From: BerryEberry1@aol.com
Sent: Friday, May 31, 2002 4:00 PM
To: rule-comments@sec.gov
Cc: Holmes@holmesdev.com; berryeberry1@hotmail.com
Subject: File No. S7-16-02

Subject line: File No. S7-16-02

To: rule-comments@sec.gov

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission 
450 Fifth Street, NW 
Washington, DC 20549-0609

Dear Mr. Katz:

My name is James Berry and I am a retired attorney, government officer, and 
investment broker.

Here is my comment on your proposed rulemaking "Disclosure in Management's 
Discussion and Analysis about the Application of Critical Accounting 
Policies."
[Release Nos. 33-8098; 34-45907 International Series Release No. 1258 File 
No. S7-16-02].  

In general, you should exercise your jurisdiction to regulate Real Estate 
Investment Trusts and the real estate segment of companies that derive a 
substantial revenue from real estate properties.  You should require that a 
publicly traded firm obtain an MAI appraisal, that is, an independent 
appraisal from a licensed appraiser, of its properties, and include that 
appraisal in its annual report and the SEC filings required in this rule.

You should widely publicize this new requirement and you should obtain from 
OMB an enforcement budget and enforce the rule as a means to build investor 
confidence and to stem the tendency of management's in an overvalued 
commercial real estate market to gut their REITs and other companies by 
failing to maintain their properties, diverting their funds to the buyout of 
management officers, and spiking the market price of their stock by paying 
out return of capital in the guise of ordinary income dividends.

"We seek comment on the proposed definition of critical accounting estimates.

Is the definition appropriately tailored?"

[No, you need an appraisal with a hard number by an independent, that is , a  
state-licensed appraiser.]
  
"Does the definition capture the appropriate type and scope of accounting 
estimates?"

[No, it is too vague.]

"Is the definition appropriately designed to identify the accounting 
estimates that require management to use significant judgment or that are the 
most uncertain? If not, what other aspects descriptive of that type of 
estimate should be included?"

1. An independent appraisal by a state-licensed appraiser that individually 
appraises all properties, totals their present market values,

2.  An estimate of the private market capitalization of the net operating 
income of the REIT or real estate segment of a company, stating the 
capitalization rate or range, using as guidance the prevailing rate of 
completed sales of properties in the same real estate sector as the REIT,

3. A statement of the net asset value of the REIT, defined as the appraised 
total value plus non-income producing assets, such as cash, cash equivalents, 
receivables, and land held for development, less liabilities, which should 
include preferred stock and all off-balance sheet liabilities such as 
commitments to buy out officers, directors, shareholders, or other investors 
such as limited partners,

4. A report of sources of cash used for dividends and distributions to 
investors such as 
a. ordinary taxable earnings, 
b. capital gains, 
c. return of capital, 
d. retained earnings, and 
e. loans,

5. A capitalization report of all investor equity, including outstanding 
shares, operating partnership units, convertible securities, and employee 
options
 and reports and the return of capital dividends and other issues.

"Is the definition appropriately designed to identify the accounting 
estimates involving a high potential to result in a material impact on the 
company's financial presentation?"

[No, it is missing the hard numbers of an independent appraisal.]
  
"Would it be difficult for a company to discern which of its accounting 
estimates require assumptions about highly uncertain matters? [No.] If so, 
how could the proposal better target them?"

[With an appraisal and a breakout of return of capital and a disclosure of 
management buyouts about to take place in cash terms in the critical 
estimates, not in numbers of shares buried in a footnote.]
  
"Should we consider setting a minimum percentage impact on results of 
operations in the second criterion of the definition, or would that be 
unnecessary because the proposed definition would not capture changes that 
have an insignificant impact?" [No.]
  
"How many accounting estimates would a company typically identify as critical 
accounting estimates under the proposed definition?" [Five, as indicated.]
  
"Would a company with multiple segments have a greater number of critical 
accounting estimates than a company without multiple segments? If so, please 
provide an explanation." [Require an appraisal for the real estate segment.]
  
