New regulations requiring diligent business segment reporting went into effect last year, but so far the Securities and Exchange Commission hasn’t been particularly pleased with the results required under Financial Accounting Standard 131. SEC chief accountant Lynn Turner told the Chicago chapter of the Financial Ex-ecutives Institute in October that the commission, in gathering internal company and analyst reports, was finding cases in which the segments weren’t adding up. Already a number of corporations have had to restate financials as a result of inappropriately adopting it.
The SEC would like the adoption of FAS 131 to strictly follow guidelines, says Paul Kepple, an accounting fellow at the SEC, so “that we don’t eventually experience decay in the application of the standard.”
The SEC is doing an in-depth study of companies to nip problems early, says James Harrington, partner and National Technical Services group leader for PricewaterhouseCoopers. “From the very beginning, the SEC warned corporations that it expected them to comply with the letter of the law.”
For some companies, however, the new standard not only requires a lot of work, it also has them worried about disclosing competitive information. Take Chronimed Inc., a health- care services firm based in Minnetonka, Minn., with $200 million in revenues. “Particularly for the small to midsized companies that perhaps have less-sophisticated financial systems, there is a good amount of restating work,” says vice president of finance Gregory H. Keane. While that’s a bother, what really concerns Keane is the transparency that business segment reporting is supposed to promote. “With segment reporting, you are sharing information that you might not have normally shared before, and now competitors might be able to figure out your business or pricing model.”
But if everybody did segment reporting properly, competitiveness would not be an issue, claims Harrington. He adds: “Besides, if you are in a competitive market, the other companies know what you are doing anyway.”