VideoThere is a paradox at the heart of the Sarbanes-Oxley Act of 2002. On one hand, the law requires companies to provide more-detailed and more-accurate financial statements. On the other, it cuts the time to do so. As recently as last year, companies had 90 days to file 10-Ks and 45 days for 10-Qs. But over the next three years, the deadlines will shrink dramatically—all in an effort to get financial data into shareholders' hands faster.
This squeezed schedule will put many companies in a bind. While the companies interviewed for this article indicated that meeting the first accelerated deadline—75 days for the 10-K—hasn't been too difficult, reaching 60 days for the annual and 35 days for the quarterly will be. "Forty-five days for the 10-Q is already challenging," says Gil Borok, executive vice president and global controller for CB Richard Ellis Group Inc. Inc., a real-estate services firm. "So to take it down to 40 days and eventually 35 is very difficult for us." (Although CBRE is private, it has public debt, and will voluntarily comply with the accelerated filing times.)
Not everyone will have trouble meeting the deadlines. Zebra Technologies Corp., a maker of bar-code technology, was among the initial batch of companies required to comply with the shorter deadline, filing its 10-K just 58 days after its fiscal year end—a feat vice president and controller Todd Naughton describes as achievable because of "a very intense focus" on quick data turnaround. In fact, Zebra has been filing its 10-Q within 35 days for six quarters in a row.
But Zebra is one of a mere handful of companies to file so fast. A review of SEC filings conducted by KPMG LLP reveals that in recent years, few companies filed their results as swiftly as they will have to. For example, in 2003 only 26 percent of companies submitted their 10-Qs within 40 days, while only 11 percent filed within 35 days. Of course, past filing times don't necessarily indicate how quickly companies can file, if pressured. But they do suggest late nights ahead for many in finance.
Full Disclosure
What makes fast filing so difficult? One problem is the many items that must be included in filings as a result of new accounting and SEC rules. For example, items that formerly were reported annually—such as pensions and business-segment results—now have to be reported quarterly.
Moreover, companies have to provide more detail in a number of areas, including variable-interest entities (FIN 46) and derivatives (FAS 133). Similarly, Enoch Jen, CFO of automotive supplier Gentex Corp., notes that the latest SEC interpretation of Section 406 of Sarbox (which discusses a company's code of ethics) requires extra work for this year's filing.
There are more basic difficulties. Despite a decade of enterprise resource planning implementations, many companies still have trouble just pulling numbers into one place. Nonintegrated finance systems, data inconsistencies, and manual reconciliation processes remain commonplace. According to a recent PricewaterhouseCoopers LLP survey, some 21 percent of companies say that an ineffective IT structure is their greatest concern in meeting the deadlines.
The second part of the process—analysis, drafting, review, and disclosure—also takes time. Hoping to shield themselves from the danger of submitting flawed numbers, boards and CEOs have added additional layers to the task. For example, Alliant Techsystems Inc., a defense contractor in Edina, Minnesota, now has disclosure and compliance committees, a subcertification procedure for business-unit heads, and an audit committee deeply involved in reviewing filings.
Squeezing time savings from the external auditors will not be easy. While the executives interviewed stressed the need to work closely with the accountants, there appears to be little they can do to speed their review. "At the end of the day, there is still a bottleneck with the auditors," says one executive.
Time Savers
Such obstacles can be daunting. Before anything, says Lawrence Serven, principal at The Buttonwood Group LLP, companies need to recognize that meeting accelerated filing deadlines is a project, and that a haphazard approach will ensure failure. He recommends developing a project charter that outlines the project's objectives, its scope, a work plan, and a description of its structure in order to escape that fate.
Such basic project-planning skills are essential, says Zebra's Naughton. When the rules came out, "the first thing we did was put together a project plan outlining how we were going to do it, a time line of events, and steps for speeding up the review process," he says. One addition was an early review of any nonfinancial parts of the financial statement, such as the descriptions of the company's products, in the 10-K.
The first area to address in such projects is the close process. According to Serven, companies can easily save time there by redesigning tasks. One headache for many finance departments is rework time, the time spent verifying numbers submitted by business units. Companies that close their books rapidly often minimize this work by requiring employees in the field to scrub their numbers before submitting them to headquarters. Erik Linn, CEO of CapAdvisory, recommends that companies also consider performing daily reconciliations rather than waiting until the end of the month.
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