Should we establish a maximum number of accounting estimates that may be 
discussed as critical accounting estimates (e.g., seven)? [No.]
"Should we expand the definition to include MD&A disclosure of volatile 
accounting estimates that use complex methodologies but do not involve 
significant management judgment? Should we do so only when the underlying 
assumptions or methodologies of those estimates are not commonly used and 
therefore not understood by investors?" 

[The premise here that it is all just too complex is an uninteresting 
application of the well-known Washington Monument syndrome. Everyone can 
understand an appraisal and a clear breakdown of return of capital and 
ordinary income dividends.]

"For each critical accounting estimate, a company would have to explain its 
significance to the company's financial condition, changes in financial 
condition and results of operations and, where material, identify its effect 
on the line items in the company's financial statements.59 Because not all 
estimates themselves are line items in the financial statements,60 their 
existence and their effect may not be readily apparent. Thus, this disclosure 
would provide additional information and clarity for investors." 

[The report should link the reduced appraisal value to the likely effect on 
rental income and therefore on accounts receivable, and therefore on the 
income dividend, and therefore on the stock price. In this way the SEC can 
help make investors who are rate shoppers and who make bad economic decisions 
because they are seduced by tax considerations realize the dangerous game 
they and REIT management's are playing with their future income.]

"There are two areas of the proposed MD&A disclosure relating to critical 
accounting estimates in which we explicitly would require a presentation of 
quantitative information.61 First, the proposals would require disclosure 
that demonstrates the sensitivity of financial results to changes made in 
connection with each critical accounting estimate. Second, the proposals 
would require quantitative disclosure relating to historical changes in a 
company's critical accounting estimates in the past three years."

[Require an appraisal each year, and a breakdown of income and return of 
capital in a dividend each year.]


"a. Quantitative disclosures to demonstrate sensitivity.

"We propose to require that a company present quantitative information about 
changes in its overall financial performance and, to the extent material, 
[real estate] line items in the financial statements that would result if 
certain changes relating to a critical accounting estimate were assumed to 
occur. The company would identify the change being assumed and discuss 
quantitatively its impact on the company. Because the point of the disclosure 
is to demonstrate the degree of sensitivity, the 
impact on overall financial performance would be discussed regardless of how 
large that is. 

"Are there any critical accounting estimates for which neither of the two 
choices for selecting the assumed changes would be appropriate?"

[Yes, the appraisal and the breakdown of return of capital and income 
dividends.]
  
"Will companies be able to select appropriate changes in their most material 
assumption or assumptions, or should we provide further guidance?"

[Your guidance should be hard numbers for the independent MAI appraisal of 
the real estate assets.]

"We solicit comment on the proposed disclosure of past material changes in 
critical accounting estimates. 

"Is sufficient disclosure of these changes already required under current MD&
A requirements?"  [No, you need an appraisal requirement.]

"Is a three-year period the most appropriate period of time over which 
investors should consider changes? If not, why would a shorter or longer 
period be more appropriate?" [An annual appraisal is required because real 
estate can rapidly deteriorate due to water damage, et cetera in the course 
of a year if management is not doing proper maintenance, but rather 
withholding the necessary expenditures and siphoning them off into, for 
example, private homes and trips to the Bahamas. The test is, could an 
analyst with a Wall Street investment banking firm learn something from the 
hard number in an appraisal, and the change in the breakdown of return of 
capital and income in the dividend, and the value of, for example, 90 strip 
malls in the eastern United States.]
  
"Would requiring disclosure over a longer period, such as five years, make it 
easier for investors to identify trends?"

[No, for heaven's sake!]

"Should we mandate a standardized format for quantitative disclosure about 
past changes in critical accounting estimates (e.g., a chart illustrating the 
dollar value of the change from the prior year for each year showing the 
impacted line items and other effects in each year)?"  

[Yes.]

"We believe that senior management should discuss the company's critical 
accounting estimates with the audit committee of its board of directors....
This type of oversight would have the potential to improve the quality and 
the transparency of disclosure."

