SEC explains comment letter and enforcement trends

The comment letter panel at the Conference on Wednesday discussed the most frequent areas of SEC staff comments. The panel comprised representatives from the SEC staff, public accounting and legal professions, and the preparer community. Panelists provided a good indication of the issues to which registrants should pay close attention as they prepare 2022 Form 10-Ks and 2023 Form 10-Qs.

During a separate panel, SEC staff in the SEC Division of Enforcement discussed trends in enforcement cases focused on accounting, auditing and financial reporting matters.

The panel discussed the topics that produced the largest volume of comments in 2022. These likely will continue to be a focus during 2023 as the staff reviews 2022 year-end filings.

Non-GAAP measures continue to be misapplied

Panelists noted the continued emphasis on non-GAAP measures in comment letters, but did not discuss the issue in any detail because of the extensive coverage by Tuesday’s Division of Corporation Finance panel. Lori Locke (CAO of Warner Bros. Discovery) did however note the importance of having policies, processes and controls in place so that different parts of a company do not communicate inconsistent non-GAAP information.

Read about the updated SEC staff guidance on non-GAAP measures in our related blog here.

Staff continues to probe climate-related disclosures

Attorney Raquel Fox (Skadden) stated the SEC has been issuing more comment letters on climate disclosures recently, emphasizing that these inquiries do not depend on the SEC’s final climate rule, but are instead based on:

• guidance issued in 2010, Commission Guidance Regarding Disclosure Related to Climate Change, that highlighted various Reg S-K disclosure requirements that may be relevant to climate-related matters – including Item 101 (Description of Business), Item 103 (Legal Proceedings), Item 105 (Risk Factors) and Item 303 (MD&A); and
• the Dear Issuer letter the SEC issued in September 2021 with sample comments on climate disclosures.

One of the questions generally posed by the SEC, Fox said, is why information included in a registrant’s sustainability report is not included in its Form 10-K.

Segment reporting

Fox mentioned that comments on segment reporting are often very time intensive to clear because the staff wants significant detail. Two common topics of segment comments are how a registrant identified its operating segments and how it aggregated the segments into reportable segments. She also mentioned that segment reconciliations need to comply with SEC rules.

Read about the SEC staff’s comments on segment reporting in our related blog here.

SEC enforcement

During the past year, the Division of Enforcement has focused on several cases regarding accounting, auditing and financial reporting, most notably:

• revenue recognition (e.g. premature recognition and fake sales); and
• material misstatements (e.g. where bad faith or lack of due care occurred).

The SEC staff also spoke about how it has aimed to deter misconduct and restore public trust through recent enforcement actions. In this regard, it pointed to how financial penalties have been increased in an effort to promote deterrence, with the Enforcement Division collecting $6.4 billion in 2022. Of this amount, $4 billion was for civil penalties with the remainder related to disgorgement and other matters. The Division also looks for companies to implement remediation measures where appropriate – e.g. by tightening internal controls.