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SEC explains comment letter and enforcement trends

Comment letters on MD&A, non-GAAP measures and climate disclosures highlighted at the 2022 AICPA & CIMA Conference.


The comment letter panel at the Conference on Wednesday discussed the most frequent areas of SEC staff comments. The panel comprised representatives from the SEC staff, public accounting and legal professions, and the preparer community. Panelists provided a good indication of the issues to which registrants should pay close attention as they prepare 2022 Form 10-Ks and 2023 Form 10-Qs.

During a separate panel, SEC staff in the SEC Division of Enforcement discussed trends in enforcement cases focused on accounting, auditing and financial reporting matters.

With additional mention by SEC staff that the Commission reads public statements made by registrants outside of SEC filings (e.g. press releases and social media) and compares those to information provided in SEC filings, registrants should ensure that the information released is consistent across mediums.

Erin McCloskey

KPMG Partner

The panel discussed the topics that produced the largest volume of comments in 2022. These likely will continue to be a focus during 2023 as the staff reviews 2022 year-end filings.

Various MD&A issues

The comments about MD&A ranged across several areas.

Lingering effects of Covid-19 and Russia-Ukraine war

Anne Parker (Office Chief, SEC Division of Corporation Finance) highlighted that registrants should include in their year-end disclosures any material impact that issues lingering from Covid-19 or resulting from the Russia-Ukraine war have had or are expected to have on their operating results or financial position. Registrants should consider the SEC staff guidance on these two topics (Covid-19; Russia-Ukraine war)

Examples of things to consider when determining appropriate disclosures are:

  • the costs of returning to normalcy;
  • ways in which the company has materially changed the way it operates or its business focus;
  • direct effects on operations in the war region;
  • indirect effects from political and economic instability due to the war, such as heightened cyber risks, supply chain issues and volatility of commodity prices as a result of the war.

Effects of emerging economic issues

Emerging economic issues can affect areas such as liquidity (e.g. rising interest rates) and operating costs (e.g. increasing wages and energy prices). Parker encouraged enhanced, company-specific disclosures that explain the effect of these emerging issues.

To help achieve this objective, she provided the following takeaways for registrants:

  • revisit and update disclosures about future risks in MD&A with consideration of the current environment;
  • clearly communicate about the specific factors that are contributing to the identified risks (e.g. explain that the cause of order backlog issues is supply chain disruptions); and
  • consider the role of the board of directors in oversight of significant areas of these risks.


Parker referenced the previously issued sample letter to China-based issuers to assist preparers in determining the nature and extent of disclosures that should be considered. She specifically used the example of the disclosure of any risks related to restrictions on how cash can be transferred throughout an organization (e.g. from consolidated subsidiary to parent company).

She also mentioned that when a registrant has considered Hong Kong or Macau carved out of the definition of China, the staff will issue a comment letter seeking clarification about the risks associated with doing business in China.

Non-GAAP measures continue to be misapplied

Panelists noted the continued emphasis on non-GAAP measures in comment letters, but did not discuss the issue in any detail because of the extensive coverage by Tuesday’s Division of Corporation Finance panel. Lori Locke (CAO of Warner Bros. Discovery) did however note the importance of having policies, processes and controls in place so that different parts of a company do not communicate inconsistent non-GAAP information.

Read about the updated SEC staff guidance on non-GAAP measures in our related blog here.

Staff continues to probe climate-related disclosures

Attorney Raquel Fox (Skadden) stated the SEC has been issuing more comment letters on climate disclosures recently, emphasizing that these inquiries do not depend on the SEC’s final climate rule, but are instead based on:

  • guidance issued in 2010, Commission Guidance Regarding Disclosure Related to Climate Change, that highlighted various Reg S-K disclosure requirements that may be relevant to climate-related matters – including Item 101 (Description of Business), Item 103 (Legal Proceedings), Item 105 (Risk Factors) and Item 303 (MD&A); and
  • the Dear Issuer letter the SEC issued in September 2021 with sample comments on climate disclosures.

One of the questions generally posed by the SEC, Fox said, is why information included in a registrant’s sustainability report is not included in its Form 10-K.

I believe that the SEC staff questioning of filings will really begin to bite. Companies are getting closer to their commitment dates – an example might be, say, a 50% emissions reduction by 2030 – so that means the financial reporting considerations start to become material. My advice would be, do your homework now – don’t let yourself get caught off-guard.

Julie Santoro

KPMG Partner

KPMG observations on Dear Issuer letter related to climate

The sample letter shows extensive inquiries. These are some of the trends we’ve observed in 2022.

  • A majority of responses back to the SEC have received follow-up questions, in particular on transition risks and business trends.
  • Over 90% of registrants have been questioned about differences between their ESG or sustainability reports and their filings.
  • The staff has been seeking more information (quantification) about carbon credits or offsets.
  • The staff has sought more granular information about capital expenditure, severe weather impacts to insurance premiums, and compliance costs.

Read more here.

Segment reporting

Fox mentioned that comments on segment reporting are often very time intensive to clear because the staff wants significant detail. Two common topics of segment comments are how a registrant identified its operating segments and how it aggregated the segments into reportable segments. She also mentioned that segment reconciliations need to comply with SEC rules.

Read about the SEC staff’s comments on segment reporting in our related blog here.

SEC enforcement

During the past year, the Division of Enforcement has focused on several cases regarding accounting, auditing and financial reporting, most notably:

  • revenue recognition (e.g. premature recognition and fake sales); and
  • material misstatements (e.g. where bad faith or lack of due care occurred).

The SEC staff also spoke about how it has aimed to deter misconduct and restore public trust through recent enforcement actions. In this regard, it pointed to how financial penalties have been increased in an effort to promote deterrence, with the Enforcement Division collecting $6.4 billion in 2022. Of this amount, $4 billion was for civil penalties with the remainder related to disgorgement and other matters. The Division also looks for companies to implement remediation measures where appropriate – e.g. by tightening internal controls. 

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