Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Stephen J. Cosgrove
August 19, 2002
Mr. Jonathan G. Katz
Secretary, US Securities and Exchange Commission
450 Fifth Street NW
Washington DC 20549-0609
Dear Mr. Katz
Re: Additional Form 8K Disclosure Requirements and Acceleration of Filing Date [File S7-22-02]
Certification of disclosure in Companies' Quarterly and Annual Reports [File S7-21-02]
Johnson & Johnson is pleased to comment on the above mentioned proposed rules.
We strongly support the Commission's efforts to enhance or restore investor confidence in the quality of companies' periodic reports and in the securities markets in general. It is clear that the markets are experiencing a serious loss of public confidence and that this problem needs to be addressed in all its aspects. We support the principle that all information that is important to a reasonable investor should be disclosed in an accurate and timely manner.
We also believe there can be a conflict between more or enhanced disclosure on the one hand and accelerated disclosure on the other hand.
In our opinion, the disclosure (or acceleration thereof) of facts or objective events that occur at a specific point in time does not result in a (potential) conflict with the quality of that disclosure. Examples of such situations include: material modifications to rights of holders of the company's securities; the appointment or departure of a principal officer; the election of a new director; director and executive officer transactions; notice from the independent accountant that a previously issued audit report is withdrawn; a change in rating agency decision; etc... We support the accelerated disclosure of these events.
However, we believe there is a potential conflict with respect to situations that are more subjective and with respect to the disclosures required in periodic reports. Specifically:
(1) The proposals require disclosure on Form 8K of certain new items or events that are less objective in nature or require estimates. For example: entry in or termination of a material agreement not made in the ordinary cause of business; any material impairment; creation of a contingent financial obligation that is material to the company; ...
(2) The proposed rule `Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies' will result in a significant increase in the MD&A disclosures. We generally support the first and third basic element relating to the application of critical accounting policies and believe these elements contribute to a better understanding of a company's financial statements by investors. However, we have concerns in respect of the proposed sensitivity disclosures. Quantitative and sensitivity disclosures may not be appropriate as they could lead to competitive disadvantages or losses (including loss of competitive data). Examples would include litigation reserves and loss contingencies. We believe companies should be given greater flexibility in determining when quantitative disclosures are appropriate. In any event, this proposed rule will significantly increase the time companies need to prepare these disclosures.
(3) The proposals require the CEO and CFO to each certify the Form 10-Q and Form 10-K. File S7-08-02 (Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports) proposes to accelerate the filing of these periodic reports. In addition, the proposal discussed under (2), above will result in a significant increase in disclosures. All this is occurring in an environment in which the accounting standards setters are issuing (or are planning to issue) a growing number of complex accounting pronouncements. We believe the combination of proposals will give companies less time to prepare financial statements and their CEOs and CFOs less time to review these financial statements and consult with auditors and audit committees. Moreover, the time for auditors to complete their audit work would be reduced. While we believe that quality and speed of disclosure are worthwhile and necessary objectives, we believe quality should be pursued first and is of greater value to the investor.
We would also like to point out that, in our opinion, the market place causes companies to disclose the most relevant information via mediums such as press releases, conference calls and website postings that virtually always precede filings on Forms 10-Q and 10-K. Perhaps the Commission could mandate the filing of earnings press releases as part of a Form 8-K or a newly created filing. This would lead to early disclosure through public filings of the most relevant information. That information could then be reviewed by the Commission as part of a mandated filing. Forms 10-Q and 10-K would, of course, still be useful for additional and more detailed disclosure.
We thank you for taking our comments into consideration and will be pleased to discuss these with you if that would be helpful.
Stephen J. Cosgrove
Vice President, Corporate Controller