Real-time headaches

FINANCE HAS ALWAYS BEEN CAUTIOUS--now maybe more than ever. As of August 23, companies have 4 business days to report events that could have a "material effect" on their financials rather than the previous 5 business days or 15 calendar days, depending on the event. Moreover, under Section 409 of Sarbanes-Oxley--"Real Time Issuer Disclosures"--the Securities and Exchange Commission has added eight new triggers for the resultant 8-K filings.

Of course, CFOs have never blithely, decided whether a material event warranted an immediate 8-K or could wait until the quarter's end to be disclosed. Take Mike Gersie, CFO of Principal Financial Group. Even before Section 409, he says, the insurer had been "turning over rocks" to disclose potentially significant events. In December 2001, for example, Principal issued an 8-K saying it was reviewing its $171 million investment in Enron, notes Gersie, even though it was a small part of its portfolio.

While such a disclosure predates Section 409, the firm is stepping up efforts to provide thorough reporting, adds Gersie. A few times a month, Principal's finance team calls the CFOs of its business units to ask about unexpected changes. And Principal is formalizing how it decides which events to report.

Such actions make sense. The expansion of what must be revealed means new judgment calls must be made. The result, says Anne M. Marchetti, practice director of Parson Consulting, is that under Section 409, CFOs might well look at numerous events daily and ask: "Is this a reportable condition?"

IS THIS ANYTHING?

Just deciding what "material" means is problematic. In a 1999 staff accounting bulletin, the SEC said an event is material "if there is a substantial likelihood that a reasonable person would consider it important." The commission also curbed the use of "rules of thumb"--such as 5 percent of net income--as gauges of how big a misstatement must be before reporting is required.

While the SEC bulletin does list several reasons that a misstatement below 5 percent could be material, it is still broad. The problem with that, says George Victor, director of accounting and auditing at Reminick, Aarons & Co., is, "yon can't have 12 people with 12 different standards" of materiality. Even though rigid cutoffs should be shunned, he advises, "'you have to eliminate as much [variation] as possible so that everybody is reading off the same page."

To further complicate matters, the term "material definitive agreement" still needs defining. The SEC has indicated that a definitive agreement is a "binding agreement," according to Larry Spirgel, an attorney with Morrison & Foerster LLP. But what constitutes a "material definitive agreement," he says, "could have a dramatic effect on how companies disclose mergers."

FASHIONABLY LATE

So what can executives do to manage the risk of being caught by a material event? One possibility is simply to file late. Under a safe harbor, in fact, the SEC gives late fliers a pass until the end of their current reporting period on some triggers. A late filing won't cost a firm its eligibility to file an S-2 or S-3 short form when it raises capital--and thus it won't have to interrupt the process to issue the longer S-1. In contrast, there's no protection for incorrect reporting.

Some executives are taking a longer-range approach. They hope to uncover problems early by scanning operating-unit data. Each morning at Cognos Inc., for example, CFO Tom Manley pores over "a rich array of report cards," including information about software deals. "If I had several large deals fall out of a quarter, that could create a potential material event," he says.

At the same time, some executives believe that technology can help. Even as it attempts to emerge from bankruptcy, Owens Coming will be installing a business-performance-management system in the next few years, according to former corporate finance director Kent Wegener. "Today, if we had an operating issue, it would go through several layers of management and analytical cycles before it reached the top layer of the company. But because of technology, it would be available at the same time at the top level as lower management," he says--allowing any material event to be recognized sooner.

NEW TRIGGERS What the SEC says should spur an 8-K filing.

1. An unexpected entry into a material definitive agreement

2. An unexpected exit from a material definitive agreement

3. Creation of a material direct financial obligation, including long- and short-term debt and capital-lease commitments, or an off-balance-sheet arrangement

4. The acceleration or increase of a material direct financial obligation or a material obligation under an off-balance-sheet arrangement

5. Material costs incurred during exit from a business or disposal of an asset

6. Impairment of assets

7. Notice of a delisting or failure to satisfy a continued listing rule or standard, transfer of listing, or completed interim review

8. A decision that previously issued financial statements or audit reports can no longer be relied on

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