August 20, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-6009
RE: Release No. 34-46300
Certification of Disclosure in Companies'
Quarterly and Annual Reports
(File No. S7-21-02)
Dear Mr. Katz:
Deloitte & Touche LLP is pleased to respond to the Securities and Exchange Commission's (the "Commission") request for comments on its proposed rule regarding Certification of Disclosure in Companies' Quarterly and Annual Reports.
We strongly support the goals of the President of the United States, the United States Congress, and the Commission to improve the quality and transparency of financial reporting. Additionally, we believe that the certifications required under Section 302 of the Sarbanes-Oxley Act (the "Act") will positively impact the quality of financial reporting and help to restore investor confidence in our capital markets. However, in order for Section 302 to be implemented consistently and effectively, we also believe that certain aspects of Section 302 should be addressed and clarified by the Commission as it completes its rule-making process. Below is a summary of those areas that we believe require clarification.
Areas to be Clarified
The Commission should clarify the rules and standards under which the principal executive and principal financial officers are to provide a certification. Additionally, the Commission should modify the certification language such that the certification requirements under Section 302 encompass the certification requirements under Section 906.
Section 302 requires that the principal executive and principal financial officers, or persons performing similar functions, certify in each annual or quarterly report that "the financial statements, and other financial information included in the report, fairly present in all material respects (emphasis added) the financial condition and results of operations of the issuer as of, and for the periods presented in the report." The Act does not state the standards under which "fairly presented" is to be determined. If not clarified, the meaning of "fairly presented" would be based solely on the judgment of the principal executive and principal financial officers of the company rather than on a consistent set of standards and rules regarding accounting and reporting requirements. We recommend that the Commission modify the language of the certification such that the principal executive and principal financial officers state that the financial statements, and other financial information included in the report, "fairly present, in all material respects, the financial position and results of the operations of the issuer as of, and for the periods presented in the report in conformity with accounting principles generally accepted in the United States of America." The result will be a consistent set of standards upon which "fairly presented" is determined.
Additionally, Section 906 of the Act requires a very similar certification. Section 906 states that the chief executive officer and chief financial officer (or equivalent thereof) shall certify that the periodic report containing the financial statements "fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in the periodic financial report fairly presents, in all material respects, the financial condition and results of the operations of the issuer." It appears that the legislative intent of Section 906 is the same as that for 302 and that, with modification, the language required under Section 302 would satisfy the requirements under 906. We ask that the Commission, in addition to clarifying how fairly presented is to be determined, add a section on compliance with sections 13(a) and 15(d) to the 302 certification language such that issuers would satisfy the requirements of Section 906 and thereby prevent submission of multiple certifications.
The Commission should clarify that the internal control certification requirements under Section 302 should not be implemented until the requirements under Section 404 regarding management's assessment of internal controls and the auditor's attestation of such assessment are clarified and related standards are established.
Section 302 of the Act requires signing officers to certify that they have "evaluated the effectiveness of internal controls" and presented in the periodic report "their conclusions about the effectiveness of their internal controls based on their evaluation." This aspect of the officer certifications is closely related to the requirement of Section 404 of the Act, which separately requires that annual reports include a report from management on internal controls that contains an assessment "of the effectiveness of the internal control structure and procedures of the issuer for financial reporting." In order to ensure consistent practice and interpretation, standards will need to be developed and implemented to establish a sufficient basis for management's assessment of the "effectiveness" of internal controls, as required under both Section 302 and Section 404, and to establish the form of management's report required under Section 404.
In addition, Section 404 requires the issuer's registered public accounting firm to attest to, "in accordance with standards for attestation engagements," the assessment made by management. Section 404 also states "any such attestation shall not be the subject of a separate engagement." However, by definition, an engagement under the "attestation standards" cannot be part of the audit; as the guidance under the Statements on Standards for Attestation Engagements is separate and apart from the guidance under Statements on Auditing Standards. This requirement under Section 404 of the Act needs to be clarified by the Commission and/or the Public Company Accounting Oversight Board.
Until the Section 404 requirements are clarified and standards are established, we do not believe that the principal executive and financial officers should be required to provide a certification regarding internal controls, as required under Section 302. To ensure orderly and consistent implementation of the internal control assessment, reporting, and certification requirements of the Act, we recommend that the Commission's rule state that the internal control certification requirements under Section 302 be implemented only after standards with respect to the assessment and reporting requirements under Section 404 have been established.
The Commission should clarify that the certifications under both 302 and 906 only apply to quarterly and annual filings.
Section 302 of the Act requires that the certification be included in "annual or quarterly reports." Section 906 of the Act requires that the same certification be included in "each periodic report containing financial statements." Based on the underlying basis for the certification (i.e., ensuring the fairness and accuracy of financial information provided to investors of issuers), we believe that the certifications should only be required in quarterly and annual filings. Without clarification, certifications appear to be required for Forms 8-K that contain financial statements, which could be financial statements of an acquired business for which the registrant's officers would have no basis to certify, as well as annual reports of employee benefit plans filed on Form 11-K. We doubt that the legislative intent of the Act was to cover such filings.
The Commission should clarify the time frame within which the signing officers are required to have evaluated the effectiveness of internal controls.
The Act requires that the signing officers certify in annual and quarterly filings that they have evaluated the effectiveness of the issuer's internal controls as of a date "within 90 days prior to the report." We believe that the date of the annual evaluation pursuant to the Section 302 certification should be as of the same date required by the internal control reporting under Section 404; Section 404 requires that the internal control evaluation be "as of the end of the most recent fiscal year," rather than a date "within 90 days prior to the report." Additionally, the Commission should clarify whether the evaluations subject to certification in the quarterly filings are to be performed as of quarter-end or may be performed as of an earlier or later date. The current language does not make it clear whether this evaluation is to have taken place by a due date that is reference to the end of the period covered by the report, the date the report is filed, or the due date of the filing. For example, a company is required to file a Form 10-Q forty-five days after quarter-end. Based on the current language, it is not clear whether the evaluation is required to be completed within 90 days of the date the report is filed (which, if the report is filed on the due date, would include the 45 days before and after the end of the quarter) or if the evaluation is required to be completed within the 90 days that make-up that quarter.
We believe that the certifications required as a result of the Act appropriately acknowledge the responsibilities of the senior officers of public companies and that ongoing certifications will focus and strengthen the involvement of those officers in the public reporting process. However, we also believe that in order for the certification requirements to be effectively and consistently implemented, the issues enumerated above should be addressed and clarified.
If you have any questions, please contact John Wolfson at (203) 761-3741 or Bob Kueppers at (203) 761-3579.
Very truly yours,
/s/ Deloitte & Touche