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Keeping the client out of the SEC's Enforcement Division.

Following is an adaptation of an article by Ernest L. Ten Eyck, CPA, partner of Johnson Lambert & Co., Washington, D.C., and Richard E. Brodsky, Esq., partner of Jenner & Block, Miami, identifying precautions useful when filing with the Securtties and Exchange Commission.

Apart from an occasional masochist, accounting and legal professionals whose clients routinely deal with the SEC would uniformly agree that their clients' least favorite division to deal with is the Division of Enforcement. There is much less uniformity, however, in understanding the mechanisms that can bring them and their clients into that usually unhappy situation and the often simple measures that can help ensure this doesn't happen. In fact, a significant percentage of both informal inquiries and formal investigations conducted by Enforcement begin with a referral from one of the SE C's other operating divisions. The otherwise routine filing and review process--and the filing requirements themselves --can produce such a referral in a number of ways.


Failure to file a report and the making of one or more late filings are both potential sources of Enforcement activity. While the SEC historically has taken Enforcement action only in egregious cases of late or missing filings, the staff is getting more sophisticated in spotting such missteps. Accordingly, "rule one" for keeping things out of Enforcement is to file all required reports and to file them on a timely basis.

If, despite the registrant's best efforts, not all information needed to complete a filing is available by the deadline, the company should either request a ffling extension (available for forms 10-Q and 10-K under certain circumstances) or file with the available information and indicate the missing information will be filed by amendment.

It usually pays to read the time requirements carefully. They sometimes provide for longer time periods for certain information. For example, form 8-K is required to be filed within 15 days of a material acquisition. But the required financial statements of the acquired company can be submitted up to 60 days after form 8-K is due.

Finally, if the registrant knows part of the filing requirements can't be met, it is a good idea to say so. Nothing is added to a company's credibility by trying to "slip one by."


A public company may sometimes complete a filing and wait to see if a controversial accounting treatment or a close call on a securities law disclosure issue will draw staff comment. This is often a bad idea because the "comment" might arrive in the form of a phone call (or a subpoena) from Enforcement.

When a clear-cut answer is not evident, staff positions are difficult to predict. Counsel, the accountants and their clients often are well advised to address out-of-the-ordinary reporting matters in a prefiling conference.

Such conferences present little risk the staff will refer matters to Enforcement because filing has not yet occurred. The staff's views can be solicited (and argued) in an atmosphere usually conducive to rational discussion.

While the commission and its staff have said little formally about prefiling conferences, the staff almost never decline a request for one but ordinarily insist on receiving written positions ahead of time.

The registrant's counsel or independent auditor also can discuss the issue on a "no-name" basis with the staff. This measure is less formal than a prefiling conference and is most useful to sound out the staff's thinking. However, such informal advice cannot be relied on as the staff's final word.


Officials of companies going public for the first time often are amazed at the bulk and complexity of the rules and regulations that surround even seemingly simple SEC filings. With the passage of time, however, amazement too often turns to dangerous complacency. Correspondingly, part of the task of professionals who advise public companies is to counterbalance that tendency with care and diligence.

Regulation S-X, which covers the form and content of financial statements filed with the SEC, includes a host of issues (apart from generally accepted accounting principles) governing everything from the captions used in financial statements to the events that can be recognized in pro forma financial presentations. Its requirements, governing such things as the content of schedules and related party transaction amounts that must be shown on the face of the statements, can be and have been a focus of both SEC Enforcement actions and private litigation.

Financial reporting releases and their predecessors--certain accounting series releases--codify formal SEC views and interpretations on accounting and financial reporting issues. While they purport to be only "interpretive guidance" of the SEC's own rules, they are de facto extensions of GAAP. They have force and effect similar to a regulation's and should be followed carefully.

The SEC staff publishes staff accounting bulletins (SABs), which, although they are not rules or interpretations and do not have official commission approval, are expansions of SEC rules and of GAAP. The SABs' lack of official status does not mean they can be ignored. SABs often deal with emerging practice issues and "form over substance" questions. In the latter case, the SEC will not hesitate to bring an Enforcement action based on its perception of substance.

The SEC staff historically has taken, on an informal basis, its own positions on a number of accounting and reporting issues. These "lolidore rules" have never been published. While the SEC has never initiated an Enforcement action based strictly on these informal positions, significant risks still exist. For example, the commission staff has the power to force a registrant to change a financial report. If a friendly invitation to do so is declined, Enforcement probably is the next participant in the discussions.

Finally, the SEC sometimes seems to be in a contest with the IRS to make the most changes to its rules and forms in the shortest time. This not only makes the maze increasingly complex but it also makes the map quickly out-of-date.

There are no shortcut answers to these complexities. A registrant and its professional advisers must learn the rules (written and unwritten), keep up with changes and strive to make every filing as "bulletproof" as possible.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Brodsky, Richard E.
Publication:Journal of Accountancy
Date:Sep 1, 1992
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