The Reality of Real-Time Reporting

New, superfast 8-K rules under the Sarbanes-Oxley Act could spawn problems with mergers, loan covenants, and share prices. Needed: a solid risk-management plan.

To report or not to report?

When finance executives must choose whether to pump out an 8-K or wait until the quarter’s end to reveal a possibly important business event, now might be a good time to err on the side of caution. That, at least, is the working philosophy of Mike Gersie, chief financial officer of Principal Financial Group, the huge 401(k) plan provider and life insurer.

Gersie has in mind the new reporting regime installed under Section 409 of the Sarbanes-Oxley Act — “Real-Time Issuer Disclosures” — and the recently enacted Securities and Exchange Commission rules that govern it. Even before the enactment of the SEC rules, he says, the company had been “turning over rocks” to bring potentially significant events to light, so the decision about whether to report them could be made promptly. A few times each month, for instance, the corporation’s finance team calls the CFOs and controllers of the company’s business units to ask about unexpected changes, both large and small. Principal is also formalizing the process for deciding which events should be reported on, as well as criteria for making those decisions.

To be sure, Principal has been aggressive about revealing unexpected events since it went public in October 2001. Barely a month later, the company issued an 8-K saying that it was reviewing its $171 million investment exposure in Enron, notes Gersie, even though those investments were a small part of Principal’s overall portfolio. In 2003, in response to investor queries about its investments in the beleaguered airline industry, the company reported on that exposure between quarters. While those efforts pre-date the new SEC rules, the company is stepping up its efforts to provide thorough disclosures in response to the requirements, adds the finance chief.

Indeed, taking pre-emptive action seems to make a whole lot of sense just now. Starting August 23, companies will have just four business days to report events that could have a “material effect” on their financial statements rather than the current deadlines of 5 business days or 15 calendar days, depending on the event. The new rules are the SEC’s response to the passage in Sarbox 409 that requires public companies to disclose the facts about financially significant events “on a rapid and current basis.”

Much more significant than the slightly tightened reporting period is the greatly expanded number of judgment calls that executives will have to make within it, now that the SEC has added eight new triggers for 8-K filings. Thanks to two triggers, which call for a company to report its unexpected entry into or exit from “a material definitive agreement,” a CFO might learn on Monday that a big sales contract on had been cancelled, then be required to report it to the SEC before the end of the work week. Within that time, the executive would likely have to call on accountants and lawyers to help define whether the event was indeed “material” and “definitive” — thorny definitional chores, at best.


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