Comments of American Society of Corporate Secretaries, on S7-08-02

American Society of Corporate Secretaries

May 22, 2002

Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
E-mail: rule-comments@sec.gov

RE: File No. S7-08-02
Comments on Release No. 33-8089; 34-45741

Dear Mr. Katz:

On behalf of the American Society of Corporate Secretaries, Inc. (the "Society"), we are pleased to have the opportunity to respond to the Commission's request for comments on the Release regarding Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports. The Society has over 3,800 members representing over 2,500 corporations in the United States and other countries.

The Society agrees with and vigorously supports the Commission's objective that public companies satisfy the capital markets' need for clear, accurate and timely information. In this period of challenge facing the United States' financial reporting system, it is in the interests of all constituents to work together to preserve the preeminence of the United States capital markets. In this letter, we present the results of a survey conducted with our membership and offer several constructive ideas for implementing the changes that the Commission proposes relative to accelerated filings of Forms 10-K and 10-Q and disclosure concerning website access to reports.

At the outset, because the member companies of the Society represent the full spectrum of industries and sizes, our members do not speak with one voice on these proposals. As our survey results show, the impacts will be felt differently by different companies. Nevertheless, we present the following practical information for the Commission's consideration.

Survey Results

We surveyed all of our member companies, and 220 companies responded. Following is an extract of the survey results. The survey results relating to:

the timing of auditors' field work;
the timing for senior management and Board-level review;
company comments regarding reduction in precision of reported financial information; and
company comments regarding reduction in ability to identify and address errors and/or adjustments in financial data

are set forth in Appendix A.

Ability to file on accelerated basis

As to the filing of the Form 10-K in 60 days:

100 companies (45%) report that they will be able to meet that deadline.
51 companies (23%) report that they cannot file in 60 days.
67 companies (30%) report that they are not sure whether they can file within 60 days.

As to the filing of the Form 10-Q in 30 days:

100 companies (45%) report that they will be able to meet that deadline.
64 companies (29%) report that they cannot file in 30 days.
54 companies (25%) report that they are not sure whether they can file within 30 days.

Consequences of accelerated filings

104 companies (47%) may have to close accounting systems early in order to accomplish the proposed timetable. 30 companies (14%) already close accounting systems early. (At least one company already closes some systems early and will have to close additional systems early.)
38 companies (17%) may experience regulatory difficulties.
148 companies (67%) may have to ask their auditors to be involved earlier in the process.
102 companies (46%) will have to hire additional staff.
59 companies (27%) will have to buy or develop additional systems.

Costs

115 respondents reported that they expect costs to increase in order to comply with the accelerated deadlines. Various companies expect cost increases for one or more of the following: additional employees, overtime, additional audit/review fees, system enhancements and increased financial printer expenses. The following summarizes estimates of increased costs for those companies that provided an estimate:

Up to $75,000 — 27 companies
$76,000 to $150,000 — 24 companies
$151,000 to $300,000 — 11 companies
$300,000 to $999,999 — 4 companies
$1 million and over — 7 companies

Other companies stated that they were not able to estimate how much their costs would increase.

70 day deadline for 10-Ks

We asked our members to consider the impact if the 10-K filing deadline was 70 days.

189 companies (86%) reported that they could more easily meet this deadline.
31 companies (14%) reported that they would save significant costs.

Some members believe that 60 days is too short to resolve some complicated, unusual or unexpected issues, and stated that an additional 10 days (or more) would be beneficial from that perspective. Some members stated that they would save costs of overtime, hiring additional staff and additional audit fees. Eleven members stated that 70 days would not be enough time for their companies; most of those companies would prefer 75 days, some longer.

35 day deadline for 10-Qs

When asked the impact if the 10-Q filing was 35 days,

177 companies (80%) reported that they could more easily meet this deadline.
25 companies (11%) reported that they would save significant costs.

Again, there are a variety of reactions. A number of companies reported that 35 days would not be enough to avoid additional costs or to satisfy their concerns regarding quality of the information filed. Some companies expect to need to delay or interrupt other business functions in order to accelerate filings.

