Fiscal Cliff, Sandy, and FCPA Among Top Risks Seen in Corporate Filings

Catherine Dunn

Corporate Counsel

01-11-2013

Over the past three months, Hurricane Sandy wracked the east coast of the U.S., fiscal cliff negotiations rocked Washington D.C., and the government enshrined the importance of antibribery compliance in its novella-length guidance document for the Foreign Corrupt Practices Act.

So how many public companies were concerned about those subjects—concerned enough, that is, to mention them in filings with the Securities and Exchange Commission?

In some cases, hundreds; in another case—that of Hurricane Sandy—more than 1,000, according to a new analysis by Intelligize, a compliance analytics firm launched by former White & Case and Shearman & Sterling attorney Gurinder Sangha. A whitepaper, “Managing Risk Better,” which the company published this week, examines public company filings from the last 90 days.

Consider how tense political talks over the fiscal cliff were manifested in the documents publicly traded firms are responsible for filling out. “Intelligize found over 700 companies have referred to the negative consequences of the fiscal cliff in recent SEC filings,” the paper states.

Who’s concerned? Try companies that depend on consumers having (and spending) discretionary income. SeaWorld Entertainment, for instance, referenced the fiscal cliff in its initial public offering filing, according to Intelligize: “Uncertainty as to the future global economic landscape, including risks relating to the so-called ‘fiscal cliff,’ has had and continues to have an adverse effect on consumers’ discretionary income and consumer confidence,” the theme- and water-park company wrote.

Government spending levels as well are concerning to the private sector. Healthcare companies such as Eli Lilly and defense contractors like United Technologies count among those that recently expressed concerns over a drop in government spending. “Many industries are still uncertain about how spending cuts to federal programs will impact their businesses,” the paper states.

The paper identifies “global economic uncertainty” as another major risk factor for industry, with many corporations counting on sales from international markets. Companies ranging from Norwegian Cruise Line to Williams-Sonoma to Hewlett-Packard discussed such risks in recent filings, according to Intelligize. For example, HP has pointed to a growth slow-down in China and to potential austerity measures in Europe, the Middle East, and Africa.

“HP further added that [these issues] would result in decreased revenue, gross margin, earnings, or growth rates and in increased difficulty in managing inventory levels in the future,” the paper states. “As a bellwether in its industry, HP’s exposure to international markets more than likely mirrors that of other large technology firms.”

Hurricane Sandy left its mark on scores of corporate filings, as companies in the Northeastern U.S. took financial hits from the storm. From airlines and insurers to retailers and utilities, “more than 1,000 companies have discussed Hurricane Sandy in their SEC filings, the second costliest storm in U.S. history,” the paper states.

Sangha foresees an increase in disaster-related disclosures to come: “In 2013, we will see more companies disclose disaster preparedness and business continuity plans in their SEC filings,” he predicts in the paper.

Enforcement against illegal bribery also appears to be top of mind. With more than 800 references to the FCPA in recent filings, Intelligize found that “most filings use similar language, even paragraphs, to protect themselves or describe their compliance efforts.”

Take Google’s approach, which references the FCPA’s prohibition on paying bribes to foreign officials to win business: “Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other agents will not engage in such conduct for which we might be held responsible,” the company states, according to Intelligize.

On average, Sangha notes, annual corporate reports filed on Form 10-K have doubled in size over the past decade—from nearly 50 pages in 2002 to more than 100 pages in 2012. “Even as we defer going over the fiscal cliff, Intelligize sees 2013 as requiring more disclosure around risks as uncertainties both at home and across the globe increase,” the paper concludes.