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In the past, the seemingly glacial pace of Securities and Exchange Commission accounting-related investigations has given professional advisors the time to be thorough in assessing a client’s financial-reporting issues, even as an inquiry or investigation proceeded. In this post-Enron era, however, the “real-time enforcement” initiative has become an SEC buzzword that has changed�sometimes dramatically�the time frames in which issues must be handled. The most visible examples of real-time enforcement have been high-profile cases where the SEC has moved for injunctive or other relief shortly after an accounting scandal made front-page news. WorldCom, HealthSouth and, most recently, Parmalat, come to mind. But there are many less visible instances where real-time enforcement is having a significant impact on dozens, if not hundreds, of SEC accounting inquiries and investigations. The SEC’s effort to pick up the enforcement pace has not been limited to accounting issues, but that is where the impact of the acceleration is felt most acutely. Time is a precious commodity during an SEC investigation due to a combination of converging factors: complex accounting principles, numerous relevant facts and a document- and data-intensive record. Before the policy of real-time enforcement, time was already in short supply. Consider the “60-day rule,” which is not actually a rule, but rather a deadline imposed on informal inquiries (i.e., where there is no order of investigation and no subpoena power) undertaken by the SEC’s enforcement staff. In the past, informal inquiries could span many months. Post-Enron, the SEC initiated an informal 60-day limit. Based on this premise, the enforcement staff will decide on one of three outcomes: the inquiry will be closed with no enforcement action, the staff will seek a formal order of investigation or the staff will recommend that enforcement action be initiated. Subjects of investigation, of course, would like to see the inquiry closed without formal action. But when the focus of the SEC’s inquiry is a financial-reporting matter, achieving that end has become increasingly difficult because of the 60-day period during which the subject must provide detailed explanations of financial matters, including accounting practices and management’s bases for judgments and estimates. Documents are produced and sometimes witnesses are interviewed. Responses must be full and direct, while bearing privilege issues in mind. Dodging questions only prolongs the process and hurts one’s credibility. Conversely, there is now little time to clarify ambiguous questions, and hence there is a sharply increased risk of misunderstandings and miscommunication. Apparent inability to respond promptly may itself be an issue. The SEC staff tends to equate the information it requests with information it expects a company to have on hand to enable management to issue a financial report. While that assumption can be considered naive, failure to meet the staff’s expectations by not responding promptly or providing what amounts to interim conclusions can put a company in a worse position than it would be in had it held back from providing information pending full assessment of the issues. What is best for shareholders? In the long run, is the 60-day rule in the best interest of shareholders? Where there are difficult, complex or highly judgmental accounting issues, a prompt 60-day-or-less response is expensive, requiring an investigative team of attorneys, employees, accounting professionals (both auditors and consultants), database experts and others, often requiring a coordinated response to oversee privilege and other legal issues. These costs add to the already significant financial burdens of Sarbanes-Oxley compliance. They are also costly in a less obvious way: They shift the focus of employees and resources away from the day-to-day business of the company, which can reduce productivity. The real-time initiative is not a substantive improvement to the SEC informal inquiry process; in the large majority of instances there is no evidence of ongoing fraud that would demand prompt SEC action. In fact, the practice may impede the process if it triggers unnecessary investigations, detracting from self-policing mechanisms that the SEC has worked for decades to help create. Some changes at the post-Enron SEC are valuable, but this is not one of them. Ernest Ten Eyck is a certified public accountant and a former staffer at the SEC. He is a senior managing director with FTI Ten Eyck, a part of FTI Consulting Inc. that specializes in assisting counsel, audit committees and others with complex accounting matters.

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