SUBSCRIBED INSTITUTE
Common SEC Comment Letter Questions for Revenue
What is a Comment Letter?
At a company that’s recently gone public, finance and accounting leaders are dealing with Securities and Exchange Commission filings, reviews, and comment letters, or letters of comment, for the first time. The overall intent of an SEC filing review is to monitor and enhance your company’s compliance with disclosure and accounting requirements. As an SEC registrant, you will have some level of review at least every three years to ensure that you’ve put the necessary transparency in place for the average investor to make informed decisions about your company.
To help with these compliance responsibilities, Zuora has gathered all the information you need about SEC comment letters for you. Here’s what you need to know to get it right when it comes to the SEC comment letter process.
SEC comment letters matter.
The SEC reviews all public companies every few years, and companies with large market capitalizations, material restatements, or market volatility receive more frequent oversight. These days, it’s nearly automatic to receive comments during the IPO process or in your first few post-IPO filings. The scope of SEC review can range from 20 or more comments on a variety of topics in an IPO to a single comment on a Form 10-K regarding a specific issue. Legal compliance comments tend to be less frequent and easier to deal with than accounting comments, which often require significant analysis of technical accounting rules, second guessing of judgments, or even revision of financial statements.
A restatement
One major risk in the SEC comment process is that your company may be required to restate your financials from a previous year. Another risk is that the SEC could ask you for a more detailed analysis — now or in the future — than your current processes and systems are designed to capture. There is plenty of risk in the filing process overall because of the inherent potential for error from inaccuracy and misrepresentation. Restatement is not only your company’s acknowledgement that you got something wrong, it’s also conceding that you didn’t realize you did.
A formal process
The SEC comment process is a prescribed, drop-everything situation with a set timeline. It’s often a resource drain for companies, incurring costs of financial and human capital to complete the process at a satisfactory level. Or, in order to avoid losing their in-house teams to the undertaking, companies find it necessary to hire outside help to manage the responses.
A public back and forth
A second round of comments can occur if you fail to review each comment thoroughly or respond to each portion of the question or request. Additionally, all comments become public once submitted and resolved, and they are posted to the SEC’s website no earlier than 20 days after the review is completed or the registration statement is declared effective. Even comment letters related to Emerging Growth Companies that have filed registration statements confidentially are eventually made public if the registration statement is declared effective.
Recent trends show revenue matters to the SEC.
According to a 2021 research report from Deloitte, SEC reviews with comment letters have been decreasing in number since 2017. However, questions around revenue recognition continue to be a top comment letter category, regardless of any overall decline. And although the SEC does not publicly disclose the criteria it uses to select companies and filings for review, Zuora’s review of SEC trends finds that revenue is one of the most important metrics — and the basis for other metrics — of SEC focus.
The SEC centers its comments on a particular set of topics.
After analyzing the comments made public on the SEC’s website, and after reviewing our own comment letter questions from FY19 10-K, Zuora found the following to be the most common topics of SEC comments:
- SSP Determination and Allocation
- Remaining Performance Obligations
- Disaggregation of Revenue
- Management Measures
- Revenue Accounting Policy
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SEC comment letters: recommendations to remember
So what does all this mean for your company and your financial teams? When the SEC comes knocking, you’ll be well prepared if you’ve invested in people, processes, and systems to keep your accounting consistent, your financial picture accessible, and your business forward-thinking.
Minimize manual tasks
To support their business models, many companies are using highly customized ERP or spreadsheet-based solutions that require accountants to execute a series of manual tasks. In order to recognize revenue — the SEC metric of choice — finance teams who do their accounting manually end up using error-prone practices such as grouping contract data, monitoring sales contracts, performing SSP allocations, and identifying performance obligations. This resource-intensive, risky process isn’t feasible with how companies today price and package their offerings, nor does it allow your company to tell a story that’s consistent enough to satisfy SEC queries. Automated solutions can give you the machine learning capabilities you need to weed out human error and maintain consistency in your books and your business.
Harness the power of automation.
Automation is what makes real-time insight into your business become a reality. The right system can make it possible for you to have accurate, up-to-the-minute data without waiting until your financial teams close the books each period. This real-time approach to information gives you more time to accurately understand your business context and more time to avert pending red flags the SEC will inevitably find. The faster you access good data, the longer you have to get your story right by making informed decisions throughout the fiscal year.
Keep your eye on the accounting goal.
Whether or not you’re facing the SEC, the objective of your financial recording processes remains the same: completeness, accuracy, and consistency. Being prepared at any point to correctly and uniformly account for an entire financial situation is a basic best practice for any business. And when your company employs the tools that make this preparation easy and thorough for your financial team, you ensure your records are ready to support the increased oversight that comes with operating a publicly traded company.
Make real-time insight your secret weapon.
If your balance sheets, P&L statements, and revenue waterfalls require manual queries and analysis, you’re dealing with stale and potentially inaccurate data. When the SEC calls that data into question, your burden of proof has become exponentially more complicated. Accurate accounting snapshots of every quarter or year require both qualitative and quantitative pieces. Your company cannot explain — to the SEC or otherwise — what happened and why it happened without a real-time understanding of your business.
Your company needs the ability to act, not just react. Make this practice your company standard with real-time systems that prioritize the compliance responsibilities your company will face during and after your IPO. By giving your financial teams the tools they need to keep your revenue story straight, you’ll ensure a smooth SEC comment letter process and present a company with revenue practices your investors can trust.
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