Neither an auditor nor an editor be: how directors should approach their role in reviewing periodic reports.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

IT IS NO SURPRISE that now, more than ever, regulators and investors are more carefully scrutinizing the accuracy and adequacy of the SEC filings made by public companies--and in particular their annual and quarterly reports.

Directors, particularly those on the audit committee, have oversight responsibilities for these reports. Companies must disclose whether or not the audit committee members have reviewed the audited annual financial statements and discussed them with management and the outside auditors. In the case of NYSE-listed issuers, audit committee members must carry out these reviews and discussions with respect to both the financial statements and Management's Discussion and Analysis (MD & A) included in each quarterly and annual report. Of course, many companies impose additional obligations on the audit committee members to review the SEC filings before they are finalized. Against this background, how should the audit committee members--and, more generally, the directors--approach these filings?

When reviewing a draft SEC filing or similar document, the director's role is not that of an auditor or editor. Let the auditors dissect the numbers, and let someone else worry about the grammar. Of course, if there is any suggestion that something is amiss, a director must make inquiry. Absent a red flag, however, a director should be able to rely on management and assume the accuracy and reliability of the information in the report. Rather, the director should focus on the substance and listen carefully for the tone and the perspective reflected in the report.

The SEC, among others, believes that periodic reports, particularly the MD & A, should reflect management's "unique perspective." This enables investors to see the company through the eyes of management and provides the context for analyzing the company's financial information. It lets investors understand the quality of, and potential changes in, the company's earnings, cash flows, and overall financial condition. According to the SEC, the MD & A should reflect what management thinks is happening and why it is happening--particularly regarding trends and contingencies that may cause reported information not to be indicative of future results.

Too often, the individuals preparing a periodic report view it as a template to be updated quarterly or annually by the rote process of plugging in new numbers and calculating percentage changes. This is sometimes seen as a "safe"...