The number of latecomers to this year’s 10-K filing season is down 30 percent from last year, yet another indicator that companies are adapting to life after the Sarbanes-Oxley Act.

According to research from Glass, Lewis & Co., only 203 calendar year-end accelerated filers asked for an extension of their filing deadlines from the Securities and Exchange Commission. While that number is still more than triple the number of extensions for 2003 annual reports, it is down from 288 for 2004—the first year accelerated filers had to comply with SOX.

Several of the companies seeking more time are serial late filers, including Fannie Mae, BearingPoint, Flowserve Corp., Hollinger International and Interpublic, according to the Glass Lewis report. Not only did those companies file late annual reports in 2004 and 2005, the report noted, but they were also tardy filing at least one of their quarterly reports in 2005 as well.

The most commonly cited reasons for delay included additional work needed to complete previously announced restatements, incomplete Section 404 internal control assessments, and unresolved accounting issues. Yet Glass Lewis also said the biggest surprise in its analysis was the large number of late filers disclosing no material weaknesses in internal controls, “considering that late filings themselves are a sign of poor controls.”

Altogether, Glass Lewis identified 63 late filers this year that cited incomplete internal control work as a reason for their tardiness. This compares with 138 companies that cited incomplete 404 assessments as a reason for delaying their 2004 reports—the first time such assessments were required.

The report comes on the heels of a Compliance Week analysis of audit and non-audit fees reported in recently filed 2005 proxies that found of 47 large filers with Dec. 31 fiscal-year ends, nearly half saw outright declines in their audit and audit-related fees, and the median decline for the whole group was 2.4 percent. Total fees plunged 7.4 percent (see Audit Fee Study in box above, right).

“I think these two studies show that 404 did not cause as many problems in the second year as the first year,” says Mark Grothe, the Glass Lewis research analyst who conducted the study.

The Business Roundtable reported in a recent survey that 52 percent of companies expect compliance costs to decline in 2006 and only 6 percent forecast higher costs this year. What’s more, 40 percent estimated costs of more than $10 million, 27 percent estimated costs from $6 million to $10 million and 33 percent estimated costs of $1 million to $5 million.

Ciesielski

2004 “was a complete inward looking drive” by corporations to bring their internal controls into compliance, says accounting expert Jack Ciesielski, head of RG Associates Inc., an investment research and portfolio management firm located in Baltimore. “In 2005, they were on safer ground. It makes sense that the number of late filers should decrease.”

The Glass Lewis data comes at a pivotal time. The SEC’s Advisory Committee on Smaller Public Companies scheduled a public telephone conference meeting for April 12 to discuss the exposure draft of the Committee’s final report, which was released for public comment Feb. 28. It had recommended that just the largest 21 percent or so of the largest companies be required to meet the stiff internal controls and outside attestation requirements of Section 404 of the Sarbanes-Oxley Act.

In early April, SEC Chairman Christopher Cox reportedly told reporters after a speech to a Stanford Law School forum on corporate governance in Washington, D.C.: “Our emphasis is on making 404 work and implementing it in a cost-effective and investor-protected way, rather than simply waiving it.”

Problems Remain

This is not to say no companies are having difficulty with their internal controls. Of the 63 companies that did cite internal controls as a reason for their late filing, 34 said they were unable to complete their assessments of internal controls and listed that as the primary reason for delaying their annual reports. These companies said either their executives needed more time to complete their assessments or their auditors needed more time to complete independent reviews, according to the report. “Typically, these companies did not provide details of any material weaknesses they may have identified,” it added.

Another 29 late filers cited delays in their internal control assessments, but not as the primary reason they were filing their annual reports late.

Glass Lewis asserts in its report that the mere inability to meet SEC filing deadlines itself indicate a material weakness in internal controls, saying, “If companies are unable to close their books in a timely fashion, this raises questions about the adequacy of their internal controls.” Indeed, the report identified 72 companies that last year disclosed material weaknesses related to their financial-close processes. “If a company can’t file its annual report on time, it begs the question: How good can its overall system of internal controls be?” the report said.

Drilling further through the data also revealed that:

Weaknesses—35 of the 203 late filers said in their late-filing notices that they had identified material weaknesses in their internal controls. Another 14 companies said they had identified possible control weaknesses.

Other Late 10-Qs—78 companies were late in filing at least one of their quarterly reports last year. Of that number, 55 recently have disclosed material weaknesses in their internal controls.

Other Late 10-Ks—81 of this year’s late filers also were late in filing their 2004 annual reports. Of those 81 companies, 66 have disclosed material weaknesses.

Late, No Weakness—15 companies have delayed their annual reports two years in a row but, as of the date of their late-filing notices, had not reported any material weaknesses. They include Ferro Corp., Kansas City Southern, Steinway Musical Instruments, Key Energy Services and MedQuist. Glass Lewis tartly said of the group: “We believe these companies’ financial-reporting controls likely are not up to par, notwithstanding management certifications that they are effective.”

‘It Makes You Wonder’

Grothe stresses that one major reason these companies haven’t disclosed material weaknesses is because they haven’t made any filings in awhile; they would only need to disclose this information if they made an auditor change. “It makes you wonder if, when they do get their annual report in, they will have material weaknesses but haven’t disclosed anything because they didn’t make filings,” he adds.

If companies don’t disclose material weaknesses, Grothe asserts, “you must question the company’s style of how it discloses these in the future and how up front and they transparent they will be to investors.”

Altogether, the research firm broke down the late filers into five categories, based on the reasons cited by the companies: incomplete internal-control assessments, unresolved accounting issues that may lead to restatements, other events and transactions, previously announced restatements and no detailed explanation provided.

Glass Lewis identified 36 companies with unresolved accounting issues that the research firm believes could lead to restatements. (The report also stressed that these companies had not yet announced restatements, as of the dates of their late-notice filings.)

For example, one of those 36 companies—Calgon Carbon—announced Feb 21 that it would delay release of 2005 financial results pending the outcome of an investigation by the audit committee related to vendor invoices that Calgon discovered had not been recorded in a timely fashion. Sure enough, on March 27, the company announced that its management and audit committee had concluded that the company should restate its financial statements for the first three quarters of 2005 as a result of the investigation related to the invoices.

Future Delays

The trend toward fewer delayed filings may be short lived; next year companies with stock-market values of less than $75 million will begin assessing their internal controls under Section 404, assuming the SEC does not grant another extension or outright exemption.

Earlier this year, a separate Glass Lewis report found that the number of revisions of financial reports by publicly traded companies surged to a record 1,295 in 2005, nearly double the previous year's mark of 650 and more than triple the total in 2002, the year SOX was passed.

According to the study, the smallest companies, measured by market capitalization, were nearly twice as likely to restate as the largest companies. “Smaller companies are where most of the problems historically have existed,” the report concluded. What’s more, Glass Lewis found that more than half of all restatements in 2005 were by companies that have disclosed at least one material weakness. “The smaller companies will keep the trend going for the next few years,” Grothe says.

Adds Ciesielski: “What you saw last year would be a walk in the park due to the sheer numbers.”