DEVELOPMENTS IN THE DIVISION OF CORPORATION FINANCE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS TWENTY-FOURTH ANNUAL CONFERENCE ON CURRENT SEC DEVELOPMENTS DECEMBER 10, 1996 WAYNE E. CARNALL ASSOCIATE DIRECTOR - ACCOUNTING OPERATIONS DIVISION OF CORPORATION FINANCE U.S. SECURITIES AND EXCHANGE COMMISSION The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of its employees. The views expressed in this paper are those of Mr. Carnall and do not necessarily represent the views of the Commission or other members of the staff. INTRODUCTION It is my pleasure to have the opportunity once again to speak at this conference on behalf of our team of 120 accounting professionals in the Division of Corporation Finance. At last year's conference our remarks focused on basic and fundamental matters that were the source of frequent comments by the staff. Similar to last year, our remarks will primarily focus on practical issues that we encounter on a day-to-day basis both in reviewing filings in the operating offices as well as interpretive issues that are addressed in the Division's Chief Accountant's Office. In addition, Doug Tanner will discuss the amendments to Rule 3-05 of Regulation S-X and Staff Accounting Bulletin 97. Doug was a major contributor in drafting both of these documents. Most of the items that we will discuss this afternoon are included in our paper on Current Financial Reporting and Disclosure Issues and Rulemaking Projects that is included in your handouts. We have one more speaker than last year. Accordingly, my remarks will be short and limited to some operational developments, a review of some of our highlights and accomplishments and conclude with some recommendations for processing filings and working with the staff. OPERATIONAL DEVELOPMENTS Earlier this year Brian Lane was appointed Director replacing Linda Quinn. You will have an opportunity to hear from Brian tomorrow morning. With Brian's appointment, the Division commenced a program to streamline the operations by reducing the number of support offices and focusing on the review and processing of documents filed by public companies. WHAT CHANGED The Division is organized into two functions: Operations and Disclosure Support. Some of the more significant changes in the organizational structure that took place this summer include the following: ! Branches were eliminated and offices were created. Previously the operations function was conducted through six "pods" that were roughly organized by industry classification that were further subdivided into 12 branches. The pods were headed by an Assistant Director and the branches by a Branch Chief. Under the new structure there are eight offices organized by industry classification plus the Office of Small Business. There are approximately 25-30 people in each office, including staff accountants and attorneys, Assistant Chief Accountants and Special Counsel as well as support staff that report to the Assistant Directors who in turn report to the Associate Directors in charge of operations - Abigail Arms, Howard Morin, Albert Dandridge and me. The following are the new offices: Health Care and Insurance Consumer Products Communications and Computers Natural Resources Transportation and Leisure Manufacturing and Construction Banking and Leasing Structured Financing and Real Estate Office of Small Business ! The Office of Small Business was significantly expanded. Filings by small business issuers, regardless of industry type, will be assigned to this group. The expansion recognizes that the issues and challenges that confront small business issuers in the registration and reporting process are different and unique compared to larger entities. By centralizing all filings, the staff will be better able to serve this group that is very important to the American economy. ! The Division's various support offices were also reorganized to reflect both changes in levels of work as well as the changing business environment. There were no significant changes in the Division's Chief Accountant's Office. In addition to Robert Bayless, the Chief Accountant, this office consists of 4 Associate Chief Accountants who each provide technical support to at least 2 offices. In addition, they respond to letters and telephone inquiries. WHY IT CHANGED Some of the benefits of the new structure include the following: ! Eliminated one level of management - there are no longer Branch Chiefs. The flatter organizational structure is designed to be more efficient and facilitate issue resolution. ! The offices are focussed on industry specialization. This will allow the staff to obtain a better understanding of the issues that confront a particular industry and will facilitate staff training. ! The interaction between the legal and accounting function is more coordinated. ! The assistant directors are more involved with the comment process and are dedicated to improving the quality and consistency of comments. While there has been significant changes in the Division's organizational structure, the staff's dedication and commitment to our mission of protecting the investing public has not and will not change. HIGHLIGHTS AND ACCOMPLISHMENTS This past year has been very busy for the Division. A record $1.2 trillion in securities were filed for registration which represents a 45% increase over 1995. IPOs, which are always selected for review, raised approximately $185 billion which is more than twice the level in 1995. I would like to share with you some of our accomplishments during the past year: ! We drafted amendments to Regulation S-X and various forms relating to acquired businesses. These amendments significantly reduce the reporting burden for a large number of registrants. In fact, a number of accountants have complained, off the record of course, that the amended rules will reduce audit fees. ! We drafted Staff Accounting Bulletin No. 97 that addressed two significant issues on business combinations: (a) the application of SAB 48 "Transfers of Nonmonetary Assets by Promoters or Shareholders" to purchase business combinations and (b) the identification of an accounting acquiror in business combinations. ! We contributed to the Task Force on Disclosure Simplification which delivered its report to the Commission earlier this year. This report identified a number of ways to streamline the registration and disclosure process including the elimination of many outdated or duplicative disclosure requirements and forms. The Commission amended a number of its rules and proposed amendments to others based on the recommendations of this Task Force. ! We completed the revisions to the Staff Training Manual. Copies of the 1996 training manual are available in the public reference room. Kurt Hohl will discuss some of the highlights of the new training manual. ! We established a professional accounting fellow program in the Division. Three accountants were hired under this program for a one to two year term during which they have severed all professional ties and communication with their old firm. This program was designed to provide the accounting fellows with in-depth exposure to the Division's full disclosure program. I consider the program to be a success, and it is my hope and expectation that it we be a permanent program in the Division. These are just some of the examples of the accomplishments of the accounting staff in the Division of Corporation Finance. The biggest accomplishment we make to the Commission's full disclosure system, however, is done day-in and day-out by the branch accountants and the Assistant Chief Accountants who are the cornerstone of our