Companies today are faced with the complex challenge of providing quality guidance to the marketplace while simultaneously avoiding the scrutiny of the SEC and the plaintiffs' bar. The pressure to increase transparency-coupled with the threat of regulatory and shareholder litigation-means that companies must walk a fine line between disclosing too much information and providing insufficient amounts, which in turn can hamper analysts' ability to report effectively on the company's valuation and future prospects.

True, increased disclosure can lead to increased liability, but this doesn't mean that companies shouldn't be making the effort. In fact, companies that are armed with a basic understanding of the law and that enforce a few simple policies can provide quality information to the market without fear of litigation.

Two groups monitor public company interactions with analysts: the SEC and the private plaintiffs' bar.

The SEC primarily looks for selective disclosures. In October 2001, Regulation Fair Disclosure took effect, barring the selective disclosure of material non-public information. If a selective disclosure is intentional, then a company must make a public disclosure simultaneously. If a selective disclosure is unintentional, then the company must disclose the information to the market promptly, usually within 24 hours or before trading opens the following business morning. Public disclosure can be made by filing a Form 8-K or any other method reasonably calculated to effect broad, non-exclusionary distribution to the public.

In the past three years, the SEC has brought only six enforcement actions charging violations of Reg. FD. Of those six, only two have resulted in monetary penalties. Siebel Systems, for example, paid $250,000 to settle claims that its CEO revealed material, non-public information at an invitation-only technology conference. Schering-Plough Corp. agreed to pay a $1 million civil penalty, and its CEO agreed to pay $50,000 as a civil penalty, to settle charges that the company released material information on two separate occasions to a select group of analysts and portfolio managers.

While the number of SEC actions seems relatively low, the threat of enforcement nevertheless remains and is real.

Communications with analysts can result in private class action suits charging the company with liability for the analyst's statements.

There are generally three activities for which companies can be held liable for statements made by analysts or other third parties:

1. First, a company may face liability for providing false information to an analyst with the intent that the analyst will act as a conduit to release the information publicly.

2. Second, companies that have significant pre-publication involvement in the preparation of analyst reports may be held liable for any false information in the published report.

3. And finally, companies can be held liable for endorsing or adopting analyst statements after they are published.

And the costs of a securities fraud class action can be devastating: defense costs often exceed seven figures, the average settlement value in 2003 was $19.8 million, and adverse disclosures typically devalue stock price and affect investor confidence.

As a result, it is essential for corporate executives to manage their communications with The Street effectively, weighing the benefits of releasing more information against the costs of potential liability for alleged misstatements that may result.

Implementing and enforcing a few simple policies can safely tip the balance and promote transparency while simultaneously preserving defenses against potential litigation.

1. Limit Communications.
   
   Do not provide non-public information selectively to analysts or other third-parties. Although Reg. FD allows companies and analysts to enter into confidentiality agreements, practically, the agreements serve little purpose, can potentially cause conflicts for analysts, and increase the risk of inadvertent disclosure for companies.
   A better practice is to make guidance fully accessible and non-exclusionary. If non-public information will be provided to any outside source, ensure simultaneous access to the market by filing an 8-K or using another means approved to reasonably notify the public.

2. Evaluate Materiality.
   
   Courts define 'materiality' broadly: information is deemed material if a reasonable investor would consider it important in making an investment decision. The SEC has provided a list of factors that would typically be considered material-first on the list is earnings information.
   Still, there is plenty of information that companies can provide to the market that will not trigger disclosure requirements. Information that is already public, general statements of optimism, and information concerning industry-wide factors are generally not considered material under the law.

While many external financial reporting activities are continuing, the XBRL General Ledger working group within XBRL International is moving upstream to the transaction levels.

Eric Cohen, the Global XBRL technical leader at PricewaterhouseCoopers and founder and chair of the XBRL GL Working Group, says interest is increasing for standardized information for representing the data that comes from operation systems, flows through the general ledger and is summarized for financial, tax and other business reporting purposes.

The XBRL GL modular taxonomies, www.xbrl.org/GLTaxonomy, have been part of XBRL from its inception, providing tags at the detail level of accounting ledger entries.

Cohen says that the XBRL GL outreach group has been working with the Organization for the Advancement of Structured Information Standards' Tax XML Technical Committee and the OECD Committee on Fiscal Affairs Forum on Tax Administration, working on a Standard Audit File, to refine the XBRL GL taxonomies and communicate its capabilities to the global tax community.

He also says that in light of more formal requirements for auditors to document how underlying accounting records agree to or reconcile with financial reporting (e.g., PCAOB Auditing Standard No. 3, Audit Documentation, Paragraph 5.c.), growing interest in continuous auditing and data level assurance, and other market factors, the need for XBRL GL is increasingly obvious. Accounting software developers in particular are being encouraged to take a more active role in fine tuning, adopting and encouraging the use of XBRL GL.

In addition to the above activities, other XBRL activities that are moving forward include:

• The Federal Financial Institutions Examination Council, the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, along with contractors, have been developing a XBRL-based system to collect, validate, manage and distribute bank Call Report information. The targeted implementation date is October 2005. For more information, go to www.fdic.gov/news/news/financial/2004/fil3004.html.
• EDGAR Online Inc., a financial information collecting and distribution company, provides XBRL-based financial statements for U.S. public companies. A limited number of financial statements can be downloaded into Microsoft Excel 2003 worksheets for free. For more information, go to xbrl.edgar-online.com/x.
• Software products from Oracle, Hyperion, SAP, PeopleSoft, ACCPAC, JD Edwards and Cartesis are--or soon will be-- XBRL-enabled.
• Ernst & Young, PR Newswire, Microsoft, Reuters, Bowne and SunTrust Banks Inc. launched a project to demonstrate how XBRL-enabled earnings releases can be created, distributed and used to facilitate greater financial transparency. For more information, go to www.xbrlforearningsreleases.com.
• In addition to the XBRL activities in the United States, similar activities are taking place in Europe and Asia. For more information, go to www.xbrl.org/PressReleases.