U.S. SEC's Levitt to Unveil Plan to Improve Earnings Reports<P>Washington, Sept. 27 (Bloomberg) -- U.S. Securities andExchange Commission Chairman Arthur Levitt, responding to a rashof serious corporate accounting problems, plans tomorrow tooutline plans for changes to improve the way companies reportearnings.<P>The SEC has met with dozens of executives, accountingprofessionals, and analysts during the past two months, trying tofind whether new rules are needed to head off accounting problemslike those that recently hit Cendant Corp., Sunbeam Corp., andLivent Inc. ``People have said in some cases there seems to be a lack ofclarity in how to account for certain things,' SEC ChiefAccountant Lynn Turner said in an interview earlier this month.``Analysts are looking for more disclosure on some of thoseactivities.'<P>The SEC wouldn't discuss specifics of Levitt's proposal ``toimprove the quality of reported earnings,' which it says will bedisclosed in New York during a ``major address on the state offinancial reporting.'<P>In recent months, though, agency officials have citedconcerns about a range of accounting practices that can affectthe appearance of the corporate bottom line. Among them are theway companies write off merger-related items, such as acquiredresearch write-offs and goodwill, accounting for restructuringcosts like severance payments, and methods to record reserves forfuture expenses. `Ensure More Clarity' ``There's broad support within the accounting profession forthe aspects of Chairman Levitt's initiative that seek to ensuremore clarity in the accounting rules and better communication onthe income statement,' said Robert H. Herz, a partner withPricewaterhouseCoopers and chairman of the American Institute ofCertified Public Accountants' SEC regulation committee. The SEC,he said, wants financial statements to reflect the way acompany's performing ``and we've found it hard to argue withthat.'<P>Accounting treatment for merger-related items or large one-time charges for expenses can eliminate future write-offs andmake earnings look better for years down the road. Critics saythat may give an artificial boost to earnings growth and make ithard to tell just how a company has performed in a given year.<P>Analysts say they would like to see earnings reportshighlight distinctions between items such as one-time andrecurring recharges and core versus non-core earnings. With moredetailed information about corporate earnings, they say, analystsand investors could uncover efforts to manipulate financialstatements without waiting for regulators or company officials totake action about abuses.<P>Private Standards Setting<P>Turner said in a recent interview the SEC may try to getclearer earnings reports by seeking rule changes from theFinancial Accounting Standards Board, a professional group thatwrites accounting rules for U.S. business. ``The chairman and Ithink if it can be done in the private standards-setting sector,that's good because you get a lot of input and you get the bestof everyone's thinking on it,' Turner said.<P>The SEC also could issue new interpretive guidance foraccountants, said Turner, who heads the office that sets thecommission policies for accounting and disclosure rules incorporate financial statements.<P>Some improvement is warranted in the area of accountingstandards, said Arleen Thomas, AICPA's vice president ofprofessional standards. ``Situations like Cendant and Sunbeam arevery harmful to the investing public,' she said.<P>Audit failures, however, don't appear to be on the rise, shesaid. About 1 percent of the 16,000 audits performed annuallybecome the subject of SEC or investor lawsuits, a number that'sstayed about the same during the past dozen years, she said.<P>Frank J. Borelli, chief financial officer of Marsh &McLennan Cos., the world's largest insurance broker, doesn'tthink extensive changes in corporate reporting are needed. ``Inthis recent rash of situations, it's been mostly a case of thecompanies not following accounting rules that are already outthere.' Some companies, however, have become too aggressive inrecording reserves for future expenses, especially whenaccounting for mergers and acquisitions, he said.<P>Probing Accounting Fraud<P>The SEC already has said it's looking at ways to stop someaccounting problems and is devoting more resources toinvestigating accounting fraud.<P>Earlier this week, the SEC approved new legal standards topermit the agency to take action against professional misconductby accountants -- something Levitt said was needed because of therecent high-profile cases of alleged accounting abuses. The SEChas reviewed the approximately 100 enforcement cases it filesannually against accountants to look for systematic breaks in theaccounting process, Turner said.<P>In a speech last month, Walter P. Schuetze, chief accountantfor the SEC's enforcement division, said ``premature revenuerecognition appears to be the first choice for cooking thebooks.' Also, he said ``reserves are being used to manipulateearnings' and recommended FASB action to fix reserve accountingrules.<P>Restructuring Charges<P>The SEC has said it's considering ways to clamp down ongrowing use of restructuring charges for factory closings andlayoffs. Those charges reduce a company's profits in the shortterm but typically result in higher reported earnings in lateryears by lowering operating costs.<P>Reporting weaknesses include company cash flow statementsthat make it hard to judge how much cash companies need to keeptheir businesses running, said Daniel J. Donoghue, a principal atPiper Jaffray Inc. brokerage in Chicago. ``Analysts should beable to use the cash flow statement to see how profitable thecompany's core operations are and to judge operating liquidity,'he said.<P>Donoghue, a member of FASB's advisory council, saidstatements, for example, could break out discretionary versusmandatory capital spending. ``It's helpful to understand ifthere's money being spent that doesn't have to be spent ifcutbacks are needed in the future.' FASB, he said, is going toconsider changes to cash-flow disclosures.<P>Changes to Merger Accounting<P>The FASB already is considering broad changes to the waycompanies account for mergers and acquisitions. The board islooking at whether all companies should have to use a methodknown as purchase accounting, instead of permitting some tosimply combine assets and liabilities in a method known as``pooling of interests.'<P>Critics say pooling, which lets companies avoid futurecharges for goodwill, say it makes it hard to compare financialstatements and creates an uneven playing field between companiesthat can use the pooling method and the majority that can not. ``Generally speaking, similar events should be reportedsimilarly,' Donoghue said. ``That is not the case today withmergers and acquisitions.'<P>University of Miami accounting professor Paul Munter, saidFASB is likely to propose more changes, such as guidance on howto assign a value to in-progress research and development.<P>The SEC has seen an increase in large one-time R&D write-offs taken when one company acquires another business andattributes much of the purchase price to in-process research, theagency's Turner has said. While creating bigger up-frontexpenses, large research and development write-offs can boostearnings for years down the road by lowering future accountingcharges for acquisition-related goodwill.
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