[This whole discussion misses the point of an independent appraisal.  
Management and the audit committee from the point of view of the investor are 
foxes consulting with foxes.]

"We request comment on the proposed disclosure about discussions between 
senior management and the audit committee regarding the development, 
selection and disclosure of critical accounting estimates.

"Would the proposed requirement provide useful information to investors?"

[No.]

"Under the proposals, if a company operates in more than one segment92 and a 
critical accounting estimate affects fewer than all of the segments, the 
company would have to identify the segments it affects. A company also would 
have to determine whether it must include, in addition to the disclosure on a 
company-wide basis, a separate discussion of the critical accounting 
estimates for each identified segment about which disclosure is otherwise 
required.93 That determination would follow an analysis similar to that in 
the 1989 guidance. A company would have to provide a discussion on a segment 
basis to the extent that discussion only on a company-wide basis would result 
in an omission that renders the disclosure materially misleading.94 We would 
not mandate repetition on a segment basis of all matters discussed on a 
company-wide basis. Rather, a company would have to disclose only that 
information necessary to avoid an incomplete or misleading picture." 

[If it is the real estate segment, don't leave it up to the company.]

"Should we provide more guidance for determining the circumstances that 
warrant segment disclosure?
[Yes.]
  
"Should we require the additional segment discussion only when more than one 
segment is affected?" 

[No, you have to reach the real estate, even if it is only one segment. It is 
the vast holdings of overvalued real estate in corporate America that 
threatens the whole economy.  You must reach it with hard numbers and real 
enforcement, and soon.]

"The company follows the provisions of FASB SFAS No. 121, Accounting for the 
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed 
Of.96 That accounting standard requires that if the sum of the future cash 
flows expected to result from the assets, undiscounted and without interest 
charges, is less than a company's reported value of the assets, then the 
asset is not recoverable and the company must recognize an impairment. The 
amount of impairment to be recognized is the excess of the reported value of 
the assets over the fair value of those assets."

[There is no FASB rule for REITs and the FASB has disclaimed jurisdiction 
over REITs. On May 6, 2002, Mr. Edmund Jenkins wrote me that the subject of 
REIT appraisals "is not one that is within the jurisdiction of the FASB.  Mr. 
Jackson Day has written that the SEC defers to the FASB.  Catch 22!]

"Possible MD&A disclosure under the proposal

"Application of Critical Accounting Policies

"We evaluate our property, plant and equipment ("PP&E") for impairment 
whenever indicators of impairment exist. Accounting standards require that if 
the sum of the future cash flows expected to result from a company's asset, 
undiscounted and without interest charges, is less than the reported value of 
the asset, an asset impairment must be recognized in the financial 
statements. The amount of impairment to recognize is calculated by 
subtracting the fair value of the asset from the reported value of the 
asset."

[We need an independent appraisal of the real estate. To get that fair market 
value, you need an independent appraisal.]

"We believe that the accounting estimate related to asset impairment is a 
"critical accounting estimate" because: (1) it is highly susceptible to 
change from period to period because it requires company management to make 
assumptions about future sales and cost of sales over the life of the hard 
drive-related PP&E (generally seven years); and (2) the impact that 
recognizing an impairment would have on the assets reported on our balance 
sheet as well as our net loss would be material."
[The reason that the asset is subject to change, and the rental revenues may 
decline, may be that management may not keep real estate up, reluctant to 
spend the necessary money on repair. An independent appraisal would catch 
this failure, and alert investment analysts at the large institutional 
shareholder firms like brokerage houses, mutual funds, state retirement 
funds, and insurance companies.  They in turn could warn investors.  In this 
way, by a simple requirement, SEC would bring the whole private reporting 
system into play in support of the interests of the investor.  Management has 
a tendency to hide its failures.  State-licensed appraisers have their own 
reputation at stake, and if they are bought, then the states prosecute them, 
something they must think about in doing outside, independent real estate 
appraisals.]

