This is one of a series of articles, Covering Financials, focused on financial accounting disclosures and how you as a journalist can interpret and report on them. The first four articles (see related links) introduce the financial accounting concepts utilized in this and future articles. If you have a topic you are interested in, post your request in the comments or email me at firstname.lastname@example.org.
Finding Financial Statements
There are two primary places to find U.S. public entities’ financial reports and related information on the internet: First, the U.S. Securities and Exchange Commission (SEC) website and, second, the investor relations section of an entity’s own public website. I recommend using both sources, because while substantial overlap exists for most U.S. entities, not all information on these sources is the same.
U.S. public entities file quarterly financial statements as part of SEC Form 10-Q and a more complete, audited set of annual financial statements as part of SEC Form 10-K. Many non-U.S. entities are cross-listed on U.S. exchanges; therefore, these entities file reports with the SEC as well.
Information often found in investor relations sections (but not at the SEC website) includes:
- corporate governance documents
- earnings announcements
- press releases
- analyst conference calls (in which the company publicly discusses its financial performance over a given period)
- presentations to analysts and statements made by entity representatives at industry conferences
You will also find the company’s 10-K and 10-Q SEC filings–excellent sources for articles. Many entities offer email or text alerts so you know when important financial events occur.
The SEC maintains a database named Edgar that houses all official U.S. public entity filings and even offers tutorials. The official filings offer excellent article sources. For example, the 8-K filing describes major events such as asset impairments, acquisitions and executive appointments.
Among such filings, the SEC Edgar database includes SEC comment letters, as well as comment letter responses (home to really interesting accounting disclosure issues). SEC comment letters are generated when SEC staff review entity filings. The filing entity must respond. Sometimes these comment letters are direct, as when the SEC challenged Groupon’s sales revenue recognition policy. You can sign up for RSS links to individual entity filings. Email and text alerts for non-Edgar SEC postings also exist.
Another reason to check both the SEC Edgar filing database and the investor relations section at the entity’s website: many U.S. entities produce quarterly and annual reports differing from their Form 10-Q and Form 10-K filings for the SEC. Quarterly and annual reports tend to include glossy photos, marketing material and the financial statements. The marketing material is often financial in nature and interesting. But these same U.S. public entities file Form 10-Q (quarterly report) and a Form 10-K (annual report) with the SEC. Both Forms 10-K and 10-Q include the financial statements as well as additional information. So to be thorough, you will want to obtain the quarterly and annual reports as well as 10-Q and 10-K reports for an entity.
Differences between a 10-K and other annual reports
One of the main differences between a 10-K and many annual reports is that the 10-K contains an extensive section on risks faced by the filing entity. The 10-K also succinctly describes the entity’s business. Entities must also disclose compensation information for top-paid employees and board directors. Often the compensation information is included in shareholder proxy filings, not the 10-K. My point is: search both the SEC and investor relations section because they contain different sets of financial information.
As an example, Popeyes Louisiana Kitchen has a tab for annual reports and another tab for SEC filings. Their annual report includes a marketing section and then the complete SEC 10-K. The annual report’s marketing section includes an informative “road map to results” describing Popeyes’ strategic plan for growth. It also highlights interesting financial trends and statistics. The marketing section is not included in their 10-K. Walmart also has an annual report tab and an SEC filings tab on its investor relations website as required by SEC regulations. Its annual report contains an extensive and interesting marketing section that doesn’t appear with its Form 10-K.
Management compensation disclosures provide interesting topic sources too. For instance, some boards may incent their management teams to increase sales revenue. Well, one of the simplest ways to increase sales revenue is to sell at a low price. If management teams do that, then sales revenue will grow, but profits will not. Enron provides a classic example. As its sales grew from $10 billion to $100 billion (10 times) its profits only doubled. Merrill Lynch provides another example. Its board set up a bonus compensation program that rewarded Merrill’s management for increasing return on equity (ROE). But the easiest way to increase return (ROE) is to take lots of risk and just hope taking the extra risk pays off positively (“high risk, high return” is the old adage). Convincing evidence shows in Merrill’s financial statements that it did increase risk by aggressively borrowing. When that strategy didn’t pay off, Merrill sold itself to avoid bankruptcy.
Exploring entities’ Form 10-K risk disclosures can unearth fascinating topics for articles. What risks do you think The Hershey Company, manufacturer of the famous Hershey’s kiss and chocolate bar, views as important? Hershey’s 10-K has the answers, some of which are not immediately obvious.
You may also be interested in the SEC’s XBRL project. The project is tagging and structuring data so that you can download the same data items for all filers and then compare trends, levels, etc. across firms and for the same firms through time. Tutorials are available at the SEC website.
Corporate Social Responsibility (CSR) Reports
Most large public entities produce a CSR report annually perfectly useful for generating article ideas. Take heed, however, of the varying CSR reporting quality across firms because CSR disclosures lack reporting standards similar to Generally Accepted Accounting Principles (GAAP). More frequently, entities are using the GRI G4 sustainability reporting guidelines.The Sustainability Accounting Standards Board (SASB) is increasingly making disclosure standards that could be included in SEC filings. Also, note a strong push internationally to create integrated reports but efforts are still (very) new. The idea of an integrated report is to integrate CSR and financial statement disclosures to help stakeholders holistically understand an entity. Because these initiatives are new, and entities in most countries adopt them voluntarily, disclosure practice and quality varies. Still, undoubtedly, CSR reporting will grow and take shape over the next decade.
At this time, CSR reports are not always easy to find on entity websites. Most are not included under investor relations sections of entity websites (Walmart is an exception). Some proactive entities have developed an Integrated Report (IR), like Southwest Airlines. If you download their annual report, it includes numerous CSR disclosures providing potentially interesting article topics. Other firms are also starting to issue IR reports but most produce a CSR report separately from their annual reports. Free databases like this one allow you to search more than 30,000 CSR reports.
To find comprehensive financial information for an entity, search the SEC Edgar database, entities’ own websites under investor relations tabs and include Corporate Social Responsibility reports also.
Steven Orpurt is a professor teaching corporate governance and sustainability in the W.P. Carey School of Business at Arizona State University.