8K in a Day?

What a difference a year makes.

When Pres. Bush took office last year, it was widely assumed that a Republican administration would ease up on the regulation of business. This was certainly thought to be the case at the Securities and Exchange Commission, where activist Chairman Arthur Levitt had already resigned, and with two other commission seats left vacant.

Indeed, near the end of Levitt's tenure, the SEC backed off from one of the chairman's major initiatives. In November 2000, the Commission passed auditor independence rules that failed to prohibit accounting firms from providing consulting services to their audit clients. Then, a few months later, a post-Levitt Commission held a meeting where acting chair Laura Unger and acting commissioner Isaac Hunt Jr. pledged to avoid taking a "punitive approach" to Regulation Fair Disclosure.

But in the wake of the Enron collapse, the regulatory pendulum now seems to be swinging the other way. Pres. Bush, speaking just one day after the Justice Department commenced a criminal investigation into Enron, vowed to convene a working group to analyze corporate disclosure rules and regulations. "There needs to be a full review of disclosure rules, to make sure that the American stockholder, or any stockholder, is protected," said the President,

The first real indication of a tougher regulatory climate came in mid-January. That's when Harvey Pitt, the Bush appointed SEC chairman, called for stricter oversight of the accounting profession, as well as more timely and accurate financial disclosure from publicly traded companies. Said the SEC chairman: "Our system of periodic disclosure is old and it's not good enough."

Ghosts in the Material World
But what is good enough? While specifics on the Pitt proposals have yet to emerge, sources close to the SEC say there will be no changes to the current auditor independence rules or Regulation Fair Disclosure.

Instead, a source at the SEC says the Commission is leaning towards revising regulations for form 8K. The revising would include adding to the list of material events that trigger the filing of the form. Currently, companies are required to file an 8K only in specific circumstances. Those situations include changes in ownership or control, clearly defined acquisitions and dispositions, bankruptcies or receiverships, changes in certifying accountants, resignations of directors, and disclosures driven by Reg FD.

In addition, the insider says the SEC will likely shorten the time in which a company must file an 8K. Right now, a company with material changes generally has 15 days to file an 8K. Says the source, who did not want to be identified: "Chairman Pitt has described the broad outline of a disclosure system of the future which would require companies to disclose unquestionably material information as soon as it becomes available."

That certainly would comport with fair disclosure requirements. "Reg FD requires the filing of an 8K with us or other public disclosure within 24 hours of an inadvertent disclosure," notes the source. "There is a precedent for us requiring reporting within 24 hours."

The problem the SEC is said to be grappling with: companies may have material problems that don't fit neatly into any of the categories that trigger an 8K. Hence, some companies are able to avoid coming clean about their difficulties. An example? Says the source: "A high tech firm that loses all its employees to a firm across the street."

What Regs May Follow
While the SEC privately grapples with Chairman Pitt's call for better disclosure, many senior financial executives are busy getting ready for whatever may come from the Commission.

"The SEC announcements are not a surprise at all," says Jeff Zellmer, CFO of Silicon Graphics Inc., a Mountain View, Calif.-based business. The company uses Ernst & Young to audit its books. While Zellmer says Silicon Graphics has a "pretty simple overall structure," he believes many companies will have to produce "much greater disclosure around how the parent company is working with subsidiaries and partnerships." Predicts Zellmer: "There will need to be a little more diligence on the part of our accounting firms in understanding how businesses actually work and all their interrelationships."

Gerald Luterman, CFO at Keyspan, a New York utility audited by Arthur Andersen, is also quick to point out that his company is ready for regulatory changes. "Basically we've kept our noses clean," he claims. "We have very little off-balance sheet financing, partnerships, joint ventures, and such. And we've never had anything to hide."

Nevertheless, Luterman concedes that additional actions may be needed to reassure investors. "I'm sure auditors are more nervous and the SEC is more nervous," he says, but he also notes that Keyspan management is in the process of reevaluating its relationship with its auditor.

"Every firm is evaluating their position with respect to Arthur Andersen," Luterman grants. "You have to. There's not a company in the United States that's not doing this."

Not real great news for Andersen.