THE CHUBB CORPORATION
15 Mountain View Road, P.O. Box 1615, Warren, New Jersey 07061-1615
May 21, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: FILE NO. S7-08-02
PROPOSED RULE: ACCELERATION OF PERIODIC REPORT FILING DATES AND DISCLOSURE CONCERNING WEBSITE ACCESS TO REPORTS
Dear Mr. Katz:
The Chubb Corporation (Chubb) is a holding company with subsidiaries principally engaged in the property and casualty insurance business. We appreciate the opportunity to respond to the proposed rule that would accelerate the filing dates for quarterly and annual reports for certain companies and require those companies subject to the accelerated filing deadlines to disclose where investors can obtain access to company filings.
We agree with the Commission that for the federal securities regulation system to function most effectively, the financial markets must have access to information that is clear, accurate and timely. We do not believe, however, that accelerating the filing dates for quarterly and annual reports would improve the flow of information to investors and the markets. We believe that the accuracy of the financial statements and the quality of the related disclosures would suffer as a result of the accelerated due dates. We also believe that acceleration of the filing dates for quarterly and annual reports would exacerbate the compression of the workload for public companies and their independent auditors.
We support the Commission's efforts to encourage companies to make their filings broadly available to the public as soon as reasonably practicable after such material is filed with the Commission.
Acceleration of Periodic Report Filing Dates
The acceleration of the periodic report filing dates would result in less accurate financial statements and less informative disclosures. To comply with the accelerated due dates, companies would be required to increase their use of estimates in the preparation of the financial statements. Also, given the shortened time period to prepare the reports, companies would tend to provide less thoughtful and comprehensive discussion and analysis of past results and expectations for the future and more boilerplate disclosures in management's discussion and analysis. Thus, while the filings would be more timely, the information would be less valuable for investors and analysts.
Chubb has a market capitalization of approximately $13 billion and would thus be subject to the accelerated filing dates. As is the case for many companies, Chubb's quarterly closing process does not begin until the day following the last day of the quarter. We process premiums and losses through the last day of the quarter. It then takes us almost four weeks to make an informed estimate of incurred but not reported claims, to compile, analyze and understand the financial results for the quarter and to issue our earnings announcement. Our average press release date over the past several years has been the 27th day of the month following the quarter close. The year end press release has been about one week later to allow our independent auditors time to complete their most critical audit procedures. At the time our press release is issued, we have not yet finalized the financial statements, particularly the footnote disclosures, nor prepared management's discussion and analysis as the individuals involved in the financial closing and earnings release are, for the most part, the same individuals involved in the preparation of the financial statements and management's discussion and analysis.
To comply with the shortened due dates, we would have to accelerate our closing process by one to two weeks. We would no longer close our books on the last day of the reporting period but would do so one to two weeks earlier and then estimate the premiums and losses for the remaining portion of the reporting period. The timing of "cutoffs" that are non-existent today could become an issue in the future. In addition, certain of the review and reconciliation activities that are currently part of our closing process might have to be deferred or eliminated. The accuracy and quality of our financial statements would suffer if actual results were replaced by estimated results and quality controls were reduced.
We agree with the Commission that there have been significant technological advances over the last three decades that have allowed us to capture, process and disseminate financial data more quickly. However, this has been more than offset by the increased complexity of our business and the greater amount of information required in our periodic filings. In this regard, we note that Chubb's 1971 Annual Report to Shareholders had 2 pages of footnotes and management's discussion and analysis filled about 7 pages. The comparable amounts in the 2001 Annual Report were 20 pages of footnotes and 21 pages for management's discussion and analysis.
We believe that independent auditors will also struggle to comply with the accelerated due dates, particularly since most large public companies have December 31 year ends and are therefore on the same reporting cycle. We disagree with the Commission's understanding that a company's audit or review is substantially complete by the time the company issues its earnings announcement. This is definitely not the case at Chubb, particularly at year end when only the most critical audit procedures are completed prior to the issuance of our earnings announcement. The audit process includes not only a review of key assumptions, estimates and judgments, but also a review of the financial statements and footnotes, management's discussion and analysis and other data and disclosures included in periodic report filings. Much of this is not yet complete at the time we issue our earnings announcement.
