SEC Cautionary Advice on Accounting Policies

SEC Cautionary Advice on Accounting Policies

New rules considered for more precise accounting policy disclosures.

By John M. Baker, Esq.

Dec. 12, 2001 – The Securities and Exchange Commission today issued cautionary advice on the selection and disclosure by public companies of critical accounting policies and practices. Release Nos. 33-8040, 34-45149, FR-60 (Dec. 12, 2001). This is the second “cautionary advice” issued by the SEC, and it appears likely that this will be a new standard format for some kinds of SEC statements.

The cautionary advice states that the SEC intends to consider new rules during the coming year to elicit more precise disclosures about the accounting policies that management believes are most “critical” – that is, they are both most important to the portrayal of the company’s financial condition and results, and they require management’s most difficult, subject or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In the meantime, the SEC encourages public companies to include in their Management’s Discussion and Analysis this year full explanations, in plain English, of their “critical accounting policies,” the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

The SEC’s press release, with a link to the cautionary advice statement, is available online at http://www.sec.gov/news/headlines/fdadvice.htm

The focus on critical accounting policies reflects one of the accounting concerns addressed by SEC Chairman Harvey Pitt in an “op-ed” published in yesterday’s Wall Street Journal. Other concerns include the need for public companies to make and update disclosures of unquestionably material information in real time and the need for public company disclosure of significant current “trend” and “evaluative” data.

The SEC has placed the op-ed online at http://www.sec.gov/news/speech/spch530.htm

Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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