Reading Financial Reports For Dummies
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Public companies must file an unending stream of financial reports with the SEC. They must file financial reports quarterly as well as annually. They also must file reports after specific events, such as bankruptcy or the sale of a company division.

Quarterly reports

Each quarter, public companies must file audited financial statements on Form 10Q, in addition to information about the company's market risk, controls and procedures, legal proceedings, and defaults on payments.

Yearly report

Each year, public companies must file an annual report with audited financial statements and information about

  • Company history: How the company was started, who started it, and how it grew to its current level of operations

  • Organizational structure: How the company is organized, who the key executives are, and who reports to whom

  • Equity holdings: A list of the major shareholders and a summary of all outstanding stock

  • Subsidiaries: Other businesses that the company owns wholly or partially

  • Employee stock purchase and savings plans: Plans that allow employees to own stock by purchasing it or participating in a savings plan

  • Incorporation: Information about where the company is incorporated

  • Legal proceedings: Information about any ongoing legal matters that may be material to the company

  • Changes or disagreements with accountants: Information about financial disclosures, controls and procedures, executive compensation, and accounting fees and services

In addition to regular reports, public companies must file an 8-K, a form for reporting any major events that can impact the company's financial position. A major event may be the acquisition of another company, the sale of a company or division, bankruptcy, the resignation of directors, or a change in the fiscal year. A public company must report these events within four days of the event's occurrence.

The rules of the Sarbanes-Oxley Act

All the scandals about public companies that emerged in the early 2000s have made this entire reporting process riskier and more costly for company owners. In 2002, Congress passed a bill called the Sarbanes-Oxley Act to try to correct some of the problems in financial reporting. This bill passed as details emerged about how corporate officials from companies like Enron, MCI, and Tyco hid information from the SEC.

New SEC rules issued after the Sarbanes-Oxley Act passed require CEOs and CFOs to certify financial and other information contained in their quarterly and annual reports. They must certify that

  • They've established, maintained, and regularly evaluated effective disclosure controls and procedures.

  • They've made disclosures to the auditors and audit committee of the board of directors about internal controls.

  • They've included information in the quarterly and annual reports about their evaluation of the controls in place, as well as about any significant changes in their internal controls or any other factors that could significantly affect controls after the initial evaluation.

If a CEO or CFO certifies this information and that information later proves to be false, he or she can end up facing criminal charges. Since the passage of the Sarbanes-Oxley Act, companies have delayed releasing financial reports if the CEO or CFO has any questions rather than risk charges.

You'll probably hear more about delays in reporting as CEOs and CFOs become more reluctant to sign off on financial reports that may have questionable information. Shareholders often panic when they hear about a delay, and stock prices drop.

The Sarbanes-Oxley Act has added significant costs to the entire process of completing financial reports, affecting the following components:

  • Documentation: Companies must document and develop policies and procedures relating to their internal controls over financial reporting. Although an outside accounting firm can assist with the documentation process, managers must be actively involved in the process of assessing internal controls — they can't delegate this responsibility to an external firm.

  • Audit fees: Independent audit firms now look a lot more closely at financial statements and internal controls in place over financial reporting, and the SEC's Public Company Accounting Oversight Board (PCAOB) now regulates the accounting profession. The PCAOB inspects accounting firms to be sure they're in compliance with the Sarbanes-Oxley Act and SEC rules.

  • Legal fees: Because companies need lawyers to help them comply with the new provisions of the Sarbanes-Oxley Act, their legal expenses are increasing.

  • Information technology: Complying with the Sarbanes-Oxley Act requires both hardware and software upgrades to meet the internal control requirements and the speedier reporting requirements.

  • Boards of directors: Most companies must restructure their board of directors and audit committees to meet the Sarbanes-Oxley Act's requirements, ensuring that independent board members control key audit decisions. The structure and operation of nominating and compensation committees must eliminate even the appearance of conflicts of interest.

    Companies must make provisions to give shareholders direct input in corporate governance decisions. Businesses also must provide additional education to board members to be sure they understand their responsibilities to shareholders.

About This Article

This article is from the book:

About the book author:

Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.
While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.
She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She’s written over 20 books including Reading Financial Reports For Dummies and Trading For Dummies.
Lita was the content director for a financial services Web site,, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.

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