Financial reporting executives have some fresh commentary to study about Securities and Exchange Commission comment letters.
Speaking at the SEC Institute last week, an official with the SEC’s Division of Corporation Finance shed new light on the process by which the SEC decides to issue a comment letter on companies’ periodic filings, and how companies should react to them.
Foremost, according to James Atkinson, a branch chief with the corporation finance division: Don’t take it personally if you don’t get a comment from the SEC. By law, the Commission reviews all publicly traded companies’ compliance with the Sarbanes-Oxley Act every three years; however, the SEC does not necessarily send a notice to every company letting it know the review has been done. He estimated that as many as 25 percent to 30 percent of all registrants will not hear a peep from the SEC. “It’s clearly not rare, and that number is getting bigger as time passes,” he said.
Conversely, he added, large companies might see SOX reviews more than once every three years, and they should not take that as a sign of trouble or suspicion by the SEC either.
When a company does receive an SEC comment letter—and the Commission expects an answer back when it raises questions—the company can request that portions of that conversation be kept confidential rather than included in the public record. But the SEC will want to restrict the scope of that request of confidentiality as much as possible, Atkinson said. Companies should not simply request that all further communications on the original comment be kept confidential.
“Be sure this is something you want to do,” Atkinson said. “It’s better that you’re the one who narrows it down” rather than have an SEC staff accountant decide what will and will not be publicly disclosed.
Christine Davine, Partner and National Director of SEC Services at Deloitte & Touche, also encouraged executives to read comment letters that the SEC makes about other companies, to see whether an issue raised with their own company has been discussed elsewhere.
Comment letters also provide insights into current SEC thinking about what should be disclosed in a periodic filing, she said, and that information could be used to help focus a company’s disclosure controls as required under SOX Section 302.
Also, Davine said, companies should not be afraid to ask the SEC for a “closure letter” when it has responded to an SEC comment and heard nothing in return. Letters that go unanswered for more than 180 days must be disclosed and can be worrisome if the issue pertains to a potential material weakness. So even though calling the SEC is an unappetizing prospect for most accounting executives, Davine and Atkinson said, companies should not be afraid to contact the Division of Corporation Finance to ask for an update on outstanding comments.
That said, Atkinson also warned against calling the SEC staff simply “to talk through the letter,” which he described as an unproductive process. Accounting executives should call prepared with a list of specific questions they want to ask and, ideally, should consult with their outside auditors before contacting the SEC staff, he said. SEC staff accountants might also request that the company auditor be included on the call; indeed, if an issue is raised all the way up to the Office of the Chief Accountant, the SEC will require that the auditor be briefed on the issue and ask whether the auditor concurs with the staff accountants’ opinion.
Paulson Unveils Capital Markets Plan
In keeping with his promise to address issues viewed as hurting the competitiveness of American capital markets, Treasury Secretary Henry Paulson recently unveiled the first steps of a plan he says will strengthen competitiveness, including a study of the current auditing system and an analysis of the factors contributing to the growth in financial restatements.
Paulson announced May 17 that the Treasury Department will charter a non-partisan committee, led by former Securities and Exchange Commission Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen, to develop recommendations to consider options for strengthening the auditing industry’s financial soundness and ability to attract and retain qualified personnel.
The Treasury Department will also commission an analysis of the factors driving financial restatements, which have soared during the past decade, and their effect on investors and the capital markets. The studies will be made public.
Cox
The actions follow a Capital Markets Competitiveness conference in March co-chaired by Paulson and current SEC Chairman Christopher Cox, where financial reporting was a main topic of discussion. Last November, the Committee on Capital Markets Regulation, commonly known as the Paulson Committee, issued a report that said the U.S. regulatory environment has become too stringent and raised questions whether the costs of Sarbanes-Oxley compliance outweigh the benefits.
The Treasury Department also reiterated its support for efforts by the SEC and the Financial Accounting Standards Board to enhance financial reporting transparency and to encourage foreign companies to list on U.S. exchanges by acting to eliminate the U.S. Generally Accepted Accounting Principles reconciliation requirement by 2009 and to converge GAAP and International Financial Reporting Standards.
Additional follow-up steps on other issues discussed at the March conference are planned.
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