American Society of Corporate Secretaries

July 24, 2002

Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

RE: File No. S7-16-02 Comments on Release No. 33-8098; 34-45907

Dear Mr. Katz:

On behalf of the American Society of Corporate Secretaries, Inc., we are pleased to have the opportunity to comment on Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies. The Society has over 3,800 members representing over 2,500 corporations in the United States and other countries.

The Society strongly supports the Commission's objectives -- requiring that public companies provide investors with more appropriate disclosure in Management's Discussion and Analysis so that investors will be able to make investment and voting decisions on a better-informed basis. In this period of challenge facing the United States' disclosure system, it is in the interests of all constituents to work together to provide assurances that relevant information is disclosed promptly to the public in order to restore and maintain confidence in the United States' capital markets. However, we believe that certain provisions of the proposal would burden companies without a corresponding benefit to investors. We have included suggestions intended to reduce the administrative costs and burdens while still supporting the purpose of the proposal.


We agree with the Commission that certain information concerning critical accounting estimates and the initial adoption of accounting policies could aid investors in understanding a company's financial disclosures and consequently in making more informed investing decisions. Our suggestions below are more of a technical nature to ensure that investors are provided with the most relevant information and that they receive this information in a manner that would make the information relatively easy to understand.

Definitional Issues

We believe that the proposal's definition of critical accounting estimates should be clarified to ensure that investors are receiving the type of disclosure that has the most value. Overall, we are concerned that the proposal introduces new terms, such as "reasonably possibly," that are unfamiliar to companies, investors and lawyers. As a result, we are concerned that that there would not be a standard approach to drafting, reviewing or understanding the disclosure.

As an example, from the proposed definition, it is unclear whether companies should select for discussion in the MD&A estimates that involve large dollar amounts but which have a lower likelihood of variance over those that involve smaller amounts but have a higher likelihood of variance. Although we believe the Commission is more interested in eliciting disclosure on the latter, the definitions do not make that clear.

To illustrate, a change in an accounting estimate relating to a pension plan may be "reasonably likely in the future" under the Commission's definition of this term (i.e. less probable than "more likely than not" but more probable than "reasonably possible") but yet there probably would not be a substantial likelihood of this occurring. Therefore, we believe that the current definition would likely result in boilerplate language in most filings with regard to items such as pensions.

As an alternative approach, we suggest that the Commission use a standard of - "Identify and describe the accounting estimates that involve the highest potential to materially impact the company's financial presentation." We believe the Commission could achieve its objective with this definition. This definition could be accompanied by a requirement to describe the methodologies used, material assumptions and reasonably likely changes.

We agree with the Commission that most companies, in general, should disclose not more than "five accounting estimates with the highest potential to materially affect the financial presentation." This would reduce the likelihood of companies - concerned with omitting an estimate that turns out to be erroneous - providing so much disclosure that investors have a difficult time discerning which estimates are most critical.

We appreciate the Commission providing examples of the types of disclosures that it would expect to receive under the proposal. In the adopting release, we urge the Commission to provide additional examples, including ones that address topics that are not covered by detailed accounting literature. We believe disclosure regarding those topics are apt to give companies the greatest challenge.

Identification and Analysis of Changes

We agree with the Commission's approach to allow companies some flexibility in how they identify and analyze changes in critical accounting estimates. We do not have a different suggestion to the two choices that the Commission proposes for assuming changes related to the critical estimates to analyze sensitivity. We do not believe that the Commission should standardize the changes that companies must assume for various types of estimates.

Disclosure of Effects of Alternative Accounting Policies Not Chosen

The Commission requested comment on whether to require a discussion of the impact that alternative accounting policies acceptable under GAAP would have had on a company's financial statements even when a company did not choose to apply the alternative. We do not believe that such disclosure is desirable. The primary goal of the Commission is to increase the transparency of financial disclosures by requiring disclosures concerning critical accounting policies as seen through management's eyes. We believe that disclosure of the effects of the policies and estimates actually chosen will meet that goal. Requiring disclosure regarding accounting policies that were not adopted would serve only to burden investors with unnecessary and meaningless information that many investors would not understand or would find confusing and would otherwise to detract from meaningful disclosure about the estimates that are actually driving the reported financial results.

Independent Auditor Examinations of MD&A

Auditors are required under current auditing standards to evaluate the reasonableness of accounting estimates used in the preparation of a company's financial statements. We note that under current attestation standards, companies can already decide whether to engage auditors to examine a company's MD&A. While an independent auditor examination of the MD&A sounds like it could be useful, as a practical matter, in the vast majority of companies the auditors already review the MD&A without a formal attestation, and the formality likely would not result in improved disclosure.

Provision for Specific Safe Harbor Protection

In preparing financial statements, companies of necessity are required to make estimates regarding events that are not known at the time, and will not be known until some future time. In addition, underlying these estimates are assumptions about future circumstances that will not be known until some future time. However, in most cases, companies do not publicly provide these specific estimates and assumptions as forecasts under the Securities Act of 1933 and the Securities Exchange Act of 1934 liability standards. The proposed rule would change that and mandate that companies disclose such estimates and assumptions.

