2015 SEC Filing Highlights, Part 1 of 2

In this post, our second annual “best-of-the-year” review, we’ll look at 2015 filings for some of the highlights of the year: the largest restatement, for example, and the biggest overseas stash. We’ll also look at lengthy comment letter correspondence, give a quick recap of auditor ratification, present some notable non-timely filings, and update disclosure controls. In a follow-up post, we’ll look at auditor changes, out-of-period adjustments, changes in accounting estimates, D&O changes, and more.

Non-Reliance and Revision Restatements
The largest negative restatement in 2015 came from Alphabet, Inc. (Google’s parent). The $711 million adjustment reduced Alphabet’s previously reported 2014 net income by roughly 2%. It didn’t however, appear to have much impact on the company’s stock price.

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The $711 million adjustment was larger than any over the past three years, but still dramatically less than the $6.3 billion and $5.2 billion adjustments that occurred in 2004 and 2005, respectively.

Our most recent Financial Restatements report found that after six years of relatively steady levels of financial restatements, the total number of restatement disclosures filed in 2015 dropped by 12.7%.

The total number of Re-issuance Restatements and the number of companies restating reached a low of 161 disclosures issued by 141 companies. Similarly, the number of Revision Restatements in 2015 also showed a decline. They dropped to 516 from 605 the year before, and accounted for 76.2% of the restatements disclosed.

ICFR and Disclosure Controls
In 2015, roughly 30,000 SOX 302 Disclosure Controls and Procedures assessments were filed by about 8,500 unique companies. Of those 8,500 companies, about 2,200 (26%) filed at least one assessment saying that their SOX 302 DCs were ineffective. That’s just about the same as last year.

With 55 disclosures, Validian Corp has the longest streak of ineffective SOX 302 assessments. Validian has been ineffective every quarter consecutively since 12/31/04 – a record 47 quarters. The most recent control weaknesses noted by Validian were related to deficiencies including financial constraints, treasury control issues, and personnel inadequacies/segregation of duty issues.

Data gathered from fiscal 2015 annual reports shows that the implementation of COSO for audited ICFRs is almost complete: 96% of companies reviewed used the 2013 Framework, in comparison to 82% for fiscal 2014. Only a small portion of companies obtaining an auditor’s assessment on their ICFRs continued to use the 1992 Framework, or did not disclose which framework they used.

Comment Letters
Back in June, we highlighted correspondence between the SEC and a marijuana company regarding the SEC’s role in questions of law. Perhaps unsurprisingly, the longest single string of letters back and forth belongs to the same company, Cannabics Pharmaceuticals Inc. Their correspondence with the SEC spanned 357 days and contained 17 letters. The focus of the review related to requests to clarify whether the company’s products are subject to FDA review. As part of the same review, the company also agreed to restate its financials to correct the method of accounting for the transfer of institutional knowledge.

The correspondence ended earlier this year in an unusual manner- without successful resolution and with no closing letter.

We issued comments on the above captioned filing … and have read your responses…but continue to have concerns regarding several issues raised in our comments, including the potential impact of the federal Controlled Substances Act on your business operations. Please note that we are terminating our review of your Form 10-K and will take further steps as we deem appropriate.

Auditor Ratification
Shareholders of Plymouth Industrial REIT Inc. registered a 48.51% vote against the reappointment of its auditor, which was the largest vote against ratifying an auditor. (A vote of 48.51% against ratification would be in the top 0.02%.) The firm has audited Plymouth’s financial statements for the last two fiscal years, in each of which the auditor expressed doubt about the company’s ability to continue as a going concern.

For all the other companies it audited in 2015, the same firm averaged almost 95% in favor of ratification.

Indefinitely Reinvested Foreign Earnings
As noted in our latest Indefinitely Reinvested Foreign Earnings (IRFE) report, the total disclosed amount of IRFE has risen steadily since 2008. Since last year, the total increased from $2.299 trillion in 2014 to $2.434 trillion in 2015, an increase of 5.9%.

All told, at 547 companies, more than half of the Russell 1000 disclosed indefinitely reinvested earnings. Microsoft and General Electric top the charts with over $100 billion in IRFE each. Figures from 10-K filings for fiscal 2015 show that IRFE balances now represent 9.46% of total assets of these companies, a significant increase from 5.80% in 2008.

Non-Timely Filings
In 2015, 1,519 companies filed total 2,987 quarterly or annual NT filings, indicating that they would be unable to file their actual quarterly or annual filings on time. 45% of NT filers only issued one NT during the year, but 12% filed late every quarter, issuing four NTs. (One company, Liberated Energy, managed to issue five NT filings – quite a feat considering any way you slice it there are only four quarters in a year.)

From the total 2015 NT filings 1,131 (or about 38%) were annual NT 10-K filings. Approximately 56% of those NT 10-K filings were followed by an actual 10-K filing within the allowed 15 day extension. An additional 15% were followed by a 10-K Filing within 30 days. Of the remaining filings, 14% issued a follow-up filing at some point in 2015 or 2016, while 13% have still not yet filed as of this writing.

Beta Music Group, Inc. had the longest follow-up time with 524 days between filings. The reason given was ‘Insufficient time’.

Of NT 10-Qs, Kaanapali Land LLC, which filed three NT 10-Qs and one NT 10-K in 2015, had the longest interval between an NT 10-Q and the subsequent quarterly report, with a delay of 413 days. The reason, according to the company’s filings, was “insufficient time’, along with a recent auditor change as well as previous auditor registration issues.

Non-GAAP
As noted in Trends in Non-GAAP Disclosures, as of September 2015, nearly 90% of SP 500 companies reported results on the non-GAAP basis. In the past, some analysts raised concerns about large discrepancies between GAAP and non-GAAP numbers. In 2015, the largest adjustments, by far, were associated with impairments in the oil and gas industry totaling $101 billion on the annual basis.

Low oil prices and the downturn in the oil and gas industry are to blame. Five oil and gas companies (Chesapeake Energy, Apache Corp, Devon Energy, Occidental Petroleum, and Denbury Resources) recorded $65 billion in impairment charges among themselves.