Restatements Missing From 8-Ks; EU Convergence; More

A government watchdog agency says some companies are still remiss in disclosing restatement announcements despite stricter rules about publicizing such news, and is calling on the Securities and Exchange Commission both to clarify its requirements for Form 8-K filings and to investigate potential noncompliance.

In a report issued last week, the Government Accountability Office said it scrutinized restatement announcements in 2004 and 2005 and found that some companies failed to disclose the information under the appropriate item on Form 8-K, or didn’t file an 8-K at all. That errant behavior comes despite SEC rules issued in 2004 requiring all companies to file a specific line item (Item 4.02) on Form 8-K within four days of management or external auditors determining that previously reported financial statements were no longer reliable.

From August 2004 to September 2005, 111 companies—about 17 percent of all restating companies in that period—didn’t file a Form 8-K for restatements, according to the GAO. Thirty-four failed to file an 8-K disclosing their restatements, either by not disclosing the announced restatement at all or disclosing it in a Form 10-K or 10-Q or an amended form. The remaining 77 companies disclosed their restatement on an 8-K, but under items other than 4.02, such as 2.02 (Results of Operations and Financial Condition) or 8.01 (Other Events).

The GAO said the issue stems in part from inconsistencies between the Form 8-K instructions and SEC staff questions-and-answers discussion concerning filing requirements under Item 4.02.

In November 2004, the SEC issued “Frequently Asked Questions” concerning the revised disclosures, which stated that a Form 8-K is required for Item 4.01 (Change in Accountant) and Item 4.02 events, even if a periodic report such as a Form 10-K or 10-Q disclosing such information is filed during the four business days following the event (see box above, right).

From August 2004 to September 2005, 111 companies—about 17 percent of all restating companies in that period—didn’t file a Form 8-K for restatements.

— Government Accountability Office

The GAO, however, said the amended forms and the amended rules don’t make the Form 8-K filing requirement clear, and instead “indicate that the filing of a Form 8-K may not be required if previously reported.” Specifically, the instructions for Form 8-K state that a public company is not required to file a Form 8-K when substantially the same information has been previously disclosed on a periodic report, the GAO noted.

To help the SEC to enforce its regulations and “improve the consistency and transparency of information provided to investors,” the GAO is recommending that the Commission’s Division of Corporation Finance investigate potential noncompliance with the current 8-K filing requirements and take “appropriate corrective action” against any companies determined to have filed a deficient filing.

The GAO also recommended that the SEC harmonize existing instructions and guidance concerning Item 4.02 by amending the instructions to Form 8-K and other relevant periodic filings to state clearly that an Item 4.02 on Form 8-K is required for all determinations of non-reliance on previously issued financial statements, regardless of whether such information has been disclosed on a periodic report or elsewhere.

In a letter responding to the recommendations, Division of Corporation Finance Director John White wrote that the Division “has a long history of examining instances of potential noncompliance brought to its attention” and assured that it “will continue this practice and take appropriate action.” White said the SEC would “carefully consider” the GAO recommendation that the SEC harmonize its existing instructions and guidance.

Nasdaq Operational As National Securities Exchange

Nearly eight months after the SEC approved its application, the Nasdaq Stock Market has finally become operational as an exchange in Nasdaq-listed securities, making it an independent self-regulatory organization, separate from NASD.

Nasdaq will become operational as an exchange in other exchange-listed securities on Oct. 1, 2006.

Thorpe

“For most companies listed on Nasdaq, the practical effect is very little,” says Andrew Thorpe, an attorney with the Morrison & Foerster law firm. “They’re probably not going to notice it.”

In connection with the transition, the securities of companies that were listed on Nasdaq and registered under the Securities Exchange Act of 1934 or the Investment Company Act of 1940 have become registered under Section 12(b) of the Exchange Act. The SEC also granted those companies that were exempt from registration under the Exchange Act a temporary three-year continuation of the exemption, until Aug. 1, 2009, to allow them to become registered under Section 12(b). The changes are the result of two SEC orders issued last week. The SEC approved Nasdaq’s application for registration as an exchange on Jan. 13, 2006.

Still, Thorpe notes that “a few regulatory differences now apply.” For example, when companies now want to register with Nasdaq, the exchange must provide certification to the SEC that a company is eligible for listing. Previously, since companies registered under 12(g) of the Exchange Act, that wasn’t required. To deregister, either the Nasdaq or the issuer must file a Form 25 with the SEC, and since Nasdaq-listed companies were previously registered under Section 12(g), their 12(g) registration would revive—which means companies have to terminate their registration under 12(g) by filing a Form 15.

Thorpe also notes that Form 144 filings related to Nasdaq-listed securities must now be filed with Nasdaq. While the SEC will allow electronic filing of Form 144 through EDGAR, Thorpe says, “Most 144s are still filed on paper. The selling stockholder’s broker should file a paper Form 144 with the exchange.”

Related resources can be found in the box above, right.

U.S., EU Regulators Unveil Plan On Financial Reporting

More than a year after they announced plans to increase cooperation, U.S. and European securities regulators have finally moved forward on a joint work plan to clear away the regulatory brambles between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles.

Van Leeuwen

The Securities and Exchange Commission and the Committee of European Securities Regulators unveiled the plan last week, which sprung from a December 2005 meeting between SEC Chairman Christopher Cox and CESR Chairman Arthur Docters van Leeuwen. The plan’s main focus is to smooth over differences in financial reporting, so that multinational companies can more easily apply IFRS in the United States and GAAP in the European Union.

Regulators on both sides of the Atlantic want to eliminate the need to reconcile the two types of financial reporting standards by 2009. Last week’s plan stipulates that SEC staff will now review issuers’ implementation of IFRS in the United States, while CESR staff will continue to review GAAP implementation by U.S. issuers in the EU.

The two agencies will share information about areas of IFRS and GAAP that “raise questions in terms of high-quality and consistent application,” according to a statement from the SEC. Van Leeuwen said the dialogue “should strengthen the application of financial reporting standards to the benefit of both investors and market participants both in the EU and across the Atlantic.”

In addition to reconciliation issues, the plan will also examine the modernization of financial reporting, disclosure information technology, regulatory platforms for risk management. The two agencies expect to continue meeting, including at least once more later this year.