How to Curb ‘Key Man Risk’ and Late SEC Filings

Missing required 10-K and 10-Q filing deadlines with the Securities and Exchange Commission (SEC) can be a costly mistake for public companies, according to managing directors Amy Gallagher and Ro Sokhi. Consequences vary based on circumstances, but a delayed SEC filing may rattle investors and lead to a drop in stock price or a company’s stock can even be delisted, they said.

However, a confluence of events is stretching accounting departments thin and testing their ability to meet the deadlines. Gallagher and Sokhi named a few: a surge of new public companies in 2022 that has increased demand for accountants, a more demanding regulatory environment — such as the PCAOB requiring greater documentation to support the positions they’re taking — and the accounting talent shortage that has made it harder for finance executives to adequately staff their teams.

Together, the forces are creating a “perfect storm” that has led to more companies of all sizes having trouble meeting filing deadlines, Sokhi said.

It all emphasizes the importance of strong internal controls, accounting systems, and reporting practices for public companies. Here are five steps finance chiefs can take to keep financial reporting efforts on task and on time:

Banish ‘key man risk’ with cross training: Evaluate your accounting/financial reporting team to make sure you do not have a so-called “key man risk,” Gallagher said. That’s where a company only has one person who knows the process and knows the information needed to get financial reporting done. “We’ve got some clients where maybe you only have one or two people and what happens is one of them leaves, and work still has to get done,” she said. “That’s where cross-training and having other people aware of where things are and how to do the process is key".

Keep a calendar: CFOs need to understand which filing deadlines apply to their companies, which vary depending on whether the company is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Especially as more companies operate with small accounting teams, it’s important to have enough staff to address the filing requirements. “They should know them well in advance of the deadline arriving and really plan out the reporting calendar and the availability of their teams,” Sokhi said.

Grab the grace period: If you know you’re going to miss the 10-K or 10-Q deadline, the first step is to file a Form 12B-25 with SEC, which is an official notice of a late filing that must be filed within a day of the required deadline. That step gives companies a grace period, Sohki said.

Build in extra time for M&A workload: For companies that underwent any significant transactions that may require special accounting or involvement of outside firms for valuation or purchase price allocation, building in extra time for the filing is crucial. “A lot of companies’ accounting functions are made to function well for the company that is existing, so if there are significant transactions like an acquisition or a divestiture, they may not have the folks involved in house to be able to account for that,” Sokhi said.

Tighten internal controls: Internal controls within companies assure that operational and financial transactions are properly accounted for, These include manual or automated controls or two signers on an expenditure, Sokhi said. “The focus has been increased in the past 10 or 20 years because the industry has noted that, if management has the appropriate internal controls the auditors have to do less and there’s much more likelihood that the CFOs and accounting teams will get the financial reporting right,” Sokhi said.

Read the full article published by CFO Dive.