Rules Of The Road In Responding To Staff Accounting Comments - Accounting Standards

1. Be prepared, even before the comment process begins.

Document your accounting decisions contemporaneously with making them, so that if you get a comment you don't have to recreate the answers from memory.
Follow the trends in Staff comment letters and responses that other companies (especially those in your industry) have given in the areas you are most concerned with. Stay current with generally accepted accounting principles (GAAP), Regulation S-X and Staff positions on issues. Don't think that a response you gave three years ago is still operative, especially if recent comment letters and responses go the other way.
Draft your material contracts and form agreements with GAAP and Regulation S-X in mind because the Staff will apply accounting principles to your contracts and other legal documents in making comments.

2. Sometimes, when you know you have an issue, consulting the Staff before making a filing and taking an accounting position can be helpful, especially when you have a novel or complex issue. Whether you go to the Office of Chief Accountant of the Division of Corporation Finance ("Corp. Fin") or the Office of the Chief Accountant ("OCA") of the Commission,¹ be sure to have the support of your outside auditor before starting the pre-filing process. Pre-filing correspondence is typically not part of the review process, so it may not find its way into the public file, but can be reached under the Freedom of Information Act ("FOIA").

3. Inconsistencies can become part of the comment process and ripple into the financial statements.

The Staff will compare what you disclose in the filing(s) being reviewed with your previously filed reports, other regulatory filings, analyst conference calls, your website, analyst reports, press releases, the glossy annual report, advertisements, statements by your competitors and other media available on the internet.
Focus on the non-GAAP financial measures and metrics you use because the Staff will tic and tie them to your financial statements.
Remember that the Staff will read your financial statements together with your MD&A and the other narrative portions of filing(s).
Focus on the big picture while keeping in mind that small points can also be the focus of inconsistencies.

4. Be sure you understand the comment. Discuss the comment with others to see if they can help in understanding what the comment is directed to and agree with how to respond. If you still don't understand the comment, call the Staff and, in a professional and polite way, ask what the comment is directed to.

5. Make sure the audit committee gets the comment letter and is involved in the comment process from start to finish. Discuss the comment letter (and the responses) with the outside auditor, counsel and other interested parties. Outside experts, such as a forensic accounting firm, can assist in reviewing files, preparing responses and being an advocate for the company in the review process.

6. Be sure to have the National Office of your outside auditor involved as early as possible with respect to accounting comments that can present an issue. Bringing them in too late in the process can be counter-productive.

7. Prepare a full, accurate and complete response.

Don't assume that the Staff disagrees with your accounting treatment.
Comment responses should apply the applicable GAAP, IFRS or Regulation S-X to the facts.
The discussion of accounting principles should be thorough. Make sure that you discuss the supporting literature. Just referencing the accounting principle or rule, or making generic references or just citing the FASB's Accounting Standards Codification ("ASC") typically is insufficient.
Show the Staff that: you did it right; you know what you are doing; and you are being candid with the Staff. The response should be persuasive and not pull any punches.
Make sure you have all the facts in the response so you don't have a "oops" moment later and have to tell the Staff that a fact you thought was a fact is incorrect and you now have to revise your previous answer.
Don't forget Rule 12b-20 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") in terms of information unknown because of unreasonable effort or expense, but don't use it unless it's absolutely necessary to do so.
Follow the ripples of where a Staff comment, as well as your response, can lead the Staff in making subsequent comments. Sometimes, the Staff's first comment is intended to see if there is an issue that should be pursued in subsequent questions. Other times, a response to one comment can open up issues in other areas that were not even covered in the first comment.
Many accounting issues are not new as much as the same accounting issue comes up in a different context. Be mindful of how the Staff may perceive an accounting practice to present issues when you don't see any problem whatsoever with the practice. Try to see the accounting world through the Staff's eyes.

8. In preparing a Staff Accounting Bulletin (SAB) 99, "Materiality," memo (whether before or during the comment process), involve lawyers and business people. Discuss quantitative and qualitative factors, don't just list them. Qualitative factors can be just as important as the quantitative factors. A thorough, well thought out SAB 99 memo should be complete, transparent and persuasive, rather than bureaucratic and cryptic. Be prepared to share the SAB 99 memo with the Staff.

9. Don't become pen pals with the Staff. If you are going through multiple rounds of comments and responses, you need to think about what to do including, but not limited to, the following: comply with the Staff comment; ask for a conference call with the Staff; or pursue another alternative, like proposing an alternative resolution of the comment to the Staff or agreeing to comply on a futures basis.

10. If you appeal a position of the review Staff, do so through each consecutive level of the Staff. Don't go from a Staff Review Accountant to the Chief Accountant of Corp. Fin or to OCA. And if you appeal, understand that the appeal will be handled by senior persons on the Staff who may agree with your position, but may identify other issues that may need amendment or revision currently or on a futures basis. Understand that an appeal, especially taking an appeal from Corp. Fin to OCA, takes time.

11. Any conference call or meeting with the Staff, whether the review Staff or the Staff in the Office of Chief Accountant of Corp. Fin or OCA should be preceded by an internal conference call/meeting to discuss who will be on the call, what points to make and what points to expect the Staff to make. Rehearsals are needed; they are not something that is nice, but unnecessary. Once you are on a call with the Staff, understand that the Staff does not know your company as well as you do, but is trying to apply a complex body of accounting standards and rules to your situation. They are professionals and should be treated accordingly. If a decision maker from the company, such as the Chief Financial Officer, is on the call, expect the Staff to direct their attention to him/her and understand that the Staff will be weighing their response in part by how that decision maker is responding, especially if you have changed your facts or position during the comment process up to that point.

12. Recognize how the resolution of Staff comments can affect internal control over financial review and disclosure controls and procedures.

13. Don't agree to a futures comment as the resolution of a Staff comment, unless you are going to comply with the comment in your next filing. Frequently, the Staff follows up to see if the company is complying with a futures comment and makes subsequent comments when they do not see compliance.

14. Expect the unexpected.

15. Housekeeping points:

Once the review process has begun, file all correspondence with the Staff on EDGAR and assume that it is reachable under FOIA. For example, marked copies or revised draft disclosures should be filed on EDGAR. If you need to request confidential treatment, do so up front under Rule 83 and remember Rule 12b-4 under the Exchange Act for supplemental information. Only ask for confidential treatment for something that you really need confidential treatment for.
Let the accounting examiner know about any pre-filing contacts with other members of the Staff.
Don't opinion-shop on the Staff.
Let the Staff know your schedule, especially if you are contemplating an offering of securities.
If you can't respond to the comment on the Staff's schedule, ask for more time to respond. Be specific about how long you will need—a two week extension is a normal period to ask for. Have a good reason if more time is needed.
Turnabout is fair play—if you take weeks to respond to a comment letter, don't expect a rapid response from the Staff.
Don't forget to get your letter at the end of the process stating that the Staff has completed its review.

Footnote

1. For formal consultations on the application of GAAP, use OCA@sec.gov and follow the OCA protocol. For waiver requests to Corp. Fin, use dcaoletters@sec.gov. For requests to the Office of Chief Accountant of Corp. Fin outside of waivers and response to Staff comment letters, call +1.202.551.3400 or submit your request through an online form at: https://tts.sec.gov/cgi-bin/corp_fin_ interpretive. For Corp. Fin pre-filing consultations, clearly state the issue, the relief being requested, the basis for the position the company is taking and the alternatives available.

United States: Rules Of The Road In Responding To Staff Accounting Comments