Delay Tactics Raise Eyebrows of Business Journalists

By Kevin Sweeney
April 13, 2005 02:09 PM

If you're noticing that delay tactics of the companies you cover are becoming a common theme, you are not alone.

 

Stringent legislation that shored up the accounting problems of corporate America has led many companies to file financial report delay requests. The Securities and Exchange Commission recently received requests from 45 companies to delay their annual reports, according to a report in The Wall Street Journal.

Brad Skillman, Director of Markets Information for the Associated Press, notes that 25 of these companies are listed on the New York Stock Exchange. Skillman also points out that to date "a total of 70 companies had the dreaded 'lf' footnote in the stock tables, though that has changed somewhat as a few have subsequently filed their annual report."

The "lf" footnote is listed in stock tables by the NYSE and the NASDAQ alongside companies who are late in filing annual reports with the SEC.

"Most delays this spring can be attributed to companies attempting to meet the requirements of the Sarbanes-Oxley Act, particularly as it relates to 'accelerated filers' dealing with the requirements of Section 404 pertaining to 'internal control,'" says James Gentry, professor and former dean of the University of Kansas School of Journalism.

 

An "accelerated filer":

 

·          Has revenue of more than $75 million.

·          Has filed one annual report and been subject to the SEC's periodic reporting requirements for a yearlong period.

·          Is ineligible to utilize small business reporting forms of the SEC.

 

If the organization you cover has made a request to delay, be careful about making any assumptions about its financial health.

 

"Don't just assume a company is in financial trouble because it's delaying," says Mary Ann Milbourn, staff writer with The Orange County Register. "What seems to be happening is a lot of the auditors are overwhelmed with the paperwork."

 

Assumptions aside, it is noteworthy that 55 of the 70 companies Skillman referred to previously were trading in the red for the current year.

Focus instead on any restatement of earnings as a preliminary red flag. If this has occurred, investigate whether the move is attributed to real financial concerns or simply to operational issues.

 

"You need to determine whether this is really going to affect the company's bottom line or if it's just moving money around from one quarter to another," Milbourn notes.

 

For example, one of the companies Milbourn covers had to restate its earnings due to a lack of explanation related to a security guard on the building's premises. This does not have a huge impact on financial performance, but could cloud the organization's image.

 

And that could translate into a hit on Wall Street. For one company in the Register's coverage area, Biolase Technology based in San Clemente, Calif., asking for a routine 15-day extension dropped its stock by 7 percent. The threat of delisting from the NASDAQ sent it plummeting another 9 percent.

 

"I think some of the first companies asking for delays are getting really slammed by the markets due to the Enron syndrome," Milbourn says. "Reporters should put into perspective why there is such a huge variation in the stock price. The independent analysts I talked to in this case didn't think the delay was particularly noteworthy."

 

Sarbanes-Oxley is also impacting the bottom line of corporate America. Organizations are spending millions of dollars on auditors, lawyers and modern software to comply with the Act. Not only is this shrinking profits, but it also challenges the productivity of company officials charged with meeting compliance.

 

Aside from independent analysts, reporters can turn to financial planners, auditors and attorneys with SEC experience to give readers perspective of what really lies behind a company delay. Business journalists can also turn to online publications.

 

"The best publication for insights is Compliance Week," Gentry recommends. "You can also find good material at CFOdirect.com, which is a site that PricewaterhouseCoopers offers. Another good source is CFO.com, the site of Chief Financial Officer magazine."

 

Electronic giants Best Buy and Circuit City recently filed requests to delay financial results. If chief competitors mirror one another's moves, journalists should not read too much into any trend.

 

"I'd assume the firms in that industry had similar issues in their finance departments," Gentry says. "We're seeing more companies get 'adverse opinions' from their auditors as a result of the new compliance."

 

If the companies you cover have seemingly complied with new regulations and filed on time, don't consider the job done. Leave no stone unturned when reporting on your beat, whether or not you find anything underneath.

 

Particularly, keep an eye out for amended filings, where they may add or change information from the original filing.

 

"The sources I talked to said that even if a company complies with all the rules, there is no guarantee they are telling the truth," Milbourn says. "If a company is bent on lying and cheating, they'll find a way around it."

 

Make sure you are on top of your game by becoming as familiar as possible with revamped legislation. Knowing what the organizations you cover must do to comply with regulations will help you ask more pointed questions about their activities.

 

For more in-depth coverage of Section 404 and the definition of "internal control," keep an eye on BusinessJournalism.org for a forthcoming article from Gentry.

 

Please enter your friend's e-mail address

Please enter your e-mail address

If you would like to include a message, please add it here:

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism