Reviewing the SEC’s Review Process: 10-K Comment Letters and the Cost of Remediation

Posted: 31 Oct 2011 Last revised: 29 Nov 2013

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Lauren M. Cunningham

University of Tennessee - Haslam College of Business

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: March 26, 2013

Abstract

Securities and Exchange Commission (SEC) comment letters provide independent and timely feedback on the clarity of disclosures and on the extent to which filings comply with Generally Accepted Accounting Principles and SEC reporting regulations. We investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation. We find that in addition to factors explicitly stated to increase SEC scrutiny in Section 408 of the Sarbanes-Oxley Act, low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter, the extent of comments, and the cost of remediation. The probability that the comment letter results in a restatement is higher for smaller companies and for companies engaging a small audit firm. We also provide evidence that comments relating to accounting issues result in higher remediation costs, largely due to the additional time required to resolve comments relating to classification issues and fair value issues. Our findings should be of interest to stakeholders who use SEC comment letters to assess disclosure quality and reporting compliance, and to managers and other stakeholders impacted by costs associated with the SEC’s review process.

Keywords: comment letters, disclosure quality, filing reviews, reporting compliance, Securities and Exchange Commission

JEL Classification: M41

Suggested Citation

Cassell, Cory A. and Cunningham, Lauren M. and Myers, Linda A., Reviewing the SEC’s Review Process: 10-K Comment Letters and the Cost of Remediation (March 26, 2013). Accounting Review, Vol. 88, No. 6, 2013. Available at SSRN: https://ssrn.com/abstract=1951445 or http://dx.doi.org/10.2139/ssrn.1951445

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Lauren M. Cunningham

University of Tennessee - Haslam College of Business ( email )

Accounting and Information Management
603 Stokely Management Center
Knoxville, TN 37996
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

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