Reduction in precision of reported financial information

About one-third (59) of the respondents to this question do not expect a reduction in the precision of their reported information. Two-thirds (125) do expect a reduction in the precision of reported information. Various concerns that companies reported are listed in Appendix A.

Reduction in ability to identify and address errors and/or adjustments in financial data

About half of the 192 companies that responded to this question stated that they expect the accelerated filings to significantly reduce their ability to identify and address errors and/or adjustments in their financial data. Various concerns that companies reported are listed in Appendix A.

Responses to questions regarding accelerating filing due dates

The following bullet points are responsive to the bulleted questions in Section II.A.2 of the Proposed Rules.

The Society agrees in concept that shortening the due dates of reports would improve the flow of information to investors and the markets, but believes that the due dates finally chosen should reflect concerns about the quality of the information to be filed. A significant number of our members believe that quality would suffer. As noted in our survey responses, almost half of the respondents may have to close accounting systems early and resort to estimations and judgments in order to meet the proposed filing deadlines, compared to about 14% now. Many companies report that they expect a reduced ability to deal adequately with contingencies and various types of accruals requiring the exercise of judgment and make needed adjustments to the reported information. These companies do not believe that there will be a benefit from acceleration.
We recommend that the filing periods be longer than proposed, at least 35 days for 10-Qs and 70 days for 10-Ks. A major factor to be considered is the large number of companies that will be required to close books early and increase their reliance on estimates and judgments, necessarily reducing the precision of reported results. Another significant factor is the risk that companies will be forced to defer accounting items until subsequent reporting periods for analysis and resolution, because of lack of time in the current period.
We do not have a consensus of our members that one or the other of the 10-K and 10-Q be accelerated. Some companies would have less (or no) difficulty filing the annual report in a shorter period of time, others the quarterly report.
A number of our members support the concept of filing by the earlier of the existing deadlines or some earlier time after their first release of earnings. Others believe that a fixed date that applies to all companies makes the most sense for the markets as a whole, in that investors and analysts will know and be able to rely on the filing dates.

As a matter of information, some companies release their earnings very early, but need lengthy periods to prepare the filed information. Other companies already file their reports shortly after their earnings announcements, which may be later in the process than for other companies. Street pressure on companies to release their earnings as soon as possible would probably discourage companies from delaying earnings announcements.
We do not believe that the proposals would cause a delay in the release of earnings announcements because many companies are under pressure from analysts to announce earnings no later than has been their historic practice. While many of our member companies could file a limited amount of information on an accelerated basis, some members believe that the approach that best safeguards the integrity of the information to be disclosed is to prepare all information to be reported before any public disclosure is made.
Some of our members can file on an accelerated basis without problems. Others can file on an accelerated basis but anticipate difficulties from the lack of time to adequately analyze their information. Those companies that do not believe that they can file on an accelerated basis obviously share the same concerns. Please see the information in Appendix A under the headings "Reduction in precision of reported financial information" and "Reduction in ability to identify and address errors and/or adjustments in financial data" for a description of the types of problems companies anticipate.

