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U.S. Securities and Exchange Commission

Office of the Chief Accountant:
Letter: Sample Letter Sent to Large Public Accounting Firms

March 22, 2001

Professional Practice Partner
XYZ Public Accounting Firm

Dear Professional Practice Partner:

In October 2000, we sent our annual Audit Risk Alert letter to the American Institute of Certified Public Accountants. That letter identified a number of significant financial reporting and disclosure issues on which the staff is focusing its attention.

Since that letter was issued, a number of events have occurred that highlight the need for clear, concise, and transparent disclosure to investors. For example, numerous companies have cited changing national and international business and industry trends. The press has reported the effect these changes are having on industry, including the increase in restructurings and asset impairments.

As a proactive step towards ensuring timely, transparent, quality financial reporting and disclosure to investors in light of current events, the staff is encouraging registrants and their independent accountants to ensure that the audited financial statements and related filings fully comply with applicable disclosure standards. The staff is looking closely at disclosures during its review of filings with the Commission. In particular, some of the disclosures the staff is focusing on include those related to segments (FASB Statement ("SFAS") No. 131), credit risk (SFAS No. 114 as amended by SFAS No. 118 and SFAS No. 107 as amended by SFAS No. 133), market risk (Financial Reporting Release No. 48), restructuring charges (Emerging Issues Task Force ("EITF") Issue No. 94-3, EITF Issue No. 95-3, and Staff Accounting Bulletin ("SAB") No. 100), impairment charges (SFAS No. 115, SFAS No. 121, SAB No. 59, and SAB No. 100), derivatives (SFAS No. 133), transfers and servicing of financial assets and extinguishments of liabilities (SFAS No. 140), and risks and uncertainties (Statement of Position 94-6).

Regarding restructuring charges, the staff wishes to reinforce that registrants are expected to comply with the guidance in EITF Issue Nos. 94-3 and 95-3 and SAB No. 100. SAB No. 100, in particular, summarizes the staff's views relative to disclosures the staff would expect for restructuring charges.

The staff believes that most economic or other events leading up to the recording of a restructuring charge occur over time. As a result, the staff believes that as those events and the resulting trends and uncertainties evolve, they often will meet the requirement for disclosure pursuant to the Commission's MD&A rules prior to the period in which the exit costs and liabilities are recorded pursuant to generally accepted accounting principles.

The staff has, on occasion, noted that disclosures addressing restructuring charges in periods subsequent to that in which the initial charge was recorded are insufficient to provide investors with the necessary information to fully understand the components and effects of such charges. For example, the staff has noted, on occasion, that registrants have not disclosed, in each period, the number of employees actually terminated pursuant to the exit plan, even though both EITF Issue No. 94-3 and SAB No. 100 require it.

As noted in SAB No. 100, "the staff often finds that, because of the discretionary nature of exit plans and the components thereof, presenting and analyzing material exit and involuntary termination charges in tabular form, with the related liability balances and activity (e.g., beginning balance, new charges, cash payments, other adjustments with explanations, and ending balances) from balance sheet date to balance sheet date, is necessary to explain fully the components and effects of significant restructuring charges. The staff believes that such a tabular analysis aids a financial statement user's ability to disaggregate the restructuring charge by income statement line item in which the costs would have otherwise been recognized, absent the restructuring plan (for example, cost of sales; selling, general, and administrative; etc.)."

The staff believes that the expected effects on future earnings and cash flows resulting from the exit plan (e.g., reduced depreciation, reduced employee expense, etc.) should be quantified and disclosed, along with the initial period in which those effects are expected to be realized. This includes whether the cost savings are expected to be offset by anticipated increases in other expenses or reduced revenues. This discussion should clearly identify the income statement line items to be impacted (e.g., cost of sales; marketing; selling, general, and administrative expenses; etc.). In addition, SAB No. 100 notes in later periods, to the extent actual experience is different than that expected, MD&A should discuss that outcome, its reasons, and its likely effects on future operating results and liquidity. This discussion need not be obscure or voluminous in order to be accurate and informative.

Changes in economic or other events may result in registrants making changes in accounting estimates. Accordingly, registrants and their independent accountants are reminded of the required disclosures in APB Opinion No. 20, including the requirement to disclose the effect on income and per share amounts for a change that affects several future periods.

Because disclosures in MD&A may have relevance to the financial statements and disclosures therein, auditors are reminded of their responsibility under Statement of Auditing Standards No. 8, Other Information in Documents Containing Audited Financial Statements, to consider whether other information and its manner of presentation contained in documents that include audited financial statements and the independent auditor's report thereon "is materially inconsistent with information, or the manner of its presentation, appearing in the financial statements."

Finally, in January of this year, the Working Group on Public Disclosure, chaired by Walter Shipley, recommended certain disclosures to improve the financial reporting of financial institutions. We encourage you to discuss these recommendations with your clients involved in lending and trading activities (e.g., banks, securities firms, finance companies, credit corporations, insurance companies, etc.). The staff believes that these recommended disclosures likely would enhance the quality and transparency of a registrant's reporting to investors; accordingly, audit committees and financial management are encouraged to give serious consideration to adopting these recommendations.

The SEC staff appreciates the efforts of your firm to improve the quality and transparency of financial reporting to investors. Should you have any questions, please do not hesitate to contact Jackson Day, Michael Thompson, or me at (202) 942-4400.


Lynn E. Turner
Chief Accountant


Modified: 04/10/2001