May 23, 2002

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-6009

Re: Release No. 33-8089; 34-45741:
Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Website Access to Reports (File No. S7-08-02)

Dear Mr. Katz:

The AICPA SEC Regulations Committee (Committee) is pleased to respond to the Commission's request for comments with respect to the above-captioned proposal. We support the Commission's goal to provide investors with access to information that is clear, accurate, and timely, and applaud the Commission's efforts to sponsor a debate on the issues surrounding how the various constituencies can support and strengthen the US capital markets.

Overview of Our Comments

The Committee recognizes that to keep pace with today's fast moving economy, the system of financial reporting must be modernized. As the AICPA recently called for in its testimony before Congress, participants in the financial reporting system must focus on three objectives in order to modernize the financial reporting model:

The acceleration of filing company financial information with the SEC is a step in the direction of achieving the third objective, i.e., more timely reporting. The AICPA has undertaken several initiatives in support of moving in the direction of on-line, real-time reporting. These initiatives include leading in the development of the Extensible Business Reporting Language (XBRL), which enables the efficient and effective preparation, exchange and analysis of business reporting data via the Internet; development of new assurance services, such as SysTrust, on whether controls were operating effectively in a technology and internal control dependency environment; and studying "continuous audit" approaches where the risk-based and control-based approaches are more likely to meet future reporting needs than traditional substantive approaches.1

Although the Committee supports changes that accelerate the reporting of information to investors, we believe there are a number of factors that will make it difficult for some companies to present quality financial information and also comply with the proposed reporting deadlines. For this reason, we would encourage the Commission to consider alternative ways of achieving the objective of more timely filings.

As discussed in our detail comments below, there are a number of competing factors that we believe the Commission should consider and balance in reaching its conclusions. Specifically, these factors include:

In light of these considerations and as discussed further below, we encourage the Commission to consider an alternative approach requiring companies to file Forms 10-Q and 10-K with the SEC based upon a specified number of days after the company's quarterly or annual earnings release. We believe this alternative strikes an acceptable balance between (a) an investor's need for timely information beyond that which is presented in an earnings release and (b) the challenges a company may face in preparing complete, quality financial information on an accelerated basis. Our detail comments offer other alternative approaches the Commission may also wish to consider.

Lastly, if the Commission adopts the revised filing deadlines as proposed, we would strongly encourage the Commission to delay the effective date of the proposed release so that it would initially apply to annual disclosure documents filed for fiscal years beginning after December 15, 2002. This would allow more time for registrants and auditors to add additional staff, redeploy existing staff and change processes or procedures in their reporting systems in order to meet the shortened reporting deadline.

Detail Comments and Discussion

Factors Contributing to the Timeliness of Reporting

Significant advances in technology have increased the speed at which companies are able to gather and aggregate accounting information, and reduce the time it takes to close the books. A few companies have succeeded in using technology to the point of achieving a "virtual close" in order to provide management with real-time information. However, as technology has changed, so too have financial reporting requirements and the complexity of business transactions. Thus, even the best financial reporting systems and processes may not be able to quickly produce some of the financial disclosures needed to comply with current reporting requirements. Further, just producing the information isn't sufficient. The preparation of quality financial information requires significant management estimations, evaluation and judgment, reviews by legal and other professional advisors, and very importantly, substantive communications between auditors, management and audit committees on accounting and reporting practices, proposed disclosures and audit findings.

Numerous factors contribute to a company's ability to report timely and "get it right the first time". Here are some of the factors the Committee identified:

In addition, because of investors' increasing demands for more information, the Committee believes registrants will need to devote additional resources to prepare thoughtful, meaningful qualitative disclosures throughout the Form 10-K. We would expect such additional emphasis and effort towards enhanced disclosures to increase in the near term because of the SEC's Cautionary Advice Regarding Disclosure About Critical Accounting Policies (Financial Release (FR) 60), Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations (FR 61), and potentially the recently proposed disclosure requirement in MD&A about the application of critical accounting policies.

Another factor related to the timeliness of reporting relates to resolution of significant issues. During the year-end audit or quarterly review, registrants and their auditors may encounter significant financial reporting and disclosure questions, especially those involving unusual, complex, or innovative transactions for which no clear authoritative guidance exists. In these circumstances, the auditor may need to have discussions with their national office. In addition, the registrant and auditor may need to discuss the issues with the SEC staff.

Factors Affecting the Quality of Financial Information

There are also factors that affect the auditor's execution of its responsibilities and the preparation of quarterly information that we would like the Commission to consider.

Auditor responsibilities - The independent audit firm will likely need to modify the audit timing and methodology to address any incremental risks that arise as a result of a compressed reporting period. For example, the auditor would need to assess what balances or disclosure items may be at higher risk of misstatement because of the use of valuation assumptions, management's estimates, or difficulty of independent confirmation in a shortened reporting cycle. In addition, the audit firm will need to ensure that effective audit procedures can be performed related to significant period-end balances and transactions occurring at or near the end of the period.

