Chairman
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1615 L Street, N.W.
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Cochairmen Edward B. Rust, Jr.
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May 23, 2002
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John J. Castellani Patricia Hanahan Engman
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HAND DELIVERED
Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.20549
Re: Release No. 33-8089, Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, File No. S7-08-02
Dear Mr. Katz:
The following comments are submitted on behalf of The Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.5 trillion in revenues. The chief executives are committed to advocating public policies that foster vigorous economic growth, a dynamic global economy, and a well-trained and productive U.S. workforce essential for future competitiveness. We appreciate the opportunity to provide you with our views on your recent proposal to accelerate the filing of quarterly and annual reports under the Securities Exchange Act of 1934 (the "Exchange Act") and to require disclosure of where investors can obtain access to company reports, including whether the company provides access to certain reports on its Internet website.
In connection with our consideration of this proposal, we solicited the input of our members through a survey to obtain their first-hand knowledge concerning the impact of the proposed acceleration of filing dates. Our members were very supportive of the efforts of the Securities and Exchange Commission ("the Commission") to give investors significant information in the form of full footnotes and other disclosures in a much more timely basis without causing significant additional costs. We applaud your efforts and are happy to work with you in fortifying investors' confidence in our markets and businesses. While almost every respondent thought more time would be better than less time, the majority of our members that responded were of the view that it would be possible to meet the proposed Form 10-K and Form 10-Q deadlines if an adequate transition period were provided. While a substantial majority felt they could adequately meet the proposed Form 10-K deadline, a smaller majority felt comfortable with the reduction of time for the Form 10-Q. In particular, some of our members felt that the reduction in the timeframe for filing the Form 10-Q would create more estimates, less robust footnotes and MD&A, and less involvement of the senior management and the board of directors. Accordingly, we are suggesting an alternative approach that would extend your proposed timeframe to first 40 days and then ultimately to 35 days. Our members generally did not express concerns with respect to the website posting proposal and were overwhelmingly supportive of your proposal and effort in this area. Our more specific comments and suggested revisions are set forth below.
Form 10-K
The Commission has proposed to shorten the filing deadlines for a company's Form 10-K from 90 to 60 calendar days after its fiscal year end. While the release notes the technological changes over the past decades, which have eased somewhat the gathering and processing of financial information, the same period has seen the wide dispersal of company facilities and the growth of international operations. In addition, the Commission's requirements, as well as those of the securities markets and the accounting literature, have expanded significantly. Moreover, in the past several months, the Commission has issued releases advising companies to provide expanded disclosures concerning critical accounting policies, liquidity, off-balance sheet financing and related party transactions, and, most recently, the Commission proposed to require a new section of MD&A to discuss the application of critical accounting policies (Release No. 33-8098, May 10, 2002). Finally, as a result of the work of the Blue Ribbon Committee to Improve the Effectiveness on Audit Committees and resulting rule changes, audit committees have assumed a more active role with respect to oversight of financial reporting.
Given this backdrop, the proposed acceleration of the due date for the Form 10-K will be difficult for some of our companies. Seven of our members have estimated that the additional costs to comply will total over $1 million, with one member estimating costs will exceed $10 million. Nevertheless, a substantial majority of our members have indicated that they would be able to meet the proposed filing deadline if they were provided a substantial transition period. They will need to adjust their practices, revise systems and hire additional staff. According to our survey, company practices with respect to the preparation of periodic reports vary significantly-there are no "best practices" in this area. A transition period would give companies an opportunity to benchmark and revamp internal management systems so that the accelerated time schedule for filing of the Form 10-K did not result in a reduction of the quality of such reports. Accordingly, we recommend an effective date that provides at least an eighteen-month transition period for companies with a calendar year fiscal year end.
Form 10-Q
While the majority of our members reported they could meet the proposed accelerated schedule (30 days) for the filing of the Form 10-Q without a serious diminution in the quality of reporting, a substantial minority requested at least a 35 to 40 day timeframe in order to assure quality reporting. For example, one of our members stated "We do not believe that the benefit to financial statement users of making quarterly data available 15 days earlier than under current requirements would warrant the significant additional cost, manual effort and risk of error in balance sheet, cash flow and footnote disclosures that would result from a 30-day filing requirement. Multinational companies that have grown through acquisitions and that have multiple, non-integrated financial systems require more time to compile and analyze quarterly financial information, and to review this information with management and audit committees than would exist under a 30-day quarterly filing requirement." In fact, several of our members stated the difficulties inherent in a 30-day timeframe and were concerned that they would not have adequate time for appropriate senior management and audit committee/board input.
A 30-day time period simply does not provide sufficient time for filing quarterly reports for some of our members. Not only must the information be gathered and integrated and the financial statements prepared, but it also must be reviewed by senior management, the outside auditor and the audit committee. Over the past several years, new rules, listing standards and accounting practices have required both a company's outside auditor and its audit committee to be more involved in the quarterly reporting process. It, thus, is counter intuitive to expect this greater involvement to occur in less time. While technologies, such as email and conference calls, certainly help, senior management needs an opportunity to review the quarterly reporting information before it is given to the audit committee. And, the audit committee members, who have other responsibilities, need time to review and discuss it.
Moreover, the Form 10-Q consists of more than just the financial statements. While companies are able to issue earnings releases more promptly, additional information is required to be disclosed in a Form 10-Q. For example, an MD&A, reflecting the view of the company "through the eyes of management" must be prepared, and the Commission has made it clear that this requirement would not be satisfied with rote or boilerplate disclosure. Moreover, if the Commission's most recent rule proposals concerning MD&A are adopted, the MD&A in the Form 10-Q will need to update the information regarding critical accounting estimates to disclose material changes.
Given the burdens imposed by the proposed accelerated reporting schedule, it is appropriate to focus on whether the benefits of the proposal outweigh them. How important is it for investors to get the full quarterly information in 30 rather than 45 days? It seems to us that investors-especially long-term investors-care more about the quality of information they receive.
The Roundtable nevertheless recognizes the Commission's interest in expediting the disclosure of quarterly information as discussed in the proposing release. This release also indicated that in response to the Commission's previous proposal to accelerate filing deadlines, a suggestion was made for a more gradual acceleration of due dates. We believe this suggestion has substantial merit. With a transition period similar to that suggested for the Form 10-Ks, most of our members believe that currently they could file their Forms 10-Q within 40 days of the end of their quarter end, and a year later, could file their Forms 10-Q within 35 days of their quarter end. At this point, they do not believe that a shorter period is possible without a diminution in the quality of the reports. This lengthy transition period is necessary for the reasons discussed above with respect to the Form 10-K. The phase-in period is also necessary for the Form 10-Q, and is perhaps more important because we are dealing with a much more compressed time schedule.
We appreciate your consideration of these comments, and we would be happy to discuss these matters further or to meet with you if it would be helpful
Sincerely,
Henry A. McKinnell, Ph.D.
Chairman of the Board and CEO
Pfizer Inc.
Vice Chairman - Corporate Governance Task Force
Chairman - SEC Subcommittee