The business activities of companies continue to become more complex. It is crucial that companies have adequate time to evaluate the results of these activities and to prepare the financial statements and related disclosures to be included in the quarterly and annual reports filed with the Commission and for their independent auditors to have sufficient time to perform their audit or review procedures. It is incongruous that in an effort to respond to the Enron bankruptcy and the alleged failure of its management and its independent auditors to identify and address accounting and reporting deficiencies, the proposed rule would significantly reduce the amount of time available for companies to prepare their financial statements and related disclosures and for independent auditors to complete their procedures.
Another negative consequence of the acceleration of the report filing dates would be its effect on the compression of the workload for financial reporting departments at public companies and their independent auditors. Due to the seasonal nature of financial reporting, the lack of flexibility in the deadlines and the ever expanding reporting requirements, personnel in these areas work extensive amounts of overtime under high levels of stress in order to meet the current report filing dates. The compression of the workload into an even shorter timeframe would most likely not result in an increase in the size of the financial reporting staff and could, in fact, result in a decrease. The effort required to meet the accelerated filing dates would be even more burdensome and stressful.
We believe that any further compression of the workload would result in a reduction in the number of qualified individuals interested in pursuing careers in accounting and financial reporting as well as an increase in current financial reporting professionals seeking other career opportunities. The quality and accuracy of the reports filed with the Commission will suffer if companies do not have the qualified professionals to produce such reports. We believe that the staff of the independent auditors would suffer from the same increased pressures, leading to fewer qualified auditors in the future.
We would not support a proposal to require companies to file their periodic reports within a specified number of days after the first release of earnings information. We believe that such a requirement would, in many instances, delay the release of earnings announcements rather than accelerate the filing of reports with the Commission.
Instead, we would support a proposal to require that any earnings announcement contain certain minimum information, such as net income and net income per share, as well as disclosures that are compatible with those that will be made in the periodic reports filed with the Commission. We believe this would encourage companies to report earnings and supporting information as soon as possible while allowing enough time for the more robust reporting that is required in the periodic reports filed with the Commission.
If the Commission decides to proceed with its proposal to accelerate report filing dates, we recommend that only the report filing date for annual reports be accelerated, to 75 days following year end, and that the reporting deadline for quarterly reports be maintained at 45 days following the quarter end. For the reasons discussed above, we believe that any further acceleration of the report filing dates would lead to a reduced quality of financial reporting.
Disclosure Concerning Website Access to Reports
We support the Commission's efforts to encourage companies to make their filings broadly available to the public as soon as reasonably practicable after such material is filed with the Commission. Chubb currently has a hyperlink to the Commission's EDGAR system, which provides investors and analysts access to reports we file with the Commission after a 24-hour delay.
We suggest the Commission modify its proposal so that a company that hyperlinks to the Commission's EDGAR system would be able to state that it provides website access to its reports as soon as reasonably practicable, particularly since the Commission expects to eliminate the 24-hour delay.
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In summary, we do not support the proposal to accelerate the filing dates for quarterly and annual reports. While we agree that the financial markets must have access to information that is clear, accurate and timely, there is a balance between speed and quality that must be maintained. In an environment where the propriety of financial reporting is being questioned, it is even more important that preparers be given the needed time to prepare accurate financial statements together with meaningful analysis of results and that independent auditors be given the needed time to complete their audit or review.
We also believe that accelerated due dates would place additional pressures on financial reporting departments and independent auditors that would result in fewer qualified professionals pursuing careers in these disciplines.
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We would be pleased to discuss our comments with the Commission or its staff.
Very truly yours,
Henry B. Schram
Senior Vice President and
Chief Accounting Officer