May 22, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: File No. S7-08-02 "Acceleration of Periodic Filing Dates and Disclosure Concerning Website Access to Reports"
We have read the proposed rules regarding acceleration of periodic filing dates and appreciate the opportunity to comment on the proposal. We note that the comment period for this proposal was limited to 30 days. In our opinion, this is an inadequate amount of time for many companies to respond. We encourage the Commission to extend the comment period to 60 days.
We disagree with and ask that you withdraw the proposed rules to accelerate the periodic annual and quarterly report filing dates. We feel that the accelerated reporting deadlines have more potential to upset the capital markets then they do to benefit them.
We believe that the compression of the 10K deadline from 90 to 60 days does not fully take into account the time required to allow audit committees, legal counsel, boards of directors and outside accountants an opportunity to fully review financial reports. We believe that the new rules will create a significant additional burden on accounting, auditing and legal professionals without a meaningful improvement in the relevance or usefulness of financial reporting. We believe that this burden will be greater for companies in the insurance industry than for companies in many other industries. We also believe that for many registrants, the new rules will reduce the reliability of financial reporting, which has a greater potential for upsetting the capital markets than the possible benefits of receiving information sooner.
1. The proposal moves up external reporting deadlines by 33% (90 days to 60 days), however it will force companies to move up internal deadlines by almost 50%
The proposal does not fully consider the heightened need for outside counsel, audit committees and boards of directors to perform detailed reviews of financial filings. Add to this time the thorough reviews of non-audited materials by the public accountants and the length of time it currently takes to "EDGARIZE" a 10K and internal deadlines are greatly shortened.
Under the proposed system, most filers will need to have a finished draft of their 10K available for internal and external reviews approximately 35 days following each year-end in order to allow adequate time for the reviewers to complete their review of the document. Under the current 90 day rule, the completed 10K drafts need to be available for these internal reviews approximately 65 days following year-end. We view this as moving the operational reporting deadline up by 46% (65 days to 35 days), rather than the 33% (90 days to 60 days) contemplated in the proposal.
2. The proposal will add substantial additional cost and inefficiency to the reporting process while increasing the probability of occurrence of accounting errors.
In order to meet reporting deadlines, many companies utilize a substantial number of routine estimates. For example, companies make an estimated accrual for accounts payable items ordered and received when the invoice has not yet been received or paid. These estimates generally roll forward, so that the estimates are later "trued up" after the monthly close with actual data. In essence this causes companies to book their numbers twice, an inefficient use of time. We believe that the new deadlines will increase the use of this technique resulting in reporting inefficiencies and a higher probability of accounting errors.
Large individual transactions, unexpected liabilities, complex accounting and changes in asset valuations caused by outside forces are a few items that do not lend themselves very well to the estimate and roll-forward technique. Many of these large or unusual transactions can be anticipated and adjusted for, but the tighter deadlines could make this process harried and may result in a higher level of accounting errors.
Furthermore, the auditing firms will be forced to audit the same number of companies in a compressed amount of time. In order to complete audits on time without a significant expansion in audit staff, audit procedures will be more focused on 10 or 11 month balances with rollforward reviews of the final month(s) activities. This will likely cause significant year-end transactions to get less audit attention than in the past and less audit attention than they should. At a minimum, auditors will still look at many accounts twice, reducing audit efficiency and driving up audit cost.
The tight deadlines will add to the significant pressure on audit fees. The increase in perceived audit risk by accounting firms coupled with the reduction in number of firms, limitations on consulting work, a general shortage of qualified personnel, tightening of reporting deadlines and additional reporting requirements creates a "Perfect Storm" scenario for very large increases in audit fees. We do not believe that the Commission factored this into their burden analysis, when calculating the additional cost of compliance.
3. The 60 day 10K reporting deadline will have a greater impact on the insurance industry than on many other industries.
Insurance companies are licensed by the states and are required to file statutory annual statements 60 days following year-end. Many publicly traded insurance companies focus their time after closing the year-end books on completing the statutory filings. Then, after the statutory filings are complete, the 10K filing is completed. Where in the past, financial reporting staff would complete the statutory filings and then move on to complete the 10K, the proposed deadline will undoubtedly require many insurance companies to add staff so they can complete both filings at the same time. This will also add to the inefficiencies discussed elsewhere.
4. The Commissions proposal attempts to improve the relevance of financial reporting by improving its timeliness, but fails to consider that timeliness is only an ancillary aspect of relevance that may not improve the overall usefulness of the information.
FASB Concepts Statement 2 provides a framework for any discussion about the balance between relevance, timeliness and usefulness of information. Paragraphs 56 and 57 (paraphrased) say, "Timeliness is an ancillary aspect of relevance. If information is not available when it is needed or becomes available only so long after the reported events that it has no value for future action, it lacks relevance and is of little or no use. Timeliness in the present context means having information available to decision-makers before it loses its capacity to influence decisions. Timeliness alone cannot make information relevant, but a lack of timeliness can rob information of relevance it might otherwise have had. Clearly, there are degrees of timeliness. In some situations, the capacity of information to influence decisions may evaporate quickly, as, for example, in a fast-moving situation such as a take-over bid or a strike, so that timeliness may have to be measured in days or perhaps hours. In other contexts, such as routine reports by an enterprise of its annual results, it may take a longer delay to diminish materially the relevance and, therefore, the usefulness of the information. But a gain in relevance that comes with increased timeliness may entail sacrifices of other desirable characteristics of information, and as a result there may be an overall gain or loss in usefulness. It may sometimes be desirable, for example, to sacrifice precision for timeliness, for an approximation produced quickly is often more useful than precise information that takes longer to get out. Of course, if, in the interest of timeliness, the reliability of the information is sacrificed to a material degree, the result may be to rob the information of much of its usefulness."
It is our belief that in some circumstances, the accelerated filing deadlines may be forcing companies to choose timeliness (an ancillary aspect of relevance) over precision when in many cases precision is a more important aspect of relevance than timeliness. In these cases, the relevance of the very information that the shorter filing deadline is trying to improve will actually be diminished. A review of the impact on stock prices from earnings restatements compared to the impact on stock prices from late reporting support that the capital markets value accuracy over timeliness when given the choice.
The Commission argues that technological improvements over the past thirty years have made it possible for companies to capture, process and disseminate information faster. By inference, this solves the problem that accuracy and usefulness of information will not be compromised by requiring it to be reported sooner. We note that while technology has improved companies ability to process information, the amount and complexity of the information has also increased, such that many of the time savings benefits from technology have been offset by the increased complexity of financial reporting.
Additionally, there is momentum gaining for companies to have their asset and liability values certified by independent experts. Former SEC Chief Accountant Walter Schuetze recently recommended this in testimony to the Senate Banking Committee. Whether this comes to fruition or not remains to be seen, however some industries already have independent evaluations performed of major assets or liabilities. For example, insurance companies currently have their reserves certified by independent actuaries. These certifications add credibility to the numbers, but they take time and may be difficult to implement under proposed reporting deadlines.
We have no doubt that if forced to most companies will do what it takes to meet the accelerated reporting deadlines. However, we believe that the additional cost in terms of dollars and decrease in the accuracy of information is greater then the potential benefit of timelier reporting. Therefore, we respectfully ask that the Commission withdraw this proposal.
/s/ THEODORE R. STALICK
Theodore R. Stalick
Vice President and Chief Financial Officer
Mercury General Corporation