Receiving a comment letter from the Securities and Exchange Commission (SEC) is not unusual for a smaller reporting company (SRC). However, it does not necessarily mean the company’s financial statements are materially incorrect. SEC comments often arise not because the accounting is wrong, but because the filing does not fully explain the company’s results, transactions, risks, or significant judgments.

This can be especially challenging for SRCs with lean finance teams and limited time to address complex disclosure requirements. Knowing where these questions commonly arise can help companies strengthen disclosures, reduce avoidable comments, and communicate more clearly with investors.

SEC Review Goes Beyond Technical Accounting

The SEC’s Division of Corporation Finance reviews whether public filings give investors the information they need to understand a company’s financial condition, operating results, risks, and significant judgments. As a result, a company can follow U.S. generally accepted accounting principles (GAAP) and still receive a comment if the related disclosure is too general, incomplete, or inconsistent with information presented elsewhere.

As such, management should evaluate each filing by asking two important questions:

1. Is the accounting technically correct?
2. Does the disclosure clearly explain the transaction and management’s reasoning?

The second question is often where companies run into difficulty.

Why SRCs May Receive More Comments

Many SRCs operate with limited accounting and financial reporting resources. The same individuals may be responsible for closing the books, researching technical issues, preparing SEC filings, maintaining internal controls, and responding to auditors.

Smaller public companies may also undergo significant changes over relatively short periods, including acquisitions, new financing arrangements, capital restructurings, leadership transitions, or changes to the business model. Each development can introduce new accounting conclusions, risks, and disclosure requirements.

Under these conditions, companies may rely too heavily on prior-year language or address disclosure questions late in the process. A disclosure may still be technically accurate but no longer reflect the company’s current operations, liquidity needs, risks, or accounting judgments.

Areas That Commonly Receive SEC Comments

Although SEC comments vary based on a company’s circumstances, several areas consistently receive greater scrutiny. These sections often involve significant judgment, complex transactions, or disclosures that require more context than the financial statements alone can provide.

• Management’s Discussion and Analysis (MD&A): MD&A should explain the business factors behind financial results rather than repeat the financial statements. Comments may arise when companies do not identify or quantify the drivers of changes in revenue and expenses, or address whether important trends may continue. For example, rather than attributing revenue growth to “higher sales,” the filing should identify factors such as pricing, new customers, transaction volume, or acquisitions.
• Non-GAAP Financial Measures: SEC scrutiny often focuses on adjusted results that receive more prominence than comparable GAAP measures, lack complete reconciliations, or exclude recurring operating expenses. Companies should clearly explain why each measure is useful, how it is calculated, and what each adjustment represents.
• Segment Reporting: Segment disclosures should reflect how management actually reviews and manages the business. Companies should evaluate the role of the chief operating decision maker, the financial information regularly reviewed, the measures of segment profit or loss used, and any significant expense categories. Even a single-segment conclusion should be supported and consistent with earnings calls, investor presentations, and other company communications.
• Critical Accounting Estimates: These disclosures should identify the assumptions that require significant judgment, explain why they are uncertain, and describe how changes could affect future results. Common areas include fair value measurements, goodwill impairment, revenue recognition, expected credit losses, equity method investments, and deferred tax valuation allowances.
• Liquidity and Capital Resources: Investors need more than the company’s current cash balance. Disclosures should explain how the company expects to fund operations and address relevant working capital needs, cash usage, debt covenant compliance, contractual commitments, financing plans, and going concern considerations.
• Business Combinations and Equity Transactions: Acquisitions, private investments in public equity arrangements, warrants, convertible instruments, earnouts, and stock-based transactions often involve complex accounting judgments. Disclosures should clearly explain the transaction’s business purpose, accounting treatment, valuation approach, and financial statement impact.

How Companies Can Improve Filing Quality

Before filing, management should review disclosures from the perspective of an investor who may be unfamiliar with the company. Each significant transaction or development should clearly explain what happened, why it matters, how management reached its conclusions, and what risks or uncertainties remain. This broader review can uncover gaps that a technical accounting review alone may miss.

Public SEC comment letters and peer filings can also provide useful insight into the questions regulators are asking and how similar companies have approached complex disclosures. These resources should serve as a reference, not as language to copy. Every disclosure should reflect the company’s own facts, judgments, and circumstances.

Prior-year language should receive the same level of review as new disclosures. Management should confirm that recurring language still reflects the company’s current operations, risks, estimates, and liquidity needs. If a disclosure could apply to almost any public company, it likely needs to be more specific.

Finally, companies should bring accounting, legal, internal audit, investor relations, and outside advisors into the process earlier. Coordinated reviews can resolve issues before the filing deadline and help confirm that the financial statements, MD&A, risk factors, earnings release, and investor materials present a consistent view of the company’s performance and significant developments.

Building a Stronger SEC Reporting Process

SEC comments are often driven by disclosures that are unclear, incomplete, or inconsistent rather than by a single accounting error. SRCs can reduce avoidable questions by giving greater attention to the business story behind the numbers, the judgments management made, and the information investors need to understand the company.

A thoughtful review process can identify concerns earlier, improve communication with regulators, and make filings more useful to investors. Contact your CRI advisor to discuss how your organization can strengthen its SEC reporting process and prepare for areas that may receive regulatory attention. Clear, company-specific disclosures can reduce unnecessary back-and-forth while building greater confidence in the company’s financial reporting.