Annual reports, or 10-Ks, are known for their extensive information relating to all aspects of a company’s business. With that being said, these files leave plenty of room for missed or omitted information, misstatements, or other inadvertent errors. In such cases, the company would file an amended 10-K (more commonly referred to as a 10-K/A) in order to provide or correct the missing or incorrect information.
Overall, there were around 340 10-K/As filed in 2017, a decrease of about 19% from the 420 or so filed in 2016. Part of the decline in the number of amended filings is likely to be attributed to the decline in the overall population of SEC registrants.
The most common reason for a 10-K/A was to incorporate the information required in Part III. This information, Items 10-14, is allowed to be filed either (a) within the original 10-K or (b) in a proxy statement or (c) in an amended 10-K no later than 120 days after the period end. Many companies chose the last option, filing after voting results become available. An amendment to incorporate Part III is a technical amendment and 10-K/As filed for this reason should not raise concerns.
Missing signatures and exhibits were the second most common reason for filing an amended 10-K in 2017. These amendments are frequently related to typographical errors or other small issues and do not raise alarms, with the possible exception of the re-filing of confidential exhibits following the reception of SEC comments.
The third most common reason for a 10-K/A in 2017 was related to auditors’ consents. Most of these amendments cited “administrative errors” as the reason for correction.
The best example of amendments that are significant red flags are those that cite financial restatements as the primary reason for filing a 10-K/A. In many cases, material restatements would also be accompanied by material weakness in internal controls. Here is an example of the disclosure text for Malvern Bancorp (free summary Watchdog Report on WatchdogResearch.com):
As previously reported in a Form 8-K filed on November 28, 2017 (the “Item 4.02 8-K”), on November 21, 2017, Malvern Bancorp, Inc. (the “Company”) was advised by BDO USA, LLP (“BDO”), its independent registered public accounting firm, that the Company should disclose that BDO’s audit report on the Company’s consolidated financial statements as of September 30, 2016 and 2015, and for each of the years in the two year period ended September 30, 2016, and BDO’s completed interim reviews of the Company’s consolidated interim financial statements as of and for the periods ended December 31, 2016, March 31, 2017 and June 30, 2017 (collectively, the “Specified Financial Statements”), should no longer be relied upon. As a result of the foregoing, the Company is restating the Specified Financial Statements. The audited annual financial statements as of September 30, 2016 and 2015, and for each of the years in the two year period ended September 30, 2016, as included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, which was originally filed on December 14, 2016 (the “Original 10-K Filing”), have been restated as set forth in this Amendment No. 1 on Form 10-K/A (this “Amendment”). Restatements of the Company’s consolidated interim financial statements for the periods ended December 31, 2016, March 31, 2017 and June 30, 2017 are being filed in amendments to the Company’s Quarterly Reports on Form 10-Q for such periods. Also as previously reported in the Item 4.02 8-K, BDO also advised the Company that they have concluded that a material weakness in the Company’s internal controls over financial reporting existed, and that BDO’s report on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2016 in Item 9A of the Company’s fiscal 2016 10-K that the Company’s internal control over financial reporting was effective as of September 30, 2016, should no longer be relied upon.
Although many of these amendments are mundane and routine in nature, reasons cited for filing amended 10-Ks should be carefully evaluated for red flags, indications of process weaknesses, or other underlying issues.