July 19, 2002

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549-0609

Subject: File No. S7-16-02

Dear Mr. Katz:

Eaton Corporation appreciates the opportunity to respond to the Securities and Exchange Commission's Proposed Rule, "Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies" ("Proposed Rule".)

The collapse of several major corporations in connection with recently identified accounting irregularities has shaken investor confidence in the financial markets and has prompted a review of the adequacy of financial reporting. The events of the last several months have resulted in numerous proposed regulations from various agencies in an attempt to restore confidence in the financial markets, regulate the accounting profession, restore the integrity of financial reporting and hold those accountable who perpetrate these accounting irregularities. Overall, we support the Commission's views on the need for improvement in the area of transparency of financial disclosures, which includes the discussion of a company's significant accounting estimates.

Financial Reporting Release No. FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies ("FR-60") issued in December 2001 provided requirements for additional disclosures about significant estimates. We believe our Company and many other companies made a genuine attempt in responding to FR-60 in their 2001 Annual Report to Shareholders by providing a section in MD&A discussing critical accounting policies. In most cases, our discussion represented an elaboration on the accounting policies already discussed in the footnotes, which we believed was the intent of the Commission's request. We subsequently learned the disclosures provided by most companies generally did not meet the Commission's expectations, which we attribute primarily to the issuance of FR-60 late in 2001, which did not give companies much time to clarify and comprehend fully the SEC intentions.

We understand the Commission has issued the Proposed Rule to clarify and further define elements included in FR-60. As stated earlier, we agree with the underlying concept of the proposal to increase transparency of financial disclosures, however we have several significant concerns, which are discussed below.

In light of these observations about FR-60 and the further clarification to be forthcoming from the SEC on this proposal, we have great concerns about the added burden and the questionable usefulness of the additional Proposed Rule we are now being asked to comment on. The Proposed Rule is very broad in scope and potential content and very costly to implement. Our view is that the costs seem to outweigh the benefits to users of financial statements. The amount of detailed disclosures required by this proposal is overwhelming and, when coupled with the requirement to breakdown the disclosure by business segment, will add significantly to the current level of information overload.

We are not aware of persuasive information or studies suggesting users of financial statements are requesting improved disclosure of critical accounting estimates. Most companies inform users of the financial statements that one of their limitations is that they include the use of estimates and judgements, and that actual results could differ from these estimates. Most users recognize this limitation of audited financial statements and are willing to rely on the management of the company to make their best judgement as to the outcome of future events that could effect the financial statements.

It appears that if this proposal had been in effect, it may not have prevented the recent collapse of WorldCom, Enron or other major companies. These collapses resulted almost completely from the misapplication of and disregard for existing generally accepted accounting principles (GAAP) related to capital expenditures, SPEs, revenue recognition and leases, not significant swings in accounting estimates. We suggest that stricter enforcement of existing GAAP would be a better solution to preventing the types of accounting fraud that struck WorldCom, Enron and other companies, instead of the new information required by this proposal.

Definition of Critical Accounting Policies

The proposal should more clearly define a critical accounting policy since as written it could sweep in many kinds of normal accounting estimates. This will lead to many accounting practice and interpretation problems and information overload. The proposal defines a critical accounting estimate as one involving assumptions that are made about highly uncertain matters where other estimates that could have reasonably used would have had a material impact on the financial statements. On the surface the definition seems relatively straightforward, however when the requirements are applied in practice, questions arise and confusion results as to what constitutes a critical accounting estimate. The use of the above criteria could potentially include accounting estimates such as pension and other postretirement liabilities, which we believe was not the intention of the SEC, as expansive disclosure requirements currently exist in this area. The definition also does not provide guidance on the application of materiality to the effect of accounting estimates on financial statements and to disclosure of these estimates by business segment.

Segment Disclosures

We believe that the disclosure of critical accounting estimates by business segment should not be required. This proposal will increase MD&A to a level of detail that will become unmanageable and obscure management's discussion of important business risks that could effect a company. We are also concerned that there will be a significant amount of explanatory disclosures around the critical estimates related to each segment to ensure that the disclosures are not materially misleading, which will further add to information overload.

