Companies that are late in filing their financial statements with the SEC may simultaneously trigger default provisions under their credit agreements and indentures. Accounting problems from practices such as the backdating of stock options make it difficult for companies to get auditors to sign off on their financial statements, resulting not only in a failure to meet SEC reporting deadlines but also a default under their loan agreements and cross-defaults under other agreements.
This problem is widespread, with over 150 companies affected by the options backdating scandals and over 1300 companies in 2005 alone filing restatements of their financial statements with the SEC (see Securities Law Daily, Oct. 30, 2006). Failure to file periodic reports with the indenture trustee within a short time of the SEC filing date creates a default under many indentures and leads to a cascading series of adverse consequences for the issuer.
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