In the wake of the Internet bubble, the U.S. Securities and Exchange Commission (SEC) enacted reforms to accelerate filing deadlines. Recognizing that information technology enables faster filing and that transparency has a time component, it shortened the deadlines for U.S. companies with market capitalizations greater than $75 million. Simultaneously, Congress passed the Sarbanes-Oxley Act, which made periodic closing and reporting more onerous. After delaying and modifying its filing rules several times, the SEC has stepped in again to make the process less burdensome. Ventana Research believes these changes take the heat off companies with long quarterly closing cycles (of nine or more days) to make substantial changes to their accounting processes and support IT systems to accelerate their close. Nonetheless, we advise all companies to focus on achieving a fast, clean close because it makes good business sense.
One of the post-Internet bubble accounting reforms enacted by the U.S. Securities and Exchange Commission (SEC) was to accelerate annual and quarterly filing deadlines. The rule change was sparked by instances of significant differences between information in a company’s press release announcing quarterly results and the official filing. The new filing deadline for the annual form 10-K was to become 60 days after the end of the fiscal year, rather than 90 days for “accelerated filers” (those with a public float of more than $75 million), while quarterly 10-Q statements were to be submitted to the SEC within 35 days instead of 40. The faster filing rule was enacted about the same time as the Sarbanes-Oxley Act. Many companies have complained about the difficulty of addressing requirements for more careful scrutiny and attestations to the quality of the financial statements while also having to meet tighter filing deadlines. In response, the SEC pushed out the effective date for accelerated reporting. Now, as the regulations are about to take effect, the SEC has stepped in again to make the requirements less burdensome.
The largest companies will still have to file annual 10-Ks within 60 days, but the SEC proposes to create a separate class of “not large” accelerated filers with market capitalizations between $75 and $700 million. It will keep the deadline for these filers at the interim requirement of 75 days. All accelerated filers still will have 40 days to file 10-Qs.
Ventana Research thinks the shortened filing deadlines would have forced many companies to find ways to accelerate their closing process. Our research has found about one-third of companies (32 percent) with more than 1,000 employees or $100 million in revenues take nine or more business days to complete their quarterly closing process. For them, the additional five days (40 instead of the proposed 35) to file their 10-Qs buys critical time to perform reviews, prepare documentation, double check for errors and the like, while still meeting requirements for a more detailed management discussion and analysis (MD&A) and a new focus on beefing up the risks section to get away from the generic boilerplate approach.
Even with the additional five days, Ventana Research advises companies to find ways to accelerate the repetitive closing and post-closing processes (particularly the Sarbanes-Oxley compliance requirements). Most corporations that are below average in completing closing and post-closing tasks could address the factors driving their schedule in a cost-effective fashion, speeding up their close, reducing risk and improving accuracy using fewer resources. Taking steps such as automating more processes, eliminating stand-alone spreadsheets wherever possible, deploying or upgrading consolidation software and automating post-closing compliance activities can speed the entire close-to-report phase of the accounting cycle. Doing such things will accelerate the management reporting cycle and save time and money by reducing the number of “flash” reports companies generate because of the slow closing process. It also should cut finance department and other administrative costs, yielding a process that is faster, cheaper, safer, smarter and better.
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