March 9, 2006

Notes from PLI’s “SEC Speaks”

We have posted notes from the Corp Fin and Accounting panels from PLI’s “SEC Speaks” conference in our “Conference Notes” Practice Area. Notes from Corp Fin’s Office of Mergers & Acquisitions are posted on’s “Conference Notes” Practice Area.

One-Time “Hall Pass” to Fix Cash Flow Classifications

One issue not discussed by the SEC Staff at PLI’s “SEC Speaks” is the SEC’s informal position that provides companies with an opportunity to fix erroneous cash flow classifications – in the discontinued operations context – without having to restate. This issue was first raised at the AICPA’s National Conference in December when Corp Fin Staffer Joel Levine stated that companies had better start paying attention to their cash flow classification. Joel also identified certain presentation formats that the Staff considers inconsistent with SFAS No. 95. Here is Joel’s speech and his PowerPoint from that conference.

Then, on February 15th, the AICPA issued CPCAF Alert #90, which notes which presentation formats are acceptable to the Staff – and that the Staff will allow companies to amend their classifications in their next Form 10-K or Form 10-Q without having to treat such amendments as a correction of an error. The Alert also states that any issues discovered and corrected in a later SEC filing will be treated as a correction of an error and require amendments of prior filings.

I don’t know why the SEC staff didn’t mention this position at the conference as I think it’s important for companies to know of this position if they have not been reporting cash flows relating to discontinued operations the way the SEC wants them to.

Talk About Having a Bad Day

As a former in-house lawyer, the thing that struck me about Google’s gaffe -that led to some internal projections being included in an “Analyst Day” presentation posted on the company’s IR web page – is that it might have cost some lawyer his or her job. Being in-house is tougher than you might imagine if you haven’t “been there, done that.” First, non-lawyers are your ultimate boss – and they often don’t like lawyers at all (since lawyers are the ones who say “no”). Second, one simple mistake like this and you can cost the company 5% of its market cap. Third, I often worked harder when I was in-house than when I worked in law firms – meetings all day, real work at night.

Now, we don’t know if a lawyer was to blame for Google’s gaffe (it depends on whether the unintended projections were included in a draft that the lawyer reviewed; I sure hope lawyers are involved in vetting analyst presentations!). In fact, the projections could have been added after it was reviewed and most in-house lawyers are absolved of any responsibility once a document leaves their hands. But this gaffe highlights the need to include double-checking on what is about to be filed with the SEC or posted on the company’s IR web page as part of a company’s disclosure controls and procedures. This mundane task clearly is as important as drafting the original disclosure since the end result is what really matters to investors. Here is Google’s Form 8-K that describes its gaffe.