The SEC staff may review any document that is filed, but always reviews initial public offerings, Form 8-K Items 4.01 and 4.02, proxies and registration statements. If the staff asks registrants to add disclosure or to change disclosure in future filings, the future filings will be checked for compliance, according to Division of Corporation Finance staffer Angela Crane. Wayne Carnall, the chief accountant in the Division of Corporation Finance, said the staff issues a large number of comment letters relating to noncompliance with Form 8-K Items 4.01 and 4.02. He said the staff will issue guidance in the near future to improve compliance with the disclosure regarding a change in accountants.

Carnall said the staff sees itself as a surrogate for investors and urged registrants not to write their disclosure to avoid comments. He also mentioned the use of references to FASB’s codification and noted that no one is familiar with those nine digit references. He encouraged registrants to describe the accounting concepts rather than cite to something that no one will look up.

The staff was asked about a rumor that there is a book of standard comments on which the staff relies. Staffer Brian Bhandari said the rumor is false, but similar fact patterns will receive similar comments. The staff tailors its comments to specific issues. Carnall noted that the staff is seeing a trend of cutting and pasting in response letters. In order to promote consistency in the staff comment letters, Carnall said the objective is to look at issues on a Division-wide basis.

Bhandari said the most frequent comments relate to disclosure required by GAAP or by SEC rules. The second most frequent comments relate to the expectation of external events. The staff looks at press releases and articles, Web sites and exhibits. They follow analyst calls and the disclosures companies make about their segments. Carnall urged registrants to review their entire documents for inconsistencies before submitting them to the SEC. Registrants have had to file restatements due to something that appeared in the exhibits, he advised, particularly in the stock compensation area.

If a response to a staff comment letter will take weeks to gather the requested information, Carnall suggested the registrant first call the staff to make sure there is not an easier way to satisfy the request. In the 1990s, he said people frequently came to the SEC to meet with the staff, but that seldom happens anymore even though the option still exists. Sometimes the staff is just asking a question, so registrants should not assume there will be a need to restate. Bhandari added that if a question relates to an accounting issue, the registrant should include its accountant on the call. The staff always consults with the chief accountant’s office before requiring a restatement, he advised.

Where there is diversity in practice, Carnall said the staff may request additional disclosure in footnotes or in MD&A. The staff may also notify the Emerging Issues Task Force of the differing approaches being used. The staff will not ask a company to present a hypothetical or an alternative approach.

MD&A

Carnall believes that MD&A is the ultimate principles-based regulation. It is just a few pages long and brilliantly written, in his view. Brian Lane, with Gibson Dunn & Crutcher, added that MD&A is where plain English is very important. It is in MD&A that most of the plain English comment letters are issued. Lane also noted a tendency by the staff to seek tabular disclosure of information to make it clearer to the readers. Carnall emphasized the importance of the analysis part of MD&A.

Lane said that some companies merely walk through their line item segments in reporting their MD&A, but they should lead with the big stuff. He recommended that registrants review the Financial Reporting Manual section on MD&A for guidance. Carnall said there are situations where a registrant must provide an explanation and not just a number.

Lane said he has observed a greater staff focus on more detailed information in areas such as critical accounting estimates, fair value accounting and any kind of reserve. Carnall urged registrants to envision themselves as an investor and to provide the level of detail that is needed to understand the business.

Lane noted that the staff has recommended the use of tables to disaggregate the costs of segments. Carnall agreed that the Commission has said that tables are one of the best ways to present information and may make explanations easier. Companies also may want to disaggregate costs by country in areas such as tax, costs and liquidity. Carnall noted that Venezuela presents a very unique financial situation yet there has been very little discussion by companies. Some companies have suffered major devaluations but had no previous disclosure about their Venezuelan operations. Venezuela remains a highly inflationary environment, he said.

Carnall was asked if a company can remove an item from its MD&A that a staff asked it to include, after a period of time has passed. If the matter is no longer relevant, Carnall said that it should be removed.