Commentary: The SEC Opens The Door -- Wide

Although companies may squirm, its new disclosure policy is good for investors

When Enron Corp. collapsed late in 2001, securities lawyers asked: Where was the SEC? Turned out the Securities & Exchange Commission's Corporation Finance Div. had passed up its chance to review Enron's annual financial reports for three straight years -- a critical gap when the Houston energy trader was pio- neering new forms of financial finagling. The 2002 Sarbanes-Oxley reform act gave the SEC clear orders to step up its reviews of big companies' filings -- and, just as important, added the accountants and lawyers needed to do the job.

Now, the SEC is putting on a final touch: Starting this fall, it will publish its comments on companies' filings -- and the back-and-forth between SEC staff and corporate officials as they hammer out disputes large and small. Essentially, the SEC will be airing Corporate America's financial dirty laundry for investors, analysts, and all the public to see.

There will be plenty to air. SEC and corporate accountants often spar for months over the wording of management disclosures and financial footnotes. The 2001 annual report for Berkshire Hathaway Inc., for example, spurred a six-month exchange over the use of nonstandard financial measures and accounting for special-purpose entities at the Omaha company. Until recently, investors were clueless that such negotiations even took place.

No more. That wealth of information will now be put to good use. Reading SEC comments on sticky accounting issues in competitors' filings should help companies get their own figures right the first time. Analysts and investors will get earlier warning on how companies are trying to spin their numbers. They'll also have powerful insights on financial problems that affect entire industries. "With the SEC's emphasis on oil reserves at Royal Dutch/Shell Group (RD ), wouldn't you like to see what the [SEC] staff is saying about reserve figures for other oil companies?" asks Phillip L. Brown, CEO of Washington-based Global Securities Information Inc., publisher of the LiveEdgar SEC document service. The new openness could even make the job of writing accounting rules easier: The Financial Accounting Standards Board could stick to enunciating broad principles, while SEC comments build up a "case law" that reflects how those guidelines apply in specific instances.

Businesses appear resigned to the change. "It's all in the brave new world of transparency and disclosure," says Grace Hinchman, a lobbyist for Financial Executives International, a professional group for chief financial officers. Clearly, many will have to make adjustments. Companies used to routinely dodge SEC requests to amend their filings, promising instead to reflect SEC-demanded fixes on their next report. Now, both companies and the SEC might prefer fixing bad disclosures rather than having to explain why they weren't changed.

SEC insiders say Chairman William H. Donaldson initiated the disclosure plan unveiled on June 23. But credit also goes to a small band of companies that three years ago began prying loose SEC comment letters. Using requests filed under the Freedom of Information Act, such firms as Global Securities Information and analysts SEC Insight Inc. of Plymouth, Minn., turned up issues that companies had tried to dodge, including a few undisclosed SEC enforcement probes. The weight of those FOIA requests -- 6,915 in the first nine months of fiscal 2004, well over double the pace two years ago -- pushed the SEC to publish all of its review letters. "If we've got correspondence that investors and companies can legitimately make use of, we ought to get it into their hands without the burden of FOIA," says SEC Corporation Finance Director Alan L. Beller. The new plan, which promises letters will be released within 45 days of a review's completion, will be faster and more dependable than FOIA.

Companies and bureaucracies will still have many ways to obfuscate. The SEC, for instance, will let companies filter their responses for confidential material, leaving it up to readers to challenge whether omissions are justified. And skeptics say the policy needs a bigger push from the top. "If Donaldson were to support it in a speech, we'd be a lot more confident," says John P. Gavin, president of SEC Insight. True enough. But even with its low-key launch, the open-book approach is a good start.

By Mike McNamee

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