With a shorter filing deadline for the largest issuers to file their 10-Ks with the Securities and Exchange Commission about to take effect, companies that aren’t yet ready for the faster filing timeframe will have their work cut out for them, experts say.
Under rules completed in September 2005, large accelerated filers—those with a public float of $700 million or more—will have to file their 10-K within 60 days for years ending after Dec. 15, 2006. That’s 20 percent less time than the 75-day deadline that is currently in effect.
Observers say that while most companies shouldn’t have much trouble meeting the requirement, some will struggle with the shortened timeframe.
Kugel
“As usual, it’s a case of good news, bad news,” says Robert Kugel, research director at Ventana Research. “The good news is that there’s a large chunk of companies that probably won’t have a difficult time making the new deadline. The bad news is that there’s another chunk that will be challenged.”
Based on his own analysis of 50 large accelerated filers, Kugel estimates that 60 percent of companies are within “easy shooting distance” of the 60-day mark. Based on their 10-K filings for their last fiscal year, Kugel said 40 percent of companies in his sample already hit the 60-day deadline and another 20 percent filed within 67 days. Yet another 20 percent filed within 68 to 74 days, and the rest were at 75 days or more. “It will be difficult to make up that kind of time given where some companies are,” he says.
Stephen Lis, national leader of KPMG’s CFO Advisory Services practice, says ultimately all companies will hit the 60-day deadline because that’s the law. The real question, he says is “How much pain will come with making that deadline and can companies do it on a sustainable basis?”
Jim DeLoach, a managing director at risk consulting firm Protiviti, agrees. “Companies can get their books closed,” he says. “What they want is sufficient time to review their filing and make sure it’s correct.”
Allen
Blake Allen, a partner at the law firm Duane Morris, also believes that will be the real challenge for companies operating under the tighter deadline. Companies have had plenty of practice closing their books more quickly since 2002. The real obstacle, he says, is the simple lack of time should some complex accounting issue arise. Allen warns that investors should not be surprised to see more Form 12b-25 filings, which alerts regulators that the 10-K may arrive late.
Kugel notes that companies have done a respectable job filing their annual reports more quickly in recent years; the sharpest decline came in 2005, when companies reduced their time to file by an average of seven days from 2004 filings.
RULE EXCERPT
Below is a summary of the SEC's rule for accelerated filing of 10-K reports, from the Commission's final release issued last year.
After consideration of the public comments that were received, we are adopting the rules substantially as proposed, but with two significant modifications, which 1) provide large accelerated filers with an additional year before they are required to comply with the 60-day Form 10-K deadline and 2) relax the exit requirements from accelerated filer or large accelerated filer status further than proposed. We are amending the periodic report filing deadlines to:
Create a new category of accelerated filer, the “large accelerated filer,” that encompasses an issuer after it first has an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates of the issuer of $700 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter;
Re-define an “accelerated filer” as an issuer after it first has an aggregate worldwide market value of voting and non-voting common equity held by non- affiliates of the issuer of $75 million or more, but less than $700 million, as of the last business day of the issuer’s most recently completed second fiscal quarter;
Amend the Form 10-K annual report deadline for the newly established category of large accelerated filers so that they will be required to file their annual reports under the 60-day deadline beginning with the first annual report filed for a fiscal year ending on or after December 15, 2006 (until then, they will remain subject to the 75-day deadline);
Eliminate the final phase-in of the Form 10-Q quarterly report deadline for large accelerated filers and thus continue to apply a 40-day deadline to the quarterly reports; and
Eliminate the final phase-in of the Form 10-K annual report deadline and Form 10-Q quarterly report deadline for the accelerated filers that are not large accelerated filers and thus continue to apply a 75-day and 40-day deadline to the annual and quarterly reports, respectively.
