By email to: Rule-comment@SEC.Gov

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

Re: File No. S7-16-02, Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies

Dear Mr. Katz:

This letter is the response of HSBC USA Inc. to the Commission's proposed disclosure requirements as set forth in Release Nos. 33-8098 and 34-45907 (the "Proposal").

Analyses of estimates

We concur with the Commission's goal of increasing the transparency of financial reporting. We also believe that expanding the disclosure of critical accounting policies to include the material transactions in significant loss accruals and valuation accounts ( a "roll forward") is generally appropriate and, in fact, usually required by GAAP in the notes to the financial statements. However, we have a very serious concern over presenting ranges of numbers and sensitivity analyses for provisions and/or accrual balances.

There is no question that ranges of loss or, for that matter, ranges of profit are calculated and/or estimated in the normal course of recording many accruals in the financial statement preparation process. Those numbers are often subjected to audit but are generally not for public consumption, any more than the intricacies of an inventory cost system. Providing extensive, detailed data underlying estimates to users of financial statements would potentially result in much confusion. For instance, in reviewing goodwill for impairment, an entity considers future cash flows that are normally calculated using several variables. Would an entity be required to disclose ranges for each variable to enable the user to calculate a seemingly endless number of values? We believe that the financial data user would not be better served by being provided with a table or a schedule of the variables used and the ranges considered for each variable and the myriad of pro forma results produced by the application of different sets of variables. Such a presentation would mean that the entity was no longer exercising its judgement to arrive at a suitable estimate but rather leaving this decision in the hands of users of the accounts. Users' judgements among possible outcomes would inevitably be made on the basis of a less complete understanding than that of the entity's own management.

For this reason, the disclosure of accrual ranges, which would allow users of financial data to recast a company's operating results into various sets of pro forma results, strikes us as contrary to the Commission's objectives. However, we believe that disclosing the variables used in arriving at accounting conclusions could possibly be useful, similar to the disclosures of assumptions used in arriving at employee benefit plan numbers. Thus, users would be able to compare those variables to those used by other entities for similar accruals and valuations.

The ultimate fact is that investors must rely on the integrity of the financial statement preparation process and the auditors of that process and its results. We realize that concept is looked upon with a jaundiced eye in the current environment. Nonetheless, the concept is valid and an entity should not be required to provide investors with so much detailed information that they become part of the audit process. That would be counterproductive to the goal of furnishing investors with improved, transparent disclosures as quickly as possible.

Proprietary information

The issue of disclosing proprietary information has been debated in the past. The potential for requiring such disclosure was loudly protested in comment letters about two years ago in response to the Commission's proposal that detailed roll-forwards of expense accruals be included in filings. Principally, the comments focussed on income tax and litigation accruals and the exposure resulting from furnishing proprietary information to those asserting claims against an entity. That information would be damaging to the entity's defenses and would likely result in the payment of claims that would not have occurred if not for the disclosure of the proprietary information.

However, we have a concern over disclosure only if the Proposal is meant to cover such accruals. It can be argued, for instance, that it is virtually impossible to obtain an opinion of counsel as to the ultimate monetary resolution of almost any lawsuit until settlement is imminent. No accrual would be made prior to that time. Thus, the Proposal's first disclosure criterion, "highly uncertain", would be met throughout the course of the lawsuit. However, we believe the second criterion would not be met since no different estimate could have reasonably been made or anticipated during the lawsuit until imminent settlement. However, if counsel were to render an opinion, prior to settlement, as to the ultimate range of loss, an accrual would be made and disclosed, if material.

Audit committee and auditor involvement

While it is impossible to know exactly what occurs in closed-door meetings, it would seem safe to assume that at most audit committee meetings, the independent auditor, the internal auditor, and the company's financial management discuss with the committee the matters that are material to the company's financial reports. Let us assume that, in addition to an array of other issues, those matters always include critical accounting estimates. It would be a piecemeal approach to confirm in the MD&A the discussion of the critical estimates and ignore the other important matters discussed. This would represent a "partial opening of the meeting door". If the Commission's objective is to seek more documentation of the audit committee fulfilling its responsibility, perhaps it should propose that the committee "sign-off" on financial information similar to the Commission's proposal to have CEOs and CFOs attest to financial information.

In reality, no matter how many additional disclosures regarding director and management responsibilities are required, the directors will always look primarily to the independent auditors for guidance on the accuracy and appropriateness of financial statements and related disclosures. However, this is not to imply that we support the notion of having auditors render any sort of report on the MD&A and the other financial data outside the financial statements in a filing. As is accurately pointed out in the proposal, the independent auditors are already obliged to read the entire filing to ascertain that there are no inconsistencies between the financial statements and the data outside of the financial statements. The current standard is adequate, although its execution is sometimes lacking. To add another level of reporting would hinder the objective of producing financial reports more quickly without improving the quality of the data presented.


Warren Buffet said at the Commission's March 4, 2002 roundtable discussion, "...I really think that the disclosure problem does not revolve around the quantity of disclosure. I mean, the SEC and the auditing profession have provided us with, you know, just a wealth of information on a quantitative basis. But, in the end, it's the CEO that determines the qualitative aspect of disclosure, and that's all important."

We agree with Mr. Buffet. In general, we have plenty of numbers and numbers don't lie, according to the adage. We also have adequate disclosure rules. However, the important thing is that audit committees and auditors stand up to management that violates the rules by twisting the truth of the numbers or avoids telling the truth at all. They must suffer the consequences along with management if they fail to do so. When the Commission's staff observes deficient reporting, it must take swift action against the company's management, directors and auditors. Perhaps this will occur more often in respect to auditors when your proposed Public Accountability Board comes into existence.

Thank you for the opportunity to comment on your proposal.

Yours truly,

Gerald A. Ronning
EVP & Controller