VideoWhen it comes to filing financial reports, will faster be better?
The Securities and Exchange Commission seems to think so. To give investors more to go on than pro forma earnings statements at the end of a quarter, the SEC will require publicly traded companies to speed up their 10-K and 10-Q filings. On top of that, thanks to a host of new and proposed regulatory requirements, corporations will likely have to include a whole lot more detail in their financial statements.
What's not entirely clear, however, is whether more reporting plus shorter deadlines equals better information. The tighter deadlines "would strain resources and could decrease the quality of reports by increasing the likelihood of errors and omissions," wrote Robert Davis, Dell Computer's vice president of corporate planning and reporting, when the SEC was considering the tighter deadlines it would eventually invoke.
In a similar vein, Ronald Samford, CFO of Hibernia Corp, a financial services holding company, wrote: "We want to be thoughtful, not hurried. We need to focus on quality, not an illusion of speed that increases the risk that financial reports may be inaccurate, incomplete or even misleading."
Indeed, the SEC's announcement in early September that beginning in 2004, companies with more than $75 million in market value will be required to file 10-Qs and 10-Ks in record time has generated strong opposition from companies, auditors, and business groups. (The SEC received 302 letters objecting to its initial proposal.)
As of next year, public companies will have to file 10-Qs within 40 days after the end of the quarter. That deadline will fall to 35 days in 2004. Annual reports must be filed within 75 days in 2003, and within 60 days beginning the following year.
That will slash the reporting time a tad. Previously, companies had 45 days after the end of a quarter to file 10-Qs and 90 days to file 10-Ks. According to a Deloitte & Touche study, it takes a Fortune 500 company about 44 days after a quarter's end to file a 10-Q, and 81 days to file a 10-K. In short, time was already tight.
To meet the new requirements, companies will likely have to boost spending to improve IT systems, hire new personnel, and shoulder higher auditing and legal fees. Although costs are likely to vary significantly across firms, some will pay a hefty price. One company responding to the Deloitte study, for example, said that modifications to its financial reporting system alone could easily exceed $1 million.
No Big Whoop
Some observers think the added expenses won't amount to all that much, however. David Fondrie, vice president of equity research at Heartland Advisors, a mutual fund company based in Milwaukee, maintains that the excessive-cost argument against faster filing is a hollow one. He notes, "A well-run company should be able to get its financials out in time if people are doing their jobs correctly."
But late filers do stand to assume a heavy load in added paperwork. The penalty for failure to comply — the loss of eligibility to use short-form registration statements for at least one year — is burdensome. "That alone is a pretty powerful incentive to get things done on time," says David Copenhafer, director of EDGAR services at Bowne & Co., a corporate reporting and mutual fund printing company.
Companies not swift enough in their reporting would have to swap the short S-3 form for the lengthy S-1 variety. That would amount to hundreds of pages of added disclosure, Copenhafer explains. "The difference in document size is huge and could cost hundreds of thousands of dollars in legal fees and additional expenses," notes Copenhafer. What's more, investors may treat failure to comply as a negative signal and punish companies that don't file on time.
Still, it might indeed have been high time for SEC to update its filing requirements, which were last adjusted in 1970. In its final rule release letter issued on September 5, the commission argued that advances in technology over the last 30 years have allowed companies to crunch the numbers and produce better reports more quickly. Technology boosts have also "increased the market's demand for more timely corporate disclosure," said the commission.
But finance chiefs contend that more-complicated accounting standards and disclosure rules have made it harder and more time-consuming to prepare the reports. "We believe that [increased complexity] more than offsets the advances in communications and technology," said Hibernia's Samford in a letter to the SEC.
Indeed, those reporting requirements are likely only to increase over time. The SEC recently voted unanimously to require corporate filers to explain how they apply critical accounting policies in the MD&A section of their financial statements, for example. The new rule would require managers to include an Application of Critical Accounting Policies section in annual reports, registration statements, and proxy and information statements.
Since Enron's collapse, of course, the feds have proposed and invoked a slew of rules governing such things as off-balance-sheet transactions and stock option treatment. What's more, the requirement under the Sarbanes-Oxley Act that CFOs and CEOs certify company financials is likely to pack even more bustle into the tighter filing deadlines. Jeff Naylor, CFO of Big Lots, a closeout merchandise retailer, reckons that certification alone will add at least two to three extra days to his company's filing process.
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