SEC Comment Letters Every Analyst Should Read

As part of its requirements under the Sarbanes-Oxley Act of 2002, the SEC reviews the financial reporting of every public company at least once every three years. If the SEC has questions, the company will receive a SEC Comment Letter.

It’s important to know that SEC comment letters don’t necessarily indicate accounting failures. While most comment letters simply request additional information or clarity to financial statements, there are certain instances where comment letters trigger a red flag. In some cases, the SEC points out vital information that otherwise can get overlooked.

Comment letters shouldn’t raise eyebrows just because they are issued, but certain events that cause comment letters to fall out of the normal parameters can give analysts some insight to financial reporting matters.

When we read comment letters, we consider how much time it takes to resolve all the comments. Sometimes, however, the conversation between the SEC and a company can span multiple letters, leading to a lengthy back-and-forth.

Audit Analytics looked at more than 2,000 reviews of companies that were traded on one of the major exchanges between 2016 and April 2018 and identified 27 companies that had SEC reviews that included at least ten back-and-forth letters.
The top five companies by the number of letters are below. (To request the complete list of companies, email us at

In many cases, long SEC reviews appear to be correlated with other significant failures including SEC enforcement actions. For example, in 2017, MDC Partners Inc [MDCA] appeared on our radar after the company was charged in an SEC Enforcement action. One of the legal charges was related to using misleading custom metrics – the same metrics that were questioned by the SEC in some of the MDC’s comment letters.

Zynga [ZNGA] had a conversation that spanned eleven letters and 150 days. Some of the comments were centered on presentation of individually tailored non-GAAP metrics, a presentation that is explicitly prohibited by the SEC rules.

A major red flag for comment letters is noted when the SEC asserts that a company partially or completely failed to address the comments. Arguably, a company’s failure to respond should be taken in the context of the overall controls environment of the company. Since 2016, three companies failed to respond to SEC comments, including Axon Enterprise, Inc [AAXN] and Dana Inc [DAN]. In such a case, the SEC will typically issue a separate letter warning that if the comments are not resolved the agency will terminate the review and release the comments to the public.

A slightly more common scenario is the failure to incorporate previously agreed upon disclosure text from SEC review into the subsequent filings. Audit Analytics identified six instances where the SEC noted inconsistencies between the disclosure and previous responses to SEC comments.

In this article, we discussed some technical deviations and red flags that may warrant additional attention. Other types of letters worth a deeper look include comments related to revenue recognition or controls failures, and cases where the SEC issues comments on a yearly basis.

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