In what appears to be a new development, companies might increasingly be distributing their earnings releases at the same time as their quarterly reports. That’s according to securities lawyers and investor relations experts, who cite audit committee oversight as one of the key factors driving the changes in the timing of disclosures.

Wolff-Reid

Traditionally, companies sent out earnings releases two or three weeks after the quarter end. “In the past,” says Maureen Wolff-Reid, the president of Boston-based investor relations firm Sharon Merrill Associates, “companies issued quarterly earnings releases well in advance of their more comprehensive Form 10-Q and 10-K filings.” Before accelerated filing rules were recently past, quarterly reports were due 45 days after the quarter end, and annual reports were due 90 days after year end.

But experts note that may change. “I do believe that some companies are holding or going to hold their earnings releases to coincide with the filing of their [10-]Qs,” notes Louis Thompson, president and CEO of the National Investor Relations Institute.

Wolfman

Wilmer Cutler Pickering Hale and Dorr partner Jonathan Wolfman agrees. “I do think that a number of companies are trying to close the gap between when they distribute their earnings releases and file their 10-Q reports,” he says. For some companies, that will mean delaying their earnings releases beyond their normal release date, but Thompson at NIRI believes that others will push up the filing date for their quarterly reports.

Both Thompson and Wolfman note that releases tied to annual reports will likely be impacted less than quarterlies. “I doubt that many will hold their earnings release to coincide with the [10-]K filing since that might be too long,” says Thompson. Wolfman agrees, noting that “it’s harder with the 10-K because so much more goes into preparing it—and it’s tied to the proxy statement.”

Impact Of Accelerated Filing

According to experts, the gap between the issuance of earning release and periodic reports has been narrowing for a number of reasons, including accelerated filing rules, more thorough audit committee reviews, and more robust disclosure standards.

Accelerated filing has already had an impact on disclosure timing. In 2002, the Securities and Exchange Commission approved rules to accelerate the filing of quarterly and annual reports by larger U.S. public companies. The changes for these accelerated filers were to be phased-in over three years; however, last week the SEC postponed the final phase-in period, granting a small reprieve for accelerated filers.

The annual report deadline has already changed from 90 days to 75 days, and—due to the recent postponement—will accelerate to 60 days on Dec. 14, 2005 (the original effective date for the final phase-in period was to be next month). Similarly, the quarterly report deadline has changed from 45 days to 40 days, and will accelerate to 35 days on Dec. 14, 2005 (again, the original effective date for the final phase-in period was to be next month).

The compressed time frame has required companies to upgrade processes and systems to ensure information can be disseminated and disclosed on time. That’s been especially critical as independent institutional research firms like Glass Lewis have noted that the inability to file on time is likely an indication of weakness in internal controls and reporting capabilities.

Although Wolfman at Wilmer Cutler was not at liberty to cite companies he’s dealt with, he did say he’s seen at least three companies in the past year either push back the earnings release or move up the 10-Q. And once the 35-day quarterly filing deadline becomes effective, Wolfman believes more companies will see this as an attractive way to do business.

Audit Committee Impact

Thompson

A second factor compressing the timing between earnings releases and quarterly reports seems to be audit committee oversight. “The trend toward issuing the earnings release and the 10-Q at the same time stems from having the audit committee look at both at the same time rather than separately,” says Thompson at NIRI.

Wolff-Reid at Sharon Merrill agrees. “Auditors are taking more time reviewing corporate financial results prior to the distribution of the news release,” she says, “Board audit committees—and entire boards in many cases—also are spending significantly greater time reviewing both the quarterly news release and the regulatory filings.”

Dallett

Matthew Dallett, a securities lawyer at Palmer & Dodge, notes that the committees aren’t the only ones taking extra time. “Everything is taking longer to sort out,” he says. “The financial audit is taking longer, and companies also have to prepare a document for attestation. The accounting committees make sure they’re on top of the process and that management is hearing the information they need to hear.”