The auditor will also need to perform its procedures (including a concurring partner review) relative to the complete financial statements and footnotes in an accelerated timeframe. Further the auditor will need to be prepared to read the other information included in the SEC filing to consider whether such information, or the manner of its presentation, is not materially inconsistent with the financial statements on an accelerated basis. In addition, auditors' responsibilities for communicating certain audit findings to management and the audit committee will still need to be accomplished.

We also wish to point out that the proposed Auditing Standards Board standard for considering fraud in an audit will require the auditor to perform certain tests in response to the threat of management override of internal controls. The proposed standard would be effective for audits of financial statements for periods beginning on or after December 15, 2002, although early application is encouraged. These tests that would be required by the new standard, by their definition, must be substantive tests and will, for the most part, need to be performed at year-end. Therefore, auditors will need to test management override by testing nonstandard journal entries that in some cases can only be performed once management has compiled the consolidating information that flows into the financial statements. Particularly for a multinational registrant, this may add some significant work on the end of the audit beyond current requirements. In summary, audit effort and costs would increase commensurate with compressed audit efforts (adjusted audit timing, methodology and approaches) as each registrant situation warrants.

Form 10-Q filing considerations - With respect to the proposed acceleration of filing the Form 10-Q to 30 days after period end from the current 45 days, presented below is the result of a very limited and informal study of current Form 10-Q reporting practices of some large companies.

  Number of days
after quarter-end

Quarterly closing of financial records- raw data available 3-5
Consolidation and related adjustments 6-8
Review and analysis of consolidated financial information and accounting estimates by financial management7-17
Independent accountant review begins7-10
Drafting of earnings release10-17
Reviewing quarterly results with audit committee or its chair16-17
Company earnings announcement18-22
Preparation of consolidated statement of cash flows, footnotes to financial statements, MD&A, and other 10-Q sections14-30
Senior management reviews of drafted filing30-32
Independent accountant, outside lawyers, investor relations reviews33-36
CEO review37-38
Audit committee/Board reviews and audit committee meeting38-42
Form 10-Q filed with SEC, EDGAR42-45

This analysis suggests that it may be difficult for registrants to comply with the acceleration of filing the Form 10-Q to 30 days after period end. Many registrants, even those with public floats well in excess of $75 million, may have longer closing processes and fewer financial reporting resources. The preparation and appropriate review of the Form 10-Q requires significant time, particularly the preparation of the MD&A (including qualitative and forward-looking information, market data comparisons and other competitive information) and the footnotes to the financial statements. While new information technology may facilitate gathering information for certain disclosures (such as market risk disclosures), most disclosures result from a thoughtful analysis and review of events by management. Those registrants surveyed indicated the additional disclosure considerations of FR 60 and FR 61 required about two additional days, and disclosure requirements of Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets required one additional day. In addition, those surveyed companies also observed that the increased expectations of the audit committee's role and responsibilities and increasing disclosure and accounting complexities are causing audit committees to spend more time in reviewing the Form 10-Q in both the planning and final review stages, and ask many more questions of the independent accountants than in past years.

Proposed Alternative to Achieve Accelerated Filings

Among the Commission's stated reasons for proposing to accelerate the filing dates for periodic reports is to lessen the "gap" between a company's announcement of earnings and the filing of its Exchange Act reports with GAAP financial statements and MD&A. Based on the SEC's stated reason and the considerations of the various filing timing factors, we believe that the Commission's objective could be achieved by tying the due date of the Forms 10-Q and 10-K to the date of a company's earnings release. Under this alternative, we suggest that the date for filing Form 10-Q be the earlier of 45 days after the end of the quarter or 20 days after a quarterly earnings release, and the due date of Form 10-K be the earlier of 90 days after the end of the fiscal year or 50 days after the annual earnings release. We believe that these time periods would provide a company sufficient time to prepare the financial statement disclosures required by GAAP and to complete the analysis of operating results and financial condition necessary to prepare MD&A.

This alternative approach recognizes the fact, as noted in the proposal, that many companies currently announce their quarterly and annual financial results well before they file their quarterly and annual reports with the SEC. Company earnings announcements do not provide investors with much of the disclosure information required in quarterly or annual reports filed with the SEC, and the manner of its presentation in press releases varies from company to company. Also, as observed in the SEC proposal, the delay in the filing of reports with the SEC means investors often make decisions without timely access to the more extensive disclosures provided to the SEC in the Exchange Act Reports. Ideally, investors would be provided access to a company's GAAP financial statements and the related MD&A at the same time a company publicly announces its periodic earnings. As a result, investor decisions would be better informed by a complete financial reporting package. However, for many valid reasons, complete financial statements and MD&A are seldom available at the time of a company's earnings release. Any attempt to eliminate the "gap" entirely may unnecessarily delay the company's earnings release because of the various filing timing factors discussed above.

