Analyzing Late SEC Filings for Differential Impacts of IS and Accounting Issues Jian Cao Florida Atlantic University Thomas Calderon The University of Akron Akhilesh Chandra The University of Akron Li Wang The University of Akron UWCISA October 2, 20091

Total Number of Delayed 10-K and 10-Q Filings for CRSP companies Timely disclosures and the SEC’s accelerated filing deadlines for Forms 10-K and 10-Q (SEC 2002, 2005) UWCISA October 2, 20092

How Does IS affect Financial Reporting? Automated and integrated IS environment can have pervasive effects on financial reporting.  Timeliness  Internal control and audit quality  IS related internal control weakness - audit delays and less accurate forecasts UWCISA October 2, 20093

Motivation When a company says that IS is a source of tardiness, it sends a significantly negative signal to the market.  IS issues are generally not disclosed to the market  IS related filing delays can be an indicator of broader financial reporting issues We investigates stock market response to the reasons for notification of late SEC filings (i.e., NT 10-Ks and NT 10-Qs)  Does the market react differently to IS issues versus accounting and other issues? UWCISA October 2, 20094

Background In 2002, in response to SOX Section 409, the SEC accelerated the filing deadlines for 10-Ks and 10-Qs.  Form 10-K: 90 days (12/ 02 ) - 75 days (12/ 03 ) - 60 days (12/04)  Form 10-Q: 45 days (12/ 03 ) - 40 days (12/ 04 ) - 35 days (12/05) In 2005, the SEC revised rules - increasing late filing & SOX 404. Large Accelerated Accelerated Non-Accelerated  Form 10-K 60 days (12/06) 75 days 90 days  Form 10-Q 40 days 40 days 45 days UWCISA October 2, 20095

Background Form 12b-25 or NT filing with the SEC  Notice of late filing before the due date  Must detail the reasons Negative consequences  SEC sanction  Exchange delisting Therefore, we expect negative stock market response. UWCISA October 2, 20096

Literature Review Delayed 10-K filings could be a signal for financial distress  Lawrence (1983): , 58 firms  Alford, Jones and Zmijewski (1994): , 182 firms The impact of NT filings on subsequent releases of delayed10-Ks and 10-Qs  Griffin (2003) finds that the investor response to 10-K and 10-Q reports is more elevated for prior late filers UWCISA October 2, 20097

Hypothesis  IS issues affect the effectiveness of internal control, the timeliness, and the reliability of financial statements  Prior to the implementation of SOX 404 (accelerated filers ), disclosure about IS issues is not widely available We expect IS reasons for NT filings to be associated with negative market response and to have larger negative response than accounting and other related reasons. UWCISA October 2, 20098

Sample Our initial sample is composed of all NT filings for 10-K and 10-Q that are included in the Audit Analytics Database January 2000 to December We select filings only for those companies that are also listed in CRSP. This procedure yields 1,310 annual and 1,727 quarterly filings, representing 1,303 individual registrant companies. UWCISA October 2, 20099

Methodology Market response: standardized daily excess stock return (SER) SER i,t = ER i,t /  ERi,t ER i,t - Market-adjusted return on t;  ERi,t – Std. Dev. of ER i,t calculated over a “non information” estimation period ([-10, -6] to [+6, +10]) Reasons for filing late - 10 primary categories: Acts of God (1.22%) Accounting Change (2.21%) Accounting Quality (10.36%) Administrative Matters (4.39%) Auditor related (7.79%) Financing Issues (8.15%) Going Concern (4.12%) IS Issues (2.44%) SOX (13.96%) SEC (14.02%) UWCISA October 2,

Methodology (cont’d) Regression model for NT 10-Ks SER i,t = α 0 + α 1 YR0304 i,t + α 2 YR05 i,t + α 3 WK i,t + α 4 IC i,t + α 5 MC i,t + α 6 CO i,t + α 7 LIQ + α 8 LEV + α 9 SEC i,t + α 10 SOX i,t + α 11 AQ i,t + α 12 FIN i,t + α 13 AUD i,t + α 14 ADM i,t + α 15 GC i,t + α 16 IS i,t + e i,t (1) Regression model for NT 10-Qs SER i,t = β 0 + β 1 Q04 i,t + β 2 Q05 i,t + β 3 WK i,t + β 4 IC i,t + β 5 MC i,t + β 6 CO i,t + α 7 LIQ + α 8 LEV + β 9 SEC i,t + β 10 SOX i,t + β 11 AQ i,t + β 12 FIN i,t + β 13 AUD i,t + β 14 ADM i,t + β 15 GC i,t + β 16 IS i,t + e i,t (2) (-) UWCISA October 2,

Results Tables 4, 5, and 6 UWCISA October 2,

Conclusions The overall significant negative returns on the day of and one day following the NT filings - Investors do value the timeliness of the financial report and there is economic cost associated with late filing. More importantly, IS issues - significantly negative market response compared with accounting and other reasons for NT filings. The findings suggest the reasons for NT filings provide information to the market and that late filers bear different noncompliance costs for IS issues than for accounting and other issues. UWCISA October 2,

Contribution Contributes to the wider research questions regarding the impact of IS on the quality of financial reporting. Documents, using a broad sample, that late filers bear different noncompliance costs for IS issues than for accounting and other issues. Improves our understanding of the information content of untimely filings (e.g., Lawrence 1983; Alford, Jones and Zmijewski 1994) UWCISA October 2,

Thank You! UWCISA October 2,