The initiatives underway and contemplated to improve the information provided in public filings will require careful, thoughtful analysis and presentation. For example, the proposed rule on Disclosure in MD&A about the Application of Critical Accounting Policies (Release Nos. 33-8098; 34-45907), if adopted, would require, among other things, disclosure of assumptions, alternative assumptions, and sensitivity analysis of the assumptions underlying critical accounting policies. We also note the Commission's January 22, 2002 release regarding MD&A, as well as the contemplated new disclosures on trend information mentioned in Section II. A of the "Critical Accounting Policies" release. The disclosures contemplated by these initiatives are the type that require significant analysis and judgment, first by the accounting, financial and legal resources who initially prepare financial reports, and then by senior management, the auditors and the Board or Audit Committee. Time will be needed to respond carefully and thoughtfully to these proposals in companies' filings. Some companies believe that this is not the time to accelerate filing deadlines.
As described above under the heading "Costs", our survey revealed that more than half of our respondents expect increased costs. For some companies, the costs will be very significant (the maximum reported was $150 million for systems upgrades that would take three years to implement). Other companies do not expect to incur any additional costs. Some of the costs are one-time (certain systems upgrades) and others are ongoing, such as for additional staff and additional auditor review.
Some companies are concerned that the reduced timeframes will make it close to impossible for them to present information to the audit committee and board of directors of an appropriate quality. They expect to be forced to close accounting systems early and rely on estimates and judgments in order to meet the accelerated deadlines, and management would have less time to analyze and review the information. Necessarily, the time that is available for audit committees and boards will be squeezed for some companies.
We agree that a company's audit or quarterly auditor review is substantially complete by the time the company issues its earnings announcement. Earnings numbers rarely change between their announcement and the filing of the corresponding periodic report.

The steps involved, and the time it takes, to prepare the necessary disclosures for the corresponding periodic report after the earnings announcement or the completion of the audit (or review) varies from company to company. Some companies prepare their quarterly reports concurrently with the preparation of their earnings release and the performance of the auditor's review. These companies tend to file their 10-Qs shortly after they announce their earnings.

Other companies do not begin the preparation of their MD&A and financial statement footnotes (both for the quarters and year-end) until after their earnings are announced. The amount of time it takes for these companies to complete their reports after their earnings are announced varies. Variables from one company to the next include the complexity of the company and its issues, whether the company has other regulatory filings (such as statutory financial statements) that demand the attention of the same staff who prepare the SEC filings, and the time it takes to obtain senior management and Board of Directors or Audit Committee review.

Most companies have a longer lag between the announcement of year-end results and the filing of their annual reports. While the audit is typically completed by the time a company announces its results, the annual disclosure obligations outside of the basic financial statements themselves are significantly more detailed and challenging for all companies than are the quarterly disclosure obligations. This necessarily requires greater attention and more time spent by all reviewers: inside accountants, independent auditors, business people, lawyers, senior management and the Board of Directors. Many of these levels of review must be conducted seriatim. In addition, most companies prepare their proxy statements at the same time and by at least some of the same people who are working on the annual report. There is not always an ability to compress the work into shorter time spans.

Because the issues involved are often challenging, a company cannot simply hire temporary staff to help out in the heavy reporting seasons; nor, for most companies, can the work be done effectively by outside counsel. The work needs to be done by those who are familiar not only with the accounting and legal requirements but also with the company's operations, trends and prospects, its industry dynamics, investor perceptions, prior disclosures, and reporting and disclosure practices. To ensure consistency over time, the same people must be involved in reviewing all filings and important press releases; the review cannot be parceled out to different staff members.
A significant number of our members fear that reliability and accuracy will be put at risk if the filing deadlines are too short. See the reactions of our members above under the headings "Reduction in precision of reported financial information" and "Reduction in ability to identify and address errors and/or adjustments in financial data" and the comments of individual members in Appendix A under the same headings.
The Society supports the Commission's conforming change from 120 days to 90 days of the date by which all schedules required by Article 12 of Regulation S-X may be filed as an amendment to the annual report. We note that most companies file these schedules at the same time as the Form 10-K, and rarely amend their filings to incorporate the schedules.
We support not making a change to the 120-day period companies have to file their definitive proxy or information statements involving the election of directors to allow the incorporation by reference of the information required by Part III of Form 10-K. For those companies with later annual meetings of shareholders, loss of the ability to incorporate by reference would be a significant burden without benefit.
The conforming changes that the Commission proposes to accelerate other timeliness requirements in Regulation S-X and in Item 7 of Form 8-K will be more difficult and costly for some companies and in some circumstances. In particular, we note the difficulty of obtaining and properly presenting financial information for a company that has not historically been subject to GAAP.

