July 19, 2002

Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, D.C. 20549–0609

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

Dear Mr. Katz:

We at Ocean Energy, Inc. (“Ocean”) appreciate the opportunity to respond to the SEC’s proposed rules to amend Item 303 of Regulation S-K, Item 303 of Regulation S-B and Item 5 of Form 20-F under the Securities Exchange Act of 1934.

We support the SEC’s objective of improving quality and transparency of financial disclosures and enhancing investors’ understanding of the application of companies’ critical accounting policies. We believe that investors have valid concerns about the use of estimates and would benefit by understanding more completely the manner and degree a company’s reported operating results, financial condition and changes in financial condition depend on estimates in applying accounting policies and the uncertainties and subjectivity associated with these estimates. However, we believe there is a point at which an abundance of information can become overwhelming to the reader of financial statements and can obscure more critical information. We, therefore, are providing the following comments and recommendations regarding the proposed rules:

Scope of the Proposals

We believe the scope of the proposals should be limited to accounting estimates. We do not believe the scope should be expanded to include disclosure of the impact of alternative accounting policies. Information about the effects of applying other accounting policies would necessarily be general, as many companies would find it impossible to calculate the quantitative effect of alternative accounting policies on their financial statements unless those policies had been applied since inception. Often where alternatives exist among accounting methods (i.e. revenue recognition, accounting for oil and gas exploration and production activities, inventory valuation, accounting for long–term contracts) it would be impossible to re–create accounting records applying an alternative method without increasing staff and incurring tremendous additional costs. This would be an onerous requirement for most accounting organizations that are already taxed by the requirements of their day–to–day activities (recording transactions, closing books, preparing external/internal reports, and understanding and applying a plethora of new accounting and reporting rules and regulations). We believe that the costs incurred to provide additional disclosures would far outweigh the benefits.

Qualitative information could also be misleading as that disclosure in itself would be only an estimate of “what might have been”. Such disclosure would contribute to what is already an overload of information for users of financial statements and could obscure other critical information. More importantly, by requiring disclosure regarding accounting policies the company did not select, external parties could cause harm to the company and its shareholders by attacking, questioning and criticizing management’s choice of acceptable accounting methods.

We believe that the description of accounting methods provided in the accounting policy footnote of the financial statements and the discussion of the impact of the estimates used in applying accounting methods provided in MD&A are sufficient and no additional disclosure is necessary to provide for transparency of financial disclosure. If the financial statements included disclosures of the effects of all available alternatives, they will become even more overwhelming in length.

Accounting Estimates Covered Under the Proposals

We believe that although increased discussion of critical accounting estimates would be beneficial, it may on occasion be difficult for a company to discern whether or not an accounting estimate meets the second criteria for classification as a critical accounting estimate, “that it must be the case that different estimates that the company reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact …".

The very existence of different estimates that a company “reasonably could have used” for an accounting estimate or the belief that changes in an accounting estimate are “reasonably likely to occur from period to period” are matters of considerable judgment and opinion in and of themselves. Many estimates, although they relate to current matters whose ultimate conclusion may be highly uncertain, are made based on the best information currently available (i.e. historical information, trends or knowledge of significant future events) and other estimates would not appear “reasonable” under the circumstances.

It may also be difficult to determine which accounting estimates would have a “material impact”. Significant market reaction (positive or negative) can occur based on information that management and auditors did not deem material. Decisions about what information is considered material are easily second-guessed.

We do not believe that the definition of critical accounting policy should be expanded to include MD&A disclosure of volatile accounting estimates that use complex methodologies but do not involve significant management judgment. We do not believe that more information necessarily makes financial disclosures more transparent. Accounting methods that have a material impact on the financial statements should be discussed in the accounting policies footnote in accordance with APB Opinion No. 22. The results of estimates using complex methodologies are subject to independent verification during the audit process and current financial statement disclosure requirements.

In addition, we do not believe that the scope of the proposal should be expanded to include unusual or innovative applications of accounting principles. These principles should be considered for inclusion in the footnotes to the company’s financial statements in accordance with APB Opinion No. 22.

