WRITTEN RESPONSES TO SEC STAFF COMMENTS
MADE BY LETTER DATED March 2, 2006
Auxilio, Inc. (the "Company"), in connection with the filing of a Form
10-K for the year ended December 31, 2004 filed with the SEC on April 19, 2005,
the filing of a Form 10-Q for the quarter ended March 31, 2005 filed with the
SEC on May 18, 2005, and the filing of a Form 10-Q for the quarter ended June
30, 2005 filed with the SEC on September 2, 2005, hereby makes the following
responses to the SEC Staff comments made by letter dated March 2, 2006. For your
ease of reference, the response is preceded by a reproduction of the Staff
comment.
Form 10-KSB for the Fiscal Year Ended December 31, 2004
Item 8A Controls and Procedures, page 18
Question 1. Your response to our previous comment one does not appear to address
our request for a clear disclosure about your conclusion on the effectiveness of
your disclosure controls and procedures. Your current language still implies
that the controls are effective except for your controls surrounding the
transactions and disclosure relating to the timely reconciliation of your income
taxes. As previously requested, please revise this section to state in clear and
unqualified language that your disclosure controls and procedures are effective
or they are not effective. For example, if true, you can state that your
disclosure controls and procedures are effective including consideration of the
identified matters, so long as you provide appropriate disclosure explaining how
the disclosure controls and procedures were determined to be effective in light
of the identified matters. Or, if true, you can state that given the identified
matters, your disclosure controls and procedures are not effective.
Response 1:
Based on the above comment, and our follow-up discussions with SEC staff,
we plan to revise our disclosure in Item 8A, through the filing of an amendment
to our Form 10-KSB for the year ended December 31, 2004 filed with the SEC on
April 19, 2005, to address your points of concern. The revised Item 8A will read
as follows:
Item 8A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of December 31, 2004, an evaluation was performed under the supervision
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.
Our independent registered public accounting firm, Stonefield Josephson,
Inc., advised us in connection with the completion of their audit for the year
ended December 31, 2004, that they had identified certain matters involving the
operation of our internal controls that they consider to be a material weakness.
A "material weakness" is a reportable condition in which the design or operation
of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by errors in amounts
that would be material in relation to the consolidated financial statements
being audited may occur and not be detected within a timely period by employees
in the normal course of performing their assigned functions.
The deficiency in our internal controls, as noted above, related to the
timely reconciliation of income taxes required by SFAS No. 109. The unrecorded
transactions and disclosure deficiency was detected in the audit process and has
been appropriately recorded and disclosed in this Form 10-KSB.
The matter identified by Stonefield Josephson, Inc. has been reviewed with
management and with the Audit Committee. Management believes that the material
weakness identified by Stonefield Josephson, Inc. was attributable in
significant part to the purchase of The Mayo Group resulting in positive income
requiring a tax provision calculation and our lack of internal accounting and
finance personnel that possess technical expertise required to calculate a
complex tax provision.
We have implemented the following changes that have a material affect on
our internal controls and procedures as they relate to financial reporting to
respond to these matters. Our responsive actions include the engagement of a
consultant to assist the Company with complex accounting issues including the
tax provision, the hiring of a new chief financial officer that has experience
in dealing with complex accounting issues and recruiting to increase staffing
levels in certain areas of the finance organization.
Our certifying officers believe that we have implemented sufficient
compensating controls to minimize the risks associated with this material
weakness identified by our independent auditors.
Based on management's evaluation, and including consideration of the
matter identified above, we believe the disclosure controls and procedures are
effective.
Company Acknowledgement
In connection with the Company's responses to SEC Staff comments made by letter
dated March 2, 2006, and as contained herein, the Company acknowledges that
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o the company is responsible for the adequacy and accuracy of the disclosure
in the filings;
o staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filings; and
o the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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