The SEC Meets The Web: "We Likey!"

On July 30, 2008, the US Securities and Exchange Commission (SEC) published its interpretive release explaining how companies can use their websites and blogs to meet their requirements for public disclosure under Regulation FD.

Dominic Jones at IR Web Report says,

“…I don’t expect a flood of companies ditching their wire services overnight and cranking out new investor relations blogs. It will take time for companies and their legal counsel to gain confidence that they can use their websites rather than the traditional methods without exposing executives to potential SEC action under Reg. FD…
Dennis Howlett takes the issue down the road to the not so distant future and declares, while quoting me twice, that this change means the end of audit as we know it.
What this new guidance does is add fuel to the regulatory oversight fires. The Big Four audit companies have successfully put the fear of prison front and center in the minds of C-level officers, reaping the increase in fees that go with it. However, they have been almost derelict in their updating of testing services for today’s complex ERP

What possible hope they have of providing guidance in this area is beyond my comprehension… If, as has been argued elsewhere, one of the Big Four collapses and this guidance is fleshed out to be meaningful, then the whole question of corporate public disclosure becomes a major talking point.

Imagine this: the entire value of traditional audit comes under question. What replaces it? A carefully orchestrated stream of transparent information that can be parsed through links. There will, in other words, be no place to hide.

Well, as much as it may seem that just putting disclosures on the corporate website or a blog could allow a Wild West scenario to emerge, where companies will start willy-nilly disclosing data without running it past their auditors and lawyers, it’s just not going to happen.  
Yes, mistakes will be made, because the disclosure controls will need to be significantly tightened.   If I were you, I would focus more on the dramatic impact on information overload and ready accessibility to all the dirty details that’s coming from XBRL mandates.  Now that’s where everyone really needs to be very careful.  
But the rules are clear.  No interim reporting that is intended to comply with Reg FD without the auditor’s review.

In December 1999, the Securities and Exchange Commission (SEC) adopted a rule that requires a company’s independent auditor to review the company’s interim financial information prior to the company filing its quarterly report on Form 10-Q or Form 10-QSB. In the SEC staff’s view, this rule makes it a clear violation of the securities laws for a company to file such a quarterly report without having its auditor perform the review in advance of the filing. The rule was effective for all fiscal quarters ending on or after March 15, 2000…

The professional standards and guidance for conducting interim reviews are set forth in Statement on Auditing Standards No. 71, Interim Financial Information (SAS 71)with only minor modifications for conforming changes by the PCAOB (SAS 100 superceded SAS 71 in 2002 with SOx). The objective of a review of interim financial information is to provide the auditor with a basis for reporting whether material modifications should be made for that information to conform with generally accepted accounting principles…

In practice, a review report typically is not issued on interim financial information, although SAS No. 71 provides that a report may be issued. The SEC does not require, and most companies do not request, the issuance of a review report. However, the SEC does require that if a company includes a representation in their filing that the auditor has performed a timely review, the auditor’s report on the review must accompany the interim financial information…

There’s also the quarterly requirements for Section 302 certifications under Sarbanes-Oxley. I don’t believe (although I could be wrong) that there is any explicit requirement in SEC rules for the auditor to review the certification. However, reading the entire filing, in a manner consistent with SAS 8 requirements, is the first procedure noted in the PITF I linked to. You can see all SEC filings now on almost any corporate website, most of which now reproduce several different versions of all SEC filings using a direct link to EDGAR or some other investor relations reporting third-party service.
Although I agree with Dennis that this new guidance on Reg FD disclosures puts more pressure on companies to produce better information, faster, more accurately, and with more polish, it doesn’t change what hoops they have to jump through first.  
Or else the penalties are clear.
A company that files its quarterly report without having its auditor perform a quarterly review is, in the SEC staff’s view, in violation of the securities laws, and an auditor with a client who does this should consider discussing the matter with the company’s audit committee and the company’s legal counsel. Guidance for conducting such reviews can be found in the SAS No. 71.

One of the primary reasons the SEC has mandated the above requirement is to minimize large year-end adjustments to quarterly financial statements that historically have been uncovered in the annual audit process…

What does change dramatically are the opportunities for deeper, richer, fuller use of company websites, in an interactive social media way.  One good example is an Investor Relations Blog.  These new tools can engage investors and rebuild trust in both companies’ financial statements and the auditors that audit them.  
Before it’s too late.
Business Wire’s response.  Of course they’d say that.
Business Wire Announces That Standalone Webposting Runs Counter to Spirit of Reg FD

Broad, Simultaneous and Real-Time Distribution is Key to Ensuring Fair and Equal Access for All Market Participants

NEW YORK–(BUSINESS WIRE)–Business Wire believes that the SEC’s Interpretive Guidance release on web-based disclosure clearly falls short of the investor relations industry’s best practices standards, and that simultaneous, real-time distribution of material news to all market participants is the key to ensuring the “level playing field” that is the intent and spirit of Regulation Fair Disclosure…

PS.  Thanks to my favorite Chicago SEC expert and to Andy Bishop for confirm on facts here.
1 reply
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