August 9, 2023

Disclosure Reviews: How the Staff Uses Earnings Calls

Our “SEC Comment Letter Process Handbook” – which was recently updated with gracious assistance from former Staffers Sonia Barros & Sara von Althann of Sidley Austin – notes that almost any of your disclosures are “fair game” during Corp Fin’s disclosure review process, including earnings calls and perhaps even social media. The Enforcement Division is also interested in those disclosures – as indicated by the non-GAAP enforcement action that John blogged about in March.

This research about how the Corp Fin Staff uses earnings call disclosures in its comment letters provides numerical data to back that up. The authors analyzed over 800 letters from 2005 to 2018. Here are a few takeaways that they recently shared on the CLS Blue Sky Blog:

We examine all SEC comment letters referencing a firm’s earnings conference call(s). Our sample includes over 800 letters from 2005 to 2018, representing slightly over 1 percent of all comment letter conversations available from Audit Analytics. More than two-thirds of the sample are 10-K comment letters, and another 18 percent pertain to 10-Qs. Thus, conference call disclosures primarily serve as a reference point during SEC reviews of periodic reports.

…We observe that approximately 80 percent of the sample are cases where the SEC refers to information disclosed in a conference call to support the claim that the firm’s disclosures in its periodic report(s) are insufficient. The second-largest group comprises 15 percent of the sample and includes comment letters emphasizing that a specific disclosure in the reviewed filing is inconsistent with the facts disclosed or the extent or format of the disclosure in the conference call. Except for non-GAAP or key performance indicators (KPI) comments, very few letters suggest that a specific disclosure in a conference call is a problem.

Our manual examination of the conference call comment letters allows us to provide other descriptive details about the subject and format of conference call disclosures targeted by the SEC. The three most frequent topics addressed are revenues, segment reporting, and non-GAAP/KPIs. Together, these three issues account for 45 percent of our sample. Management Discussion and Analysis (MD&A) disclosures related to risk factors, products, customers, markets, or seasonality are also common, representing 23 percent of the sample.

Overall, we document a broad scope of issues addressed, suggesting that the SEC finds firms’ conference call disclosures useful in many aspects of the review process. We observe that the SEC refers to information disclosed both during the management presentation and the question-and-answer portion of the calls. While half of the comments refer to the conference call from the same fiscal quarter as the filing under review, the SEC also references conference call disclosures from earlier periods and even from calls that occur after the filing being reviewed.

This info provides a good roadmap for what to focus on when you’re reviewing an earnings release, in addition to forward-looking statements. And if you’re looking for a way to show your “value-add” in the earnings release process, you can now point to data to show that your involvement may save your company from comment letters – or worse – down the road.

Liz Dunshee