VideoThe Securities and Exchange Commission (SEC) pumped out over a dozen rules related to corporate reform over the last six months, 10 of them adopted within the last two weeks. Alan Beller, director of the SEC's Division of Corporation Finance, said these have been the busiest two weeks of rulemaking in the agency's history.
A trio of the rules address off-balance-sheet transactions, complementing two rules recently finalized by the Financial Accounting Standards Board (FASB).
After months of private and public debate about accounting treatments and disclosure requirements, however, the rulemakers seem to have reiterated the spirit of the previous rules, drawing just a few new lines in the sand — albeit important ones.
Consumer and investor advocates, still haunted by Enron flashbacks, claim that the SEC did not go far enough to curb future abuse. On the other hand, many industry lobbyists, as well as accounting and law firm representatives, have cheered the commission for incorporating public comment into the new rules and (in their eyes) cutting down on regulatory overkill.
As for FASB's new rule on consolidation of variable interest entities, or VIEs (formerly called special purpose entities, or SPEs), the organization embraced a more principle-based mandate rather than sticking to bright line standards. Whether this new approach deters VIE abuse remains to be seen.
Other actions during the last two weeks have been described by many observers as a dilution of earlier reform proposals. The SEC postponed adoption of a controversial rule that would have compelled lawyers to blow the whistle on clients who they could not persuade to correct securities law violations.
The commission also defanged two proposals related to accounting firms. One aimed to ban accountants from creating and auditing tax shelters for the same client; in its final form, the rule permits accounting firms that provide audit services for a client to continue to provide tax advice, subject to the approval of the client's audit committee. In addition, although lead and concurring audit partners must rotate off a client after five years, the SEC revised the proposed period for other audit team members, extending it from five years to seven.
Highlights of the new SEC and FASB rules are listed below. For a more comprehensive discussion of the future of off-balance-sheet financing, see our special report "Balancing Act."
The SEC's MD&A Disclosure Rules
In an open meeting held on January 21 and in accordance with Section 401(a) of the Sarbanes-Oxley Act of 2002, the SEC adopted final rules on disclosure of off-balance-sheet arrangements and aggregate contractual obligations. (Read a summary of the rules.) These rules apply to the "management's discussion and analysis" (MD&A) section of quarterly and annual financial reports that companies file with the commission.
In its original proposal, the SEC would have mandated disclosure of off-balance-sheet arrangements that had so much as a "remote" possibility of being material to a company's financial condition. But after most of the 50 comment letters filed with the commission railed against this provision, the SEC retreated to the current standard, "reasonably likely."
Other provisions remain intact. The proposal defines off-balance-sheet transactions in terms of U.S. generally accepted accounting principles (GAAP), requires that companies explain their off-balance-sheet arrangements in a separately captioned subsection of the MD&A and also requires companies (with the exception of small businesses) to provide an overview of certain known contractual obligations in tabular form. That last provision should have corporate finance departments burning the midnight oil, says Cathy Sweeney, the former CFO of The Staubach Co. and now the principal of Dallas-based CRESA Partners Capital Markets.
During the open meeting, SEC Commissioner Roel Campos questioned the requirement to use U.S. GAAP to define and categorize off-balance-sheet arrangements. Since foreign private issuers may file their primary financial statements in accord with the standards of the International Accounting Standards Board or their home country, suggested Campos. their unfamiliarity with U.S. GAAP might put them at a disadvantage. Perhaps, he added, they might even be tempted to have accountants write and file the MD&A.
"I hope not," bristled Alan Beller, director of the SEC's Division of Corporation Finance. Beller, who led the meeting, explained that U.S. GAAP is to be used only to define the universe of off-balance-sheet arrangements that are subject to the rule and not to impose a new reporting regime on foreign companies.
The SEC's Regulation G
Adopted on January 15 to satisfy Section 401(b) of Sarbanes-Oxley, Regulation G governs the use of non-GAAP financial information disclosures for a variety of SEC filings. (Read the final rule.)
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