documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2020, due to a material weakness in internal control over financial reporting, as further described below.
The Company did not maintain effective controls over the purchase price accounting related to the Company’s acquisition of Leagold Mining Corporation (“Leagold Acquisition”). Specifically, the Company did not (i) identify and deploy control activities through policies that establish expectations and procedures that put policies into action, and (ii) internally communicate information, including objectives and responsibilities for internal control, necessary to support the function of internal control. As a result, there was inadequate control over the determination of the fair value of acquired assets and over the resulting deferred income tax liabilities recognized, as well as inadequate documentation over such controls. This control deficiency resulted in an immaterial misstatement which was corrected in the Company’s audited consolidated financial statements prior to release, but creates a reasonable possibility that a material misstatement in the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company has limited the scope of its internal control over financial reporting and disclosure controls and procedures to exclude controls, policies and procedures of the business acquired pursuant to the Leagold Acquisition, as allowed by the United States Securities and Exchange Commission and Canadian securities Administrators. See page 61 of the Company’s management discussion and analysis for the year ended December 31, 2020, which is attached hereto as Exhibit 99.2, for a summary of the excluded controls related to the acquired business.
C. Attestation report of the registered public accounting firm. KPMG LLP’s attestation report, “Report of Independent Registered Public Accounting Firm”, accompanies the Company’s Consolidated financial statements for the years ended December 31, 2020 and 2019, which are attached hereto as Exhibit 99.3. KPMG LLP’s audit of internal controls over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of the business acquired pursuant to the Leagold Acquisition.
D. Changes in internal control over financial reporting. Commencing with the first quarter and throughout the period ended December 31, 2020, the Company implemented social distancing protocols, as per recommended COVID-19 health and safety guidelines, to have the majority of its corporate office and site administrative staff work remotely from home. This change has required certain processes and controls that were previously done or documented manually to be completed and retained in electronic form.
Furthermore, in the process of strengthening internal controls the Company implemented new Enterprise Resource Planning (“ERP”) systems at the Corporate office and Aurizona mine in the second and fourth quarters, respectively. The implementation of the ERP systems is expected to, among other things, improve user access security and automate a number of accounting, back office and reporting processes and activities, thereby decreasing the amount of manual processes previously required.
Except for the implementation of the new ERP systems and identification of material weakness noted above during the fourth quarter, there was no change in the Company’s internal control over financial reporting that occurred during the period ended December 31, 2020, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Under the supervision and with the participation of management, including the CEO and CFO, management is committed to remediating the material weakness in a timely fashion, with appropriate oversight from the Company’s Audit Committee. The remediation plan includes strengthening the design of controls and documentation to the accounting for future business combinations, and improving internal communication of related policies or procedures. Management will continue to monitor and evaluate the design and effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures, and may make modifications from time to time as considered necessary.
The Company’s management, including the CEO and CFO, does not expect that its disclosure controls and procedures or internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
NOTICES PURSUANT TO REGULATION BTR
The Company was not required by Rule 104 of Regulation BTR to send any notices to any of its directors or executive officers during the fiscal year ended December 31, 2020.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company’s board of directors (the “Board”) has determined that it has at least one audit committee financial expert serving on its audit committee. The Board has determined that Lenard Boggio is an audit committee financial expert and is independent, as that term is defined by the Exchange Act and the NYSE American’s corporate governance standards applicable to the Company.
The Commission has indicated that the designation of a person as an audit committee financial expert does not make such person an “expert” for any purpose, impose on such person any duties, obligations or liability that are greater than those imposed on such person as a member of the audit committee and the Board in the absence of such designation and does not affect the duties, obligations or liability of any other member of the audit committee or Board.
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