When a company misses the deadline for filing a required 10-K or 10-Q with the Securities and Exchange Commission, the tardiness can ding the bottom line, according to experts from UHY, a professional services firm that provides audit, tax and consulting services.
Depending on the circumstances, a delayed SEC filing may rattle investors and lead to a drop in stock price or a company’s stock can even be delisted, Ro Sokhi, an audit partner at UHY in New York and Amy Gallagher, an Atlanta-based managing director in UHY’s consulting practice said in an interview.
Yet a confluence of events is stretching accounting departments thin and testing their ability to meet the deadlines, Sokhi and Gallagher said. These include: a surge of new public companies in 2022 that has increased demand for accountants, a more demanding regulatory environment — for example, the Public Company Accounting Oversight Board is requiring companies to provide more documentation to support the positions they’re taking — and the accounting talent shortage that has made it harder for finance executives to adequately staff their teams, they said.
Together, the forces are creating a “perfect storm” that has led to more companies of all sizes having trouble meeting filing deadlines, Sokhi said.
Indeed, the number of public companies that announced delays in the release of their annual reports this year rose to 71, a roughly 40% jump from the previous year’s 42 firms who were in those straits, according to a March report from Intelligize. Some big names are among the delayed filers: The El Segundo, California-based toy company Mattel, along with the Wilmington, Delaware-based Teflon-manufacturer Chemours, and Chicago, Illinois-based Archer Daniels Midland just to name a few.
That doesn’t necessarily spell trouble for all companies, but it does point to the importance of tightening internal controls, accounting systems and reporting practices. Here are five steps finance chiefs can take to keep financial reporting efforts on task and on time:
Banish ‘key man risk’ with cross training: Evaluate your accounting/financial reporting team to make sure you do not have a so-called “key man risk,” Gallagher said. That’s where a company only has one person who knows the process and knows the information needed to get financial reporting done. “We’ve got some clients where maybe you only have one or two people and what happens is one of them leaves, and work still has to get done,” she said. “That’s where cross training and having other people aware of where things are and how to do the process is key.”
Keep a calendar: It’s worth noting that deadlines vary depending on whether you’re a large accelerated filer, an accelerated filer or non-accelerated filer. Whatever the company type, CFOs need to be keenly aware of the deadlines. It’s all the more important at a time when companies have smaller teams, because they need to be sure that they have enough staff to get the job done. “They should know them well in advance of the deadline arriving and really plan out the reporting calendar and the availability of their teams,” Sokhi said.
Grab the grace period: The first step for CFOs who know they’re about to miss an 10-K or 10-Q filing is to pivot and let the SEC know by filing a Form 12B-25, the official notification of late filing that you must file within a day of the required deadline. That step gives companies a grace period, Sohki said.
Build in extra time for M&A workload: It’s important to build in such time if there have been any significant transactions that could point to the need for special accounting and the involvement of outside firms for valuation or purchase price allocation, for which the expertise might not be available in house. “A lot of companies’ accounting functions are made to function well for the company that is existing, so if there are significant transactions like an acquisition or a divestiture, they may not have the folks involved in house to be able to account for that,” Sokhi said.
Tighten internal controls: Internal controls are processes within companies that CFOs and their accounting teams develop to ensure that operationally and financially, transactions are appropriately accounted for. These include manual or automated controls or two signers on an expenditure, Sokhi said. “The focus has been increased in the past 10 or 20 years because the industry has noted that, if management has the appropriate internal controls the auditors have to do less and there’s much more likelihood that the CFOs and accounting teams will get the financial reporting right,” Sokhi said.
