2014 SEC Filing Highlights, Part 1 of 2

In this post we kick off what we hope will be an annual series. It is a full-year recap of some of the most notable SEC disclosures that we track: a “best-of-the-year” review. In this first post, we’ll look at the largest restatement; the longest string of ineffective controls; and some notable non-timely filings, comment letters, and auditor ratification votes. In a follow-up post, we’ll look at non-recurring adjustments, D&O and auditor changes, and more.

Non-Reliance and Revision Restatements
As noted in our latest Restatements report, 2014 saw 746 unique companies disclose a total of 831 financial restatements. 600 of the restatements (about 76%) were “revision” restatements that did not undermine reliance on previously filed financial statements.

The largest restatement of the past year was that of Hertz (HTZ). The car rental company’s errors go back to at least 2011, and reduced cumulative net income by more than $200 million. The final restated financial statements were just released in July 2015, making it one of the longest restatement-related investigations in the past few years.1

ICFR and Disclosure Controls
In 2014, over 30,800 SOX 302 Disclosure Control and Procedures assessments were filed by roughly 8,800 unique companies. Of those 8,800 companies, about 2,200 (25%) disclosed at least one weakness or significant deficiency that caused their controls to be ineffective.

At 23 consecutive quarters, Retrophin, Inc. has the longest streak of ineffective SOX 302 assessments. The company also had ineffective management ICFR assessments in each of the past 5 years, making it the longest running streak of adverse SOX 404 opinions too. (Retrophin, an emerging growth company, is exempt from the requirement to obtain an audit of its internal controls over financial reporting.)

Some of the control weaknesses noted by Retrophin were related to errors in the granting of executive compensation awards. After conducting an internal investigation, the company issued a restatement in Q1 2015.

While Retrophin has taken numerous steps to remedy these material weaknesses – including the implementation of a new accounting system and hiring additional staff – as of June 30, 2015 at least some of the weaknesses were still unremediated.

Comment Letters
Out of more than 6,300 conversations originating in 2014 and relating to 10-Ks and 10-Qs, the longest single string belongs to Petroquest Energy, Inc.2 Their correspondence with the SEC spanned 277 days and contained 19 letters, mostly related to estimates of oil and gas reserves.

The length of the conversation could be partially explained by the Company’s need to establish a separate PUD Review Committee:

COMPANY RESPONSE: In response to the Staff’s comments, the Company has recently taken steps to enhance its reserve booking processes to comply with Rule 4-10(a) of Regulation S-X and the Staff’s guidance thereunder with respect to proved undeveloped reserves. In connection with the adoption of its development plan as of December 31, 2014, the Company formed a PUD Review Committee (the “Committee”) comprised of its Chief Operating Officer, Executive Vice President of Operations, Chief Financial Officer and Reservoir Engineering Manager. This Committee will meet annually in connection with each year-end reserve report and its purpose is to take a more holistic review of PUD locations booked, not only in terms of technical and financial merits as reviewed by the Company’s independent reservoir engineering firm, but also to apply a more robust evaluation of the timing and reasonable certainty of the development plan in light of all known circumstances.

Petroquest twice requested an extension of time to properly respond to the comments, and also requested that part of the information contained in the letter remain confidential.

Auditor Ratification
Shareholders of Green Earth Technologies, Inc. registered a 68.32% vote against the reappointment of Friedman LLP, which was the largest 2014 vote against ratifying an auditor. The national firm has been Green Earth’s auditor since 2008. In each of its opinions, the auditor has expressed doubt about the company’s ability to continue as a going concern. Green Earth Technologies is without a doubt an outlier. For all the other companies it audited in 2014, Friedman LLP averaged 98.48% in favor of ratification.

Non-Timely Filings
In 2014 over 2,000 companies issued an NT filing, indicating that they would not be able to file a required periodic report by the appropriate deadline. First Hartford Corporation seemed to have the most difficulty, issuing seven NTs over the course of the calendar year. Interestingly, First Hartford Corporation was also the leader in total NT filings during the 5 year period from 2010 to 2014, with twenty-two. In most of those filings, the company claimed “insufficient time” as the reason for being unable to file on time – a bit of a tautology.

Experience Art & Design, Inc. had the longest delay between filing an NT and issuing their actual report. On May 15, 2014, the company filed an NT 10-Q indicating that they would be unable to file their first quarter report for the “period ended March 31, 2014, because the financial statements, review by auditor and XBRL formatting for the period are incomplete.” 466 days later, on August 24, 2015, the company finally filed its 3/31/14 10-Q. While that is the longest delay, over 400 companies still haven’t issued their late filing as of the end of August 2015.

1. With the final results issued, Hertz displaced KBR as the largest restatement. KBR had previously topped the list with a cumulative negative impact of $154 million.
2. mCig, Inc. had the longest conversation with 25 letters, but we excluded this company from the analysis since most comments focused on 8-K rather than 10-K or 10-Q filings.