FORM 10-K/A GAMCO Investors, Inc. - Gabelli

ITEM 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management, with the participation of the Chief Executive Officer and under the supervision of the Chief Financial Officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of
December 31, 2006. In conducting the aforementioned evaluation and assessment, management identified two material weaknesses in internal control over financial reporting during
the course of the 2006 audit. Accordingly, because of these two material weaknesses, management concluded that the Company’s disclosure controls and procedures were not
effective as of December 31, 2006.
Management did not have adequate controls in place to ensure that there was no more than a remote likelihood that a material misstatement of the annual or interim consolidated
financial statements would be prevented or detected as it relates to: (1) the evaluation of and accounting for certain non-routine transactions in accordance with U.S. generally
accepted accounting principles and (2) the reporting of individual assets and liabilities of certain investment accounts in the consolidated financial statements relating to the accounting
treatment and financial statement presentation of certain of the Company’s proprietary investments. We initially incorrectly recorded the assets and liabilities of certain proprietary
accounts on a net basis as we were accounting for them in the same manner as we account for an investment in a non-consolidated partnership. Whereas these proprietary
investment accounts are not partnerships but are in fact managed trading accounts 100% owned by GBL, upon closer examination of our accounting policy, it was subsequently
determined that they should be recorded on a gross basis in accordance with APB 10 and because they do not fall under FASB Interpretation 39 exceptions to APB 10.
As a result of the first material weakness, the Company restated its December 31, 2005 amounts in the consolidated financial statements. This deficiency resulted from management
not having a process in place to properly identify and evaluate the accounting treatment for and financial statement presentation of certain proprietary investments. These proprietary
investments were reported on a net asset basis but should have been reported on a gross asset and liability basis. In the consolidated statements of financial condition, the assets
and liabilities (primarily short positions and margin) associated with these investment accounts were netted. All required adjustments were made to the December 31, 2006
consolidated financial statements prior to issuance. The effects of the restatement on the December 31, 2005 consolidated financial statements is as follows: Cash and cash
equivalents, investments in securities, receivable from brokers and other assets increased by $2.5 million, $20.4 million, $1.3 million, and $0.1 million, respectively, and investments
in partnerships and affiliates decreased by $17.1 million for a net increase in total assets of $7.2 million. Accrued expenses and other liabilities, payable to brokers, and securities
sold, not yet purchased increased $0.1 million, $3.9 million and $3.2 million, respectively, for a total increase in liabilities of $7.2 million.
In the second material weakness relating to the evaluation of and accounting for certain non-routine transactions in accordance with U.S. generally accepted accounting principles,
the Company’s control deficiencies over accrual of compensation expense for investment partnerships compensation were contemplated in the determination of the material
weakness evaluation. As a result of the second material weakness, the Company filed Form 10-K/A of GAMCO Investors, Inc. on August 9, 2007, which constituted
Amendment No. 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 to restate the Financial Statements and amend Management’s
Discussion and Analysis of Financial Condition and Results of Operations (Including Quantitative and Qualitative Disclosure about Market Risk) in Part I, Items 1 and 2,
respectively, to reflect the reversal of certain previously-accrued expenses for investment partnerships compensation.
(b) Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the
Exchange Act. Management, with the participation of the principal executive officer and under the supervision of the principal financial officer, the Company conducted an
evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, as required by Rule 13a-15(c) of the Exchange Act. There are
inherent limitations to the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective internal control over financial reporting controls can only provide reasonable assurance of achieving their control objectives. In
making its assessment of the effectiveness of its internal control over financial reporting, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework.
A material weakness (within the meaning of the Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of
Financial Statements, of the Public Company Accounting Oversight Board (United States)) is a significant deficiency, or combination of significant deficiencies, that results in there
being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based on the definition of “material
weakness”, the deficiencies described below indicate the existence of material weaknesses in the Company’s design or operation of internal control over financial reporting. Based
on that, management concluded that the following material weaknesses existed in the Company’s internal control over financial reporting at December 31, 2006 and disclosed this
to the Audit Committee and to the independent registered public accountants.
Management did not have adequate controls in place to ensure that there was no more than a remote likelihood that a material misstatement of the annual or interim financial
statements would be prevented or detected as it relates to two items. First, there was a material weakness relating to the reporting of individual assets and liabilities of certain
proprietary investment accounts in accordance with U.S. generally accepted accounting principles. In the consolidated statement of financial condition, the assets and liabilities
(primarily short positions and margin) associated with these proprietary investments were reported on a net basis, rather than reported on a gross basis. Next, there was a material
weakness relating to the evaluation of and accounting for certain non-routine transactions in accordance with U.S. generally accepted accounting principles. All required
adjustments were made to the December 31, 2006 consolidated financial statements prior to issuance.
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