Are you in compliance?

Don't miss out! Sign up today for our weekly newsletters and stay abreast of important GRC-related information and news.

Get updates on Compliance Week offerings, including new features, databases, research, and other resources, along with announcements of upcoming Webcasts, conferences, seminars, CPE/CLE opportunities and more.

Published every Thursday, Compliance Week Europe offers a condensed summary of risk, audit, and compliance news either originating in Europe, or of special interest to European compliance professionals. This newsletter will follow developments by the European Commission, as well as those of national governments across the region, or any U.S.-based news that might have consequence across the Atlantic. Frequency: weekly; Thursday a.m.

A fresh edition of Compliance Week delivered via e-mail and online every Tuesday morning, relentlessly focused on the disclosure, reporting and compliance requirements of our 25,000+ paying subscribers.

Published every Friday, Compliance Weekend was launched at the behest of subscribers, and offers a quick Plain English review of the week's key developments. We hope you enjoy this supplement to Compliance Week's Tuesday edition.

Fixing 10-K Errors You Don’t Know You Have

Boston Wayne | April 22, 2008

You might think that once you draft your Form 10-K or 10-Q and prepare it for submission to the Edgar filing system, you’re pretty much home free and the chance for errors is behind you.

You’d be wrong.

The plain truth is that companies have many “opportunities” for error between Edgarization and filing their periodic reports with the Securities and Exchange Commission. When you examine the number of amendments that are submitted after a filing—what I call “attention deficit filings”—it’s clear that a few thoughtful precautionary steps can dramatically reduce the number of missteps we see here.

Before I begin this journey, let’s take a brief look at the Form 10-K/A filings submitted to the SEC between Feb. 20 and March 20 of this year to get a sense of the types of errors that happen. Why this particular period? Well, while amendments can obviously occur at any time, I believe this time frame is especially ripe because it captures the filings of a significant number of calendar year-end reporting companies. In this selected time frame, we can review some 113 Form 10-K amendments.

So what do we see? While there are perhaps a number of “baskets” one could identify to categorize the filings, for ease of discussion, I’m going to lump them into two. (And for anyone doing the math, some errors fall in both baskets, so my totals add up to more than 113.)

Basket 1: Amended Filings as a Result of Restatements, SEC Comments and Planned Filings. Submissions falling into this category could be necessary for any number of reasons, including errors identified subsequent to the initial filing that did not occur as a result of the conversion process, those occurring as a result of an SEC review, and those that were contemplated at the time of the filing of the initial report. In the case of a contemplated filing, I’m referring to amendments that take place because a registrant incorporated information from its proxy statement and was not able to produce the information within the 120-day time frame, thus triggering this disclosure in a Form 10-K/A. Of the 113 filings in our period, 42 can be categorized as falling into Basket 1. Certainly there are practices and processes that many companies have in place (as Southern Co. does) to combat Basket 1 errors, but they’re not the focus of my suggestions below.

Basket 2: Attention Deficit Filings. “ADF” errors are what we want to discuss here. When you read the explanatory notes in the amended filings, you find that 80 of the 113 amendments contained errors that could have (and should have!) been caught prior to filing. But, before we go further, let’s attempt to define an ADF. Examples would be forgetting to date, dating incorrectly, or forgetting to include a signature line on items such as the CEO and CFO certifications. A registrant might also check the incorrect box on the facing page or omit exhibits thought to be included in the filing. The possibilities go on and on. As I said, in most cases, these are careless errors that could have been caught if people paid just a bit more attention prior to filing. I suspect that a closer look at many original filings locked up in Edgar would reveal similar ADF problems. Registrants are just not aware of their existence—at least, not yet.

Now, Southern’s corporate structure gives us plenty of opportunity to make these mistakes too. As a large electric utility, we have six reporting entities under the corporate umbrella. I even admit that I’ve experienced some of these failures myself and done the walk of shame down Amendment Road. My ADF, of all things, was forgetting to attach the Section 302 and 906 certifications to an amended filing. (So not only did we have to amend a filing, we had to amend the amendment to provide these certifications.) Those on the outside that periodically glance at the explanatory notes for Forms 10-K and 10-Q amendments might think they are somewhat routine and harmless. Those of us on the inside, however, know they can be absolutely excruciating.

