Regulation S-X ¹ requires registrants to have their interim financial information filed in a quarterly report on Form 10-Q reviewed by an independent public accountant in accordance with PCAOB standards. When the Commission established this requirement in December 1999, it stated that “discipline is needed for the quarterly financial reporting process” and that “early involvement of the auditors should reduce the likelihood of restatements or other year-end adjustments and enhance the reliability of financial information.” ² We believe financial reporting is stronger because of this requirement, and the Commission’s observations are equally applicable today as they were almost two decades ago.

When engaged to perform these reviews, the auditor’s procedures are tailored for each registrant’s unique financial reporting processes. Further, auditors coordinate with management to meet the registrant’s planned reporting timelines to reduce the risk that the auditor’s required involvement may cause a delay in the registrant’s quarterly filings. The auditor’s interim reviews comply with the requirements of PCAOB AS 4105, ³ which provides structure to the nature, timing, and extent of the procedures to be performed. Further, AS 4105 requires the independent auditor to read other information that accompanies the interim financial information (e.g., management’s discussion and analysis) and to take action if material inconsistencies are identified.

There are no rules or auditing standards relating to the independent auditor’s involvement with respect to earnings releases. Further, registrants may issue earnings releases at varying stages of their quarterly reporting process, and often do so before the independent auditor has completed their review of financial statements to be included in the Form 10-Q. As a result, there is significant diversity in practice on the procedures, if any, that registrants request their independent auditors to perform on the earnings release.

We believe any changes to expand the use of earnings releases to satisfy portions of the reporting requirements of Form 10-Q should be based on the input of investors and registrants. In our role as independent auditors, we have identified the following challenges that would need to be addressed if any prospective rule changes are made.

We recommend the SEC work collaboratively with the FASB to holistically improve the effectiveness and usefulness of interim disclosures required by GAAP. To this end, we support the SEC’s active participation in the FASB’s Disclosure Framework Project on Interim Reporting. Through this collaboration, we recommend the SEC and FASB continue to consider input from investors and preparers regarding the usefulness of disclosures and whether the benefits of providing certain interim disclosures justify the costs. As standards have been revised or updated, there has been a significant expansion in the disclosure required for interim periods. There are a number of accounting standards, such as ASC 815, Derivatives and Hedging, that require extensive interim disclosures that are similar to those required for annual periods. It appears that some of the required disclosures are inconsistent with the principle in Rule 10- 01(a)(5) of Regulation S-X that permits the omission of certain footnote disclosures that substantially duplicate the disclosure contained in the most recent annual report to shareholders or audited financial statements. This section of Regulation S-X also includes a presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year.

We suggest the SEC and FASB work together to establish a holistic approach to interim reporting that reflects the conceptual guidance in Rule 10-01(a)(5) of Regulation S-X and limit new interim requirements to those describing (1) items that have changed materially since year-end and (2) material transactions. We believe limiting interim disclosures to these areas will enhance the prominence of relevant interim developments. For example, if an investor’s understanding of the derivative and hedging disclosures in the annual report would not change based on the interim disclosures that are currently required, we recommend the FASB and SEC evaluate if those disclosures could be omitted in the interim period. The SEC and FASB may want to consider the International Financial Reporting Standards approach to interim reporting, which would appear to be a more holistic approach.