Pre-Paid Legal Services Inc. received a letter from the Securities and Exchange Commission saying the company’s accounting policy for commission advance receivables does not conform to generally accepted accounting principles, reports Dow Jones Newswires.
The SEC said the company should amend its periodic reports to restate its financial statements in order to expense all commission advances when made.
The company plans to request a meeting with the SEC’s chief accountant to discuss the SEC’s position prior to amending any of its filings, says Dow Jones.
The company reiterated its belief that its current accounting policy is in compliance with GAAP, adds the news service.
The SEC letter is the result of an appeal to the commission’s determination concerning the company’s accounting for commission advances.
In May, Pre-Paid Legal said using the SEC accounting method, its pro forma earnings per share would be reduced to 57 cents from $1.67 for fiscal 1999; 81 cents from $1.92 for fiscal 2000; and 27 cents from 60 cents for its first quarter of fiscal 2001.
Pre-Paid pays many of its salespeople as much as three years’ total commissions in advance when they sell new month-to-month policies, according to Dow Jones.
As reported in a Jan. 17 Heard on the Street column in The Wall Street Journal, some accounting experts have said Pre-Paid should expense these commission payments fully each quarter as ordinary customer-acquisition costs. Pre-Paid historically has treated them as assets, a practice that has helped boost earnings and shareholder equity.