November 14, 2005
Mr. Amit Pande, Assistant Chief Accountant
Securities and Exchange Commission
Washington, DC
Re: VSB Bancorp, Inc.
Item 4.02 Form 8-K
Filed December 23, 2004
File No. 000-50237
Dear Mr. Pande:
This letter is provided in response to your letter of August 4, 2005,
received by us on August 29, 2005, regarding the above document and the Annual
Report on Form 10-KSB for the year ended December 31, 2004. The following
responses are numbered to correspond to your letter
1. We have revised our Form 10-KSB for the year ended December 31, 2004 to
add the following language as Item 8A:
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision of, and with the participation of, our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as contemplated by Rule 13a-15 under the Securities
Exchange Act of 1934 ("the Exchange Act"). Based upon, and as of the date
of, that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective, in all material respects, in timely alerting them to material
information relating to the Company (and its consolidated subsidiaries)
required to be included in the periodic reports the Company is required to
file and submit to the Securities and Exchange Commission under the
Exchange Act.
For the reasons set forth below, we do not believe that a discussion of the
restatement of the financial disclosures in the December 31, 2003 Form 10-KSB is
appropriate in the Item 8A insert set forth above because the restatement had no
relationship to the issue of disclosure controls.
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2. The restatement of our December 31, 2003 Form 10-KSB does not represent
a material weakness in our disclosure controls and procedures and therefore does
not reflect adversely upon the effectiveness of our internal disclosure controls
and procedures. Instead, the restatement results from a re-interpretation of
existing accounting pronouncements.
In order to understand why the restatement does not reflect a material
control weakness, it is first necessary to understand the reasons for the
amendment. We recognize and acknowledge that the presentation of our financial
statements is ultimately the responsibility of the Company. However, with
respect to both of the two reasons for the amendment of the Form 10-KSB, the
amendments were the result of a re-interpretation by the Company's independent
accounting firm of accounting literature on how known facts, which were fully
and completely reported to management, should be reflected on the company's
financial statements. As described below, all relevant facts were fully
disclosed in the Company's original 10-KSB. The facts, and the revision of the
interpretation by the Company's accounting firm, were as follows:
THE COMPANY'S STOCK DIVIDEND DURING THE FIRST QUARTER OF 2004.
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During the first quarter of 2004, the Company's board of directors declared
a four for three stock split, effected by a one-third stock dividend. The
stock dividend was declared on January 28, 2004 and was payable to
stockholders of record on February 17, 2004. The stock dividend was
disclosed to the public in a Report on Form 8-K filed with the Commission
on January 29, 2004. Therefore, the announcement of, record date for and
payment of the stock dividend were all after the end of the fiscal year
covered by the 2003 10-KSB, but prior to the filing thereof. At that time,
we consulted with Deloitte and Touche, our independent accountants for 2003
fiscal year, as to whether various items of share data contained in the
annual report should be revised to reflect the stock dividend that did not
occur until after the end of the year. We were advised by our independent
accountants that we should not do so and that proper accounting
presentation required that we not revise the year end 2003 financial data
to reflect an event that did not occur until the first quarter of the
following year.
The stock dividend was disclosed in Note 19 of the notes to the financial
statements contained in the original report on Form 10-KSB for 2003 and
thus not only was it fully known to the investing public but it was also
fully known to our independent accountants when they issued their audit
letter.
In September of 2004, we began the process of preparing and filing a
Registration Statement on Form S-8 for shares of stock being issued in
connection with an Employee Stock Ownership Plan that had been approved by
stockholders at our 2004 annual meeting in April. We had changed accounting
firms March 2004 for reasons that had nothing to do with these issues and
we had fully disclosed the change in a Report on Form 8-K that was filed on
March 15, 2004, prior to the filing of the original Report of Form 10-KSB.