In addition, due to increasing pressures like shareholder litigation, companies want their certifying accountant to sign off on the numbers before the earnings release goes out. “There is an increasing desire of auditors to complete their review before the earnings release,” says Wolfman. “This is not a requirement. But audit committees and auditors would like to have the reviews completed earlier.”

Tied to this is the fact that the NYSE recently proposed to alter its corporate governance listing standards regarding audit committee meetings by clarifying that “the audit committee must meet to review and discuss the company’s financial statements and must review the company’s specific Management’s Discussion and Analysis disclosures.” The original rule only required that audit committees “discuss” the issues.

The insertion of the phrase “meet to review” has raised a number of key questions regarding board practices; namely, will audit committees have to “meet” in person, and more often, to review the required disclosures? (see related story above, right)

Either way, companies may look for increasing efficiencies, choosing to draft the earnings release and review the regulatory filing on as concurrent a basis as possible. “Naturally, the audit committee would rather have one meeting,” says Palmer & Dodge’s Dallett. “It’s a matter of efficiency. As a practical matter, an audit committee can review an earnings release and an early release of the 10-Q at the same time.”

Fuller Disclosure A Driving Factor

A third factor impacting the timing of earnings releases and periodic reports is the mandate for more complete disclosures. That’s because the corporate governance rules that have been adopted since Sarbanes-Oxley—from Web site posting mandates to pro forma reconciliation with GAAP—have prompted audit committees to become much more involved in the disclosure process of a public company's financial statements. And that’s on top of calls from institutional investors and the SEC for more complete and plain English MD&A disclosures.

“There’s a trend toward fuller press releases,” says Wolfman at Wilmer Cutler, “often put up at the company’s Web site, and [companies] want these to reflect the final information. They are also motivated by Regulation FD,” he says.” That’s because companies want to feel confident they’ve complied with Reg. FD before they hold their conference call and one-on-one meetings.

There’s always the chance that something might occur between the time a company announces earnings and the time it files its periodic report. If, for example, a company is under litigation and developments occur during the interim period, it would have to change retroactively its earnings release. As a result, says Wolfman, “There may be an incentive to file the 10-Q earlier or for things to work the other way, deferring the day of the earnings announcement.”

Theory Or Practice?

Aaron

Not all companies see the need for a simultaneous publishing of earnings release and periodic reports, however. Tiffany & Co., for example, files its quarterly report two to three weeks after the earnings release, and files its annual report four to five weeks after the release. Mark Aaron, the company’s vice president of investor relations, sees nothing wrong with a two-stage process. “We provide a lot of meaningful information in the earnings release, which adds some flavor to the conference call,” he says. “We’re not going to hold up the [10-]Q or [10-]K. We want to communicate information as soon as possible to investors.”

According to Aaron, Tiffany makes the multi-week break between earnings release and periodic report easier to tolerate by providing critical financial information up front. “We issue primary information—sales and earnings—as well as a balance sheet,” he says.

”Some companies hold the balance sheet until they file the 10-Q.” For Tiffany, says Aaron, “It’s more of a timing issue. Investors shouldn’t have to wait.”

Nevertheless, the combination of factors above has caused experts to predict an increasingly diminished time-frame between earnings releases and periodic reports. “With a renewed focus on corporate governance, the initiation of disclosure committee reviews, more active audit committees, and a more comprehensive financial review process,” says Wolff-Reid at Sharon Merrill, “the trend seems to be moving toward a more tightly integrated approach to producing quarterly news releases and regulatory filings.”

“Integrating the process becomes even more reasonable in light of the SEC's recommendation that companies move toward including in the earnings release the same type of information contained in the 10-Q,” she adds. “For these reasons, we should continue to see the time period between the quarterly news release and 10-Q [and] 10-K filing diminish. The benefit for shareholders will be a more consistent message and a more enlightening discussion of the financial results in both documents.”