Risk & Compliance

New 10-K Deadline Pressures Firms

The final phase-in of the SEC filing deadlines for 10-Ks is raising anxiety and the chance that more companies will request extensions.
Helen ShawNovember 15, 2006

The new, shorter quarterly filing deadline that looms for large companies with a public float of at least $700 million will bring yet another challenge for finance departments—and could cause more companies to request filing extensions.

The Securities and Exchange Commission’s Form 10-K deadline for “large accelerated filers” with a fiscal year end on or after December 15, 2006, will be reduced to 60 days. Currently, the filing deadline is 75 days. The change is an attempt to compel companies to report quarterly results faster, while still maintaining data integrity and executive accountability, notes Stephen Lis, national leader of KPMG’s CFO advisory services practice.

The shortened timeframe, however, “makes it difficult to ensure that better disclosure is in fact getting out there,” commented Nancy Wojtas, a partner in the law firm Cooley Godward Kronish. “It’s going to be a real problem to honor that timeframe,” she said, especially for finance chiefs and chief executive officers who by law are charged with certifying the accuracy of 10-Ks and other financial reports. Those executives face stiff penalties under the Sarbanes-Oxley Act—the most extreme being a prison sentence—for certifying misleading financial statements.

Wojtas expects that more companies will request the automatic, 15-day extensions offered by the SEC to file 10-K reports, a move that would not trigger any covenant defaults or concern a company’s bondholders or banks, she added. “There may be no alternative than to file [for an extension],” she said.

Finance departments are already under pressure to meet the existing filing deadlines, as illustrated by staff members who regularly work overtime and department heads that hire temporary employees. “We have seen companies running from the [financial] printer to get the filing done,” remarked Lis.

There are myriad logistical challenges to completing a 10-K report. The components of the filing process include closing and consolidating the financial books, management analysis and review of the financials, and a statutory filing regime that includes management analysis and sub-analyses, says Lis. Common problems include manual data entry, high error rates, and inconsistent global data. Additionally, the mere coordination of people involved in the process can be overwhelming. One KPMG client identified over 300 people who were involved in signing off on the financial statements, recalls Lis.

“The brute force strategy is something you can’t live with for a long time,” said Lis. Companies must standardize and automate many aspects of their procedures if they want a reporting process that can be repeatable and sustainable, adds Lis. To start, companies need to examine which aspects of filing are the most time consuming. Firms should also define which employees are accountable for which tasks and ensure that everyone understands the process. “Unless companies put together a systematic approach, they are going to flounder because the bar has been raised,” contends Lis. “This process can be managed if you focus on it and treat it like a core business process.”

Yet Wojtas questions the benefits of the new filing deadline. “I hope the Securities and Exchange Commission realizes what kind of demands they’ve put on companies,” she said, questioning the benefit of having information in the public markets for an extra 15 days. “Does the risk of getting it wrong outweigh the modest benefit of 15 days?” asked Wojtas.