We believe that the time periods we suggested (the earlier of 45 days after the end of the quarter or 20 days after a quarterly earnings release and the earlier of 90 days after the end of the year or 50 days after the annual earnings release) would provide a company sufficient time to prepare the financial statement disclosures required by GAAP and to complete the analysis of operating results and financial condition necessary to prepare MD&A. Those intervals should provide independent auditors sufficient time to complete their work, including performing required audit testing, performing necessary quality control procedures, and fulfilling their communication responsibilities to management and audit committees. Also, those intervals should provide audit committees and boards of directors sufficient time to exercise meaningful oversight of the financial reporting process and review of financial reports.

We anticipate two concerns about correlating the due date of the periodic filing to the date of the company's earnings announcement:

We believe the first concern is limited to assessing regulatory compliance with timely filing requirements and a company's status as a timely filer. To address this concern, we would propose that the Commission modify the cover pages of Form 10-Q and 10-K to require the registrant to note the date of its first public disclosure of periodic results and to indicate whether or not the report has been filed within the prescribed timeframe. Because investors and the market currently deal effectively with differences in the timing of earnings releases and periodic reports, we do not believe investors and the market will be concerned by this proposal. Today, many companies notify investors and the public of the date that they expect to announce periodic results, and the market adapts to that timetable. In addition, many companies file their Exchange Act reports before the current deadlines and financial news services notify investors and the public about the availability of those reports.

Related to the second concern of what constitutes an "earnings release", we believe that the answer to this question will be evident by a company's formal announcement procedures. However, noting that some companies "pre-release" earnings to the extent they expect performance to be materially different than market expectations, the Committee believes that such preliminary releases should not be considered "earnings releases " for this purpose because they disclose expectations, not final results. We do acknowledge that some companies issue earnings releases that disclose extensive financial information but omit certain traditional measures of results (e.g. earnings per share or net income). This is an issue that the Commission would need to address if it adopted this alternative.

Other Alternatives

If the Commission believes the above alternative is not acceptable, the Committee suggests the Commission consider the following additional alternatives:

Other Issues

We also have the following comments on certain other questions posed in the proposal that we believe merit further consideration.

Acquired businesses required by Rule 3-05 of Regulation S-X and Item 7 of Form 8-K - With respect to audited financial statements of acquired businesses required by Rule 3-05 of Regulation S-X and Item 7 of Form 8-K, we believe that no revisions to the current time frame for providing audited financial statements should be made. We believe that a reduction in the time provided for filing audited financial statements on Form 8-K simply to conform to any acceleration of the deadline for filing audited financial statements of the registrant is not warranted. These audits often involve businesses that have never been audited or even had financial statements prepared in accordance with GAAP prior to acquisition. In most cases, the audits do not commence until after the closing of the transaction. Reducing the time period in which to complete the audits would have a significant impact on the cost of these audits, and in some cases would be impracticable to complete by the accelerated due date. In short, we know of no reason to accelerate the filing deadline for audited financial statements required by Rule 3-05 of Regulation S-X.

Filing on financial statements provided to comply with Rule 3-09 of Regulation S-X - While not specifically addressed in the proposed rule release, we believe that the Commission should also consider the ramifications of accelerated filing on financial statements provided to comply with Rule 3-09 of Regulation S-X. We believe that the due date for Rule 3-09 financial statements should not be accelerated to conform with that of the investor registrant. Accelerated filing of such financial statements could require a public company that does not meet the definition of accelerated filer to file its financial statements before they would be otherwise required by the Commission's rules.

Acceleration of due dates for Form 20-F - The possible acceleration of due dates for Form 20-F should be addressed in a separate rule proposal. This would allow the Commission to adequately address the unique accounting and reporting concerns facing foreign filers and provide foreign private issuers and other affected parties an opportunity to provide comments.

Extension periods provided under Rule 12b-25 - We believe that the filing extension periods provided under Rule 12b-25 should not be shortened. If the proposed rules are adopted, many companies may have difficulty meeting these accelerated deadlines and should not be penalized as "late filers" by also shortening the extension period. Utilizing the existing extension period with the proposed accelerated deadlines will still require companies to file Forms 10-K and 10-Q on an accelerated basis compared to the existing deadlines.

* * * * *

We appreciate the opportunity to comment on the proposed rule and would be pleased to discuss our comments.



Amy A. Ripepi, Chair
AICPA SEC Regulations Committee

1 More information on XBRL, SysTrust and other similar initiatives is available at www.xbrl,org, www.aicpa/assurance/index.htm and, respectively.