May 23, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Proposed Rule: Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports - File No. S7-08-02 (the "Proposing Release")
Dear Mr. Katz:
U.S. Bancorp ("USB") is pleased to submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its proposals to accelerate periodic report filing dates and require disclosure regarding web-site access to those reports.
USB is the eighth largest financial holding company in the United States and is headquartered in Minneapolis, Minnesota. We provide a full range of financial services, including lending and depository services, cash management, foreign exchange and trust and investment management services. USB also engages in credit card services, merchant and automated teller machine processing, mortgage banking, insurance, brokerage, leasing and investment banking. USB employs approximately 50,500 people on a full-time basis and reported net income of $1.7 billion in 2001 and had assets of $171.3 billion at December 31, 2001.
This letter is organized in three sections. The first section is an Executive Summary that gives an overview of USB's comments. The second section details USB's general concerns regarding the impact of the proposals, and then addresses our specific concerns with reference to each of the acceleration of Form 10-K due dates and Form 10-Q due dates. The final section presents our conclusions with respect to the proposals.
I. Executive Summary
We commend the Commission for its leadership during the uncertain economic environment over the past nine months. The actions taken by the Commission in response to varied market factors have maintained our capital markets as one of the strongest in the world. While recognizing the ongoing changes that are occurring in the marketplace and agreeing with the Commission's goal to provide clear, accurate and timely information to the marketplace, we do not believe that the Proposing Release achieves the Commission's goal. Any potential benefit gained by accelerated reporting requirements will be lost due to the decrease in information made available by companies and the likely deterioration in the usefulness to readers of such information.
The proposed process would also impose increased and unnecessary costs, without providing significant corresponding benefits to investors. Simply put, the incremental costs and the likely deterioration in the quality and reliability of financial reporting caused by the proposed reporting process outweigh the purported benefits. In our opinion, accelerating the reporting requirements will not improve the quality of financial reporting nor prevent companies from inadequately or inappropriately disclosing critical accounting policies or financial arrangements. We recommend that the Commission not change the filing deadlines for periodic reports.
A. Overview of Acceleration of Periodic Reports
USB agrees with the Commission's assessment that quarterly and fiscal year-end financial information is important to the financial markets and that investors demand this information at the earliest time it is available. We are concerned, however, that the goals of fostering disclosure at the earliest possible time and of ensuring that the information is accompanied by meaningful analytical information may be incompatible. USB believes that the Commission will need to make a judgment as to which of these goals is more important, since the focus on one will clearly impact the other.
For example, if the Commission accelerates the due dates of Forms 10-K and 10-Q, USB believes, as more particularly described below, that this would likely result in a decrease of the information that is available, reduce the quality and reliability of information that is available and increase the costs of the reporting process, all at a time in which uncertain market conditions require us to present more information and analysis than ever before. Additionally, we believe that these effects will have a greater impact on the filing of Form 10-Q than the Form 10-K.
Reduction of Preparation Time and Review Time could Reduce Report Quantity, Quality and Reliability. The quality of information in periodic reports is of vital interest to investors. The current filing deadlines have allowed for timetables to be established as our business has grown in size and complexity and our reporting requirements have increased to gather the needed information, prepare the footnote disclosures and the interpretative text required by the Commission and banking regulators, review internally for possible errors, and allow review by independent auditors, legal counsel, and the audit committee of the board of directors before the filings are made.
The time needed for gathering and reviewing financial information and other disclosures required to be made in the forms has not decreased, but has increased over the last several years.1 If we were required to draft the periodic reports in a shorter timeframe, we would necessarily only have time to focus on high-level changes in our operations and business due to the decrease in time to gather and analyze the same amount of information that currently requires 45 days. Further, irrespective of the number of employees we dedicate to prepare periodic reports, there are several steps in drafting periodic reports that we may be unable to accelerate. For example, due to the fact that the review function must be performed by those executive officers whose job function puts them in the unique position to have a comprehensive view of our company and operations, we cannot decrease the time it takes for our review function by increasing the number of people dedicated to preparing our reports. We also note that due to the increased focus on audit committees in the last several years, it is necessary to provide adequate time for the audit committee to meet its fiduciary responsibilities. A further concern of the review function is whether our independent auditor would be able to provide as much guidance to us in the course of our preparation of the periodic reports as it currently is able to, due to the shorter timeframe in which its clients will demand advice.
Reducing the time available for steps necessary to complete the periodic reports could lead to disclosure of the minimal amount of information required, less review by management and audit committees and a decline in forward looking disclosures, all of which could adversely affect the reliability of financial statements.
