New York State Society of Certified Public Accountants NYSSCPA 530 Fifth Avenue New York, NY 10036-5101 June 10, 1999 Re: Release 33-7606A: Regulation of Securities Offerings Jonathan G. Katz, Secretary US Securities and Exchange Commission 450 Fifth Street, NW Stop 6-9 Washington DC 20549 Dear Mr. Katz: The New York State Society of Certified Public Accountants is pleased to submit the attached comments on certain of the issues raised in the above release. The Society's SEC Practice Committee developed these comments. If you have questions, please call me at (212) 719-8350 and I will arrange for a member of the Committee to contact you. Very truly yours, James L. Craig, Jr. Technical Services Division cc: Robert N. Waxman, CPA Chair of the SEC Practice Committee Mitchell Mertz, CPA Member of the SEC Practice Committee New York State Society of CPAs SEC Practice Committee Comments on Certain Issues Raised in Release 33-7606A Proposals Relating to Exchange Act Filings Acceleration of Due Dates -- Forms 10-Q and 10-K We agree with the objective of expediting the flow of finan- cial information; however, the acceleration of the due dates of Forms 10-Q (10-QSB) and 10-K (10-KSB) to 30 days and 60 days, respectively, will create a very difficult situation for the thousands of registrants with limited financial staff and their auditors. Based on the experience and history of many of the clients represented by the Committee members, many clients now struggle to meet the current 45 and 90 day deadlines. We therefore recommend keeping the current filing due dates. If the due dates were accelerated, the burden to file on time will be extremely severe on (a) registrants to complete and close the financial cycle and then prepare their financial statements and disclo- sures as well as tax and regulatory filings, and (b) auditors to perform SAS 71 reviews of quarterly fi- nancial statements, and complete the year-end audits of all their public clients. It is probable that in accelerating the filing dates the re- quests for extensions under Form 12b-25 (which the proposal does not address and we assume will remain at calendar 15 days) will dramatically increase. We do not believe that exempting only small business issuers will solve the workload compression problem which is faced by all registrants (both large and small) and auditors. This compression problem is caused by ever increasing required disclosures, changing and complex accounting require- ments, and the demand for expanded audit procedures. Also, auditors have always had an especially demanding first-quarter workload due to the volume of calendar year-end audits, tax filing deadlines for corporations, partnerships and individuals, and various regulatory filings. Form 8-K -- Selected Financial Data The proposal would require an acceleration in the reporting of annual and quarterly selected financial data in Form 8-K. The proposal is to file by the earlier of the date of the company's earnings release, or within 30 days after the end of quarterly reporting periods, or 60 days after year-end. Our comments on the acceleration of 10-Q and 10-K filings apply also to Form 8-K. We do not believe that requiring all "large" companies to file selected financial data within the 45/90 period will place a burden on these registrants. However, selected financial data should not be required of small business issuers since they generally have limited financial staff and this type of requirement would blur the line between the relaxation of rules applicable to small issuers and the more demanding rules that apply to "large" issuers. Nevertheless, if selected financial data is available and dis- seminated by any registrant before the filing of the 10-Q or 10-K, then it should be filed on Form 8-K. So for small busi- ness issuers, if the data is available and disseminated, they should file the same information on Form 8-K in advance of their 10-QSB and 10-KSB, or with these filing forms. We believe that a satisfactory solution to the problem of "have" and "have not" investors would be to require regis- trants to file all financial data and other information actually released to investors, analysts and the financial press (either by press release of conference calls) on Form 8-K simultaneously under a new 8-K item number. Having selected financial data in the form required by Item 301 of Reg. S-K, will be beneficial in that the data will be more uniformly presented and more comparable across various in- dustries. We suggest changing change the specific information now required by Item 301 to make it more meaningful and to bring some of its minimum requirements up-to-date. For example, we would include the following additional items: § Unusual items, including asset impairments, writeoffs, restructuring charges (gains and losses) § Extraordinary gains or losses § EBITDA, amount and per share (with the appropriate and detailed footnote disclosure of this non-GAAP measure of cash flow) § Comprehensive income or loss § Although now in the rules, some additional emphasis on providing other financial items and discussion (either income statement or balance sheet) that are thought to be meaningful by registrants, and that are specifically highlighted and communicated to ana- lysts and investors by the registrant Form 8-K -- Independent Accountant We agree-- (1) with the requirement to report in Form 8-K whenever the auditor notifies a public company that it may no longer rely on the auditor's previously issued report, or that the auditor will not consent to the use of a prior audit report, (2) that these events would be reported within one busi- ness day of their occurrence, and (3) with the proposal to accelerate the deadline for filing Form 8-K to report an auditor change from five busi- ness days to one day. However, in order to balance the need for timely disclosure against the procedural delays involved in supplying all the in- formation required by Item 4 of Form 8-K, we recommend a "check the box" format be used. Thus, if there are any Item 4 events, the registrant would merely indicate such an event had transpired by checking the appropriate event and filing the form within one day, after which the registrant would have five days to file all the particulars required by Item 304 of Regulation S-K. As to your request for comment on whether companies should report when they seek to have another auditor reaudit a prior audited period, we do not believe this reporting is necessary. Notification under Item 1 above would alert investors that prior year financial statement(s) will be reaudited (since the most recent auditor has stated that the registrant may no longer rely on its previously issued report or will not consent to the use of a prior audit report). Proposal for Form B Disqualification We support as a disqualifying event some indication of liquid- ity problems such as: net losses, or negative cash flows, or negative working capital, or a shareholders' deficiency, or debt default, etc. We note that certain of these problems by themselves may not lead an auditor to issue a "going concern" opinion, but we agree with the comment in the proposal, that using a "going concern" opinion as the disqualifying event would put an unreasonable burden on auditors. It is possible that the going concern qualification may exacerbate the issu- ers problems if it were denied the use of Form B for that reason since a successful offering on a Form B may give the registrant sufficient proceeds to remove the auditors going concern opinion. Proposal for Redefining the Small Business Issuer We support the proposal to raise the revenues test and elimi- nate the public float test. However, we believe that a higher revenue test should be considered. Based on current business conditions the threshold should be set at $75 million. Rais- ing the revenue test would ease the regulatory burden on small business issuers and help them in getting timely financial in- formation to the public. We do not see the utility of three year old financial information in registration statements that would be required for smaller issuers. Underwriter Due Diligence The Commission has solicited comment as to whether it should add to its six due diligence practices the following: An SAS 71 auditor review of the issuer's quarterly finan- cial statements An SSAE 8 auditor review of the issuer's MD&A A year end disclosure review of the annual report by a qualified professional We believe that SAS 71 and SSAE 8 reviews should be considered by underwriters on a case by case analysis and not added to the list of practices since the adequacy of due diligence would still be subject to a facts and circumstances test with or with- out these additions. While we are not yet clear as to the exact qualifications and value-added of a review by an "indepen- dent qualified professional," we believe it is a concept that should be developed outside of this release and proposed sepa- rately. Due Date for Annual Report of Foreign Private Issuers The Commission proposes an acceleration from six months to five months for filing Form 20-F annual reports, and transitional re- ports. We agree that six months is excessively long, and be- lieve that a phase in should be adopted: from six to five months in year one and from five to four months in the succeed- ing year. Thus, all foreign private issuers would be at four months within two years.