July 19, 2002
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission FILED ELECTRONICALLY
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, DC 20549-0609
RE: File No. S7-16-02
Dear Mr. Katz:
Thank you for the opportunity to comment on the Commission's "Proposed Rule Concerning the Application of Critical Accounting Policies", subject File No. S7-16-02 (the "Proposed Rule"). Computer Sciences Corporation ("CSC") supports your efforts to improve reporting and disclosure practices and the usefulness of reports to investors. In fact, since the Commission issued FR-60, "Cautionary Advice Regarding Disclosure about Critical Accounting Policies", it is apparent that there has been a substantial expansion of disclosures regarding critical accounting policies in filings with the Commission.
However, generally, we believe that the Proposed Rule would require excessive information that is not useful to the investor. Furthermore, we do not believe that the proposed sensitivity analysis regarding critical accounting estimates would improve an investor's understanding of a company's financial performance, and we believe that there are numerous practical application issues. We also have several other comments regarding the Proposed Rule discussed below.
We are concerned that the Commission's proposal will require all registrants, the majority of whom are ethical, to unnecessarily complicate their disclosures on significant accounting policies, estimates and sensitivity analysis. The root cause of many publicized shortcomings in financial reporting appears to relate to clearly unethical transactions and accounting, which was then compounded by apparently deliberate and misleading accounting disclosure and inadequate oversight by board members and external auditors. These recent failures are not indicative of deficiencies in existing reporting and disclosure requirements; quite to the contrary, these are situations where the registrant's financial statements and disclosures included in its SEC filings clearly did not comply with existing requirements under both generally accepted accounting principles and SEC reporting requirements. Further additional disclosure and reporting requirements would not have remedied the situations where registrants chose to mislead the investing public. Rather, aggressive enforcement action by the Commission, including application of criminal sanctions, will deter unethical behavior such as that perpetrated by a few registrants.
Critical Accounting Estimates
The proposed quantitative disclosures require determination of either the "reasonably possible near term changes in the most material assumptions underlying the accounting estimate" or the "reasonably possible range" (the "sensitivity analysis"). The level of precision this would suggest is fundamentally inconsistent with the inherent nature of the uncertainties affecting such estimates. The presumption that management has developed a well-defined range on all matters involving a high degree of uncertainty is generally inconsistent with the commercial business environment and existing business practices. In fact, in many cases it would be much more difficult to define the upper and lower ends of the range than the point estimate used for recognition purposes.
There also is a significant speculative quality to the proposed disclosures. Many of the assumptions and uncertainties underlying accounting estimates depend upon macro-economic factors. These factors include general industry trends and the state of the overall economy as a whole. In the current economic climate, for example, most companies have significant difficulty developing reliable forecasts for their own business. Forecasting industry and economic trends further complicates quantification of estimates and would exacerbate the difficulty in implementing the proposed disclosures. We further believe that the combination of this type of information with historical and forward-looking information currently included in a registrant's MD&A would result in confusion. For this reason, we do not believe that disclosures predicated on such speculative assumptions would further investors' understanding of a company's financial performance.
Additionally, we do not believe the proposed disclosures regarding critical accounting estimates, particularly the sensitivity analysis, would be meaningful to investors. The complex nature of this disclosure would add further confusion, rather than clarity, for the average investor. This would be contrary to the Commission's objective of providing clear and concise disclosures that can be readily understood by the average investor. Furthermore, the proposed disclosures relating to critical accounting estimates would further compound issues we raised in our May 17, 2002 comment letter submitted in response to the Commission's proposal to accelerate Form 10-Q and 10-K filing deadlines (File No. S7-08-2).
There also are significant practical issues with the sensitivity analysis. It would be very exhaustive for a global multi-national company to describe all accounting estimates involving assumptions about highly uncertain matters. Furthermore, we believe that there would be significant practical issues in summarizing disparate information into a composite that reflects the underlying substance in any meaningful way.
If the Commission decides to move forward with the sensitivity analysis, we would recommend that further guidance be provided as to its quantification. We, frankly, do not know how it would apply to our business. We also recommend, if required, that the sensitivity analysis be included in a separate section of the Form 10-K due to its fundamentally different and speculative nature, as compared to historical financial and forward-looking information currently included in the MD&A. We believe this would only partially mitigate any investor confusion which will arise.
CSC agrees with the inclusion of a qualitative and quantitative discussion of material changes in accounting estimates, but we believe that this information should only be disclosed for the most recent year. Assigning changes during the current year to the original accruals two and three years earlier would be exceedingly difficult and in most instances would not be practicable.
The proposal that management review critical accounting estimates with the audit committee, taken together with existing matters subject to review by the audit committee, other Commission proposals and the New York Stock Exchange proposal, would expand the responsibilities of audit committee members well beyond the personal time commitment most would be willing and able to spend. Existing audit committee responsibilities already encompass a registrant's earnings release, filings with the Commission, meetings with a registrant's internal and external auditors and numerous other matters. Such a dramatic expansion in their responsibilities will transform the audit committee member's status to one of constructive employment and compromise the independence and objectivity essential to the management oversight role of the audit committee.
Initial Adoption of Accounting Policies
Further disclosure in the MD&A regarding alternative accounting policies that could have been, but were not, adopted by the registrant would not provide meaningful information to an investor. We believe that this type of disclosure would result in further investor confusion, not greater clarity regarding a company's financial performance. It is not possible to fairly contemplate long-term implications of the application of an accounting policy since the actual impact on financial results is dependant on future economic factors and business conditions.
The Proposed Rule estimates that preparation of the additional disclosures contemplated therein would average 56 hours. We are certain that the actual work requirements would be substantially greater, particularly for global multi-national companies. In fact, between time spent by our internal accountants, internal auditors and external advisors, including our external auditor's consultation, we have already incurred substantially more effort than this estimate in evaluating and understanding the Proposed Rule. As one example of the level of complexity and dispersion, CSC has 600 locations in 45 countries using 25 currencies. We suspect that most registrants will have at least comparable complexity. In view of such complexity and geographic dispersion, accumulation of the proposed disclosure information across the business units and operating groups of a multi-national company would be arduous, time consuming and costly.
In our opinion, the Commission has taken and continues to take commendable steps in the current business environment. However, the additional disclosures outlined in the proposal may have the unintended consequence of clogging financial reports of public registrants with extraneous, complicated and materially misleading information. In fact, it would diminish rather than enhance investors' understanding of a registrants financial performance. Furthermore, given the malfeasance of certain companies recently in the news, it is unlikely that the proposed disclosures outlined in the proposal would have provided the investing public with a meaningful understanding of the improperly recorded transactions that they would have acted upon.
Thank you for the opportunity to comment on this issue.
Leon J. Level
Vice President and Chief Financial Officer
Computer Sciences Corporation