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SEC & Financial Reporting Basics

SEC & Financial Reporting Basics

Common forms:

  • Form 8K – Report of Unscheduled Material Events or Corporate Changes
  • Form 10K – Annual Report
  • Form 10Q – Quarterly Report
  • Form 4 – Statement of Changes in Beneficial Ownership (remember, you own your own data. Even though the company fills it out, you own the data.)

Form 10K / 10Q Basics

  • The audit committee is tasked with the detailed review of the filings and process. It recommends to the full board approval to file the 10K or 10Q.
  • Even though certain directors may be more comfortable with certain sections, and everybody has a different background, every director should read the entire document, especially the 10K.
  • Before the 10K goes to the board, it should be reviewed by internal and external counsel.
  • External auditors review the financial statement, risk factors and MD&A (management discussions and analysis) sections in the 10K/10Q and are not focused on the other sections in the 10K. Outside counsel tends to focus on the other details of the 10K such as risk factors and legal forms.
  • Typically, the audit committee is asked to review and comment on the earnings press release without taking a formal vote to approve it.
  • Directors should know the process used by the company to complete the 10K/10Q (e.g. who were involved, if there is a disclosure committee, the company’s review process, the involvement of the audit firm, etc.).
  • Disclose Committees report directly to the CFO and CEO and should have robust discussions about risks and highlight any significant changes or new analysis that investors may not have heard, e.g. covid disclosures.
  • Internal representation letters are also known as “certification” or “sub certification” letters. Most companies send these out every quarter. They are important and set the tone at the top. They ask key executives and managers confirm the key representations they are making to management and they create accountability throughout the business structure.
  • The external auditors are more concerned about risks than ever before, especially with covid. Auditors are giving their opinion as to whether a company will continue for another year (called going concern) and complications with covid have heighten their need to ask questions (e.g. does the company have adequate funding if sales dry up?).
  • Board members should understand the insights provided in each section of the 10K/10Q (e.g. business section, risk factors, MD&A, legal proceedings, etc.).
  • When reading an MD&A be mindful of whether the tone and content is consistent with what you heard in the boardroom or in the pitches.
  • Have board meetings close to the time the 10K or 10Q are to be finished so you can have the right conversation in the boardroom about how the quarter went, what the next quarter is going to look like, what is on track, what is off track, etc.
  • If you are going to look at another company’s 10K as a model, be sure to look at companies in the same industry as your own.
  • Some believe that more disclosures are better than less. It is rare that the SEC will come back and say you have disclosed too much. Accurate and timely disclosures can help you defend your position if you are sued.
  • Be mindful of not using “marketing” jargon in your disclosures – fact check first. If a statement seems unclear or out of place, be sure to ask about it.
  • Observe if the business section and risk factors evolve with the changes in the business, or do these sections appear stale.
  • Observe the quality of the document (changes and errors may reflect process, staffing, or internal control issues). Sometimes the audit committee chair will look at a red-line version before it gets filed to make sure no major changes need to be made. Major changes can be tracked (e.g. in an Excel spreadsheet or a running list) and noted as to whether they are still open, closed, or carried over to the next quarter. You can begin the next quarter’s spreadsheet with the items that were carried over.
  • Do not be afraid to take notes but be mindful that they are discoverable in a deposition. Do not include anything you do not want to have read later on or that can be misunderstood out of context. Be systematic and consistent in destroying your notes. For example, all notes are destroyed after five quarters.
  • Determine your best strategy for filing your 10Q and 10K. Consider whether you file it when you issue your earnings press release or do you release it a day later? Consider the timing used by others in your industry. Minimize the time between the conference call, the press release, and the filing.
  • Some companies state that they are releasing “preliminary data” in their press release and then file their 10Q right after that. Regardless, take every effort to ensure the accuracy of your 10K/10Q so you do not have to make changes.