments for revenue recognition and research and development expenses are common.

Comparison to Industry Standards

• Many companies in the biotechnology industry, including Amgen, Biogen, and Gilead Sciences, are subject to rigorous internal control requirements under Sarbanes-Oxley.
• Disclosing material weaknesses is not uncommon, but the severity and nature of the weaknesses, as well as the remediation plan, are critical factors in assessing the impact on investor confidence.
• Compared to other companies that have disclosed material weaknesses, Xencor's situation appears to be related to specific non-routine transactions and tax legislation, rather than broader systemic issues.

Stakeholder Impact

• Shareholders may experience short-term uncertainty due to the restatement of financial statements and the change in auditors.
• Employees in the finance and accounting departments may be involved in the remediation efforts.
• The company's reputation with customers and suppliers could be affected if the internal control weaknesses raise concerns about financial stability.

Next Steps

• Xencor will continue to implement its remediation plan to address the material weaknesses in internal control over financial reporting.
• KPMG will conduct an audit of Xencor's financial statements for the fiscal year ending December 31, 2025.

Key Dates