VideoSoon the CFO and the CEO won't be the only ones in your company suffering sleepless nights. Unnerved by the Sarbanes-Oxley Act's requirement that senior managers certify Financial statements, a growing number of arms are requiring lower-level employees to swear on the accuracy of their own numbers reported to management.
According to James Harrington, leader of U.S. accounting technical services for PricewaterhouseCoopers LLP, the process, called "upstream certification" or "subcertification," typically mirrors the Securities and Ex-change Commission's certification requirement: business heads and middle managers must sign letters stating that their units' reported numbers are accurate.
Alliant Techsystems Inc., an Edina, Minn.-based defense contractor, pushed certifications down to the staff level last year. When Sarbanes-Oxley was passed, "we immediately developed a process that cascades down the organization," says corporate controller John Picek. The company requires certifications from the operating heads and controllers of each division, as well as from any corporate functions that have input into the filings.
Such certifications could provide some protection for CFOs. Kenneth Winer, a partner in the Washington, D.C., office of law firm Foley & Lardner, says subcertifications show that management took reasonable steps to verify the numbers. "It would give me a lot to talk about as an SEC defense lawyer," says Winer. "But it's not an invulnerable shield. If there's a red flag that you're aware of, you still have to address it."
An upstream certification process could also lead employees to take a more active role in financial reporting. Alliant is already seeing a change in employee behavior, says Picek. "We're getting a lot more input up front, which makes the process more streamlined," he says.
Employees facing this new responsibility are unlikely to be as happy. Winer suggests that an employee who knowingly — or perhaps even negligently — signs a false upstream certification could be found liable by the SEC, and possibly by the courts. To make matters worse, the typical firm's directors' and officers' coverage does not extend to middle managers. Indeed, those managers may have their own word for the outcome of this process: insomnia. —Don Durfee
Pay Pals
Who says nonprofits don't pay well? While scandals at a number of companies have forced a closer examination of executive-compensation practices, a new corporate-watchdog group has caused a stir with compensation excesses of its own.
Members of the Public Company Accounting Oversight Board (PCAOB) were recently taken to task for voting themselves large compensation packages — $452,000 for themselves and $560,000 for the chairman (still not selected at press time).
That's more than the total cash compensation for the average CFO, estimated at $432,000 in 2002 by Mercer Human Resource Consulting. President Bush makes only $400,000, and former Securities and Exchange Commission chairman Harvey Pitt earned a modest $142,500. But since the PCAOB was set up as a nonprofit and will be funded by fees from public firms, the members' pay is not limited by legislation.
Supporters of the salaries, including Pitt, argue the competitive pay is needed to lure qualified candidates from the private sector. Not everyone agrees. Says Rep. Barney Frank of Massachusetts, the ranking Democrat on the House Financial Services Committee: "I think it was a mistake, but we're past it now." —Joseph McCafferty
Universal Disagreement
When Universal Health Services Inc. asked CFO Kirk Gorman to resign in February at the urging of its auditor, KPMG LLP, analyst Nancy Weaver of investment-banking firm Stephens Inc. downgraded the stock, but not because she thought the ousting hinted at accounting problems at the King of Prussia, Pa.-based health-care provider. Rather, she thought the company had lost one of its vital components.
"He is an incredibly capable CFO," says Weaver. "I have profound respect for him." Other analysts speak just as highly of Gorman. "He's the straightest shooter in the industry," says B. Kemp Dolliver, managing director at SG Cowen Securities Corp.
Despite Gorman's sterling reputation, KPMG refused to endorse Universal's quarterly financial statements until he was removed.
The dispute arose over the signing of the management representation letter, verifying that the company's financial statements were prepared in accordance with generally accepted accounting principles. Gorman agreed to sign the letter, but noted his anxiety in a letter to the audit firm. "I'm neither a certified public accountant nor a securities lawyer," wrote Gorman. "I do review and analyze the financial statements and disclosures in our 10-Q and 10-K filings, but I can't personally verify that all of our accounting is in accordance with GAAP." He asked the firm to also sign a representation letter attesting to its review of the disclosures. KPMG not only refused, it went to Universal's board and argued that it couldn't approve the company's financial statements as long as Gorman was CFO. The company later accepted Gorman's resignation over what it called "philosophical differences." (Gorman did not return calls from CFO seeking comment.)
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