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American Institute of Certified Public Accountants. Committee on Relations with SEC & Stock Exchanges

Savoie, Leonard M.

eGrove (Univ. of Mississippi)

University of Mississippi eGrove AICPA Committees American Institute of Certified Public Accountants (AICPA) Historical Collection 7-22-1969 Letter from Leonard M. Savoie to Francis M. Wheat American Institute of Certified Public Accountants. Committee on Relations with SEC & Stock Exchanges Leonard M. Savoie Follow this and additional works at: https://egrove.olemiss.edu/aicpa_comm  Part of the Accounting Commons LEONARD M SAVOIEEXECUTIVE vice PRESIDENTAMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS666 FIFTH AVENUENEW YORK, N Y. 10019July 22, 1969Commissioner Francis M. WheatSecurities and Exchange Commission Washington, D. C. 20549Dear Frank:Donald Bevis, Frank Weston and I are pleased to have the opportunity to comment on your excellent study en­titled "Disclosure to Investors: A Reappraisal of Adminis­trative Policies under the ’33 and '34 Acts." We are very much impressed with the quality and scope of this study. Furthermore, we find ourselves largely in agreement with the philosophy and objectives of the study.We believe it is entirely appropriate that con­sideration now be given to coordination between the dis­closures required by the ’33 and ’34 Acts, to greater certainty and predictability of disclosure requirements, and to a consistent interpretive pattern which would assure that appropriate disclosures are made before securities are traded.We are impressed with your concentration on dis­closures required for securities in the trading markets. It is important that these disclosures be complete and consistent with disclosures required for securities in the new issue market.We have a number of specific comments which may be helpful on certain parts of the study. To aid in your con­sidering our points, we have listed them below indexed to your table of contents.III. The Form and Content of ’33 Act ProspectusesC.3(a) We approve of the proposal to require in annual reports on Form 10-K a breakdown of sales and earnings by lines of business substantially the same as that called for Commissioner Francis M. Wheat - 2 - July 22, 1969in Forms S-1, S-7 and 10 by ’33 Act Release No. 4988 ('34 Act Release No. 8650) which was published on July 14, 1969. This release calls for disclosure of revenues and contribution to income by lines of business in parts of registration state­ments other than the financial statements. As indicated in letters of March 7, 1969 and October 31, 1968 from LeRoy Layton to the Commission, we continue to have reservations about the need for information as to classes of products or services in addition to information as to lines of business.The Accounting Principles Board of the American In­stitute has on its agenda a consideration of disclosure of operations by separate lines of business of diversified com­panies. The Board is studying this subject in anticipation of issuing an Opinion containing criteria for determining which product line disclosures, if any, should be required for a fair presentation of financial statements in accordance with generally accepted accounting principles. The Board hopes to be able to complete its study sometime in 1970.C.3(b) We approve of the study's recommendation that a statement of source and application of funds should be re­quired in prospectuses and annual reports filed with the Commission. The Accounting Principles Board has up for consideration a proposal to make the source and application of funds statement a basic statement along with the balance sheet and income statement. Should such an Opinion be issued, the funds statement would then be required before an inde­pendent auditor could express his opinion that the financial statements are presented fairly in accordance with generally accepted accounting principles.We have noted that your study recommends the state­ment be required only following the development of appropriate standards. The Accounting Principles Board has in mind developing appropriate standards for a funds statement.C.3(c) We note your expressed hope that the Adjustments Committee of the New York Association of Insurance and Finan­cial Analysts will promptly confer with the AICPA committee on insurance accounting and auditing. Conferences between these two committees have occurred over the last several months. Communications between the two groups are flowing freely. The Institute is exerting its major effort toward improving the basic financial reporting of insurance com­panies. Although we recognize some merit in the use of an adjustment formula, we believe that this would not be a satisfactory substitute for improved basic accounting and reporting. We are mindful of the urgency of life insurance company reporting problems and we are diligently pursuing this subject.Commissioner Francis M. Wheat - 3 - July 22, 1969C.4 We note with interest your conclusion that the Commission’s policy on projections should not be changed. We appreciate the factors underlying this decision and would at this time agree with it. We recognize, however, the pressures for presenting projections and we are convinced that pressures will increase. We recognize that the diffi­culty of obtaining objectivity in making estimates is per­haps the greatest reason for prohibiting such disclosures. We shall continue to observe and study this growing area of concern; we hope to remain in close touch with the Commission as practices evolve.IX. The Breakthrough in Dissemination of ’34 Act ReportsWe applaud the action taken by the study in the development of a microfiche system of disseminating '34 Act reports and other disclosure documents. This system, which you have already installed, provides an excellent and economical service for those interested in these dis­closures. We agree that the improvements in '34 Act reports recommended in the study, combined with their prompt avail­ability on microfiche, will greatly enhance their importance.X. Registration and Reporting under the ’34 ActB.1 We agree that reports should be as timely as is practicable without imposing unreasonable burdens on reporting companies. It is reasonable to require annual reports to be filed within 90 days after the close of the fiscal year. A quarterly report, we agree, would be more useful than the present, irregular 8-K report.B.3 We agree that disclosure documents should be co­ordinated to avoid repetition.B.4 The form of '34 Act reports and registration state­ments should indeed be compatible with microfiche and electronic data processing procedures.C.3 We support the requirement for a five year summary of consolidated earnings in annual reports. We also agree with the recommendation for condensed, unaudited earnings data to be supplied for each of the first three quarters of a fiscal year. We note with approval your suggestion that interim earnings statements should not be subject to liability under Section 18 of the '34 Act.Commissioner Francis M. Wheat - 4 - July 22, 1969C.5 We understand your desire for disclosure of data concerning the resources