SEC Staff Looks for Good Disclosure in Times of Stress

The staff of the Securities and Exchange Commission has put preparers and auditors on notice that they are studying filings closely to assure they reflect any signs of stress companies may be experiencing as a result of the economic crisis.

SEC staff members met with the SEC Regulations Committee of the Center for Audit Quality in a regular session in April to discuss their latest crop of financial reporting concerns. The recently published summary of that session makes it clear that SEC staff is looking closely to assure that companies are fully explaining whatever stress they may be experiencing. For example, the SEC staff said it was taking a hard look at issues like goodwill impairments, going concern disclosures, reductions or curtailments in benefit plans, and even notices that filings would be late for plenty of consistency and disclosure.

Chris Holmes, chair of the SEC Regulations Committee and a partner with Ernst & Young, said SEC staff indicated they are studying Management Discussion and Analysis to assure compliance with AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and Uncertainties, which calls for some robust disclosures regarding risks an entity may be facing. “Particularly in an area of heightened risk and uncertainty, perhaps companies aren’t beefing up disclosures to address those risks and uncertainties,” he said.

SEC staff also signaled they are poring over Form 12b-25 filings, which indicate a required filing will be late, for good discussion about why a filing can’t be done on time. The staff reminded preparers and auditors that inaccurate or misleading disclosures can lead to enforcement actions.

Holmes said it is typical for companies trying to work out financing problems or get waivers or other modifications to debt to delay filings in hopes of avoiding a going concern finding from the auditor. “The staff is concerned that 12b-25 filings potentially are not providing the disclosures to the market that they think they should,” said Holmes. “This was a reminder to companies that those filings need to disclose any material information that may be necessary under the circumstances.”

The staff also is looking closely at goodwill impairments, or writedowns in the value of goodwill, for plenty of sound reasoning behind the impairment charge, as well as the accounting and disclosure around any kind of benefit plan reductions as headcounts are reduced. The staff also is tuning in to going-concern findings, looking for indications throughout financial statements and MD&A that the issues are clearly and consistently disclosed.

Holmes said Wayne Carnall, chief accountant of the SEC's Division of Corporation Finance, is committed to quarterly releases of the SEC staff’s financial reporting manual, which gives insight into SEC staff thinking as it interprets various requirements. As such, the SEC Regulations Committee is expecting another update in July after it was first published in April.