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U.S. SEC's Levitt to Unveil Plan to Improve Earnings Reports<P>Washington, Sept. 27 (Bloomberg) -- U.S. Securities and
Exchange Commission Chairman Arthur Levitt, responding to a rash
of serious corporate accounting problems, plans tomorrow to
outline plans for changes to improve the way companies report
earnings.<P>The SEC has met with dozens of executives, accounting
professionals, and analysts during the past two months, trying to
find whether new rules are needed to head off accounting problems
like those that recently hit Cendant Corp., Sunbeam Corp., and
Livent Inc.
``People have said in some cases there seems to be a lack of
clarity in how to account for certain things,' SEC Chief
Accountant Lynn Turner said in an interview earlier this month.
``Analysts are looking for more disclosure on some of those
activities.'<P>The SEC wouldn't discuss specifics of Levitt's proposal ``to
improve the quality of reported earnings,' which it says will be
disclosed in New York during a ``major address on the state of
financial reporting.'<P>In recent months, though, agency officials have cited
concerns about a range of accounting practices that can affect
the appearance of the corporate bottom line. Among them are the
way companies write off merger-related items, such as acquired
research write-offs and goodwill, accounting for restructuring
costs like severance payments, and methods to record reserves for
future expenses.
`Ensure More Clarity'
``There's broad support within the accounting profession for
the aspects of Chairman Levitt's initiative that seek to ensure
more clarity in the accounting rules and better communication on
the income statement,' said Robert H. Herz, a partner with
PricewaterhouseCoopers and chairman of the American Institute of
Certified Public Accountants' SEC regulation committee. The SEC,
he said, wants financial statements to reflect the way a
company's performing ``and we've found it hard to argue with
that.'<P>Accounting treatment for merger-related items or large one-
time charges for expenses can eliminate future write-offs and
make earnings look better for years down the road. Critics say
that may give an artificial boost to earnings growth and make it
hard to tell just how a company has performed in a given year.<P>Analysts say they would like to see earnings reports
highlight distinctions between items such as one-time and
recurring recharges and core versus non-core earnings. With more
detailed information about corporate earnings, they say, analysts
and investors could uncover efforts to manipulate financial
statements without waiting for regulators or company officials to
take action about abuses.<P>Private Standards Setting<P>Turner said in a recent interview the SEC may try to get
clearer earnings reports by seeking rule changes from the
Financial Accounting Standards Board, a professional group that
writes accounting rules for U.S. business. ``The chairman and I
think 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 best
of everyone's thinking on it,' Turner said.<P>The SEC also could issue new interpretive guidance for
accountants, said Turner, who heads the office that sets the
commission policies for accounting and disclosure rules in
corporate financial statements.<P>Some improvement is warranted in the area of accounting
standards, said Arleen Thomas, AICPA's vice president of
professional standards. ``Situations like Cendant and Sunbeam are
very harmful to the investing public,' she said.<P>Audit failures, however, don't appear to be on the rise, she
said. About 1 percent of the 16,000 audits performed annually
become the subject of SEC or investor lawsuits, a number that's
stayed 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't
think extensive changes in corporate reporting are needed. ``In
this recent rash of situations, it's been mostly a case of the
companies not following accounting rules that are already out
there.' Some companies, however, have become too aggressive in
recording reserves for future expenses, especially when
accounting for mergers and acquisitions, he said.<P>Probing Accounting Fraud<P>The SEC already has said it's looking at ways to stop some
accounting problems and is devoting more resources to
investigating accounting fraud.<P>Earlier this week, the SEC approved new legal standards to
permit the agency to take action against professional misconduct
by accountants -- something Levitt said was needed because of the
recent high-profile cases of alleged accounting abuses. The SEC
has reviewed the approximately 100 enforcement cases it files
annually against accountants to look for systematic breaks in the
accounting process, Turner said.<P>In a speech last month, Walter P. Schuetze, chief accountant
for the SEC's enforcement division, said ``premature revenue
recognition appears to be the first choice for cooking the
books.' Also, he said ``reserves are being used to manipulate
earnings' and recommended FASB action to fix reserve accounting
rules.<P>Restructuring Charges<P>The SEC has said it's considering ways to clamp down on
growing use of restructuring charges for factory closings and
layoffs. Those charges reduce a company's profits in the short
term but typically result in higher reported earnings in later
years by lowering operating costs.<P>Reporting weaknesses include company cash flow statements
that make it hard to judge how much cash companies need to keep
their businesses running, said Daniel J. Donoghue, a principal at
Piper Jaffray Inc. brokerage in Chicago. ``Analysts should be
able to use the cash flow statement to see how profitable the
company's core operations are and to judge operating liquidity,'
he said.<P>Donoghue, a member of FASB's advisory council, said
statements, for example, could break out discretionary versus
mandatory capital spending. ``It's helpful to understand if
there's money being spent that doesn't have to be spent if
cutbacks are needed in the future.' FASB, he said, is going to
consider changes to cash-flow disclosures.<P>Changes to Merger Accounting<P>The FASB already is considering broad changes to the way
companies account for mergers and acquisitions. The board is
looking at whether all companies should have to use a method
known as purchase accounting, instead of permitting some to
simply combine assets and liabilities in a method known as
``pooling of interests.'<P>Critics say pooling, which lets companies avoid future
charges for goodwill, say it makes it hard to compare financial
statements and creates an uneven playing field between companies
that can use the pooling method and the majority that can not.
``Generally speaking, similar events should be reported
similarly,' Donoghue said. ``That is not the case today with
mergers and acquisitions.'<P>University of Miami accounting professor Paul Munter, said
FASB is likely to propose more changes, such as guidance on how
to 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 and
attributes much of the purchase price to in-process research, the
agency's Turner has said. While creating bigger up-front
expenses, large research and development write-offs can boost
earnings for years down the road by lowering future accounting
charges for acquisition-related goodwill.
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