There’s global agreement that the Year 2000 problem, known as Y2K, exists. Many computer systems are not programmed to deal with the start of a new century, and may suffer from processing inaccuracies or system failure. Some members of the financial community predict a global recession, if not a global meltdown, as information infrastructure fails. No-one is quite sure what will happen; hence the growing call for public companies to improve disclosure of their Y2K-related preparations.
The US Securities and Exchange Commission has been frustrated with the response, particularly after it issued Y2K disclosure guidelines in January 1998. The SEC suggested the MD&A section of the annual report, which requires companies to discuss known ‘trends, demands, commitments, events or uncertainties that are likely to have a material impact on them,’ as the likely venue for Y2K discussion. It went on to specify that Y2K-related issues are material even if a company has not yet started to assess its Year 2000 issues or started but not determined if the issues are material.
The SEC outlined what it expected to see in annual reports and quarterly filings, including a company’s plans to address Y2K issues relating to its business and, if material, its relationships with customers, suppliers and other constituents. There should be a timetable for carrying out plans and a note of ‘the total dollar amount expected to be material to the company’s business.’ Finally, the SEC pointed out that disclosure should be ‘reasonably specific and meaningful, rather than standard boilerplate.’
Boilerplate coverage
Following publication of the January bulletin, the number of annual reports filed containing the phrase ‘Year 2000’ jumped from 10 to 70 percent. However, during the first four months of 1998, the SEC checked over 1,023 annual reports found that 64 percent did not provide a specific timetable. Only 49 percent disclosed plans to evaluate the risk faced by firms they deal with. Just 22 percent disclosed the estimated cost of the millennium bug.
So the SEC issued a stronger, more detailed Year 2000 Disclosure Interpretive Release at end July, noting that ‘many companies are not providing the quality of detailed disclosures that investors expect.’
Dr Edward Yardeni, chief economist at Deutsche Bank and a prominent critic of corporate response to Y2K, agrees that companies have not provided enough information. Yardeni has been collecting the Y2K disclosure statements from the 10Ks and 10Qs of S&P 500 corporations since the beginning of 1998 and posting them on his web site www.yardeni.com. In his web book Year 2000 Recession, he states that in most Y2K statements, ‘It was two or three paragraphs of boilerplate claiming that Y2K wasn’t likely to have a material impact on the company unless, of course, key suppliers and vendors failed to be compliant.’
Opening Europe’s eyes
While the need for improved disclosure in the US is being widely debated, most European markets are further behind on the issue. In December 1998, the European Commission issued a report, How the European Union is Tackling the Year 2000 Computer Problem. It indicated that this year much more emphasis will be placed on information disclosure, but nothing specific about corporate disclosure for investors.
Outside the US, the primary regulatory pressure on Y2K disclosure has been from the UK, where the Accounting Standards Board and its Urgent Issues Task Force published Year 2000 Issues: accounting and disclosure last March.
‘Legislation requires the directors’ report to give an indication of the likely developments in the business of the company and of its subsidiary undertakings,’ the report notes. ‘Some disclosure of the uncertainties inherent in the Year 2000 problem, and of the risks associated with incomplete or untimely resolution, is necessary. This information, together with that related to costs incurred and planned for future periods, may be given in the directors’ report of companies or in any operating and financial review or equivalent statement.’
Unlike the SEC, the ASB hasn’t done any monitoring. Michael Butcher, ASB secretary, says, ‘As a standards center, we don’t monitor anything systematically.’ The London Stock Exchange, which is following the ASB’s recommendations and requiring companies to disclose Y2K information in their results, seems to have no plans for monitoring compliance.
Best practice
Roy Randall, director of IR at Royal & Sun Alliance Group in London, describes his company’s disclosure as a ‘best practice’ issue, with little other regulatory pressure. The firm discloses its Y2K plans and costs in presentations to analysts and shareholders. As for published disclosure of Y2K, Randall says. ‘It is not on last year’s annual report, but it will be on this one.’
One private sector group monitoring Y2K disclosure in the UK is Company Reporting Limited, a monthly journal based in Edinburgh. Last August Company Reporting noted that despite the ASB’s standards-setting, ‘Disclosure of millennium compliance programs is poor.’ Of the 400 top UK companies analyzed, the journal found that only 25 percent mentioned Y2K in their annual reports, with half of those estimating the total costs involved in their Y2K plans.
The publication does say disclosure has been improving. Results from 146 companies from August to December reveal that 95 percent now mention Y2K in their reports; and the number providing a total cost estimate has increased marginally. Company Reporting still warns of ‘the overly optimistic expectations that companies held regarding the success of their compliance programs.’
Rose-colored glasses
Cutter Consortium, a US-based consulting firm specializing in Y2K, has looked at disclosure in the US and Europe. It shows more companies mentioning Y2K in their reports, but Cutter questions the quality of the disclosure. ‘A lot of companies are putting on a brighter face than is truly the case,’ says Sheila Green, senior analyst. ‘Traditionally software projects lag behind in deadlines. Something like 24 percent of all software projects have met their deadlines. So, how realistic are these companies? I’d say they’re looking at life through rose-colored glasses.’
Green says the frequency of disclosure is improving, but she questions its quality: ‘We’ve found the disclosures sorely lacking in some respects. What does it mean when someone says we’re 90 percent compliant? What does that tell you? It’s very, very vague.’
While consultants and regulators criticize disclosure, investors, who perhaps have the most influence with corporations, have been largely silent on the issue of Y2K. Cisco’s director of investor relations, Mary Thurber, says that most institutional investors aren’t asking her about Y2K. ‘It’s mostly investors I’ve never heard from.’
Pia Gideon, manager of external relations for Sweden’s Ericsson, says that when the company held an October meeting with international analysts in Stockholm, ‘The issue did not come up.’
Investor mood
As the deadline approaches, the mood of investors may change, especially as companies have already begun to report Y2K-related computer errors. The SEC has demanded that investment advisors with over $25 mn under management disclose what measures they are taking to review the Y2K preparedness of the securities they are recommending.
For its part, Merrill Lynch published a report on the status of thousands of companies’ Y2K progress last July. It was generally upbeat on the issue, and several analysts commented that most companies they contacted were forthcoming. However, they also noted that the 10Qs and 10Ks they’ve been receiving contained little information on Y2K.
JP Morgan issued its own July report. It recommended specific industries, such as those specializing in IT, which will benefit most from Y2K problemsG next year, when ‘customers will begin to panic.’ Such scrutiny means companies’ disclosure will have to increase. Not only will they have to be better prepared, they’ll need to communicate this preparedness in specific language.
The problem for companies striving to disclose Y2K information is the lack of precedent. There’s no easy way to discuss and report on a problem the consequences of which can only truly be measured after the event. For now, though the one known variable in the Y2K equation is running out time.
