WORKING WITH SEC STAFF IN THE REGISTRATION AND FILING PROCESS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 1996 TWENTY-THIRD ANNUAL NATIONAL CONFERENCE ON CURRENT SEC DEVELOPMENTS FEBRUARY 16, 1996 Remarks by Melanie A. Fowler* Assistant Chief Accountant Division of Corporation Finance U.S. Securities and Exchange Commission** (c) Copyright 1996. All rights reserved. The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author, and do not necessarily represent the views of the Commission or the author's colleagues on the staff. ------------ Today I would like to talk with you about working with the staff in the Division of Corporation Finance, including such topics as who is included in the review process, how the process can be facilitated, how comments are generated and why, and suggestions for making the review process as smooth as possible. Let me start with a brief overview of the organizational structure and responsibilities of the accountants you work with at the SEC. Each filing selected for review is assigned to a staff accountant in the Division of Corporation Finance. All initial public offering filings are given a full review and other filings are selected for review based on nonpublic selection criteria. During 1995 the staff completed a special targeted review of periodic reports filed by approximately 1000 registrants who had not been reviewed for several years. A transactional filing selected for review is assigned to the staff accountant with a due date which allows for completion of the review and issuance of comment letters within 30 days of the date the document is filed with the Commission. The staff accountant performs the initial review and proposes comments for issuance. The filing and the staff accountant's comments are reviewed by an assistant chief accountant, who edits and/or adds comments as deemed appropriate based on his or her review of the filing. Accordingly, accounting comments are considered by two people before issuance. The staff accountants and assistant chief accountants consult, on an as- needed basis, with associate chief accountants, of which there are four, the Associate Director for Accounting Operations, and the Chief Accountant, all of which are part of the Division of Corporation Finance. Separate from the Division of Corporation of Finance is the Office of the Chief Accountant of the Commission. Corporation Finance consults with the Office of the Chief Accountant of the Commission on GAAP application and interpretation issues. Prefiling consultations are strongly encouraged by the staff to facilitate the processing of filings containing complex or unusual transactions. Such consultations eliminate the time- consuming effort during the review process to identify and resolve an issue which could prolong the review process. Correspondence regarding a prefiling matter should be directed to the Chief Accountant of the Division of Corporation Finance and should clearly set forth what action is being requested of the staff. Sometimes letters are received which provide, for example, information regarding an acquisition transaction and it is unclear whether the registrant is seeking concurrence with the proposed accounting, a waiver of reporting obligations, or a no action position from the staff. All relevant facts and assumptions should be included in the letter, as well as all relevant technical references (even those that may support a different conclusion from that expressed in the letter). For matters regarding the application of GAAP or Regulation S-X, it is also very helpful if the registrant indicates whether or not the registrant's independent accountants agree with any conclusions set forth in the letter. The staff's response will be based on the specific facts and circumstances set forth in the letter. If the facts change in the actual filing, the staff's conclusion may change. Also, the Office of the Chief Accountant of the Division of Corporation Finance (and not the staff and assistant chief accountants in the Division) has the delegated authority to grant waivers or no action letters regarding reporting or disclosure obligations. Therefore, all requests for waivers or no action letters should be directed to the Division's Chief Accountant. If specific accounting or disclosure issues have been addressed on a prefiling basis or warrant special attention on the part of the staff upon filing with the Commission, we encourage registrants to point out such matters in the cover letters accompanying the filings. Attention to these matters facilitates staff processing. Requests for waivers, which generally require particularly prompt attention on the part of the staff, should always be addressed in separate correspondence and not be included in cover letters. It is helpful, however, if cover letters make reference to waiver requests granted or requested. When reviewing filings, the accounting staff reviews the entire document and focuses on achieving (1) comparability between registrants, (2) consistency in interpretation and application of GAAP among registrants, and (3) completeness of required information under GAAP and the Commission's rules and regulations. Regarding comparability, the staff wants to be sure that where there is a choice among accounting methods for registrants in certain areas, the method chosen by a particular registrant is disclosed. A registrant's deferral of certain types of costs, when others may expense such costs, serves as a good example of this situation. Consistency in applying GAAP and completeness of disclosure are both rather self-explanatory. Obviously, we like to see different registrants read and apply GAAP to the same type of transaction in the same way where there are no alternative methods and we like to see that all required information is provided that is material to an investor's decision. In addition to the above, the staff looks for consistency between the various sections of the filing. For example, if a staff accountant sees disclosure in the notes to the financial statements that a registrant has recorded a tax valuation allowance equal to 100% of a material deferred tax asset and the registrant reported strong earnings for the past several years, the staff would, based only upon such information provided in the filing, expect to see disclosure in Management's Discussion and Analysis that is consistent with the establishment of a 100% valuation allowance. The staff issues comments on a filing where it identifies the need for improvement in these areas and believes that these improvements are necessary to assist an investor in making an informed investment decision. All reviews include consideration of any previous correspondence with the registrant obtained from both our hardcopy and EDGAR registrant files, as well as memorandum prepared by the staff in previous registrant reviews. The staff's comments generally take three forms: requests for supplemental information, requests for amendments to filings, and requests for improvements in future filings. Requests for supplemental information are issued when the staff believes that it needs more information to understand the substance of a transaction and/or the registrant's accounting for the transaction. Such information enables the staff to consider the need for improvement in the disclosure or accounting. To facilitate the review process, it is extremely helpful if a registrant considers the following when preparing a supplemental response: - specifically address all questions raised in the comment; - provide all relevant facts and assumptions; and - provide reference to all relevant authoritative technical guidance (GAAP and the Commission's rules and regulations) considered. A well-prepared complete response letter greatly facilitates the review process. Requests for amendment of filings are issued when the staff believes that recommended improvements are material and it is necessary for the financial markets to get the information on a timely basis, i.e., the information may have an immediate impact on an investor's decision. These requests are generally issued in connection with initial public offerings, proxy statements, and other transactional filings. Futures comments are issued when recommended improvements are not of immediate consequence to investors but will improve financial reporting. In the event that you receive a request for amendment and believe it to be more appropriate to consider the recommendation in preparation of future filings, please discuss such matter with the staff assigned to your filing. Upon receipt of a comment letter from the staff, if you are not clear as to what the staff is asking for, please call the staff accountant named in the letter for clarification. It has been the staff's experience that it is more efficient and productive for all parties if the discussion is limited to those particular comments in question rather than every comment in the letter. All comments should be followed up with a written response. For an EDGAR filer, all responses must be filed electronically. If the response is not filed electronically, it will not be included in the registrant's EDGAR correspondence file and will not be available for consideration by the staff in future reviews of the registrant. In the event a request for supplemental information relates to a particularly complex or material transaction or the registrant needs an immediate response, the matter may be addressed on a piecemeal basis with the staff. However, staff review of all accounting responses may be necessary before giving clearance on the piecemeal request because financial statement issues may be interrelated. In closing, I would like to briefly discuss the process for resolving accounting issues. The closing paragraph of our comment letter has been expanded to include a number of different names and telephone numbers of senior staff that you can contact. In addition to the branch accountant, the letter includes the names and telephone numbers of the Assistant Chief Accountant that reviewed the filing, the Associate Director - Chief Accountant and the Associate Director - Accounting Operations, along with other Associate Directors. Registrants are free to call anyone named in the letter. In addition, registrants are free to seek the views of the Office of the Chief Accountant of the Commission regarding the application of GAAP.