"E. Auditor Examination of MD&A Disclosure Relating to Critical Accounting 
Estimates.

"A company's management bears primary responsibility for its accounting 
estimates. Auditors also have important responsibilities regarding a 
company's accounting estimates. A company's auditor currently is responsible 
for evaluating the reasonableness of the accounting estimates made by 
management in the context of the financial statements taken as a whole.97 
When a company's audited financial statements are included in an annual 
report filed with the Commission, the independent auditor is required to read 
the information in the entire filed document, including the MD&A, and 
consider whether such information, or the manner of its presentation, is 
materially inconsistent with information, or the manner of its presentation, 
appearing in the financial statements.98" 

[But the auditor is barred from aggressive investigation of possible fraud, 
as the SEC is not. The shift from relying on an indifferent FASB to an SEC 
interested in protecting REIT shareholders from sharp practice is the SEC's 
broader governmental power, and the question is, what sanctions will attach 
to its accounting rules. A range of sanctions for a range of violations will 
make the rules more credible and improve the chances of the SEC achieving its 
major purpose, which should be less fraud, and fewer unjustified market 
bubbles. Every market bubble in history has burst. Sanctions already attach 
to independent appriasers.]

"One possible approach would be to adopt a requirement that an independent 
auditor must examine, in accordance with Attestation Standards,99 the new MD&
A disclosure relating to critical accounting estimates."

[Yes, an independent auditor,  and an independent appraiser.]

"To complete an examination, an auditor must examine documents and records 
and accumulate sufficient evidence in support of the disclosures and assum
ptions and take other steps to get reasonable assurance of detecting both 
intentional and unintentional misstatements that are material to the MD&A 
presentation.102 To accept an examination engagement, an auditor must have 
sufficient knowledge about the company and its operations. AT §701 therefore 
requires that an auditor must have at least audited the company's financial 
statements for the most recent period covered by the MD&A, and the other 
periods covered by the MD&A must have been audited by it or another 
auditor.103" 

[But as of now the auditor lacks a crucial piece of evidence: he lacks an 
independent appraisal of the real estate held by the company as part of that 
evidence. The SEC could require it.]  

"If we were to require examinations by auditors of part or all of MD&A 
disclosures, should we also require that a company file, or disclose the 
results of, the auditor's reports?" 

[Yes.]

"What would be the relative benefits and costs of a requirement for an 
auditor examination with respect to the critical accounting estimates portion 
of the MD&A?"

[The benefit to the investor and his brokerage analyst is the knowledge as to 
whether he should risk a portion of his retirement by investing  or 
continuing to invest in the company.  The primary client of the SEC is the 
investing public, not the accounting profession and not the companies it 
regulates.]

 "If we do not require auditor examination or review, are there other steps 
we should take to help ensure the quality of disclosure in this proposed 
section of MD&A?"

[Yes, the independent licensed appraiser's appraisal of the real estate 
segment.]

"...We believe that quarterly updates to reflect material developments would 
be appropriate. Disclosure of material developments made only at the end of 
each fiscal year also may not identify changes quickly enough to inform 
investors adequately." 

[This is closing the barn door on Enron, a relatively rare trading 
phenomenon. Far more important and pervasive is the existence of overvalued 
real estate.  An annual appraisal with a hard number is a solid requirement, 
less often would be inappropriate, and more often would be burdensome. 
However, each quarter a REIT should compare and report the stock market price 
of its shares and the Net Asset Value for that period, on the assumption that 
the annual appraisal is still valid. That would address the coming crisis of 
confidence in commercial real estate, which pervades the whole country, as 
opposed to the unique Enron energy trading abuses, which are unlikely to be 
repeated.  It is better to prepare for the next war rather than fight the 
last war.]

"We solicit comment on the quarterly updating requirement for U.S. companies. 


"Are there some accounting estimates or material assumptions or methodologies 
that would normally be considered by companies only on a less frequent basis 
than quarterly? If so, which ones?" 

[The appraisal.] 

