May 23, 2002
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Re: File Number S7-08-02
Dear Mr. Katz:
The Financial Reporting Committee (FRC) of the Institute of Management Accountants is pleased to provide our response to the Commission's Proposed Rule: Acceleration of Periodic Reports Filing Dates and Disclosure Concerning Website Access to Reports (the "Release" or the "proposed rule"). In summary, we do not support issuance of the proposed rules as they relate to the acceleration of the periodic filing requirements; however, we generally do support the Commission's proposals regarding website access.
While we applaud the Commission's most recent efforts to improve disclosure through its issuance of Financial Reporting Releases Nos. 59, 60 and 61, we strongly believe that accelerating the filing of periodic reports, as proposed in the Release, will not achieve the goal of providing investors or users of financial statements more accurate, useful or understandable financial information. Despite the good intentions underlying the change, we believe that the proposed rule will actually be counterproductive, likely resulting in less reliable financial information and an increase in the number of financial statement restatements.
Given the significant costs that will be imposed on the preparer community of the proposed rule, we believe the Commission's efforts to protect investors, and the preparer community's efforts to increase the usefulness and reliability of financial data, would be better served by improving the precision and reliability of financial data within the existing time constraints under the securities laws. In that regard, we support the Commission's efforts to address the more difficult accounting and financial reporting issues we face, such as the consolidation of special purpose entities, disclosures relating to estimates used in the preparation of financial statements, and the presentation of pro forma financial data. Our specific comments on the Release are discussed below.
Accelerated Reporting Deadlines
In the Release, the Commission noted that over 30 years have passed since it last changed the Form 10-Q and Form 10-K filing deadlines and that information included in those reports is often stale by the time the reports are filed. The Commission further commented that significant technological advances have occurred over the last 30 years and that this technology has made it easier for companies to swiftly process and disseminate information. While these observations are certainly true, we would observe that over that same period generally accepted accounting principles, along with the authoritative accounting literature, have become significantly more complex and the number of new pronouncements overwhelming. If the Commission were to compare the volume of authoritative accounting literature and interpretations from 30 years ago to those of today and compare an annual report from 30 years ago to one of today, it would observe the increased volume of the financial disclosures and complexities in the accounting standards used, the breadth of financial operations of many registrants, and the complexity of the specific transactions that must be accurately reflected in financial reports each and every interim and annual reporting period.
In the Release, the Commission stated that one of its objectives is to decrease the time between the earnings release date and the availability of full 10-Q/K data. We believe the proposed release is not the most appropriate solution to that problem. The SEC has observed, and we agree, that there are sometimes problems with press releases. However, it is unclear to us whether these problems could be solved by the concurrent availability of additional financial information or the release of a full Form 10-K or Form 10-Q. If the Commission believes the solution to this problem is to improve availability of additional GAAP financial information or MD&A, we believe that the Commission should propose a minimum level of disclosure in financial press releases or a rule targeting that problem, that is, directly targeting individual companies that provide partial data in their press releases. Alternatively, the Commission could explore ways to streamline and simplify the current disclosure requirements of Forms 10-K and 10-Q to enable them to be filed more quickly.
The general assumptions contained in the proposed rule are problematic to us because we believe they fail to adequately address the potential adverse effects on "quality." We believe quality is the first priority of the financial reporting system and that the Commission should not foster an environment where there may be a rush to judgment (undoubtedly sacrificing precision for speed) on significant or complex accounting issues or estimates in order to meet the newly proposed timeframes. We do not want the preparation of financial statements to become vulnerable to a series of shortcuts, either by registrants or their independent accountants, necessitated by the accelerated deadlines. Further, parties with material (and increasing) responsibilities for reporting financial data need time to properly discharge those responsibilities in the public interest. For example, there has been significant progress made in getting audit committees more involved in the preparation of a registrant's financial statements. Those involved in preparing financial statements, such as management, a registrant's auditors and its audit committee, cannot afford to rush through decisions that have potentially major investor protection consequences.
We have other serious concerns with the Release. One being that the shortened timeframes will inflict serious hardship on many, if not the majority of, public companies. For example, when a registrant publicly announces its financial results in a press release, many times there are not "full" GAAP financial statements behind the numbers. While technology may have increased the speed with which numbers can be complied, Regulation S-K data, including MD&A, and the footnotes to the financial statements are still written by people and these disclosures are typically written after the financial numbers have been compiled. Stated another way, we do not believe public companies should delay the dissemination of financial information while narrative disclosures are being written. Advances in technology have not solved the inherently human issues associated with financial accounting and disclosure overload.
In addition, we have concerns that the proposed rules will adversely affect our public accountants. They may be unable to compress their 90-day "business season" into a 60-day period without increasing staffing levels and bearing the additional costs associated with maintaining idle resources for the remainder of the year.
Accordingly, we do not support the proposed rules relating to acceleration of the periodic reporting filing dates and believe the present reporting dates should remain unchanged. If the Commission believes there is a problem with press releases, we recommend that the Commission propose a minimum level of disclosure in financial press releases or rules targeting individual companies that provide partial data in their press releases. Alternatively, the Commission could explore ways to streamline and simplify the current disclosure requirements of Forms 10-K and 10-Q.
Website Access Proposals
While we generally agree with the Commission's proposals regarding website access, there does not appear to us to be any reason to distinguish between registrants based upon size. Therefore, we believe this proposal should apply to all registrants that maintain a web site. Further, given that internet crime is a pervasive problem, unless a registrant is allowed to link an investor to the registrant's EDGAR filings (in order to obtain assurances that financial statements being used by the reader are the actual ones filed on EDGAR), registrants should be provided "good faith" protection should copies of its filings unknowingly become corrupted leading to investor reliance on incorrect data.
The only other item we believe merits being separately studied is the decision as to whether to apply a similar rule change to foreign registrants. We believe these issues are sufficiently different as to warrant a separate study and rule proposal.
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We appreciate the opportunity to express our views and representative of the FRC would be pleased to meet with you or members of the Commission's staff to discuss our comments or answer any questions.
John J. Perrell III, CPA
Chair, IMA Financial Reporting Committee