Do Last Year’s Risk Factors Look Good? Not So Fast...
Absent a significant change in the economy or the business of a company, or significant legislative or regulatory developments, the risk factors that need to be provided in SEC filings do not change much from year to year. There is an occasional new factor, or the deletion of an old factor, but typically the updates are minor.
That should not necessarily be the case. Increasingly over the last several years, companies have implemented more formalized approaches to consider and manage the risks that they face. These approaches range from simple, periodic reviews by management and reports to audit committees regarding the most significant risks, to formalized and sometimes fully-staffed “enterprise risk management” programs that systematically identify and address risks in a wide range of contexts.
As a company is considering the risk factors that should be provided in its Form 10-K, the financial reporting team needs to consider the risks that have been identified by management as part of the processes that are occurring elsewhere within the company. For instance, it would be awkward in securities litigation to defend why a risk that was given significant consideration by management and the audit committee, or that was portrayed as a large red circle on the “heat map” produced as a part of the ERM process, did not warrant discussion in the risk factors section. Similarly, it would make it more difficult for a company to avail itself of the safe harbor for forward looking statements where the disparity between the risk factors that were provided in the Form 10-K and what was discussed internally was so great that it undermined the company’s position that it provided “meaningful cautionary language.”
Well crafted risk factors, along with good safe harbor introductory language, is the least expensive insurance that a company can have with respect to securities litigation. We encourage you to keep this language up-to-date so that it can provide the best coverage possible.