Now that I’ve pointed out my colleagues’ missteps and confessed my own, let’s move on to a few suggestions that should help anyone engaged in the raw thrill of preparing a periodic SEC filing.

  • Filing Deadlines. Never plan to file on the day of a filing deadline. If this is your approach, you are already beginning your stroll down Amendment Road. At Southern, we set out a yearly filing schedule well in advance and plan to file at least three days prior to the deadline. Other involved parties in your company must know your timetable and your absolute seriousness that it take place as planned. This three-day period is important for many reasons, not the least of which is that it gives a company the time to address unplanned developments, which inevitably occur. Above all, the extra time gives a company the flexibility of not having to file in the midst of a filing deadline fire that cannot be extinguished.
  • Exhibit Preparation. Normally, exhibits can be prepared well in advance of the expected time of the filing. My advice is to have a designated person lead the exhibit preparation process. Make sure the exhibits are prepared early and checked by counsel, the independent accountants, and appropriate others at least one week prior to filing. Again, a review of a few of the explanatory notes will reveal that problems with exhibits, particularly with Section 302 and 906 certifications, are common occurrences that lead to amended filings.
  • A Filing Checklist, or the “Hula Hoop Effect.” The importance of a filing checklist cannot be overstated. I compare it to a preflight check that an airline pilot uses prior to takeoff. On our checklist at Southern, we detail the important “systems” that should be reviewed. A good checklist will list the persons responsible for preparing and verifying the significant portions of the filing. We list items such as checking the cover, verifying the exhibits, including dates and conformed signatures where required, and similar matters. Finally, and perhaps most importantly, individuals are required to sign the filing checklist. I refer to all this as the “Hula Hoop Effect,” because I’m of the opinion that a slowdown, if only for the purpose of Hula Hooping for a period of time, is a good exercise. It provides time to reflect before (as we say at Southern) “mashing the button.”
  • Involve All Significant Areas in Final Sign-Off. After Edgarization, make sure that all significant realms of the company have an opportunity to review the report that is to be submitted. I suspect that at many companies there is a tendency not to burden your outside counsel, the independent auditor, or others in this final review process. This is a mistake, and it becomes readily apparent when you read the explanatory notes. For instance, many of them have problems with dates and conformed signatures that could have been easily caught if the person in charge had a chance to review the final Edgarized document.
  • Doing a Comparison. After the Edgarization process has been completed and prior to filing, we run a comparison between the pre-Edgar file and the post-Edgar file. Not only does this comparison show the changes that we made to the Edgarized version, it reveals any unintended changes that might have resulted from the conversion process itself. Oftentimes, I see explanatory notes that lay blame with the financial printer for errors in a filing. A comparison check should avoid problems of this sort.
  • Explanatory Notes. While this will not be the most profound observation you’ll ever hear, you can learn a lot by reading the explanatory note at the beginning of a Form 10-K/A or Form 10-Q/A filing. Reading these descriptions should help any company wanting to make sure that it has proper controls in place to avoid ADF problems. I would encourage any registrant engaged in periodic filings with the SEC to review these explanatory notes on a routine basis. It wouldn’t take long, and the benefits are significant.
  • Bringing Your “A” Game. Golfers know what I mean here. Just like Tiger Woods, you must bring your best to the filing process each quarter. Staying with this sports analogy for a moment, I don’t have to remind anyone that it’s the routine ground ball that gives even a major leaguer the most trouble. (Remember Bill Buckner and the 1986 World Series!) My point is that all who are involved in the Forms 10-K and 10-Q filing processes must concentrate during the few days prior to a filing, making sure that they use all the tools at their disposal (such as the Filing Checklist) to make sure the filing is ready for submission.

I hope these filing suggestions will help all who are involved in periodic SEC reporting. Come to think of it, I need to remember to take a look at the Feb. 20, 2009, to March 20, 2009, ADF filings (if there are any!) to see if there is any pattern of improvement.