BDO Seidman, LLP
Accountants and Consultants
330 Madison Avenue
New York, NY 10017
(212) 885-8000 Phone
(212) 697-1299 Fax

May 20, 2002

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-6009

Re: Release No. 33-8089; 34-45741
Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Website Access to Reports
File No. S7-08-02

Dear Mr. Katz:

We are pleased to respond to your request for comments with respect to the above-captioned proposal.

We agree that for the financial markets to function most efficiently, they "must have access to information that is clear, accurate, and timely." In that regard, we support the part of the proposal that would require companies to disclose where investors can obtain timely access to their periodic reports, whether they provide website access to these reports, and, if not, why not.

However, we have serious concerns about the main thrust of the proposal that would accelerate the filing due dates of Forms 10-K and 10-Q. In our view, the incremental benefit of timeliness produced by such acceleration would be far exceeded by the potentially reduced reliability and meaningfulness of these reports. The acceleration proposal assumes a level of financial reporting system sophistication among registrants that would enable them to produce Forms 10-K and 10-Q in sufficient time to be audited/reviewed by the shortened due dates. We do not believe this assumption is generally valid in today's environment. However, the goal of accelerated filings is a worthy one. Therefore, we would urge bodies such as the Financial Executives Institute, National Association of Corporate Directors, Institute of Internal Auditors, Auditing Standards Board and the FASB to work in a coordinated effort to develop mechanisms within which these forms can be produced and audited/reviewed in a more timely manner.

Our more specific comments about the Release and our recommendations for alternative approaches are set forth below.

Relevance and Reliability

Timely financial reporting is a key component of "Relevance," one of the twin pillars of FASB Statement of Concepts No. 2, Qualitative Characteristics of Accounting Information. However, the other pillar, "Reliability," needs to be considered equally in evaluating achievement of the goals of that Statement. In doing so, there is often a delicate balance between the characteristics of relevance and reliability in particular circumstances. In that regard, while investors need information on a timely basis for it to be useful, timely information is of no use if it is unreliable or it is perceived to be potentially unreliable. On the other hand, financial information that is accurate and transparent is of little use if it is issued long after the related reporting period.

In analyzing the Release in this context, it appears to us that the 30 and 15 days reduction in time for filing Forms 10-K and 10-Q, respectively, while more timely, may not offset the risk in many cases that the condensed filing process will create pressures, resulting in errors and poor judgments in preparing and auditing/reviewing the periodic reports as well as less meaningful disclosures.

The accelerated filing process also may be a catalyst for increased instances of financial fraud. In that regard, the general conditions for criminal behavior are "means, opportunity, and motive." Establishing an environment in which pressures are brought to bear on the participants in the financial reporting process (e.g., management, company accountants, audit committees, external auditors, attorneys) to prepare and audit/review periodic filings significantly earlier will, in our view, create an "opportunity" which could be a breeding ground for financial fraud or even honest mistakes of judgment.

The massive publicity accompanying the Enron disaster has severely undermined the credibility of the entire financial reporting process. The focus of attention during this post-Enron era has rightfully been on whether investors can trust the numbers, not whether the numbers can be issued earlier. Clearly, then, investor focus is on the reliability component of the Concepts Statement. Accordingly, we believe this is not the right time to create new rules which could sacrifice reliability for incremental timeliness.

Form 10-K Filings

The Commission is basing its proposal on its "understanding that a company's audit (or review in the case of interim financial statements) is complete or substantially complete by the time the company issues its earnings announcement." While this may be true for some large companies, it is not necessarily true for others, particularly for smaller companies. We have seen no studies which support the Commission's understanding. Furthermore, we have seen no studies which track the time span between earnings releases and actual filing dates for specific registrants. Without such data, it is difficult to reach a conclusion that there is sufficient time between the earnings release and filing dates to complete the filing, including the audit and other oversight functions.

One also has to evaluate the proposal in the context of resource allocation. Accounting firms ordinarily staff their audit engagements using a pyramid structure, with a partner overseeing managers and more junior staff. As such, the partner's primary role is to review the work performed in material areas and to be responsible for significant decisions. These functions require a high level of attention and technical expertise. Considering the fact that audit engagement partners generally oversee more than one engagement at a time, performing such demanding work in a more condensed period may require different partners to be assigned to certain of those engagements. A firm may not have sufficiently qualified partners to whom these responsibilities can be reallocated. Moreover, any such replacements are likely to be less experienced in the particular industries than the incumbent partners.

The Release raises a question about how often the earnings numbers change between their announcement and the filing of the reports. This question seems to imply that lack of any such changes means that the audit is substantially complete at the time of the press release. While this may be true in some cases, it is not a conclusion that can be applied generally. Lack of changes could also imply good internal accounting controls. Moreover, even in those cases where the audit is substantially complete by the press release date, there are various layers of review which may not have taken place by that time, such as the concurring partner review and, in some accounting firms, review by an SEC-reporting specialist. In addition, the audit committee may not have given the same degree of substantive attention to the press release as it does to the actual filing.

