Month: March 2020

Novel Coronavirus Disclosures

I hope all of you are well.  We’ve been working on staying safe and keeping our systems updated and working.  I actually was hoping to have a new post by now giving you a summary of our Critical Audit Matter data findings.  However, with a shift to remote learning at the University of Nebraska at Omaha, remote learning for my son who is a sophomore in high school (and the only child of doting elderly parents) and then the absolutely unprecedented increase in early proxy filings I’ve not had time to get back to that post.  However – the audit reports are still flowing and if you would like a summary of the reports please let me know.  As soon as things settle down a bit we will finish the transformation of our audit fee data and include the CAM details as additional fields in the audit fee data.

However, I was talking to one of the team today who suggested that I do a quick check to see what had been disclosed about the Coronavirus in the filings that have been made since the first of the year.  So I did do a quick search of just 10-K and DEF 14A filings.  The DEF 14A disclosures mostly report on the prospect of switching to a virtual annual meeting.  As you can imagine the 10-K disclosures vary significantly in the level of detail and salience.  Here is a link to a summary extraction of the disclosures (frequency and company name as well as CIK (COVID.csv).

I was really interested in the nature of the disclosure made by Carnival Corp given the challenges they were facing with illnesses on their ships.  They filed their 10-K on 1/28/2020 (this is very consistent with their historic filing date for their 10-K).  Here is the extent of their disclosure:

Fiscal Year 2020 Coronavirus Risk
 
In response to the ongoing coronavirus outbreak, China has implemented travel restrictions. As a result, we have suspended cruise operations from Chinese ports between January 25th and February 4th, canceling nine cruises. We also expect that travel restrictions will result in cancellations from Chinese fly-cruise guests booked on cruises embarking in ports outside China. We estimate that this will impact our financial performance by $0.03 to $0.04 per share. If the travel restrictions in China continue until the end of February, we estimate that this will further impact our financial performance by an additional $0.05 to $0.06 per share. Five percent of our capacity was scheduled to be deployed in China in fiscal year 2020. If these travel restrictions continue for an extended period of time, they could have a material impact on our financial performance.

Here is the disclosure from American Airlines (2/15/2020)

  In particular, an outbreak of a contagious disease such as the Ebola virus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus, coronavirus or any other similar illness, if it were to become associated with air travel or persist for an extended period, could materially affect the airline industry and us by reducing revenues and adversely impacting our operations and passengers’ travel behavior. For example, the coronavirus outbreak that originated in or around Wuhan, China in January 2020 has resulted in the widespread suspension of commercial air service to the region, including by American, as well as the imposition by the U.S. and other governments of significant restrictions on inbound travel from this region. Our suspension of service, which remains in place as of the date of this report, and the potential for a period of significantly reduced demand for travel has and will likely continue to result in significant lost revenue. As a result of these or other conditions beyond our control, our results of operations could be volatile and subject to rapid and unexpected change. In addition, due to generally weaker demand for air travel during the winter, our revenues in the first and fourth quarters of the year could be weaker than revenues in the second and third quarters of the year.

 

These are interesting given the significant impact these companies have experienced as a result of this outbreak.  I’m not intending to evaluate the quality of the disclosure – that remains for an empirical study – I am just surprised at the brevity of the disclosure.

Since I had the disclosure counts, I was curious about the frequency of disclosures across time.  Below is a graph of the average count of the frequency of COVID or CORONAVIRUS mentions in 10-K filings by date.  The interesting feature of this pattern is that it at least suggests that this was not a significant concern to the management of this sample of firms until after March 8.  So the first disclosure was made by Carnival on 1/28 with two instances of either word.  While the average disclosure frequency doubled by 3/2 – this does not seem like a significant uptick relative to what happened soon after.  As an aside – the firms who disclosed before 3/3 were mostly Large Accelerated filers (the filing deadline for 12/31 FYE LAF was 3/2 this year).  So the uptick in disclosure counts reflects more mentions in the 10-Ks of relatively smaller firms

disclosure_freq

I also mentioned in the first paragraph that we have seen an uptick in early proxy and 10-K/A filing ( registrants will sometimes disclose information required by Item 10 – Item 14 in an amended 10-K if they are uncertain if they will be able to file their proxy in time to meet the 90 day deadline after they have filed their 10-K.  In total our executive/director and audit fee extractions are running about 12% higher then this same time last year.  Most of the increase seems to be in 10-K/A filings rather than a real increase in proxy filings.