Costs and Benefits. USB believes that the Commission considerably underestimates the current cost of complying with regulatory requirements. Incrementally, costs have risen over the past three decades. Reducing the time to file periodic reports by a third would create an even higher peak workload that would result in both quantitative costs, such as requiring more "man hours" in a shorter period of time that would result in a higher turnover in personnel, as well as qualitative costs, such as the decrease in analysis of and confidence in the information provided. The costs of providing quality information to the market are without a corresponding benefit to the marketplace due to the decrease in quality and quantity of analytical information with the inherent decrease in reliability of information.
Both the Quantity and Complexity of Generally Accepted Accounting Principles (GAAP) and Disclosures Have Increased. While technological advances have aided the preparation of periodic reports, the rules that must be complied with for their preparation - accounting, disclosure, and review - have grown increasingly more complex during the same period. The GAAP that must be complied with for the preparation of the financial statements and the related disclosures have increased significantly in quantity and complexity since the filing deadlines were established for the Form 10-K and Form 10-Q. These include complex accounting standards and disclosures for significant changes in business trends and risks impacting our business, off-balance sheet special purpose structures, asset transfers, financial derivatives, pensions and other postemployment benefits. One specific example of the significant increase in financial accounting and reporting complexity is reflected in the accounting for financial derivatives with over 800 pages of new interpretations as a result of complicated accounting standards that are difficult to comply with.
While technological advances have assisted in the transmitting and summarization for the reports, much of the time involved in the preparation of the periodic reports is concerned with the preparation and review of the footnote information for the financial statements and the interpretative text including the forward-looking information and discussion of changes in significant accounting policies that are required for the Form 10-Ks and Form 10-Qs. This qualitative information requires expert preparation and careful review to ensure that quality disclosures and required interpretive information are part of the periodic reports and technological advances have not relieved the time it takes to prepare this information.
B. Form 10-K Acceleration
The current 90-day period for the careful preparation of a Form 10-K, including the completion of fiscal year-end audited financial statements, should be retained. Although USB can currently meet the 60-day requirement, we believe that most companies will have difficulty meeting that timetable and auditors may find it difficult to complete their procedures in a manner that is beneficial to investors. As described below, USB does not object to the acceleration of the due date of Form 10-K as strenuously as the acceleration of the due date of Form 10-Qs.
C. Form 10-Q Acceleration
As described above, we believe that filing of periodic reports on Form 10-Q in less than 45 days will likely reduce the quality of financial disclosures rather than achieve the desired impact outlined by the Commission. To meet this timetable, we believe most companies will be forced to significantly decrease the information provided to investors and the marketplace with a possible deterioration in reliability of information that is provided to investors. We would be happy to meet with the Staff to provide an understanding of the process and timing of USB's Form 10-Q reports. There is very limited opportunity to decrease the time it takes to prepare quarterly reports without disproportionate costs to companies, and more importantly, disproportionate costs to the market due to deterioration in the quality of financial information provided to investors.
As an alternative method of providing useful information to the marketplace, we would suggest the Commission focus on the quality of financial earning releases and potential inconsistencies between a company's press release related to financial results and the formal Form 10-Q filing. We believe this is more of an enforcement issue than an issue of timely quarterly filings. Acceleration of periodic filings does not necessarily accomplish the objective of more useful information to investors. As mentioned previously, the Commission continues to expand additional disclosure requirements as evidenced in FR-61 Statement issued January 22, 2002 and the recent Securities Act Release No. 8098 (May 10, 2002) proposing critical accounting policy disclosure in Management's Discussion and Analysis. These expanded disclosures are extensive and complex in nature, requiring additional time and technical background to prepare, as well as sufficient time for an adequate review by management, audit committees, and independent auditors.
As described above, we believe that the proposals, if adopted, would materially impede the quantity, quality and reliability of the reporting process. The proposed process would also impose increased and unnecessary costs on companies and officers and directors of companies, without providing significant corresponding benefits to investors and the public interest. Simply put, the incremental costs without improvement in the quality and reliability of filings that will result from the proposed reporting process outweigh the purported benefits. We recommend that the Commission not change the filing deadlines for periodic reports.
Terrance R. Dolan
Executive Vice President and Controller
cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
Alan L. Beller, Director, Division of Corporation Finance
1 The Commission's FR-61 Statement issued January 22, 2002 and the Commission's recent proposing release (Securities Act No. 8098, May 10, 2002) covering additional disclosures that should be considered for the Management's Discussion and Analysis of Financial Condition and Results of Operations is another example of added disclosures that filing companies would have to prepare and have reviewed within the current filing deadline for the Form 10-K.