of extractive industries. The same general conclusion is reached in a research study soon to be published by the Accounting Research Division of the American Institute. The research study will recommend the reporting of reserves of natural resources. However, the research study is not an authoritative pronouncement calling for adherence by members of the Institute. The Accounting Principles Board will consider accounting and reporting problems in the extractive industries within the next year or two. This subject requires further study.C.8 This recommendation repeats the requirement for a source and application of funds statement, for which we have already expressed our approval.D.1 The recommended changes in format of Forms 10 and 10-K generally meet with our approval. We reserve comment on the requirement for inclusion of financial statements of less- than-majority-owned companies in which the registrant takes up income on the equity basis. The Accounting Principles Board has the subject of equity accounting on its active agenda.D.2(a) Reference is made to source of income by lines of business. We have earlier expressed our approval of this change.D.2(b)(i) We agree that it would be desirable to require disclosure of the dollar amount of backlog of firm orders, together with appropriate comments thereon.D.2(c) The five year summary of earnings should be substituted for the three year profit and loss statement, ’ as you recommend.D.2(d) Once again we specifically endorse the source and application of funds statement.D.2(f) You have suggested that the Commission convene a series of meetings between members of your staff and repre­sentatives of the American Institute of CPAs, the Financial Analysts Federation and the Financial Executives Institute to accomplish a revision and simplification of the financial schedules required by Regulation S-X. We think this would be desirable; we would be happy to have our representatives attend such a meeting. We agree also with your suggestion to permit an option for filing Schedule XVI separate from the rest of the Form 10-K report and with a later due date.Commissioner Francis M. Wheat - 5 - July 22, 1969D.2(f)(7) Your discussion of Schedule XVI raises a number of questions which require further study. We agree that a materiality test should be developed for the reporting of management and services contract fees. We question the use­fulness of reporting taxes other than income taxes. We be­lieve that there is considerable merit in reporting amounts of discretionary expenses where they are material. This raises problems of definition of discretionary expenses. Such expenses might for various companies include advertising, re­search and development and maintenance and repairs. Your study acknowledges the American Institute's research study on re­search and development. We are hopeful that this study will produce useful information for improving accounting in this area. Nevertheless, we would look with favor on the reporting of research and development expenditures, subject to a fairly high materiality level.0.2(g) We endorse your recommendation that a simplified method of disclosing options held by management., consistent with the proxy rules, would be appropriate. In addition, we note that option disclosure requirements of the SEC, American Institute, and New York Stock Exchange all differ. It would be constructive to work out some consistent rules.E.1 We would like to see more companies incorporate financial statements from annual reports to shareholders into Form 10-K by reference, in accordance with general instruction F(a) of the recommended Form 10-K. We question the need for differences in the annual report and Form 10-K (exclusive of schedules), as the disclosure objectives of each are essentially the same.E.2 We approve of the recommended change in format to provide easy reference between Forms 10-K and 10 and among different companies on microfiche.E.3(a) We again express approval of requiring sales and income by lines of business.E.3(b) We agree that it would be helpful to have some disclosure in Form 10-K of specific current developments in a company's business.E.3(c) We again repeat our endorsement of a five year summary of earnings and a statement of the source and appli­cation of funds.E.3(d) We understand your desire for disclosure of pro­duction information of extractive industries, but we note that it is not ordinarily provided for other industries. Further­Commissioner Francis M. Wheat - 6 - July 22, 1969more, we question whether cost per ton data and similar data are useful to investors and we believe that, in the absence of known and uniform standards, the disclosure of such data might be more misleading than informative.F. We support the idea of a quarterly report on Form 10-Q. We have previously supplied many specific comments on this proposed form and we are pleased to note that they have largely been accepted in your study.XI. Annual Reports to Shareholders and Proxy StatementsB.3 On page 372, the study raises the question of whether the auditor should be required to state in his opinion that he has reviewed all financial disclosures in the annual re­port to shareholders, wherever located in the report, and that they are "fairly based on the certified statements." This is an interesting proposal and one of far-reaching significance. We believe it would be improper to impose such a requirement at this time. There are no present guidelines that would encompass such a sweeping proposal although they may be devel­oped in time. There are many legal and other practical obstacles to such a requirement.On the other hand, your alternative approach to amend Rule 14a-3(b) to inhibit misleading condensations of financial information would seem to be quite helpful. We approve of this. We also agree with your observation that the improvements in scope and timeliness recommended for Form 10-K will exert a beneficial influence on the quality of dis­closures made in the annual report to shareholders.D.2 We agree with your objectives in requiring a concise summary of essential features of a merger proxy statement. Your specific proposals seem to us to be on the right track.######We think it would be appropriate to continue to re­view Regulation S-X. The American Institute made a detailed study some two years ago and furnished the Commission with copies. We would be glad to discuss the recommendations made in that study and to participate in further consideration of Regulation S-X.We appreciate this opportunity to comment on your study. We shall be pleased to discuss our comments with youCommissioner Francis M. Wheat - 7 - July 22, 1969at your convenienceYou may count on our continued cooperation.Sincerely yours,Leonard M. SavoieExecutive Vice PresidentCC: Mr. Andrew BarrBC: Members ofExecutive CommitteeAccounting Principles Board Committee on Relations withSEC & Stock Exchanges

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Letter from Leonard M. Savoie to Francis M. Wheat

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Letter from Leonard M. Savoie to Francis M. Wheat

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