Sensitivity Analysis / Qualitative Measures

We have significant concerns with the proposal to include sensitivity/other quantitative analysis in the disclosures concerning critical accounting estimates. We feel more qualitative disclosures about critical accounting estimates would be more beneficial to the users of financial statements. Often, estimates are based on several major assumptions and changes in several of those assumptions could not be adequately captured in a sensitivity analysis. We believe that management's discussion of the required assumptions and why those assumptions were selected would be more informative compared to a range of possible outcomes that would portray the potential impact on earnings. The qualitative analysis would enable the user to better understand the development of the estimate and provide an understanding of the possible impact of changes in market conditions/variables.

We are also concerned with sensitivity analysis on critical accounting estimates from the perspective of managing the business. We believe this would be putting companies at a competitive disadvantage if sensitive estimates such as environmental liabilities, litigation, insurance receivables or tax reserves were required to be disclosed in the form of sensitivity analysis. The disclosure of ranges of possible outcomes could compromise a company's ability to negotiate and settle litigation, tax audits, insurance claims or environmental matters.

As described earlier, the development of estimates requires management's assumptions and best judgement of circumstances or events which will occur in the future. Management uses the knowledge of their business to determine the appropriate assumptions to utilize when developing the estimate. Sensitivity analysis would provide users a forum to second-guess management if an assumption was determined inaccurate. We believe if this information is provided to investors it would detract from the current and future prospects of the business. The qualitative approach to disclosure would provide investors with an understanding of why management changes assumptions from time to time and eliminate some second-guessing of the estimates contained in the financial statements.

Disclosure Overload

The business environment has significantly increased in complexity in recent years and has resulted in more required information in SEC filings. Investors have become overwhelmed with the amount of data available in companies' filings. The Commission continually seeks to provide accounting guidance that balances investors need for useful information with eliminating superfluous disclosure. We are in support of additional disclosure which provides investors with a view of the Company "through the eyes of management", however we believe this proposal in its current state will only add to the disclosure overload, especially when coupled with the requirement to breakdown the disclosures by business segment. The proposed disclosure requirements would essentially expand MD&A by several pages for each significant issue with the required quantitative analysis. We believe users of financial information would be better served if the SEC returned to its original objective in FR-60, which was to highlight a company's significant accounting estimates. We encourage the Commission to provide limited guidance in the area of providing information on significant accounting estimates versus a detailed "one-size fits all" approach.

We continue to believe disclosure overload is a significant issue facing the Commission and financial community (both preparers and users), especially in light of the expanded disclosure requirements of this proposal. We contend that disclosure overload is a significant obstacle to realizing the Commission's objective of accelerated filing deadlines.

Outside Auditor Involvement

We question the benefit of the requirement for the independent auditor to examine the proposed disclosures related to critical accounting estimates. The auditors have presumably audited these estimates in connection with the audit of the financial statements and additional scrutiny seems unnecessary. Most likely this would result in an increase in the cost of the audit without a significant benefit.

Accelerated Filings

In addition to this proposal, the SEC is sponsoring a proposal to accelerate annual and quarterly filing requirements. If these Proposed Rules move forward, we request the Commission consider the effect on the proposal related to accelerated filings, as these two proposals appear to be working towards incompatible objectives. The critical accounting estimate proposal would inevitably require more time, effort and disclosure, while the proposal on accelerated filings seeks quicker, more accurate filings. We believe the Commission must address the issue of disclosure overload before considering the proposal to shorten deadlines. Another element of the proposal to be considered in conjunction with accelerated deadlines is the requirement for auditors to opine on MD&A. The addition of this requirement to the proposed rule would impose difficulties in meeting the accelerated filing requirements.

* * *

We appreciate the Commission's consideration of these important matters and welcome the opportunity to discuss any and all issues with the Commission at its convenience. Answers to selected questions contained in the proposal are included below. If you have questions regarding this letter, please feel free to call me at (216) 523-4175.


/s/ Billie K. Rawot

Billie K. Rawot
Vice President & Controller
Eaton Corporation

Answers to selected questions

We solicit comment with regard to broadening the scope of our proposals to achieve a more expansive objective.

We seek comment on the proposed definition of critical accounting estimates.

We request comment on the proposed identification and analysis of changes.

We solicit comment with respect to independent auditor examinations of the proposed MD&A disclosure regarding critical accounting estimates.

We solicit comment on the disclosure presentation aspects of the proposals.

We solicit comment with respect to the potential benefits of the proposed MD&A disclosure.