May 22, 2002
Jonathan G. Katz
Secretary, U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
File Reference: No. S7-08-02
Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Website Access to Reports
Dear Mr. Katz:
The following provides our response to the Securities and Exchange Commission (SEC) rule proposal on the acceleration of reporting deadlines for Forms 10-Q and 10-K to 30 days and 60 days after a registrant's fiscal quarter end and year end, respectively, as well as our comments on your plan regarding website access to registrants' financial information. Taking into consideration the heightened scrutiny that accounting and financial reporting are under, we support the overall objective on which these initiatives are based, which is the timely and accurate reporting of financial information to shareholders and the investment community. We do not believe, however, that the rule, as proposed, will necessarily achieve this objective.
Acceleration of Filing Dates - Forms 10-Q and 10-K (Exchange Act of 1934)
While it is vital for SEC registrants to provide the capital markets with timely, accurate and dependable financial information on both a quarterly and annual basis, the measure of simply reducing the applicable preparation time for Forms 10-Q and 10-K does not seem the most feasible. We believe that there are a number of issues that the SEC needs to consider in making a final decision on whether to adopt these tighter deadlines, as proposed.
It is the SEC's contention that with all of the advances in information technology and communications since the current deadlines were established over 30 years ago, most seasoned public companies now have the resources to close their books and prepare full sets of financial statements in accordance with GAAP1 in less time. While this may be the case, it is important to consider the increased complexity of the rules under which GAAP financial statements are prepared. Over the same thirty year period, the Financial Accounting Standards Board (formerly the Accounting Principles Board) has issued over 150 final standards, the Emerging Issues Task Force has reached consensus on hundreds of issues, the SEC has issued many Staff Accounting Bulletins and the AICPA has issued numerous Statements of Position (all of which have some relevance to GAAP). The complex nature of these pronouncements has greatly increased the need for enhanced technical understanding of their provisions and the related effects on financial statement preparation. As such, quarterly and annual financial reporting in accordance with these rules is not something which should be expedited purely for the sake of making the information available to investors at-large. Without ample time for a proper, thorough application of these rules, the SEC's primary goal of providing accurate and dependable information to financial statement users would not be sufficiently met. The key is finding a balance whereby accuracy and dependability of financial reporting are not undermined by the level of acceleration which has been proposed. Regardless of time constraints, the ultimate goal is quality financial reporting.
We certainly agree that there is a need for companies to provide useful and complete financial information in a timely manner, but in its current form, this proposed rule does nothing but consider the "timely" portion of the issue. What about accuracy, dependability and completeness? If the proposal is approved, we believe that these aspects of the financial statement preparation process will be adversely affected in several ways. First, the obviously tighter time constraints (especially with the proposed 60-day filing deadline for Form 10-K) could affect the financial statement preparers' ability to ensure that all required disclosures are made. Such disclosures are on the rise in light of the aforementioned increase in accounting pronouncements issued (most with greater complexity), and it is imperative that those who are responsible for the financial statements prepare them with adequate "due diligence". Second, it seems that the proposed acceleration would counteract the SEC's goal for audit committees to play an integral role in the financial statement process. In his March 7, 2002 speech on Making Audit Committees More Effective, SEC Chief Accountant Robert Herdman, made several statements on audit committees, such as "...the role of the audit committee is central to insuring the integrity of published financial statements on which investors rely, and which are central to the efficiency of our capital markets" and "they [audit committees] have to understand the sometimes highly complex information and results put before them." That being the case, it seems contradictory to now ask them to perform this integral role, but "make it quick." Third, independent auditors may have difficulty in allocating sufficient staff to their respective clients for reviews and audits under these proposed deadlines. For example, if a particular auditor's office has a limited pool of staffpeople available to perform quarterly reviews and annual audits of clients with calendar-year fiscal years, this proposal will require them to spread these limited resources over all of such clients at the key filing deadlines. In other words, there will be more companies filing 10-Qs and 10-Ks before the proposed deadlines, and these auditors will now have less time in which to perform their required procedures, without incurring the incremental cost of hiring additional staffpeople. As such, this situation could jeopardize the quality of the audits and reviews performed by independent auditors. Taking these points into consideration, it appears that the SEC's proposed acceleration of filing deadlines for Forms 10-Q and 10-K somewhat undermines the need for accurate and dependable financial information.
While it is true that we disagree with a blanket acceleration rule for all "accelerated filers," as defined in the proposal, we do agree with the SEC's objective that financial statements and related disclosures be complete and accurate in the most timely manner possible. As such, we would not be opposed to a rule that requires registrants to file their Forms 10-Q and 10-K within a specified period (e.g., 15 days) after their earnings press release, not to exceed the current reporting deadlines. Ideally, this method would serve investors, shareholders and the capital markets well, while upholding the SEC's call for timely financial reporting. There is one possible negative aspect of this approach, however, which is the potential delay in registrants releasing earnings via press releases in order to provide themselves with greater time to prepare full sets of financial statements for SEC filings. As such, the initial availability of financial information may be pushed back in some cases, but no further back than current practice.
In addition, if the SEC does deem it necessary to tighten the time constraints on Forms 10-Q and 10-K, perhaps less severe acceleration (e.g., 40 days for Form 10-Q and 75 days for Form 10-K) would be more acceptable to registrants. Based upon our recent filing experience here at UST Inc.2, those deadlines appear more reasonable and realistic, and would be less likely to adversely affect registrants' ability to provide accurate reporting of financial results.
Website Access to Reports
We concur with the SEC's initiative to require a company (who is an "accelerated filer", as defined) to disclose in their annual report where investors can obtain access to other company filings on its website. This portion of the proposal coincides with the goal of making such information available on a timely basis. It seems fair to assume that most companies fitting the "accelerated filer" definition would already have websites on which such information could be provided; as such, the proposal would not require these companies to incur any incremental costs in establishing one.
The requirement that SEC filings on Form 8-K, 10-K and 10-Q be made available on registrants' websites the same day on which such filings are made seems a difficult standard to meet, when there is still a 24-hour lag for such filings on the EDGAR website. Once EDGAR's delay is lifted, as planned, then applying the "same day" standard to registrants' websites would be more appropriate.
If you wish to discuss any issues raised in this letter, we can be contacted at (203) 661-1100.
/s/ Robert T. D'Alessandro
Robert T. D'Alessandro
Senior Vice President and Chief Financial Officer
/s/ James D. Patracuolla
James D. Patracuolla
Vice President and Controller
1 Generally Accepted Accounting Principles (U.S.)
2 Our Form 10-K for the year ended December 31, 2001 was filed on March 8, 2002 (67 days after year-end) and our Form 10-Q for the quarter ended March 31, 2002 was filed on May 10, 2002 (40 days after year-end).