"Should they be omitted from the quarterly updating requirement on that 
basis?" 

[Each quarter a REIT should compare and report the stock market price of its 
shares and the Net Asset Value for that period, on the assumption that the 
annual appraisal is still valid.]
  
"Is the scope of the disclosure required in a quarterly update appropriate? 
If not, what should be added or omitted?"  

[The appraisal.]

"We seek comment on the proposed disclosures related to initial adoption of 
accounting policies.

"Would the proposed disclosures about initial adoption of accounting policies 
provide useful information to investors and other readers of financial 
reports?"
 
[The independent appraisal is crucial to the investment analysts at the major 
firms, and especially the large institutional investors on behalf of 
retirees.]
  
"Are there particular situations involving the initial adoption of a material 
accounting policy for which we should require additional disclosure? If so, 
what are those situations and what additional disclosure should we require?" 

[Yes, REITs throughout the country on which retirees are relying are hiding 
management buyouts, neglecting buildings, and touting return of capital as if 
it were income in dividends.  These are endemic practices in the REIT 
industry, and a high profile SEC campaign to stop them is in order. That is 
how to ensure that investors are not confused: clear, prominent, national 
publicity, not obscure tinkering with existing rules.  The assumption of 
Federal responsibility where there is Federal jurisdiction should be 
broadcast to the markets.  This is not anti-business.  It is an attempt to 
gradually deflate the commercial real estate bubble before we have a 
deflationary implosion like that of Japan, which was driven by non disclosure 
of problems with banks and real estate and the stock market, all tied in 
together.]
  
"Should we require companies to disclose, in MD&A or in the financial 
statements, the estimated effect of adopting accounting policies that they 
could have adopted, but did not adopt, upon initial accounting for unusual or 
novel transactions?" 

[Yes, hiding the buyout of departing management is a novel transaction in 
technical terms, although as a practice it is par for the  course.]
  
"What would be the costs for companies to prepare disclosure about the 
effects of alternative accounting policies that could have been chosen but 
were not?" 

[The SEC should solicit each of the 50 State governments for information on 
the cost of an MAI appraisal of the assets of Real Estate Investment Trusts 
in that state. The SEC should also solicit the views of the National 
Association of Real Estate Investment Trusts, NAREIT, on the cost issue.]
  
"Would investors be confused if companies presented disclosure of the effects 
of acceptable alternative policies that were not chosen?" 

[Institutional investors are not going to be confused by the truth, nor are 
intelligent individuals.]
  
"Should we require in MD&A a discussion of whether the accounting policies 
followed by a company upon initial adoption differ from the accounting 
policies applied, in similar circumstances, by other companies in its 
industry, and the reasons for those differences?"

[No, let each company worry about its own problems without surveying its 
industry.] 

"Please explain."

[This is more closing the barn door.] 

"If such a discussion should be required, please identify the specific 
disclosures companies should make.
  
Would a company know the policies applied in similar circumstances by other 
companies in its industry? If not, would auditing firms or other financial 
advisors be able to assist companies in determining whether their accounting 
policies generally diverge from industry practices? 

[The AICPA rule requires them to so state.  It is the meaning of the term, 
"generally accepted accounting principles," for heaven's sake. It is the 
independent auditor's job, not the company's job.]

 
"The proposed MD&A discussion must be presented in language, and a format, 
that is clear, concise and understandable to the average investor."

[The "average investor" is an overly tax conscious rate shopper who refuses 
to recognize that high rates of dividend return mean high risk of losing that 
return altogether.  Not much can be can be done for this "average" investor, 
even with simple and straightforward language that says, "this is a high 
risk, we are in a real estate bubble, every bubble has burst, don't make this 
investment."  Nothing can penetrate his imprudence.  But a great deal can be 
done for the institutions that serve this investors' interests, and that 
invest for him -- the analysts at the Wall Street firms, the major insurance 
companies, the huge state and private retirement funds, the mutual funds, 
none of whom at present have access to independent appraisals of the REITs 
they, too have unwisely placed in their huge portfolios, so they cannot do 
their job, which is to spot the bad appleas and unload them. So, please, 
never mind about the "average" investor, focus instead on the highly 
sophisticated mutual fund manager and other large institutional investors, 
the kind that read the Crain publication, Pension and Investment Age. If 
there is hope it lies 
not with the investment proles, but with the institutional investor pros. 
Give them the tools they need.]

