For the largest of calendar-year companies, late filings were way up for the most recent reporting period. But an analysis of those filings shows that—despite concerns to the contrary—this year’s new, shorter filing deadline wasn’t to blame.
“By and large, companies had no problem with the new deadline,” says Mark Grothe, research analyst at proxy advisory firm Glass, Lewis & Co.
Instead, the stock-option backdating scandals, which were responsible for two record-breaking quarters of late filings in the second and third quarters of 2006, sent late filings soaring once again.
March 1, 2007, was the deadline for calendar-year large accelerated filers to file their annual reports with the Securities and Exchange Commission. That date marked the first time those issuers had to meet a shorter 60-day filing deadline, 15 days shorter than previous years. The new deadline applies to companies with market capitalizations of at least $700 million that have filed at least one annual report with the SEC.
The vast majority—94 percent—of the roughly 1,300 LAFs with calendar year-ends filed their annual reports on time. Only six companies even mentioned the quicker filing deadline in their late-filing notices, Glass, Lewis noted in its latest “Yellow Card Trend Alert.”
Late filers that don’t file their annual reports within 15 days of their original deadlines aren’t in compliance with SEC rules. Potential consequences include defaulting on bank loans or having their stocks delisted by national securities exchanges; late filings could also preclude companies from using short-form shelf registrations for up to one year.
“For nearly all of those that did delay their filings, it wasn’t because of the [shorter] deadline,” Grothe tells Compliance Week. “They had other issues that would’ve likely delayed their filings regardless of the deadline.”
In particular, stock options timing issues and a batch of prolonged restatements boosted the number of late filings by LAFs to the highest late-filing rate—among those companies for an annual or quarterly period—in the last two years, and the second-highest number of annual late filings in the last four years. Other reasons commonly cited for this year’s late filings were business combinations or business sales, and unresolved accounting issues.
‘Paper, Pencil, And The Nearest Drawer’
From Feb. 26 through March 5, 81 companies—about 6 percent of calendar-year LAFs—notified the SEC they would be late in filing their annual reports, up 47 percent from the comparable period a year earlier. That number is second only to the 2004 annual period, the first in which companies had to comply with the internal control reporting provisions of Section 404 of Sarbanes-Oxley, when 100 calendar-year LAFs, or 6.9 percent, delayed their annual reports.
Kugel
“All of the increase over last year is the result of options backdating issues … which for most companies is not a current issue,“ says Robert Kugel, senior vice president at Ventana Research. “The rest of the situations are not all that different from last year, therefore it’s hard to make case that the shorter deadlines in and of themselves are at work here.”
Indeed, 28 companies delayed their annual filings because of investigations into stock option grants. Among them, 19 have already said they’ll need to restate. In addition, the Glass, Lewis report notes “a good chance” that some of the nine other companies will also have to fix their past financials.
Observers say it’s not surprising that companies with ongoing options-related investigations would delay their annual reports.
“Back in the days of the dot-com bubble, executive compensation record-keeping may have been one notch above paper, pencil and the nearest drawer,” Kugel says. “Companies have to untangle what they did and when they did it, which results in delays in coming up with the information.”
Still, Kugel says, “Like the 404 blip a couple of years ago, I think this is mostly a one-time event.”
Grothe at Glass, Lewis agrees. “Once the options investigations blow over, we should see a leveling off or a slight decline in late filings, especially among the larger companies,” he says.
However, he says, late filings are likely to increase during the next quarter and be higher than the third quarter of 2006. “A lot of options investigation won't be cleaned up completed by then, and even if they are, companies still might delay their 10-K and then they won't have time to finish their quarterly financials.”
M&A, Sales, And 404
Without the option-timing scandals, the number of late filings for 2006 annual reports and quarterly reports actually would have been down at year-earlier levels, Grothe says. Omitting the 28 options-related late filings, there would have been only 53, two fewer than for the 2005 annual reports.
Previously announced restatements that are still incomplete are another factor maintaining the high level of late filings. Some companies that announced restatements in 2005 unrelated to stock options backdating still haven’t yet restated, Grothe says. “Once they get through the pipeline, late filings should drop off,” he says. “But there will still be some of those restatements hanging around next year.”
Out of 38 companies working on previously announced restatements, 19 were restating due to option-grant errors. Twenty-one companies blamed their late filings on other events and transactions, such as mergers, acquisitions, or business sales, while 12 cited unresolved accounting issues which Glass, Lewis says could lead to restatements. Nine of those 12 were investigating past option grants.
“Every period, there are a handful of companies that went through merger or acquisition that, depending on the timing, could be expected to cause a delay,” says Grothe. “Those are usually one-time late filers.”
Four companies said they delayed their reports because they were unable to complete the internal-control assessments required under Section 404 of Sarbanes-Oxley, which was the cause of the large number of late filers for 2004 annual reports last March, when companies had to comply with 404 for first time. Those companies said either their executives needed more time to complete their assessments or that their auditors needed more time to complete their own independent reviews.
“It's usually an indication that they found something that needs more work, maybe a material weakness or a deficiency,” Grothe says. He noted that two of the four companies were complying with 404 for the first time, due to a change in their filing status.
Eight other late filers cited delays in their internal-control assessments, but not as their primary reason for filing late. Six companies didn’t provide any detailed explanations for their late filings.
Not Much Leeway
Allen
While the compressed timeline isn’t by itself resulting in the increased number of late filings, P. Blake Allen, a partner at the law firm Duane Morris, says, “It is certainly a significant contributing factor.”
While the additional time wouldn’t make a difference for companies with an issue of the magnitude of a stock option review, he says the shorter time frame can present a challenge. “There is not much leeway in the 60-day timeframe, so if an extraordinary event occurs, like a business combination or divestiture, or a significant issue arises, such as a complex revenue recognition interpretation question, it's very difficult to stay on track,” Allen says.
He says another factor contributing to late filings is increased auditor scrutiny set into motion by Sarbanes-Oxley.
“Auditors continue to look very closely at management’s accounting treatment decisions, and in particular with option practices, the documentation underlying those management decisions,” Allen says. In particular, he says companies may find that, after they make an acquisition, their auditor doesn’t agree with the acquired company’s pre-acquisition accounting, which can lead to delays.
Acquiring companies should focus on the target company’s accounting “sooner, rather than later, to avoid setting themselves up for their own filing delays down the road,” he says.
Kugel, meanwhile, says companies “shouldn’t be coming in just under the wire.”
If companies are currently taking more than five or six business days to close their quarterly books, he says, “They probably have the ability to give themselves more breathing room in making these filing deadlines by looking at their closing process. They may have the ability to automate more.”
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