September 27, 2018

Restatements: Tax Reform/Accounting Changes Open Pandora’s Box?

This WSJ article speculates that the work that companies have done in order to comply with new accounting standards & address the financial statement impact of tax reform may have opened Pandora’s box when it comes to restatements. Here’s an excerpt:

During the first six months of 2018, 65 companies detected accounting mistakes significant enough to require them to restate and refile entire financial filings to regulators, compared with 60 companies for the same period last year, according to Audit Analytics. The Massachusetts-based research firm analyzed disclosures from more than 9,000 U.S.-listed going back to 2005, identifying companies that had to reissue their financials because prior documents were deemed no longer reliable.

The uptick came during a period when finance teams were overhauling corporate accounting paperwork to comply with the new U.S. tax law and new revenue accounting rules. In many instances CFOs and their staffs had to go over past financial reports to recalculate the value of tax credits or liabilities, or to assess how past results would look under new rules.

The article highlights two companies – Seneca Foods & Camping World Holdings – that restated financials based upon issues discovered during efforts to address the new revenue recognition standard (Seneca) and tax reform (Camping World).

We’ve previously blogged about Audit Analytics’ warning that the new revenue recognition standard might result in more restatements – so if this turns out to be a trend, they’ll have every right to say “we told you so.”

SEC Enforcement: A Very Expensive “Fish Story”

The SEC recently announced an enforcement action against SeaWorld & its CEO for alleged disclosure shortcomings associated with the impact of the documentary “Blackfish” on the company’s business.  This  Ning Chiu blog summarizes the proceeding.  Here’s an excerpt:

News articles begin to speculate as early as August 2013 that there may be a link between the film and the company’s declining attendance. That fall, the company’s annual reputation study conducted by its communications department found that its score had fallen by more than 12% from the prior year. This finding was presented to the strategy committee that included the CEO, but was excluded from materials for a later meeting that the chairman of the board attended.

Musical acts and promotional partners started to cancel performances or withdraw from their marketing arrangements, which the SEC believes “should have provided confirmation” that the company’s reputation had been materially damaged by the film. Instead, in articles around the same time, the CEO expressly stated that he could not “connect anything” between the film and any effect on the company’s business. The company also stated in other media that there was “no truth” to the suggestion that the company’s reputation had suffered.

SeaWorld and its CEO agreed to settle the SEC’s charges without admitting or denying the allegations. The company paid a $4 million penalty and the CEO paid $850,000 in disgorgement and prejudgment interest and a $150,000 civil penalty.

Bad News: Give It to ‘Em Straight!

I guess you could say that the theme of today’s blogs is “bad news” – so this recent blog from Adam Epstein about how to deliver that kind of news to investors is probably a good way to close things out.  The short answer is “give it to ’em straight.” Adam reviews all the ways he’s seen companies try to spin bad news, and says they just don’t work. Here’s an excerpt:

It doesn’t work. Smart investors have seen this movie before, and it ends badly. Every public company has bad quarters. Great companies face bad news directly, and succinctly, because nothing they say is going to undo the bad results. Every other path destroys trust and erodes value.

The blog acknowledges that sometimes a company’s bad quarter may distract from many other positive developments in the business. If that’s the case, the blog advises that instead of using those developments to spin bad news, management is better off to let those future results speak for themselves when announced.

John Jenkins