Now It’s Crunch Time For Accelerated Filers

Crunch time is getting closer for accelerated filers approaching year’s end. The sprint to a compressed, 60-day process to close the books and meet filing deadlines for the largest and most complex public companies will begin in a few short weeks.

The long-foretold 60-day close process falls in the same year thatcompanies also must address an ample collection of new rules and emerging concerns for the first time. Among them: new pension-disclosure requirements, ongoing concerns about stock option grants and valuations, new guidance surrounding uncertain tax positions, new guidance on fair-value accounting, and new compensation-disclosure rules that will affect proxy statements.

Given those new curveballs, is a 60-day closing even achievable? Well, yes. Or at least, it should be.

Selling

“Companies have had years of warning,” that the 60-day filing deadline was imminent, says Tom Selling, a financial reporting consultant and an adviser to the Association of Audit Committee Members. “The Securities and Exchange Commission started talking about this seven years ago, and now it’s finally happening. There’s been plenty of warning.”

For companies with a market capitalization of $700 million or greater, the accelerated 60-day deadline for filing an annual report takes effect at the end of the current year. For calendar-year companies, that means their first 60-day closing process will begin as they ring in the new year in January.

Prepare For The Long-Term

Gimpert

John Gimpert, a partner at Deloitte & Touche and co-chair of its Sarbanes-Oxley steering committee, said the firm has been working with its clients to prepare for their first 60-day close for the past few years. The preparation that’s necessary is neither quick nor easy, he says. “The real fixes around this are longer term.”

Selling is even more pointed. If companies haven’t started preparing for this by now, “it’s too late,” he says.

A company’s ability to meet the 60-day deadline will depend in large part on how efficiently it prepares the closing trial balance and gets the draft financial statements completed, he says. “This will depend on whether they have done adequate preparation prior to year-end that will enable them to determine year-end adjustments and evaluations, estimating bad debts, inventory reserves, employee benefit calculations, asset impairment tests, and other general accruals and amortizations, to name a few,” he says. “A lot of these tasks can and should be automated.”

Automated solutions will help, says John May, a partner in the risk and quality group at PricewaterhouseCoopers. At the same time, however, the closing process has become much more complex because of complicated accounting rules, more complex business structures, and companies’ global reach into multiple regulatory and taxing jurisdictions.

Perhaps the most significant step companies can take between now and the end of the year is to review timelines associated with key steps in the close process and to assure that all hands are on deck at the right times to do their jobs, says Elizabeth Noe, a partner with the law firm Paul Hastings.

Noe

“Make sure all the participants in the year-end process are in place, and are not only aware of their deadlines but have aligned their schedules,” she says. And, Noe warns, that includes people inside and outside the company. “Don’t shortchange the time you give to outside counsel and auditors in this process. You have to get those people lined up ahead of time, let them know your expected timelines, and get their buy-in to that timeline.”

Gimpert advises companies to spend the remainder of the calendar year assuring their recognition of revenue will be clean, since that particular piece of accounting can flummox financial reporting efforts more than any other.

“Do you know your transactions that are more risky?” he says. “Do you have policies and procedures around those? Do you have good protocols for people to go up the organization and assure they are booked properly so there are no mistakes?”

Complex sales contracts continue to be a high-risk area for companies, Gimpert says, so companies should work now to assure that their accounting for them will not run into trouble in the reporting and auditing process. “You can’t have these things unwinding in January,” he said. “You’ve got to get them right up front.”

Noe agrees that surprises like a challenge to revenue or any number of other “intervening events” would cause significant problems for the close process. Companies that discover accounting problems, evidence of fraud, or other complications during the close may be hard-pressed to cope with those complications and still meet the deadline, she says.

“There are always going to be companies with problems that arise that can’t be addressed in a 60-day time frame,” she says. “I’m sure we’ll see companies that can’t meet the deadline. But it remains to be seen how many failed to meet it because their internal processes could not be completed in time, or whether some intervening event arises.”

Never Too Late To Improve Process

Janette Marx, a senior vice president at Ajilon Finance, says that regardless of where a company may be in its preparation process, it’s never too late to improve its situation.

Marx

“Managers should take the time to assess what’s been achieved so far and what needs to be accomplished between now and the end of the year in order to successfully file,” she says. If a company is behind schedule, “think about alternate solutions to accelerate production.”

Marx and others also stress that communication is key at this stage of the process, to assure that everyone involved is aware of critical timelines.

PwC’s May says companies can use the remainder of 2006 to get a lot of disclosure language drafted and circulating for review to make the close process more efficient. Companies should have a strong enough sense of how the year will wrap up to begin drafting disclosures, especially surrounding new rules like pensions and executive compensation.

“A lot could be done now,” he says. “Rules should be analyzed now. Disclosures can be written now and the numbers can be dropped in at year-end. There’s almost no limit to the amount of the annual report that can be written right now.”

Finally, the experts say, keep a checklist of what works and what doesn’t, so that the process can be reviewed and improved upon in the following year. “Brainstorm after the close and ask: ‘How could we have made this process better?’” he says. “Where did we have transactions that caused problems? Where do we need additional training for next year?”