Society's Recommendations on Accelerated Filing Dates

Almost half of the companies who responded to our survey report that they can meet the proposed 30 and 60 day requirements, with a significant additional number reporting that they could more easily meet deadlines of 35 and 70 days. Many other companies, however, believe that it will be difficult or costly, or both, for them to meet either the proposed deadlines or deadlines of 35 and 70 days. An important point is that some of the companies that can meet the accelerated deadlines nevertheless fear that the quality of their financial analysis and reporting will suffer, as discussed above. Companies also note the increasing disclosure obligations for MD&A, in particular, which will require time for a thoughtful disclosure response.

Accordingly, the Society recommends that the Commission proceed cautiously. Alternatives we hope you will consider, which we think will help safeguard the accuracy and quality of reported information, yet still meet the objectives set forth in the proposal, include the following:

providing longer due dates than proposed — at least 35 and 70 days;
providing a lengthy phase-in period (perhaps 24 months) to permit companies to change their processes and make the investments needed to meet reduced filing deadlines; and
lengthening the periods permitted by Rule 12b-25 for Forms 10-K from 15 days to 20 days and for Forms 10-Q from 5 days to 10 days. While our member companies do not like the idea of relying on Rule 12b-25, they would appreciate the safety net that it would provide.

We have heard anecdotally that certain industries may have more members that expect difficulty in complying with the proposed deadlines than other industries. Our survey did not capture data on this point. However, it might be something that the Commission could watch for in the comment letters submitted by individual companies. If the comment letters support the anecdotal information that certain industries face true impediments, then perhaps exceptions could be crafted for specific situations.

Website Access to Information

Well over 90% of those responding can and will provide access to the specified Exchange Act forms on their website if the proposed rules are adopted and 70% currently do so. The following bullet points are responsive to the bulleted questions in Section II.B.2. of the Proposed Rules.

We believe
- the proposal would aid in encouraging companies to make information available in a variety of locations and hence make corporate information more widely accessible and disseminated,
- investors would find this information useful, and
- the proposed disclosure requirement would provide sufficient notice to investors of the available sources of corporate information.
We believe that all reporting companies should be subject to the proposed new requirement, including small issuers and foreign private issuers that file on Form 20-F. The cost is minimal and the benefits significant.
The majority of respondents who already make such materials available would incur no additional costs. Others estimate expected additional costs from zero to $25,000 per year for staffing to administer the site.
We recommend that the proposal be changed to permit next business day posting, rather than the same business day. This would allow members to use the same staff to EDGARize and to handle the web posting (often a process that requires two different formats and separate proofreading) rather than having two sets of employees working simultaneously. We do not think additional disclosure beyond the proposal is needed at this time.
While generally we do not believe that additional guidance is necessary in how to comply with the proposal, it would be helpful to have staff familiar with various hyperlinks and vendors available by e-mail and at a toll-free telephone number during a six month phase-in period. It also would be very useful to make EDGAR available real-time (so budget-conscious members could link directly to the documents on the EDGAR site, instead of paying a vendor for a link to a pay-EDGAR site or having internal staff prepare and post a pdf copy). While not related to the proposal, we also continue to ask for the ability to file EDGAR documents 24 hours a day, 7 days a week - this would be consistent with the idea of making information available to the public at the earliest available time, since there is now after-hours trading and 24 hour real-time business news on cable channels.
We do not object to an additional requirement to include the additional disclosure in 10Qs. While we expect some companies will also put this disclosure in their annual report to shareholders, others will prefer not to in order to save space, which is always at a premium in the annual reports of our budget-conscious members.
We believe the disclosure of a company's Internet address is helpful to investors, and we know of no reasons why a company would object to providing disclosure of its website address. While website addresses are already relatively easy to locate with search function, the requirement will save investors time and make it easier for the less sophisticated, in terms of computer skills.
We would have no objection to a conforming change to require disclosure of a company's website address in Securities Act registration statements, but since Exchange Act filings are readily available we do not believe this is necessary.
We do not believe a company should be required to disclose whether it provides access to all of its Exchange Act filings (and not just its periodic and current reports). We do not object to a requirement to provide access to exhibits or supplemental schedules that are required to be filed by EDGAR, but do not believe additional computerization of paper-only documents should be required. We have no objection to also requiring access to the proxy statement.
While not all investors may have ready access to the Internet, we do not believe there is a current need for additional ways to facilitate access to Commission information for those without Internet access. Many who do not enjoy Internet access at home can access it at public libraries, schools and the workplace. Further, the existing SEC public reference rooms provide access to paper copies to fill the gap for those without Internet access. And many of our members already provide copies (free or only for the cost of copying and mailing) of any public documents requested by investors.