In order to finalize the Form S-8 for our ESOP, we needed the consent of
our former accounting firm for the incorporation by reference of their
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audit report on our 2003 annual financial statements. We requested that
consent and they undertook what they advised us was a normal review of the
Form 10-KSB from the previous year prior to issuing their consent. Our
former accounting firm then advised us for the first time that they had
revised their interpretation of applicable guidance regarding the
disclosure of per share data.
Our former accountants advised us that we were required to amend our Form
10-KSB to show the restatement of the financial statements to effect the
per share changes for the stock dividend. The advised us that they would
not consent to the incorporation by reference of their audit report on our
2003 financial statements into the Registration Statement on Form S-8
unless we amended the 10-KSB and filed an 8-K disclosing Item 4.02
non-reliance.
DECONSOLIDATION OF TRUST PREFERRED SECURITIES.
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At the same time, and also as the result of our request for consent to
incorporate the prior audit report by reference, our former accounting firm
advised us that they had changed their position regarding whether our
trust-preferred securities transaction should be consolidated for financial
statement purposes. The trust preferred securities transaction had been
entered into during the summer of 2003 and it was full disclosed in the
Report on Form 10-KSB for 2003 at pages 7, 40 and 41. In accordance with
our understanding of proper accounting presentation of the trust preferred
securities transaction at that time, and in accordance with the
presentation adopted by other entities that had engaged in effectively
identical transactions, and after consulting with our independent
accountants, we consolidated the variable interest entity trust created in
order to effectuate the transaction with our own financial statements. We
disclosed the consolidation in our discussion of the principles of
consolidation at page 6 and page 7. In addition, at the time, we were aware
of the adoption of FIN-46 and FIN-46R and the deferral of the effectiveness
thereof for our Company until one year later, due to our status as a small
business filer and the economics of the transaction (we were a small issuer
of a larger trust preferred pool). We disclosed this and the fact that
adoption would require deconsolidation in the discussion of Recently-Issued
Accounting Pronouncements at page 9.
When our former accounting firm reviewed our Form 10-KSB prior to
permitting incorporation by reference into the Registration Statement on
Form S-8, they concluded that we were required to deconsolidate the
variable interest entity, thereby increasing total assets by $150,000 and
changing the balance sheet presentment of the trust preferred securities to
reflect additional subordinated debt. This increase was insignificant to
our balance sheet and income statement presentments.
We do not believe that either of these situations represents a problem with
internal controls because all data was properly, fully and accurately reported
throughout our system and no new facts were disclosed that caused the
restatement. We find no similarities between these circumstances and the
examples of control weaknesses described in PCAOB Auditing Standards No. 2. All
of the PCAOB examples involve situations in which the failure to report or
review transactions resulted in a risk that factual information would not be
conveyed to decision makers involved in the presentation of financial
disclosures. We are a small public company with a public float of less than
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$25,000,000. As both the stock dividend and the trust preferred transactions
were new to our Company, we researched the issues and asked for our former
accountant's advice as to our conclusions for the proper treatment. We believe
it is perfectly reasonable that the process of preparing our financial
statements should include consultation with our accountants and to seek their
guidance on how to properly report known facts. That they changed their
interpretation of existing guidance on these issues does not reflect a control
weakness on our part.
3. As set forth above, we did not conclude that our disclosure controls
were ineffective as of the end of fiscal 2004. Therefore, no changes in our
disclosures were made and we continued to conclude that the controls were
effective as of March 31, 2005.
We acknowledge that the Company is responsible for the adequacy and accuracy of
the disclosure in the filings referenced in your letter. We further acknowledge
that neither the comments in your letter nor our response to them forecloses the
Commission from taking any action with the respect to the filing and that your
comments do not constitute a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United States.
Please advise us as to whether this response is satisfactory and, if so, we will
proceed to file an amendment to our Report of Form 10-KSB for the year ended
December 31, 2004, adding as Item 8A the language quoted above in response to
Item 1 of your letter.
Very truly yours,
/s/ RAFFAELE M. BRANCA
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Raffaele M. Branca
Executive Vice President &
Chief Financial Officer
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