accounting program. Each year we review thousands of filings and issue comments that assist registrants and their accountants in improving the information that is disclosed in registration statements and annual reports. Our comment process has also led to numerous situations in which the financial statements had to be restated for noncompliance with GAAP. WORKING WITH THE STAFF During the last two years one of the more popular sessions at this conference was about working with the staff. As there is not a separate session this year, I would like to share with you some recommendations in this area. While most of these items are simply good common sense, following them can facilitate the review process. Let me first emphasize that while our role and responsibilities as regulators is different from that of the independent accountant, we both serve a critical function in assuring the American investor obtains the necessary information to make an investment decision. We clearly share many common goals in facilitating the review process. We both benefit from an efficient process where issues can be resolved with appropriate answers. Number 1 As you are preparing or assisting your client in preparing a registration statement, annual report or current report on Form 8- K consider the following: ! Are there any complex accounting or reporting issues for which guidance is not clear? ! Are there issues concerning what financial statements should be included in the filing? For example, was a transaction the acquisition of a business that requires financial statements or a simply an acquisition of assets? ! Are there situations in which financial statements required by the rules cannot be provided - for example, financial statements of an acquired business, but a statement of revenues and direct operating costs could be provided? If the answer to any of these questions is yes, I strongly encourage the registrant to address these issues with the staff in a prefiling meeting or letter. The staff is always willing and welcomes the opportunity to meet with registrants, prospective registrants and their advisors to facilitate the registration and reporting process. These letters and requests for meetings can be coordinated through the Division's Chief Accountant's Office. It is our policy to generally respond to prefiling letters within ten business days of receipt. There are some who take the approach of not addressing these complex accounting and reporting matters with the staff on a prefiling basis; rather, they take the attitude of let us see if the staff catches it and addresses the matter in the comment letter. Well, frequently we do catch it. Several times a week I receive telephone calls from registrants and their advisors stating that one of these complex accounting and reporting matters needs to be resolved and effectiveness declared that day or there will be drastic consequences. Addressing these issues on a prefiling basis and working with the staff throughout the review process should eliminate the need for these fire drills. I cannot over emphasize the importance and value of addressing issues on a prefiling basis which allows both the registrant, their advisors, as well as the staff time to appropriately address and resolve the matter. Addressing these issues at the last minute can delay the registration process or, worse, possibly result in an inappropriate conclusion. Number 2 The document should be complete when filed including financial statements that are current with respect to the age requirements of Regulation S-X. As the markets have been strong, there has been pressure to file incomplete registration statements to get in line for review. These registrants intend to obtain the required information during the review process. This is not acceptable. The document should be complete when filed. The staff has limited resources and reviewing incomplete documents is not efficient. Registrants trying to cut in line may find themselves at the end of the line. The staff may simply advise them that the review will not commence until the appropriate financial statements are filed. Registrants believing they have extenuating circumstances as to why an incomplete filing should be reviewed should discuss the matter with the staff prior to submission. Number 3 Registrants are encouraged to address unique accounting and reporting issues in their cover letter that accompanies the filing. Frequently, there can be issues that do not warrant prefiling consultation with the staff, but the issues are substantially complex and/or unique and would result in the issuance of staff comments absent supplemental information. By addressing these issues in the cover letter, registrants can facilitate their review process by providing the staff with the necessary information to understand and evaluate the issue. The benefits can be fewer comments issued or comments that are more specific. Eliminating the need for the staff to write comments saves everyone valuable time. Registrants should not ask for interpretive guidance or request a waiver of the requirements of the form in the cover letter. Such requests regarding accounting related issues should be addressed to the Division's Chief Accountant's Office. Number 4 Be responsive in addressing the staff's comments. No one benefits from numerous rounds of comments. We all benefit from an efficient and effective review process. The better job the registrant and its advisors do in responding, the faster the staff can clear the comments. Number 5 If you have questions regarding the comments, call the staff accountant whose name and telephone number appear in the letter. The staff accountant is the one most familiar with the letter and will be able to respond to your inquiries. It is in our mutual interest to make sure that the comments are clear, and the registrant can respond to them appropriately. Both the staff accountants and the Assistant Chief Accountants look at a large number of filings each week. If there are a number of questions and issues that need to be discussed, it is generally more efficient to call and establish a mutually convenient time, and to indicate the issues to be discussed. Advance notice of these issues can facilitate the dialogue. Number 6 It is the Division's policy to generally respond to amendments within five days of the filing date. If comments are needed sooner, the registrant should review their particular situation with the staff as soon as possible. As the staff is trying to juggle many different filings, advance notice as to timing demands is beneficial. Providing the staff with a time table of the desired date for comments, responses and effectiveness can facilitate the process. Number 7 Occasionally, the registrant and its advisors may not agree with a comment and are unable to resolve the issue with the branch accountant and the Assistant Chief Accountant. In this situation, the registrant and its advisors have the opportunity to first address the issue with the Associate Chief Accountant responsible for the particular office and then with Robert Bayless or me - both Associate Directors. In addition, registrants and their advisors can seek the opinion of the Office of Chief Accountant on matters relating to GAAP. My comments on working with the staff can be summarized with one word: COMMUNICATION. Improved communication with the staff will improve both efficiency and effectiveness of the review process for the registrant, their advisors, and the staff. CONCLUSION In conclusion, on behalf of all the accountants in the Division of Corporation Finance, we look forward to working with you in 1997.