SEC Chair Would Reexamine Fair Disclosure Rule
Harvey Pitt, President Bush's selection for chairman of the Securities and Exchange commission, has indicated that, if confirmed, he would be willing to address the burdens placed on companies by Regulation Fair Disclosure (Reg FD).
Reg FD, one of former SEC chairman Arthur Levitt's pet projects, requires publicly held companies to provide information that could influence the purchase of shares simultaneously to every potential investor. Brokerage houses that used to receive advance information about companies' performance and other information, have asked for clarity as to exactly what kinds of information need to be imparted to all investors simultaneously.
Mr. Pitt has expressed his support of the purpose of Reg FD, which was designed to protect investors. "The underlying concept of Regulation FD is really unassailable, which is that no one should have an unfair advantage in the marketplace." Mr. Pitt has, however, agreed to examine complaints to determine whether, for example, companies may violate Reg FD if they simply confirm to brokerage houses that comments they made on the direction of earnings have not changed.
Mr. Pitt has also indicated that, if confirmed, he will examine all SEC rules to determine how they fit into today's economy. Many securities laws have been on the books for over half a century and reflect a time and technology that is "light years away from what we now confront daily," Mr. Pitt said.
Mr. Pitt is expected to be confirmed by the Senate quickly and, if confirmation occurs, could take over the SEC chairmanship within two weeks.
Just say no to proforma
pro forma statements, sometimes released to the public before the GAAP results are announced, should be disclosed at the same time
No! Only one set of numbers.
Answer: To cover our bets and "hopefully get close to reality." That does not inspire confidence in the financial reportingn system.
Link
Difficult to Draft
Still, it would be difficult for the FASB to draft standards for pro forma accounting because ``there is no rhyme or reason'' to what is excluded, Willens said. The most likely solution would be for the SEC to require that companies clearly delineate their pro forma results and trace their relation to GAAP results, he said.
Comment
Owner-investors can decide how to interpret the numbers only when they're in GAAP.
That FASB "structure" is simply codifying accounting methods that are not consistent with GAAP.
If we don't show "true profitability" then the financial statements are not reliable, and the public press releases are both misleading and have no credibility. Financial reporting system needs to come up with another method to justify having confidence in numbers.
Proforma is popular because it misleads.
FD: Tread carefully
A leash keeps the camel out of the tent.
I see many excuses to give exceptions to firms' accounting rules on the notion that they are somehow unique entities. Yes, burning cash in new ways, but not using the modernized rules to create real wealth.
With shorter times to market saturation compared to the car or radio, IT should have shorter time to profits. Today we're being asked to believe that the IT market is going to get saturated faster, yet the time to profits is slower.
Hogwash. The laws of economics are simple: Margins shrink as competition increases. Low barriers to entry in IT mean that companies that lose a lot of money today, are simply going to lose more money tomorrow.
Despite this troubling inconsistency at the foundation of our financial market, investors are asked to rationalize this inconsistency by embracing "much needed new rules."
Some would promulgate new rules and waivers to ensure that time line stretches ad finitum. Returns on investment are useful if they occur within a lifetime, not a millennium.
Given the vacuous profits, the leadership in the regulatory and financial reporting system should be asking "why are companies allowed to be called 'going concerns' without making profits despite a clearly saturated and collapsing market?"
The old rules should guide us to this question; however, the financial reporting system would like us to avoid being accountable for an answer: Companies that more quickly saturate a market should be given fewer waivers and shut down more quickly.
"New rules" simply mean more excuses to burn more scarce capital. That does little to inspire confidence in the capital market, the regulatory system, or the financial reporting system.
Play be the existing rules before getting exceptions
PART II
Who's promoting the notion that they're an "exception"; and what are the real incentives to justify arguing these rules "no longer apply"? The more companies that can "stick around burning cash," the more opportunities to provide consulting services.
Prove you can comply with the existing statutes, rules, industry standards accounting standards, and professional ethics before you ask the owner-investors to believe that you're going to comply with new rules. Otherwise, you're asking us to believe that the camels, by free choice, are going to do what they're required.
Mind reading doesn't work in a world where there are many excuses to avoid following the clearly promulgated statutes. Before we can believe that new rules are required or will be followed, the burden proof shifts to the financial reporting system to develop some credible reasons (a) why invedstors should believe that the rules no longer apply; and (b) that the reporting system can comply with the existing rules.
Not only do the capital market fail to produce dividends, it fails to provide a consistent standard for "how long do we wait to see the profit genie." Clearly, we require another financial crisis to awaken us to the importance of "reasonable prices." Owner-investors should embrace new rules only when the boards produce dividends. Until then, learn to keep your nose where you promised: On the existing industry standards and professional ethics.
There is no need for new rules. There is great need to applying the existing rules to the existing situation. We are at risk when the market mania drive the rules. The rules should be guiding the market not letting the camels roam free.