The Commission's proposal recognizes that the required disclosures would require companies to make forward-looking statements, with all of the implications for potential liability that such disclosure entails. The approach taken in the proposed rule is an instruction to encourage companies to consider the terms, conditions and scope of the safe harbor provisions when drafting Item 303(c) disclosures. However, we believe that the Commission should provide specific safe harbor protection, similar to Item 305(d) of Regulation S-K adopted in 1997, requiring quantitative and qualitative disclosures about market risk. The nature of the new disclosure requirements and potential liability risks to companies are analogous to those of the market risk requirements.

This is a particularly appropriate case for protection because the nature of the disclosures is inherently uncertain. In fact, a principal criterion for determining what matters to disclose is that they are highly uncertain. Furthermore, these are forward looking statements that in almost all cases companies have not provided voluntarily, but will be disclosing only because mandated by the Commission.

Reliable safe harbor protection is especially critical because its intended effect is to provide a defense under the Private Securities Litigation Reform Act in a motion to dismiss the complaint. This ultimately depends on how the court treats the defense in a particular case. If the Court holds there is a factual issue that is improper to resolve in a motion to dismiss, as to whether any cautionary language is sufficiently "meaningful," the protection of the safe harbor is diminished. Companies should not be at risk to find out in possible litigation whether they sufficiently brought these new disclosures under the safe harbor sections for statements that are unquestionably uncertain.

In addition, although the new disclosures are in the MD&A, they address the results, financial condition and changes in condition reported in the financial statements. Thus, the new disclosures necessarily will be read in connection with the financial statements, which already contain discussion about the use of estimates and assumptions in preparing financial statements, and that actual results could vary from those estimates.

Finally, the Commission's objective of providing clear, concise and understandable information would be compromised, and the disclosures possibly obfuscated, if companies had to protect themselves by loading the new Critical Accounting Estimates section with disclaimers in order to be eligible for safe harbor protection. The proposal recognizes this possibility in Section III.H. where it states that "the purpose of the proposed disclosure would be hindered if a company were to include disclosures that consisted principally of blanket disclaimers of legal responsibility . . . in light of the uncertainties . . . "

Therefore, this is an appropriate case for the Commission to provide automatic safe harbor protection for the proposed disclosures. Accordingly, the Commission should provide in the final rule that all information provided under Item 303 (c), except for historical facts, is deemed "forward looking statements" accompanied by meaningful cautionary statements meeting the requirements of, and entitled to the full protection of, the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Exchange Act. The final rule should also provide that the safe harbor protection applies to all types of issuers and transactions, and to statements made by an issuer or any other person specified in Section 21E(a) or Section 27A(a) which would cover statements made by persons acting on behalf of issuers, outside reviewers and underwriters.

Subsection (g) of both Section 21E and Section 27A grant the Commission authority to provide exemptions with respect to liability "that is based on a statement or that is based on projections or other forward-looking information," if consistent with the public interest and the protection of investors, as determined by the Commission. We believe that the determinations made by the Commission in the proposal about the value and benefit to investors and the reasons discussed above provide strong support for such determination.

Potential for Competitive and Other Harm

We believe that the proposal would result in situations that place companies in risk of competitive and other harm. For example, disclosures that meet the proposed rules about matters in dispute, such as litigation, tax audits and regulatory disputes would, in some cases, become self-fulfilling prophecies. We suggest that companies not be required to make disclosure about a matter under the final rules if the disclosure has the potential to, itself, influence the outcome of the matter.

Disclosure of that information would waive the attorney-client privilege, could be interpreted as an admission of liability by the company, and would adversely affect a company's ability to negotiate favorable settlements in litigation and to pursue favorable tax strategies. These same issues came up in connection with the Commission's 2000 proposal for disclosing valuation or loss accrual accounts (Release No. 33-7793; 34-42354). We refer the Commission to our comment letter April 14, 2000 on that proposal. Our letter, and the comments of other professional associations and firms and registrants showed the significant economic and competitive harm that would result from disclosure of contingency reserves.

Those comments and concerns remain valid and applicable to the current proposal insofar as it applies to contingency reserves. We urge the Commission to exclude litigation, environmental remediation costs, contingent income and franchise tax liabilities, and product liabilities from the scope of the proposed rule about critical accounting estimates, and to include a specific exclusion to that effect in the final rule.


Should the Commission or its Staff have questions concerning the comments in this letter or desire additional information to assist it in preparing the adopting release, please do not hesitate to contact me at (703) 526-5754.


/Broc Romanek/

Broc Romanek
Chair of Subcommittee on Critical Accounting Policy Disclosures

cc: Susan Ellen Wolf
David Smith
Tom Sanger
Margaret Foran