Backdating Causes Late Filings to Soar

Four percent of all companies with market caps over $75-million filed their most recent quarterly reports late. The most common reason: problems wi...
Stephen TaubAugust 24, 2006

Forget Sarbanes-Oxley 404. A record number of companies filed their recent quarterly reports late, and the most commonly cited reason was the rapidly growing option backdating scandal.

According to shareholder advisory firm Glass, Lewis & Co., 138 companies with market capitalizations of at least $75 million submitted late-filing notices for the second quarter, up 52 percent from year-earlier levels. Forty-eight of those companies said they postponed their filings because they were conducting investigations into their historical stock-option grants, including such well-known names as Apple Computer Inc., UnitedHealth Group Inc., Monster Worldwide Inc., CA Inc., and Juniper Networks Inc. By contrast, only three companies cited incomplete internal-control assessments as the reason for their delay.

The number of companies filing late represents about 4 percent of all companies with market caps of $75 million or more, and with quarters that ended on June 30. “This is the highest late filing rate we’ve seen for a quarterly period,” says the Glass Lewis report.

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Nonetheless, the percent of late quarterly filings is not as bad as the number of tardy annual report filings generally attributed to Sarbanes-Oxley section 404. Glass Lewis notes that when 2004 annual reports were due in March 2005, the first year in which both companies and their independent auditors had to assess the effectiveness of their internal controls, 306, or nearly 12 percent, of calendar-year companies submitted late-filing notices.

Of the 48 companies citing stock-option grant investigations as the reason for filing late, 19 already have said they will need to restate prior financial statements. “We think there’s a good chance that some of the 29 other companies, which were still checking their books for options-related errors, will have to fix their past financials as well,” Glass Lewis adds in its report.

Glass Lewis points out that without the option scandal, the number of late filings for this quarter would have been only 90, one fewer than during the second quarter of 2005.

Altogether, the research firm estimates that at least 121 companies have disclosed restatements, internal investigations or government investigations in connection with issues relating to the timing of past stock-option grants.

Other reasons cited for late filings include additional work needed to complete previously announced restatements, and unresolved accounting issues. The three companies that cited incomplete internal-control assessments were Allied Defense Group, Highwoods Properties Inc. and Parlux Fragrances Inc.

Glass Lewis also highlighted a number of serial late filers, including Flowserve Corp., HealthSouth Corp., Financial Industries Corp., and MedQuist Inc., which were late filing their 2005 and 2004 annual reports, all three of their quarterly reports in 2005 and 2004, and their first two quarterly reports for 2006. “That makes 10 straight late filings,” Glass Lewis notes.

Late filers that don’t file quarterly reports within five days of their reports’ original deadlines are no longer in compliance with Securities and Exchange Commission rules. Potential consequences for companies include defaulting on bank loans or having their stocks delisted by national securities exchanges.

In addition, failing to file reports on time may preclude companies from using short-form shelf registrations (used to issue additional stock) for up to one year.

According the Glass Lewis, the auditors of the largest numbers of late filers were KPMG and PricewaterhouseCoopers, each accounting for 26.4 percent of the total.