Related Topics:
			Business Research: ERP, Finance Vendor Research: Adaptive Planning, Applix, Approva, Axentis, Cartesis, Centage, Certus, Clarity Systems, Coda, Cognos, FRx Software, Hitachi America, Hyperion, Infor – Extensity/Systems Union, KCI Computing, Lawson, Longview Solutions, Microsoft, Oracle, OutlookSoft, PROPHIX, SAP
			Printer friendly version Email this article Send feedback to editor

Summary
Say what you will about the United States Securities and Exchange Commission (SEC), it is not afraid of information technology. For example, it quickly recognized the power of the Internet as a tool for communication with shareholders, for good and bad purposes. SEC Regulation FD, which opened up companies’ quarterly investor calls to anyone, would not have been practical before the Web, and securities firms now monitor outgoing e-mails just as they have had to monitor “snail mail.” In addition, the SEC has just taken steps to accelerate adoption of eXtensible Business Reporting Language (XBRL), which will make it easier for investors to acquire and use financial information (as well as improve the SEC’s enforcement effectiveness). Advances in accounting and financial software have sped up companies’ accounting close. Recognizing that, the SEC enacted a rule requiring large public companies to file their annual reports within 60 days instead of 75. The rule will go into effect shortly. Will corporations be ready?

View
In the late 1990s the SEC began a process to accelerate the deadlines by which public companies under its jurisdiction must file their periodic financial statements. The purpose was to increase financial transparency. Not all companies were reporting their balance sheets and/or statements of cash flow when they announced their earnings (Enron was a famous example), making it impossible for analysts to vet the income statement fully when public attention was fixed on it in the days immediately following the earnings call. (It was possible for two months to pass from the original earnings announcement before a skeptical analyst could look at the details.) The original deadline of 90 days from the end of fiscal year to file the annual Form 10-K became 75 days in the first step. After delays to allow companies to deal with the Sarbanes-Oxley Act, large accelerated filers (LAFs) – corporations with more than US$700 million in public float – whose fiscal years end on or after Dec. 15, 2006, now will have to file 10-Ks within 60 days. Smaller accelerated filers – companies with a public float of between US$75 million and US$700 million – are exempt from the rule and still have 75 days, while the remaining “micro cap” public companies have 90 days.

Ventana Research was curious to see how ready LAFs are to meet the shortened deadline, so we analyzed the trends in their 10-K filing dates over the past five years. Not having ready access to a database with a complete set of information, we sampled 50 companies. The results show that while a majority of companies will make the new requirement without a great deal of difficulty, a significant minority will find it challenging. Specifically, about 40 percent of LAFs were already filing their 10-Ks with the SEC within the 60-day period in their latest fiscal year. Another 20 percent were within a week of that mark, a gap we think is short enough to close without much difficulty. Of the rest, another 20 percent had filed their 10-Ks to the SEC in 68 to 74 days after the end of their fiscal year, and the remaining 20 percent filed in 75 days or more. Shortening the process by these many days will present challenges, so it is quite possible that more companies than normal will wind up filing late for the 2006 fiscal year.

We did not discern any pattern in the earlier versus later filers in terms of size, industrial segment or complexity of their business structure. Certainly, there are differences in the magnitude of the task, but some companies appear to have done a better job of adapting to the shorter times than others. With several years to prepare, LAFs overall did a good job of cutting their filing times. We found 40 percent of companies were able to trim three weeks off their filing dates between 2002 and 2006, and another 40 percent cut it by two weeks. With the rest, 10 percent reduced the interval by one week, and the other 10 percent actually recorded an increase (most of these already were filing within the 60-day period). On average, companies in our sample reduced their filing dates by 15 days over the 2002-2006 span, with the largest average decrease taking place in documents filed in 2005.

Partly because of the tighter filing requirements, companies are focusing again on accelerating their accounting close periods. This topic garnered attention in the 1990s but faded with the recession early in this decade and was likely sidetracked in public companies by their need to implement processes and systems to meet Sarbanes-Oxley requirements. Having a fast, clean close is more important to LAFs because the standards for reporting are higher in the wake of the stock market bubble fiascos.

Assessment
Ventana Research thinks all companies should look into reducing the time they spend closing their books. LAFs have a regulatory requirement to close in timely fashion, but many companies are likely to save money and achieve better financial visibility by doing so. We see two sets of initiatives that corporations should take to reduce their closing interval, one related to IT and the second to process. On the IT front, corporations should automate as many manual steps as possible by (1) deploying consolidation software or using it more effectively (including discarding obsolete packages); (2) reducing the need for spreadsheets by creating data feeds between systems, doing calculations within consolidation software or enterprise resource planning (ERP) systems (for example, expense allocations) or automating and centralizing commission calculations; (3) implementing software that gives managers greater control and auditability of spreadsheets that cannot be automated out of the process; and (4) simplifying their financial systems as much as possible by, for example, reducing the number of ERP system vendors and instances of these ERP systems. At the same time, Controllers also must look into several process changes that have demonstrated they can shorten the accounting and filing cycles. Simplifying accounting structures by eliminating unnecessary detail is usually a good place to start, as is standardizing and automating as many of the closing and post-closing processes as possible. For companies with complex tax issues, starting any tax calculation/optimization analysis earlier can help. Companies also can alter the timing of accounting events such as billing or closing subjournals one or even several days before the end of the fiscal period to distribute manpower availability and eliminate or reduce wait times after the period ends.

Related Research Notes:
Cutting SOX Compliance Costs
Companies must accelerate transition to a sustainable process 

SEC Helps XBRL Take Off
Agency will fund projects that encourage adoption

Spreadsheet Auditing Cuts Risk
New technology from Compassoft audits and governs spreadsheets

Spreadsheets Enter the 21st Century
New capabilities will address critical shortcomings

SEC Lightens Reporting Burden
But companies still should expedite the process as much as possible

Consolidating the Chart of Accounts
Applying Master Data Management to a long-standing problem