A publicly held company is required by the Securities and Exchange Commission (SEC) to file a large report concerning its financial condition at the end of each quarter. These are the Form 10-Q (for quarterly filings) and Form 10-K (for annual filings).
There are a number of time-consuming steps involved in the production of the Forms 10-Q and 10-K. In fact, though you may have an excellent system in place for producing reliable financial statements within a few days of month-end, the additional steps are so onerous that you may find it difficult to file the reports with the SEC in a timely manner, even though the filing dates are a number of weeks later.
The additional steps needed to close the books for a publicly held company include all of the following:
- Auditor investigation. The company’s outside auditors must conduct a review of the company’s financial statements and disclosures for its quarterly results, and a full audit of its annual results. This is the most time-consuming of the public company requirements. The company can reduce the amount of time required for a review or audit by providing full staff support to the audit team, as well as by having all requested information available as of the beginning of the audit or review work.
- Legal review. It would be extremely unwise to issue the financial statement package without first having legal counsel review the statements to ensure that all required disclosures have been made, and to verify that all statements made are correct and fully supportable. This review is usually completed near or after the end of the work done by the auditors, but can be scheduled slightly sooner if you believe the disclosures to be substantially complete at that time.
- Officer certification. Depending upon what type of Form is being issued, different company officers are required to certify that the information in the financial statements presents fairly the financial condition and results of operations of the business. Since there are substantial penalties and jail time involved if an officer were to make a false certification, it should be no surprise that the signing officers will want to spend time reviewing the complete set of financial statements. This review can be done before the auditors have completed their work, so officer certification does not usually increase the duration of the closing process.
- Audit committee and board approvals. The audit committee must approve every Form 10-Q, and the board of directors must approve every Form 10-K. Given the number of people involved, you should schedule review and approval meetings well in advance, to be conducted a few days prior to the required filing date of the applicable Form. Scheduling the review slightly early gives you time to make adjustments, in case anyone expresses concerns during the review, and wants changes to be made prior to filing.
- EDGARize and file. Once the Form 10-Q or Form 10-K is complete and fully approved, you must file it with the SEC. The filing is done using the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system that is operated by the SEC. You can submit this information in various formats, but you will almost certainly have to convert it from the format in which the documents were originally prepared. This means hiring someone to convert the reports to the applicable format, which is a process known as EDGARizing. Not only is the conversion specialist responsible for converting the financial statements, but this person also files the statements with the SEC on behalf of the company. The conversion process usually takes one or two days, but you should factor in additional time for the auditors to review the converted format – the auditors must give their approval before you can file with the SEC.
Of all the issues noted in this section, the largest factor standing in the way of closing the books is likely to be the work schedule of the auditors. If they have other clients scheduled ahead of your company, then the review or audit work may not even begin until several weeks after you have closed the books in all other respects. Consequently, it is extremely useful to work with the audit partner to move the company to the head of the auditors’ work queue. Of course, if you are scheduled first by the auditors, this means that you must also have financial statements and all supporting schedules prepared at a very early date – so be sure that you will be ready before lobbying for a scheduling change.