Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-6009
23 May 2002
Dear Mr. Katz:
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
We are happy to respond to your request for comments with respect to the Commission's proposal to accelerate periodic report filings (the "Proposal").
As an international law firm with many international clients (including US clients with substantial foreign operations) we have several concerns about the Proposal that would accelerate the filing due dates of Forms 10-K and 10-Q. It is our understanding that the Proposal assumes financial reporting involves only US GAAP financial statements of domestic companies. We believe this assumption neglects to consider the impact on US registrants with substantial foreign operations.
Our more specific comments about the Proposal and our recommendations for alternative approaches are set forth below.
In viewing the Proposal, it appears to us that in the case of domestic issuers with substantial foreign operations the 30 and 15 day reductions in time for filing Forms 10-K and 10-Q, respectively, whilst more timely, may not offset the risk that the shortened filing process will create increased pressures and costs, possibly resulting in errors and poor judgements in preparing the periodic reports.
Form 10-K Filings
The Proposal rightly recognizes the impracticability of requiring foreign private issuers to meet shortened timetables due to foreign legal requirements and practical difficulties in reconciling or converting financial results to US GAAP. Yet, the Proposal fails to recognize that similar burdens affect domestic issuers with significant foreign subsidiaries. The international expansion of a registrant's business makes the financial reporting process more complex than filing as a purely domestic company. In our experience, many of such global companies must under foreign law prepare and file publicly statutory accounts for foreign subsidiaries based on foreign generally accepted accounting principals which must be audited by foreign auditors. By way of example, financial information is required to be filed publicly in Belgium, France, Germany and the United Kingdom. Having prepared such statutory financial statements under the relevant jurisdiction, they must then be converted to US GAAP and made Regulation S-X compliant for consolidation purposes, audited by US auditors and agreed with officers and directors of the parent company. This work is even more complex if the financial statements of the foreign subsidiary must not only be consolidated into the US parent's financial statements but must also be filed separately under Rules 305, 309 or 310 or Regulation S-X. The new timing could force US companies with foreign subsidiaries to complete US GAAP Regulation S-X compliant financial statements independently of foreign statutory accounts which could increase costs by requiring separate processes and lead to inconsistencies in financial reporting as accounting issues might only be detected in the later statutory audit completed after the filing of the 10-K. Following Enron, given the demand of US public market participants for increased financial transparency, we question the overall benefits of creating an accelerated reporting process that would compress preparation of multi-jurisdictional consolidated accounts beyond current audit practice for foreign companies.
Form 10-Q Filings
It is our opinion that although there is not likely to be a requirement for publicly filing foreign financial statements on a quarterly basis, some of the practical problems described above for Form10-K also apply to Form 10-Q filings.
We would recommend either that (1) domestic issuers with significant foreign operations be excluded from the definition of "accelerated filer" or (2) the Commission adopt the variation identified in the Proposal to require companies to file their reports by the earlier of the existing deadlines or a specified number of days after the first release of earnings information for that period. In the case of our second recommendation, a company with significant foreign operations in need of the longer period to prepare accurate financial statements could choose not to make an earnings announcement and thus avoid the practical difficulties identified above. Obviously, such a decision not to make an earlier earnings announcement could have an adverse effect on such registrant's share price and a company would have to consider such a possibility at the time.
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We appreciate this opportunity to express our views to the Commission. We would be pleased to answer any questions the Commission or its staff might have, at their convenience.
David E. Schulman
Brian M. McCall
Todd C. Gensler