A fundamental tenet of the Release is the assertion that over the last 30 years "advances in communications and information technology have made it easier for companies to process and disseminate information swiftly." While this is true, there are a number of countervailing forces which greatly mitigate the "number crunching" benefits of technological advances, as follows:

1. Explosion in accounting pronouncements - over the same 30 year period, the FASB issued 145 Statements, the EITF published guidance on an average of 25 issues per year since 1984, the AICPA issued 44 Statements of Position, and the SEC issued a number of rules, regulations and informal pronouncements. The sheer volume and complexity of the rules promulgated over the last three decades have had a dramatic effect on the time needed to prepare and audit the financial statements.

A number of the accounting pronouncements that have been issued over the last few years are extremely complex and require a significant degree of judgment. Accordingly, implementation of such recent pronouncements and many of the disclosures required by all pronouncements over the years may not be reflected (and indeed may be impractical ever to reflect) in a company's computerized information portion of its financial reporting system.

In addition, the Commission's proposed Plain English disclosures, dealing with all the factors and accounting assumptions that could affect company performance, would add time to the preparation of filings.

Finally, as a result of the Enron disaster, many have called for changes to principles-based accounting standards, as opposed to a rules-driven "check the box" approach. We agree with this vision and hope that it will result in an overlay of principles on top of underlying detailed guidance in order to provide a clear context for application of the principles and to enhance comparability among companies. However, to the extent that the principles are too broad and are not accompanied by detailed application guidance, significant time could be added to the audit process involving extensive discussions with management and the audit committee as to interpretation of particular standards.

2. Increased globalization - The international expansion of registrants' businesses has added an extremely complex layer to the financial reporting process. Many more companies have subsidiaries or investees in other countries. Many of these require statutory audits based on domestic GAAP, which, itself has been expanding in most countries. Once the statutory financial statements are prepared, they must be converted to U.S. GAAP for consolidation purposes, audited by the foreign auditors (who may not be part of the principal auditors' international network), discussed with management of the parent company, and reviewed by the principal auditor. In some cases, the principal auditors' review is performed in the foreign country. Even though technological advances can accelerate this process to some degree, it is likely that the net result of globalization has been an increase in the time needed for filing Form 10­K.

3. Proposed increase in GAAS - The Auditing Standards Board ("ASB") recently issued a proposal, Consideration of Fraud in a Financial Statement Audit, to expand its fraud standard in response to recommendations by the Public Oversight Board Panel on Audit Effectiveness ("PAE") and other changes in the environment. The proposed Standard, if adopted, would substantially change audits by increasing the focus on professional skepticism, particularly with respect to the potential for a public company management's override of internal controls. Included in these expanded proposed procedures are examination of journal entries and evaluating the business rationale for significant unusual transactions. While some of the procedures relating to these matters can be performed during the year, the primary audit focus will normally be at the end of the year because of the greatest potential for fraud at that time. The proposed Standard also emphasizes the need to perform other substantive tests at or near year-end in response to identified risks of material fraud. These period end tests may include inventory counts (including more in-depth evaluation of inventory quantities), confirming contract terms with customers, and inquiries about unusual terms of sales. The need to focus on year-end testing also applies to secondary auditors. This, then, would mean that much of the review of their work by the principal auditors could only occur after year-end, thereby delaying the audit completion date.

The POB has stressed the need for a special body to review the implementation status of the PAE recommendations. We understand that the SEC staff may assume this responsibility in view of the POB's recent termination. As a result of this review and of commentators' responses to the ASB proposal, there could be additional recommended or required audit procedures which could similarly expand the audit work performed at and after year-end.

Moreover, one has to consider the effect of the post-Enron environment on the scope of the audit. Clearly, auditors have been extraordinarily sensitized to the need for professional skepticism. In these circumstances, it is only natural to expect auditors to be more careful in performing their work, which is likely to add to audit time.

4. Special learning curve - In the aftermath of Enron, there have already been numerous auditor changes and there are likely to be many more. Such changes inevitably involve a steep learning curve for the new auditors. While auditor changes are nothing new, the extraordinary extent of such changes in the current environment will require a substantially greater time commitment from those involved, creating a cascading effect on the time they would otherwise devote to their existing clients.

Although the severity of this situation should abate in about a year absent any legislation requiring audit firm rotation, so it should no longer be a "countervailing force" at that time, this special learning curve is a sufficiently significant cause for delaying implementation of the proposed rules for one year.

Form 10-Q Filings

Much of what we have described in the Form 10-K Filings section above also applies to Form 10-Q filings in terms of press release logistics, increased globalization, and the GAAP explosion on an even more compressed time frame.

The SEC Practice Section of the AICPA has recently adopted a membership requirement whereby the concurring reviewer would be apprised of significant interim reporting issues on a timely basis. This procedure will add to the time involved in SAS 71 reviews of Form 10-Q. In addition, some accounting firms have procedures which exceed this new rule by requiring the concurring reviewer to review the interim workpapers prior to filing the Form 10-Q. This step is designed to enhance the reliability of the filing. Accelerating the due date for Form 10-Q would make it more difficult to perform this valuable procedure effectively.

