There's a new accounting mantra echoing through the corridors of corporate North America, and it consists of four words: Better late than sorry.
A growing number of high-profile companies, from Alliance Atlantis Communications Inc. to Nortel Networks Corp., have been taking the heretofore unthinkable step of delaying their financial reports -- risking almost certain collateral damage to their share prices -- instead of venturing forth with questionable numbers that might once have been deemed good enough.
According to accountants and corporate governance experts, it's a marked about-face from just three years ago, when short-term stock gains seemed the almighty guiding light.
Welcome to the world of accounting chill.
New compliance laws under the U.S. Sarbanes-Oxley Act and comparable rules that came into effect this year in Canada in the wake of the Enron Corp. and WorldCom Inc. scandals have triggered high anxiety among managers and directors of public companies, not to mention their outside auditors. If it means incurring a blow to short-term stock value, they seem to be saying, so be it.
"A lot of the restatements that we're seeing and a lot of the delays are people who are trying to come to terms with new rules," said Laurie Woodruff, leader of the Canadian assurance practice at chartered accounting firm PricewaterhouseCoopers LLP. "Until things settle down, we're going to see more of the same for a while."
Though Mr. Woodruff declined to comment on specific examples, one of the more notable delays came just 10 days ago, when Alliance Atlantis announced it would push back its year-end reporting date to May 17 from April 5.
Chief financial officer Judson Martin was quick to stifle insinuations of scandal, indicating the delay was simply a matter of management and its auditor getting it right. "We want to make absolutely damned sure that we do our job and they do their job, absolutely," he said in an interview.
Asked if the auditing process had been weighed down with more discussions this year about writedowns and valuations, he said: "In the heightened environment that we're in, naturally that happens."
At Nortel Networks, meanwhile, the news was decidedly gloomier. The company abruptly fired three top executives, including chief executive officer Frank Dunn, as it delayed its official 2003 results and prepared a second restatement of three years worth of numbers. The shares lost about 30 per cent of their value in one day.
Both those delays capped a 12-month period in which restatements or reporting postponements were announced at such companies as Atlas Cold Storage Income Trust of Toronto, NovAtel Inc. of Calgary, U.S. mortgage finance giant Freddie Mac, New York Stock Exchange-listed Ahold NV, a Dutch-based grocery giant with stores in Holland and the United States, and Swiss-based Adecco SA, the world's leading temporary jobs agency, also listed on the NYSE.
Although some companies have admitted to specific deficiencies in internal accounting systems, others -- such as Freddie Mac and Ahold -- fell into the Alliance Atlantis category, saying the delays were solely a matter of doing things right.
"I think the delays are a result of everyone crossing the t's and dotting the i's and taking longer," said Beverly Topping, president and CEO of the Institute of Corporate Directors in Canada.
While the pain for investors may in some cases be short-lived, sources in the accounting world say the continent-wide bill for compliance with new rules could eventually make the multibillion-dollar implosions of Enron and WorldCom seem like pocket change.
And the pressure isn't about to let up. As of next year, new rules in Canada will compress the annual filing window by 50 days, placing further pressure on management.
Until this year, public companies had 140 days from the end of the fiscal year to file annual reports. As of 2005, that will be cut to 90 days. (In the United States, the goal posts have already been moved from 90 days to 75.)
Mr. Woodruff said the key reason for the move -- in the works before the Enron scandal broke -- is to minimize the opportunity for insider trading, information leaks and selective disclosure. "It's a big crunch," he said. "I think we're going to see companies withdrawing from public markets."
While most large public companies have managed to install computer systems and hire new staff to cope with more rigorous auditing rules, that time crunch could become especially burdensome to venture issuers and smaller Big Board companies, said Frank Allen, national chairman of the securities and capital markets group at law firm Borden Ladner Gervais LLP.
That's because smaller firms tend to have leaner infrastructures and less pull with public auditing firms, especially in the months following Dec. 31. "It's very difficult to get face time at that time of year for audit reports. You just don't have leverage with the audit firm."
Doing all the added accounting-compliance work without hitting clients with sticker shock is becoming "a huge challenge for the profession," Mr. Woodruff said. He added that even if auditors were to provide a tenfold increase in assurance, they wouldn't be able to scale their prices accordingly. "I'm confident that not one of my clients is going to pay me 10 times as much . . . no matter how much assurance I give them."
Rob Brouwer, managing partner for the Greater Toronto Area at auditor KPMG LLP, said that while quarterly statements in Canada need not be subjected to external audits (as they now are in the United States), "most public companies are having quarterly reviews done, and that clearly adds to the cost."
Also on the horizon in Canada are regulations that are expected to add a significant premium to the cost of mandatory external audits. The rules, analogous to Section 404 of the Sarbanes-Oxley Act, will force managers to file reports on the design and effectiveness of the internal controls that govern financial reporting procedures -- giving regulators a peek under the hood, as it were, of the auditing process.
The rules, still in the drafting stages, are also expected to require a company's external auditors to examine management's report and, in turn, provide an assessment of the controls and their effectiveness.
"That is one of the important pieces we're working on," said John Carchrae, chief accountant with the Ontario Securities Commission. Mr. Carchrae said he expects a Canadian draft to be available for comment "well before the end of this year," possibly by late summer or early fall.
If the U.S. experience is any guide, the cost of complying with 404-type rules will be far from trivial. Financial Executive International, a U.S.-based association of chief financial officers and comptrollers, conducted a survey in January that showed companies expect to incur an average 38-per-cent jump in external auditing fees, or $590,100 (U.S.). The specific numbers ranged from $52,200 for companies with less than $25-million in annual revenues to $1,531,400 for companies with more than $5-billion in revenues.
And that doesn't include a company's internal expenses. "It's a huge undertaking," Mr. Woodruff said. "The audit fees are the part of the iceberg you see above the water."
If there's a speck of good news, it's echoing through the corridors of the public accounting firms -- an industry that could use some after the debacle at Enron, which brought down former Big Five accounting firm Arthur Andersen.
"It's a newly influential profession," Mr. Woodruff said. "People listen to us these days."