Quantitative Disclosures to Demonstrate Sensitivity

We believe that users of financial statements have valid concerns about the uses of estimates and that management should provide thorough, transparent qualitative disclosures concerning material estimates and the methodology and assumptions used in critical accounting policies. However, we believe that the quantitative disclosures proposed will be difficult to apply in practice. Accounting estimates may contain numerous assumptions, and some of these assumptions may be interrelated. The calculations are often not independent of each other and have effects on other business activities. Sophisticated modeling techniques would be required in order to provide a reasonable outcome for changing assumptions. Therefore, we do not believe forced quantitative analysis and arbitrary sensitivities would necessarily provide meaningful information. We also believe that mandated quantitative disclosures would result in an inappropriate and confusing array of information and additional complexity that would prove overwhelming to the user of the financial statements who will have to read and understand both the upper and lower ranges of possible different scenarios for 3-5 different accounting estimates. There could also be situations where the market would be reacting to hypothetical information that is possible but not really probable. We believe that qualitative disclosures are more appropriate and would address investor concerns.

Quantitative and Qualitative Disclosures Concerning Past Changes in the Estimate

We believe current MD&A disclosure requirements are adequate to provide for disclosure of material changes, trends or uncertainties and that no additional rules are necessary.

Senior Management’s Discussions with the Audit Committee

Our Company’s senior management discusses critical accounting estimates with the audit committee of our board of directors as part of regularly scheduled audit committee meetings. Currently, each member of the Company’s board of directors must sign the Company’s Form 10–K that includes audited financial statements and MD&A. We believe that their signatures on the Form 10–K reflect their involvement with the document and their agreement with its content. Therefore, we do not believe any additional disclosure would provide useful information to investors or increase their confidence.

Auditor Examination of MD&A Disclosure Relating to Critical Accounting Estimates

MD&A disclosure is the responsibility of a company’s management, and one of the objectives of MD&A disclosure is to enable investors to see a company through the eyes of management. The signatures of our senior management on filings that include MD&A indicate their involvement with and responsibility for such disclosure.

MD&A discussion must also provide a context in which financial statements can be analyzed and it must disclose trends, demands, commitments, events and uncertainties that are reasonably likely to occur and have material effects. These topics result in a type of disclosure that is very unique. Even considering the uniqueness of such disclosure, we believe that it is still appropriate for auditors to have a role in reviewing MD&A disclosures. The role should be limited, however, to a review of the accuracy of statements of fact, amounts, or calculations, which, by their nature, are subject to verification. It would be extremely difficult for auditors to “audit” any statements containing management’s assumptions or judgments about the business or any forward-looking information that management believes should be included in the discussion.

We believe that there is little benefit to be gained from increased auditor involvement beyond that noted above. A requirement for auditors to perform an examination in accordance with Attestation Standards, while providing additional assurance regarding the accuracy and reliability of certain historical disclosures, could also have the unwanted effect of limiting disclosures to historical data that could easily be verified and chilling management’s discussion of future events or uncertainties that management feels are reasonably likely to occur. An examination of MD&A by auditors would be cost prohibitive and in all likelihood would cost more than the audit of the accompanying financial statements. Finally, if reporting deadlines are accelerated, there will be no time available for our auditors to perform such an examination of MD&A.

We rely on both our auditors and our external counsel to review our MD&A disclosure and to provide comments regarding its adequacy. We believe that the current rules regarding the nature of the disclosures as well as auditor involvement with MD&A are adequate.

Proposed Disclosure about Initial Adoption of Accounting Policies

We do not believe it is necessary to provide separate rules for disclosure regarding initial adoption of an accounting policy. If an accounting policy initially adopted by a company has a material impact on the company’s financial presentation it should be considered for disclosure (1) in the footnotes to the financial statements in accordance with APB Opinion No. 22 or (2) in MD&A as a “critical accounting estimate” in accordance with the proposed disclosure rules.

In addition, we do not believe it is necessary for a company to disclose that it had made a choice, explain the alternatives and state why it made the choice that it did. Numerous business decisions, both operational and accounting, require the exercise of judgment and choices among available alternatives. In the area of initial adoption of an accounting policy, we believe that the interaction of management, independent auditors and the audit committee provides the necessary checks and balances. Current rules provide for adequate disclosure.


Users of financial statements have valid concerns not only about the uses of estimates in financial reporting but also about the integrity and completeness of all disclosure. We believe that, in general, the rules already in existence require such full and accurate disclosure. Enhanced disclosure about the estimation process is desirable because it would result in a greater awareness on the part of investors of the degree to which financial statements are dependant upon judgment regarding highly uncertain matters. However, we believe that qualitative disclosures alone would address the current concerns about accounting estimates.

We appreciate the SEC’s consideration of these important matters.


/s/ William L. Transier
William L. Transier
Executive Vice President
    and Chief Financial Officer