Should the Commission or its Staff have questions concerning the comments in this letter or desire additional information to assist it in preparing the adopting release, please do not hesitate to contact me at 215-761-6242.

Very truly yours,

/s/ Pauline A. Candaux

Pauline A. Candaux
Chair
Subcommittee on Accelerated Filing Dates
and Disclosure Concerning Website Access

c: Kathy Gibson
Bob Reed
David Smith
Carol Ward
Susan Wolf

Appendix A

Auditors' field work

187 companies provided information about when auditors' field work is finished for their 10-Ks. The responses may be summarized as follows:

15 to 25 days — 20 companies
26 to 35 days — 38 companies
36 to 45 days — 45 companies
46 to 60 days — 50 companies
Over 60 days — 34 companies

Timing for senior management/Board-level review

Our responding companies reported that their 10-Ks and 10-Qs are substantially ready for senior management/Board of Director-level review in the following timeframes:

10-Ks

1 to 25 days - 19 companies
26 to 35 days - 17 companies
36 to 45 days - 36 companies
46 to 60 days - 51 companies
Over 60 days - 78 companies

10-Qs

1 to 25 days - 57 companies
26 to 35 days - 90 companies
36 to 40 days - 30 companies
41 to 45 days - 6 companies
46 to 60 days - 2 companies

Reduction in precision of reported financial information

A higher degree of estimation and judgment for items such as sales, inventory, costs and expenses, resulting from books being closed earlier.
Reduction in ability to include, quantify and evaluate contingencies and make adjustments from financial systems information.
Compression of time for analysis and audit will result in higher risk of error and more amended filings.
Could be significant problems during periods with significant transactions or with personnel turnover.
Cash flow statement may have less precision.
Companies with recent mergers and that lack integrated financial systems depend on manual efforts to close books and report results. A 30 day quarterly close will require closing books early, additional resources, increased use of estimates and shortcuts and significantly increase the risk of error.
Reconciling cash, investments and payables will be more difficult, as statements aren't always available until two to three weeks after month's end.
Complicates the estimation process for accruals, allowances for doubtful accounts and reserves, leading to less precise numbers.
Will be difficult when we have to add or revise information or presentation in response to new accounting development or requirement.
Could lead to less comprehensive review by outside auditors.
May eliminate cash flow statement from the earnings release so resources can be devoted to preparing the 10-Q.
Completeness and quality will be negatively impacted. Footnotes will be less lengthy and the MD&A less robust.

Reduction in ability to identify and address errors and/or adjustments in financial data

Although we release earnings 3 - 4 weeks after period end, much of the supplemental and footnote data is prepared later. Our difficulty will be with that data.
Anticipate that some items would, as a practical matter, have to be deferred to the succeeding period for fact development, analysis and resolution.
Insufficient time to analyze financial output in order to identify issues; little follow-up time to resolve.
Review times at all levels will be decreased.
Payables and contract adjustments would be more difficult to nail down and accuracy would suffer by an unpredictable amount.
New and additional disclosures plus complexity of new accounting standards increases risk for errors and subsequent adjustments.
Concerned that the level of participation for the members of the audit committee will be decreased.
Our operations and the accounting and tax rules are so complex that every available minute is devoted to checking and crosschecking information.
Errors and adjustments will end up being found after the filings have been made.
If the result is a delay in filings, the consequence will be a false presumption of an issuer problem.
In the case of complex accounting issues or unique transactions, the timing could make it difficult to comply with required disclosures.