Further, we are amending the requirements for exiting accelerated filer or large accelerated filer status to:
Permit an accelerated filer with less than $50 million aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates, as of the last business day of its most recently completed second fiscal quarter, to exit accelerated filer status without a second year’s determination or other delay; and
Permit a large accelerated filer with less than $500 million aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates, as of the last business day of its most recently completed second fiscal quarter, to exit large accelerated filer status. This filer would have to comply with accelerated filer or non-accelerated filer requirements depending on whether its public float was $50 million or more, or less than $50 million, as of the last business day of its most recently completed second fiscal quarter.
Source
Revisions To Accelerated Filer Definition And Accelerated Deadlines For Filing Periodic Reports (Securities and Exchange Commisison; Dec. 21, 2005)
“Can companies cut this by a week if they need to? Yes. Many did just that the year before last,” he says. “But a lot of companies will be going through some heroic hoops to get to the 60-day deadline. It ought to teach them a lesson that they need to address their process issues, increase their level of automation and decrease their reliance on spreadsheets.”
On the process side, Kugel says for many companies, unnecessary complexity in their accounting systems is often the culprit that slows the closing process. On the IT side, “We’ve found consistently that companies that limit their use of spreadsheets close faster than the ones that make extensive use of them.”
How To Get There
Companies can take several steps to simplify and accelerate their closing processes. Foremost, Lis says, is to make sure the business has “a systematic approach” to capture all the information the company will need to file its 10-K report. That approach also must be sustainable year after year.
“Some companies are still struggling with closing and consolidating their books globally,” he says. While companies have made improvements, “they still have a ways to go. We still see data consistency issues, manual activity, and reconciliation issues.”
Lis
Another issue is that too many people are involved in the management analysis and review process. Lis has seen some companies that have more than 300 people approve various elements of the 10-K filing. “You can argue about what the right number is, but it should be well below 100,” he insists. “Companies must establish accountability around the information. To do that, they should limit the number of people who sign off on the information to those who are critical to that data.”
In addition, he says the process of gathering the required information and assembling the statutory filing has been “a very fragmented, very manual process.”
“Companies aren’t properly managing the flow of data, and don’t have a central repository for that information,” Lis says. Anyone wanting confirmation of that theory can walk into a corporate controller’s office during the 10-K review, “and you’ll see spreadsheets, binders and handwritten notes everywhere,” he continues.
Standardizing and automating processes connected to closing the books and preparing the 10-K report are other valuable steps to take. Kugel says consolidation software is “a no-brainer;” companies that haven’t installed any yet should do so, and those that already have should see whether an upgrade is a wise move.
“A lot of companies deployed their current consolidation software as long as 10 or 15 years ago,” he says. “It may no longer be doing the job.”
DeLoach
DeLoach at Protiviti notes that some companies don’t take full advantage of the automation capabilities available to them even within their own business software systems, such as SAP or Oracle. “We still see situations where companies haven’t optimized the controls configuration within their existing ERP systems,” he says.
DeLoach also says companies need to improve their set of controls over financial reporting “so they have a better mix of automated versus manual controls and preventative versus detective controls.”
DEADLINES
A chart from the SEC’s Web site, which indicates the revised deadlines for filing periodic reports, follows:
Category Of Filer
Form 10-K Deadline
Form 10-Q Deadline
Large Accelerated Filer ($700MM or more)
75 days for fiscal years ending before December 15, 2006 and 60 days for fiscal years ending on or after December 15, 2006
40 days
Accelerated Filer ($75MM or more and less than $700MM)
75 days
40 days
Non-Accelerated Filer (less than $75MM)
90 days
45 days
SEC Answers On Form 10-K
Companies also should consider reducing the number of software vendors they use. Pruning the number down to one might be impractical or even unwise, Kugel says, but most companies can weed out at least one or two vendors if they try. They also should look to harmonize multiple instances of the same software. Again, Kugel says, “It doesn’t need to be a single instance, but the companies that are taking 70 to 75 days to file probably have more instances of their ERP software than they need.”
Allen at Duane Morris says companies that aren’t ready for the accelerated timetable should immediately assemble a detailed timetable in conjunction with their outside counsel and independent auditor. In-house legal and accounting teams should be involved as well to ensure that the timetable is “sufficiently aggressive, yet realistic.”
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