WASHINGTON: The US Securities and Ex-change Commission (SEC) has blasted America's 500 biggest companies for weaknesses in their 2002 annual reports ranging from “boilerplate analyses” to “rote calculations.”
In a long-awaited critique of the 10-K annual filings of the Fortune 500 corporations, the SEC said that it had screened all 500 filings and selected 350 for a thorough going-over.
“We expect to selectively review future filings of these companies,” said the SEC report, which came after months of book-cooking scandals in corporate America that have frightened investors and worsened a three-year bear market in stocks.
The SEC did not single out individual companies for criticism, but said the most frequent failings in annual reports were in the Ma-nagement’s Discussion and Analysis (MD&A) sections.
The MD&A is supposed to give a textual narrative of a company’s business events for the year and its prospects looking ahead, fleshing out the often impenetrable story told by the dense financial tables that make up the bulk of annual reports.
According to the SEC, in many MD&A sections, “companies simply recited financial statement information without analysis or presented boilerplate analyses that did not provide any insight.”
The SEC said that it had sent out many letters to companies to discourage MD&A that gave only “rote calculations of percentage changes ... and boilerplate explanations of im-material changes.”
The SEC, which polices thousands of public firms, also mandates discussion in the MD&A of “critical accounting policies.”
But, it said, many annual reports fared poorly on this, too.
“We noted a substantial number of companies did not provide any critical accounting policy disclosure,” the SEC said.
After years of growing use by companies, especially in the technology and telecoms sectors, of so-called “pro forma” financials, the SEC said the 2002 crop of Fortune 500 reports was peppered with this questionable practice.
Pro forma financials depart from the nationally recognised GAAP, or generally accepted accounting principles, usually by ignoring certain costs to pad the profit line.
“We asked companies either to remove non-GAAP financial measures, because we believed they were misleading or susceptible to misinterpretation, or to present them less prominently with better explanation,” the SEC said.
It sasid financial services companies rec-eived more such requests from the SEC than companies in other sectors.
Inadequate explanation of restructuring and impairment charge had also been targeted by the SEC for comments to many companies. Such charges are often included in profit-and-loss statements with only minimal explanation of their meaning.
The pension plan headaches of some companies prompted the SEC to ask for fuller ex-planation of plan assumptions and the potential impact on the business of plan obligations.
“The negative stock market returns of the last three years caused many companies to have significant unrecognised losses related to their pension plans, which are often not transparent to investors,” the SEC said.
The SEC had said in December 2001that it would review the annual reports of all Fortune 500 companies. The decision came as the collapse of Enron Corp ushered in a wave of corporate scandals that shook Wall Street. -- Reuters
Did you find this article insightful?