Accounting & Tax

GAO Report Raises Concerns Over SEC Reviews

Calls for more consistency when examining accounting issues at public companies.
Lisa YoonJune 21, 2001

Amid a flurry of examinations for accounting improprieties, the Securities and Exchange Commission is coming under some scrutiny itself. A report released last week by the General Accounting Office criticizes the agency’s method for handling reviews of accounting issues for being vague and inconsistent.

The report represents a small victory for companies who increasingly contend that there is no method to the SEC’s madness when handling accounting issues. “The report validates concerns expressed over the past few years,” says Brian Borders, president of the Washington, D.C.- based Association of Publicly Traded Companies. “We’re hopeful that the new SEC chief will review the findings and make the appropriate changes.”

After gathering the viewpoints of the SEC’s Office of the Chief Accountant (OCA), public companies, and their auditors, the GAO reported that the “integrity of the securities market” and the protection of investors relies on an “effective working relationship between the registrants, the accounting profession, and the SEC.” The report indicates the need for “increased transparency of OCA procedures in resolving accounting matters.”

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To that end, the GAO recommends increased communication to registrants about the status of reviews. It also calls for more transparency on how the SEC conducts its consultations with other accounting firms and the Financial Accounting Standards Board, and greater insight for companies into the SEC’s approval process for determining when registrant restatements are necessary.

One of the report’s conclusions is that smaller companies that deal with the SEC only occasionally may not have a full understanding the SEC’s internal processes. “As a small company you may not have the resources to respond to the SEC as well as a large corporation,” says Harlan Plumley, CFO of Lightbridge Inc., a Burlington, Mass.-based service provider to telecom industry. “A small- cap public company has a greater reliance on the services of their public accountants and law firms. As a result, less internal resources are available to respond to SEC inquiries.”

In addition to this concern, companies told the GAO they feel in the dark about what sources the SEC uses in determining acceptable accounting and financial reporting. They are also unsure of the SEC’s time frame in resolving issues.

Because of the lack of understanding of the OCA’s process, many companies feel they must rely too heavily on their accounting firms to help them wade through the process, when proper accounting is ultimately the company’s responsibility. Compounding the problem is the perception that only the Big Five have a complete understanding of the intricacies of the OCA’s process and that, therefore, companies have little choice but to hire them to “lead the effort for them.”

And while companies can appeal OCA decisions, interviewees gave the GAO three reasons why they are reluctant to do so. One is that they believe the SEC supervisors have already reviewed and approved their staff’s decisions and are therefore predisposed to rejecting any appeals.

A second reason is that companies fear opening a new can of worms. “Registrants have the perception that, in the appeal process, the SEC may open other accounting issues,” the report concluded.

Also, appeals are expensive. Companies interviewed told the GAO that it can cost them from $25,000 to $100,000 in legal and accounting fees to bring up an issue with the SEC in the first place; and an appeal would cost even more.

In response to the companies’ concerns, the SEC said that relevant information is publicly available on the Internet and elsewhere. It also said that it is difficult to determine how long it will take the OCA to resolve a case. Furthermore, SEC officials told the GAO that “all SEC guidance can be tied to existing generally accepted accounting practices and, therefore, does not represent new GAAP.”

Despite the SEC’s claims that they are doing all they can, the GAO report recommends that “the SEC make public additional information that explains its current policies and procedures for reviewing and deciding on accounting issues.” The GAO also recommends more meetings between the SEC and companies and accountants “regarding the methods for disseminating the variety of the SEC’s rules and interpretive guidance and the method for communicating the OCA’s final position on accounting issues.”

It’s clear from the report that companies perceive tension in the relationship with the SEC. The OCA responded that the tension is “constructive” and has made the U.S. markets work well. But companies and groups that represent them don’t seem to agree. “There’s more than healthy tension here; there’s too much tension,” says Barry Rogstad, president of the American Business Conference in Washington, D.C. “The environment has become increasingly adversarial over the past several years. There needs to be a dialogue about what’s best for all members of the securities industry.”