"...The purpose of the proposed disclosure would be hindered if a company 
were to include disclosures that consisted principally of blanket disclaimers 
of legal responsibility for its application of a new accounting policy or its 
development of its critical accounting estimates in light of the 
uncertainties associated with them. While the Commission fully expects 
companies to craft the proposed disclosure responsibly to take advantage of 
any available safe harbors, simple disclaimers of legal liability would be 
contrary to the disclosure goals underlying the proposal and would not be 
permitted.115" 

[These disclaimers would have little impact when the SEC took them to court 
for non-compliance. Enforcement, however, will not happen if the OMB guts 
SEC's enforcement budget.  In this way OMB can render all of this 
meaningless.]

"Should the proposed disclosure be presented in a separate section of MD&A or 
should we require that it be integrated into the other discussions of 
financial condition, changes in financial condition, results of operations 
and liquidity and capital resources when the proposed disclosure is closely 
related to an aspect discussed in those separate sections of MD&A?"

[Real estate should be separate.]
  
"Should other requirements relating to the language and format be added to 
the requirement for clear, concise and understandable disclosure? If so, what 
requirements?"

[A hard number in an independent appraisal.]

"The Exchange Act and the Securities Act contain parallel safe harbor 
protection for forward-looking statements against private legal actions that 
are based on allegations of a material misstatement or omission. 130 In 
addition, two Commission rules under those Acts that pre-date the adoption of 
the statutory safe harbors also provide protection for forward-looking 
statements." 

[But these do not reach concealment of the deterioration of assets, and of 
tens of million dollar buyouts of departing management that are hidden in 
footnotes and expressed as a number of shares to be disbursed for an unnamed 
purpose, with no cash amount stated.  In short, they higher bar to private 
suits does not mean that courts will ignore this standard fraudulent  method 
of gutting REITs and other companies while propping up the stock price 
through returns of capital labeled as income dividends. The higher bar in the 
safe harbor act does not protect against litigation when a company is gutted 
in this way.  The higher bar is not a complete bar. An action for common law 
fraud still survives. And institutional investors are interest parties with 
the assets and the will to pursue litigation, even if the SEC mounts a weak 
enforcement effort.]

"Some of the proposed MD&A disclosure, but not all of it, would require a 
company to make forward-looking statements. 

[But not the appraisal, which is present value. This simple, hard, 
independent number does not fall afoul of all the usual cautions about 
forward-looking statements.  It is not subject to collateral attack as too 
complex, or too burdensome, or too speculative.  It is useful, clear, and 
simple.]

"In addition to the requirements we propose, are there particular aspects of 
critical accounting estimates or their development or impact that the 
proposals should specifically require companies to address? If so, what are 
they?"

[The appraisal.]
  
"In addition to the requirements we propose, are there particular aspects 
concerning a company's initial adoption of an accounting policy that the 
proposals should specifically require companies to address? If so, what are 
they?
  
"Is disclosure necessary concerning the procedures that management follows in 
selecting its critical accounting estimates? If so, what additional 
disclosure should be provided?"  

[An independent, state-licensed appraiser, where licensing exists. The SEC 
should invite the state governments to comment on this rule, after it 
republishes it to include the appraisal requirement.] 

[A new SEC rule that reads something like this: 

[Each publicly traded Real Estate Investment Trust shall prepare each year a 
new MAI appraisal of the properties in its portfolio, and include it in its 
annual report, filing it at the same time with the Securities and Exchange 
Commission and with the Security regulation authority in each state in which 
it has a principal place of business.]

Thank you for your consideration of these comments.

Sincerely,

James Berry