In each of the past three years, the SEC has reviewed the filings of more than half of all public companies. In its 2015 Agency Financial Report, for example, the SEC disclosed that it reviewed 51% of public companies last year (p. 51), vastly exceeding its plan to review 33% of companies. On the other hand, as we noted in our blog last May, there has been a steady decline in the total number of 10-K and 10-Q SEC comment letters.
We have heard more than one party question the apparent discrepancy between this decline and the SEC’s statement. The declining number of comment letters was even raised at the Q&A part of the AICPA conference last December. SEC staff, in response, attributed some of the decline to their focus on only the most material topics, while avoiding comments on mundane and immaterial parts of the disclosure. In other words, the SEC confirmed that not all – or even necessarily most – reviews end in the issuance of a comment letter.
The Sarbanes-Oxley Act of 2002 requires the SEC to review the financial statements of every public company at least once every three years. But how many companies receive an actual comment letter every three years? To explore this topic, we matched a population of 10-K Audit Opinions to our Comment Letters database. The results are presented below.
As we can see from the table above, only about 20% of companies received a comment letter in 2015, and just over half of all companies had an actual 10-K or 10-Q comment letter at any point in the past three years. Assuming our population is roughly comparable to the SEC’s and that trends from 2013 and 2014 remain relatively consistent, that means another 30% or so were reviewed but did not receive comment letters. For the subset of Accelerated and Large Accelerated Filers, the picture is slightly different: about 70% received at least one comment letter in the past three years.
Further analysis of the population of the companies with no recent 10-K or 10-Q letters reveals that these companies are not somehow immune to SEC comments – it’s just that their letters are either older or related to some other filings, such as 8-Ks, proxies, or registration statements.
Out of 2,833 companies with no formal 10-K/Q letters in the past three years, about 60% had at least one 10-K letter from before 2013. 50% of the same 2,833 companies also received at least one recent non-10-K letter in the past three years. For Accelerated Filers, both figures jump up to around 70%.
So is it safe to conclude that a company with no recent letters on record is due for a review? Not necessarily. While there might be a pending review or one currently in progress, the financials might have been already reviewed, but the review did not lead to any comment letters.