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SEC Advisory Committee issues report on capital formation, calls for more intensive disclosure.

The Securities and Exchange Commission Advisory Committee on the Capital Formation and Regulatory Processes, chaired by SEC Commissioner Steven M. H. Wallman, released its final report on modernizing the disclosure process for registered companies. The report reexamines the registration regulations under the Securities Act of 1933 and recommends changes that would strengthen investor safeguards and reduce regulatory burdens.

The advisory committee recommended changing the current shelf-registration method (which requires periodic registration of equity or debt issues) to a company-based registration system--a one-time registration of eligible companies that would encompass all securities they or their affiliates might sell or offer. Wallman told the Journal that both issuers and investors would benefit from the change because it would speed companies' access to the market while enhancing the disclosure requirements and making corporate reporting more reliable. However, Wallman said that streamlining the registration system without improving the disclosure process would be unacceptable. Consequently, the advisory report includes specific reforms tailored to enhance the accuracy and reliability of the periodic reports, such as the 10-Q and 10-K reports, that are provided to the markets.

Getting involved earlier in the process

The report recommends involving the independent auditor earlier in the process of creating the reports, such as form S-1, which are used to register initial public offerings. The report also encourages auditor involvement in all registrants' quarterly filings of form 10-Q before they are filed with the SEC. Currently, auditors are required to perform retrospective reviews if a registrant meets certain financial thresholds.

The report also includes recommendations to enhance the monitoring functions of underwriters, outside directors and auditors by giving them more time to perform their due diligence work. The commission also examined the concept of encouraging a company's board of directors to adopt a board disclosure committee, which could be the audit committee, to promote better due diligence on the part of outside directors on an ongoing basis. "The committee is encouraging more auditor reviews by tying them to due diligence responsibilities of other parties, such as the underwriters and outside directors," said Wallman.

"We also are considering if Statement on Auditing Standards no. 71, Interim Financial Information, reviews should be mandated for companies that wish to use the company-based registration system," said Wallman. The commissioner said some of the larger accounting firms have determined that mandating SAS no. 71 would add an average extra cost of 3% to 5% per quarter to the annual audit fee. "It may be worth the expense in the streamlined process to ensure the auditor is more heavily involved on a continuous basis" said Wallman.

Using tougher guidelines

The report also recommended that, because the 1933 act reporting requirements were more comprehensive than those of the Securities Exchange Act of 1934, the earlier requirements be used for all filings. It would extend the use of the statutory liability and penalty provisions of the 1933 act to cover all reporting requirements as well.

The SEC has requested comments on the recommendations of the advisory panel report. For further information, contact Anita Klein, of the SEC Office of Chief Counsel. For a copy of the report, fax a request to the OFfice of Commissioner Wallman at 202-942-9563 or call 202-942-0800.
COPYRIGHT 1996 American Institute of CPA's
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Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Journal of Accountancy
Date:Nov 1, 1996
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