From: Ron Stowell [rstowell@LSI-INDUSTRIES.com] Sent: Friday, May 17, 2002 10:23 AM To: 'rule-comments@sec.gov' Subject: Comment on File S7-08-02 Importance: High May 17, 2002 Securities and Exchange Commission, REF: File #SR-08-02 The SEC is sending confusing messages to registrants that, to me, evidence a complete lack of understanding of the real world of financial reporting from the perspective of the Chief Financial Officer, Chief Executive Officer, Audit Committee and Board of Directors of registrants. I specifically take great exception to the proposals to accelerate the filing of Form 10-Q to 30 days (from the current 45 days) and Form 10-K to 60 days (from the current 90 day requirement). I also take great care and pride in the public financial reporting that I am associated with. Companies are faced with, and have complied with severely increased disclosure requirements. These disclosures have increased both in quantity and complexity. Just to cite a few, we have the following issues to deal with, all of which have taken on new meaning and importance: materiality; revenue recognition; adherence to corporate policies in a decentralized environment; appropriate disclosures; stock compensation; acquisition accounting; segment reporting; MD&A; etc. Personally, I agree with the increased emphasis in these areas as they are all critical to the reporting of operating results. The outside Independent Certified Public Accountants have become more involved in the quarterly reporting process - and rightfully so. This also involves additional time, effort and cost to accomplish. It also is a very positive enhancement to public company reporting integrity. Another huge initiative of the SEC in the past few years has been the involvement of the Audit Committee, part of which is focused specifically on the quarterly reporting on Forms 10-Q and 10-K. The Audit Committee Charter has been a great concept and method of documenting and publishing specifically what the Audit Committee is responsible for. I our case, this means that either the Audit Committee, or its chairman, must review and approve all publicly filed documents. Simply put, this takes time to accomplish. The members of the Audit Committee, all non-employee independent directors, are heavily involved in their own companies' operations or quarterly reporting process, business or personal travel, etc. In other words, in order to accomplish this Audit Committee review function, time has been added to the 10-Q and 10-K filing process. I would like to describe our typical quarterly closing time schedule, given perfect adherence to our schedule with no problems or diversions (such as sickness, vacations, closing problems or delays, new or complex issues to figure out, etc). Financial statements typically due in to my office on the 7th work day - say April 9th. Consolidation is accomplished on the 8th work day - say April 10th. Approximately two or three days are consumed in review of these operating results by me as CFO, as well as by our Corporate Controller and our CEO. Subsidiary Controllers are questioned about the content of their financial statements, adherence to corporate policy and GAAP, and any unusual variance from expected financial performance. This review is done for quality control purposes to insure that we publish appropriate financial statements. Adjustments to the subsidiary financial statements are booked as necessary. A complete financial statement package is typically completed on about the 12th or 13th work day, complete with operating narratives prepared by the business unit presidents - say April 16th. This quarterly package is then delivered to the Audit Committee and Board, and to the outside Independent Certified Public Accountants. Our Audit Committee and Board meeting are typically on the 3rd Monday of the month - say April 22nd -- followed by a Tuesday earnings press release and investor conference call. Therefore, the time period between completion of our quarterly financial statement package (which does not include a draft of the Form 10-Q) and the Audit Committee meeting becomes the time the CPA firm and the Board have to review the financial performance and operating narratives of the company. This time period has typically been from four to five days, including two days of a weekend. The Form 10-Q draft typically starts to be prepared prior to the Audit Committee meeting, and is always completed several days after that meeting. This has been any where between three and fifteen days subsequent to the Audit Committee meeting, again depending upon other business responsibilities, complexity of disclosures, etc. Once drafted, the Form 10-Q at our company must be reviewed by and comments incorporated from following people: Audit Committee chairman; Securities Attorney; President and Chief Executive Officer. Of course, after any and all appropriate changes are incorporated into the document, it must be "Edgarized" and filed. Our typical filing date has probably been between the 35th and 42nd day following the end of the quarter. The lengthy discussion above of our company's time table for filing a Form 10-Q is a "no problems encountered" description. However, add in a new or complex accounting issue related to an operating transaction, then this could easily extend two or more days to the 13th or 14th work day. We are not heavily staffed, and with such a lean staff, I am the only person who has responsibility for drafting the Form 10-Q. My Corporate Controller and one staff accountant work closely with me in the review of the financial statements and collection of all necessary disclosure data from our subsidiaries. We are a Nasdaq-listed company with approximately $270 Million of revenues. The process is obviously very similar for the Form 10-K, however we take more time to close the books. And then there is the matter of the year-end audit, which is much more work and time than the quarterly review process. The financial statements and footnote disclosures are more complex than for the quarters. So even though the SEC is proposing a total of 60 days for filing the Form 10-K (down from 90 days), the time is extremely tight and critical if companies were forced into the accelerated reporting schedule. The added year-end task is preparation of the printed "glossy" annual report, for which we typically take delivery on about the 84th day following year-end. "Accuracy" of financial reporting of operating results has always been critical, but even more so over the past few years. I am sure that the SEC is not suggesting any compromise in "accuracy" in order to adopt the shorter reporting cycle. We and many, many companies would be faced with adding financial or other staff and the very real potential for short cuts or compromise of quality of financial reporting if the 30 and 60 day reporting requirements were implemented. There is virtually no ability for us to increase prices to recover this added cost, so ultimately the investor would suffer, assuming a constant price/earnings ratio. Any ideas what this additional staff would do for the other approximate 65 or 70 days of the quarter? I also have some brief comments on the SEC proposal to accelerate insider reporting of stock transactions to "same day reporting." Obviously this was dreamed up by the same young, inexperienced attorneys in the SEC ivory towers. My comment will be by way of setting out an example of the inability to comply with this proposal. An executive's broker is attempting to sell stock with a price limit (minimum) established. That executive is out of the office either on business or maybe fishing in a remote stream in Idaho. The price limit is reached at 3:55 p.m. and the trade is executed. The brokerage firm notifies the executive's office promptly at 4:15 p.m., but because the executive is in the air (or the fish are biting), he is not able to pick up a voice mail until 7:00 p.m. that evening (at best). This is not an unrealistic example in which that executive has no chance of reporting that transaction on the "same day." If the current Form 4 reporting schedule is no longer appropriate and accelerated reporting is so critical, then 3 or 5 day reporting should suffice. This comment would have been submitted earlier, however I was completely consumed in the quarterly closing and reporting process up until just a few days ago. Please consider the practical and real world aspect of business, companies and individuals before the SEC adopts any new regulations in this area. Respectfully submitted, Ronald S. Stowell Vice President, Chief Financial Officer and Treasure LSI Industries Inc. 10000 Alliance Road Cincinnati, Ohio 45242 513-793-3200 FAX: 513-791-0813 rstowell@lsi-industries.com