SEC.

• Author: Marshall, Jeffrey
• Position: Securities and Exchange Commission

While there have been positive changes in financial reporting in recent months, Donald T. Nicolaisen, the Securities and Exchange Commission's (SEC) chief accountant, sounded a note of mild frustration in his remarks. Nicolaisen, noting that he had come on as chief accountant in August 2003, said, "I've fallen short of my expectations on what we could have done, but we have made significant progress on several fronts."

The SEC is encouraged by companies undergoing "a real push to get the numbers right," he said, but the status quo simply isn't acceptable. He argued that industry and specific-company failures are still too common, investors remain skeptical of reporting in general and there remains a prolonged drop in investor confidence. Nicolaisen defended the certification process set up by Sarbanes-Oxley, calling it "a real positive for the capital markets." In fact, he added later that the Act's Section 404 "is the one area that can have a truly lasting impact on financial reporting."

Among the "areas for improvement" he mentioned:

* Communication. It needs to be done in plain English, and the Management Discussion and Analysis (MD & A) section of the annual report should provide a useful forward look at the business and the industry to investors. Companies need to concentrate on a direct method of cash flow measurement, and should avoid aggregating segments in their reports, he added.

* Off-balance-sheet reporting. Nicolaisen noted that the SEC's study of current practices involved here is expected to be issued by the end of the year, and that "we're developing recommendations now."

* XBRL, An SEC "concept release" explores the idea of data tagging, and the SEC has established a voluntary XBRL program that could furnish XBRL files in time for companies to work on their 2004 calendar year tax filings, he said.

Nicolaisen said that reports that as many as 1,000 of the 5,000 or so "accelerated filers" may miss the deadline for Section 404 (it was November 15) "would be discouraging." He noted that auditor resources, which have been stretched thin, may be a factor here, not just companies having failed to do their part in meeting the deadline. Echoing McDonough, he said that public announcements about the discovery of...