While audit committees are normally involved with timely oversight of Form 10-Q, there are frequently practical difficulties in arranging for all audit committee members to devote the appropriate time to this oversight function. Accelerating the due dates will exacerbate this problem.

Finally, from an overall perspective, requiring Form 10-Q to be filed by 30 days after the quarter end would, in essence, generally require the interim numbers to be ready for auditor review by the end of the second week (and even earlier for foreign subsidiaries) and the full filing to be ready for review by the auditors and the audit committee by the end of the third week. This seems to be an unreasonably demanding time frame for most companies, their audit committees, and their auditors.

Audit Committee Involvement

Recent stock exchange rules and initiatives of the National Association of Corporate Directors and the PAE have substantially expanded the role and responsibilities of corporate audit committees. The recent Enron hearings and the attendant publicity have also placed a renewed focus on the importance of vigilant audit committee members.

In this highly charged environment, audit committees are likely to spend substantially more time in fulfilling their oversight role with respect to management and the internal and external auditors. Since many of the financial reporting and auditing issues are likely to arise at the end of a reporting period, more (rather than less) time will have to be allocated to these responsibilities. Otherwise, the goal of having effective audit committees may not be realized. Moreover, it may now be even more difficult to attract qualified audit committee members who are already facing increased litigation exposure and reduced and more costly liability insurance.

Management Involvement

Company management has also been sensitized by the recent attacks on the credibility of financial reporting. To respond to this credibility crisis, management of many companies are likely to strengthen internal accounting controls, including more layers of review, which, in turn, will expand the time needed to prepare financial statements. This enhanced reliability should be given time to permeate the financial reporting process.

Effect on Smaller Companies

The Release is correct in stating that smaller companies "may not have the infrastructure and resources available or necessary to prepare their reports in a shorter timeframe." In addition, smaller companies may be involved in transactions which are as complex as those of larger companies. While, as previously discussed, we feel that even larger companies may face such difficulties, smaller companies are particularly susceptible.

Accordingly, we urge the Commission to be sensitive to the possibility that adoption of filing rules that are impractical for smaller companies could drive them out of the public marketplace. In that regard, we believe that the threshold for compliance with the proposed acceleration rules (i.e., public float of $75 million) is not appropriate for addressing the concerns of smaller companies. It seems to us that the need for more timely reporting is focused on "large seasoned" companies, as that term is used in the Introduction to the Release. If that is so, then a public float criterion does not reflect that focus. Market capitalization is not necessarily indicative of company size (as the dotcoms have so unfortunately shown). In addition, market capitalization is not a stable criterion (e.g., dotcoms, once again). Furthermore, market capitalization is also not necessarily reflective of the strength of a company's internal controls or other financial resources, or the extent to which it is owned by non-insiders (e.g., by mutual funds, pension funds). If company size is the objective, then the relevant threshold should be based on revenues or assets.

Alternative Proposals

For the reasons stated above, we do not agree with the Commission's proposal to accelerate the filing deadlines for Forms 10-K and 10-Q. However, if the Commission decides to proceed with this initiative, we have the following proposals, listed in order of preferability:

  1. The first alternative would be to require companies to file Form 10-K and 10-Q by the earlier of the existing deadlines or a specified time after their first release of earnings information for that period. This alternative would support the objective of providing more complete timely information to the marketplace by companies having the ability to do so. We do not believe that this alternative would delay the release of earnings announcements because the marketplace demands such announcements at specific times, based on history and reporting by competitors. Companies could ill-afford to ignore these demands.

  2. A second, less preferable, alternative would be to (a) accelerate the filing deadline for Form 10-K to 75 days during a two-year transition period, after which time the Commission would re-evaluate the need to adopt further accelerated filing rules for Form 10-K and any acceleration of Form 10-Q filings and (b) change the acceleration threshold to revenues or assets (measured as of the beginning of the year), as discussed above.

The transition period would (a) give companies time to develop systems to enhance the speed of their financial reporting process and (b) provide relevant information to enable companies and the Commission to re-evaluate this rule.

We would not include an accelerated 10-Q filing date under this second alternative because, as previously discussed, we believe that a 30-day deadline is too restrictive for these filings. However, this assertion could be re-evaluated after the aforementioned two-year transition period.

Conclusion

It is incumbent on all participants in the financial reporting process to do their utmost in a coordinated effort to produce reliable, transparent, meaningful, and timely financial information and, thereby, to restore credibility in the marketplace. The fruits of these efforts will essentially dictate the timeframe in which financial information is furnished to investors because timeliness will be based on market demand. Laggards will be punished by the investor community.

However, until the results of any such coordinated initiative are achieved and because of the public's paramount concern about the reliability of reporting in this post-Enron environment, we do not believe this is the time to accelerate the due dates as proposed in the Release.

* * * *

We appreciate this opportunity to express our views to the Commission. We would be pleased to answer any questions the Commission or its staff might have, at their convenience.

Very truly yours,

s/ BDO Seidman, LLP

BDO Seidman, LLP