Your SEC letter preparedness plan: how to be ready for the “big one”

As inhabitants of Silicon Valley, we’re sure to have been shaken by an earthquake or two. For me, it’s always a reminder of how important it is to have a disaster plan and earthquake preparedness kit ready…for the big one! In the corporate world, there’s also a need to prepare for the inevitable—and that includes the SEC comment letter.

Technically speaking, Section 408 of the Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission to review the filings of public registrants at least once every three years. And that review may be sooner if the company has reported a material misstatement, experienced significant volatility in its stock price or been affected by something the SEC deems relevant. Based on its review, the SEC issues a comment letter to start the dialogue with the company. It usually requests supplemental information so that SEC staff can better understand the company’s accounting and disclosures. Depending on the company, its activities and transactions, and the transparency of its disclosures, these letters can include a handful or dozens of comments.

Practically speaking, comment letters are known to hit the CFO’s fax machine just after close of market on an otherwise quiet Friday afternoon. In most cases, the SEC will ask the company to respond to its inquiry within 10 business days.

Instantly unsettled, corporate executives respond frantically (and sometimes in a panic), racking their brains about who they should call and assessing whether voicemails will be returned before the weekend. Then their minds wander to the level of risk inherent in the accounting and disclosures contained in their filings. And finally, they’re left asking, “What now?”

It doesn’t have to be this way. Creating an SEC preparedness plan can save time and money and is scientifically proven to lower stress levels.

Creating your emergency plan

It’s a given that responding to SEC inquiries requires time, resources and efficient project management capabilities.

First, create a SEC review preparedness folder on your company’s intranet—it should include copies of the following documentation:

  • All technical accounting memos, whether written by the company or your auditors
  • Correspondence with your auditors and legal counsel regarding key accounting and disclosure decisions
  • Any materiality assessments that were performed for evaluation of errors, disclosures and the like
  • Documentation regarding key transactions, including impairments, business acquisitions and restructuring activities
  • Restatement documentation (if applicable)

Having reviewed and assisted in the response to hundreds of SEC comments, I’m still amazed by how much time can be spent tracking down the information needed to respond.

Second, create a tactical plan that identifies who should be engaged in the response and how efforts will be coordinated. Comment responses should be both thoughtful and careful—you can’t do that if you’re in panic mode.

Consider the following steps:

  1. Coordinate a call with key accounting members, legal counsel, outside legal advisors and your auditors.
  2. Create a “response team,” which may include both accounting and legal personnel, capable of drafting responses.
  3. Develop a timeline, including when information will be gathered and when responses are due, allowing enough time for review.
  4. Determine who should be engaged in the review. Legal counsel and the auditors are a given, but what about your disclosure committee and board of directors?
  5. Assign a project coordinator to consolidate comments and keep everyone up-to-date and on schedule.

With key information at your fingertips and a tactical plan in hand, you won’t be shaken when the big one arrives.

 

 

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