Capital Markets

Financial Reporting

Sign of the Times?
Tim ReasonAugust 1, 2002

Investors aren’t the only ones swearing after news of WorldCom’s woes. In June, furious at the widening corporate accountability scandal, the Securities and Exchange Commission ordered CFOs and CEOs at 945 companies to file sworn statements–starting this month–attesting to the truth of their most recent annual and quarterly reports.

So far, the order applies only to this year. But, says Douglas M. Hagerman of law firm Foley & Lardner, “a requirement to certify SEC filings under oath is a serious wake-up call to CEOs and CFOs everywhere.”

The order, with its implied threat of perjury penalties, came just two weeks after the SEC proposed a broader but less onerous rule that all CEOs and CFOs sign each 10-Q and 10-K, certifying–but not swearing–that the report is correct and complete.

That rule–which is still on the table–poses less of a personal threat to CFOs, who are already required by the SEC to sign quarterly and annual reports. The SEC notes that the rule “creates a new legal obligation for [CFOs and CEOs], but does not change the standard of legal liability.”

The question now is, will the SEC revert to the proposed certification rule next year? If so, just what would change for finance chiefs?

For starters, the SEC clearly hopes your boss will develop a keen appetite for finance minutiae. “The CEO is going to be in the CFO’s office a lot more,” speculates Hagerman.

“The SEC is trying to nail down the fact that signing a financial statement is a very intentional, solemn act,” adds Stanley Sporkin, a retired judge and former head of the SEC’s Division of Enforcement. The proposed certification rule, says Hagerman, would codify the Ninth Circuit Court’s ruling in Howard v. Everex Systems Inc., which holds company officers responsible for the contents of documents they sign.

Clearly, the SEC is fed up with protestations of ignorance from officers like former Enron CEOs Jeffrey Skilling and Kenneth Lay. Forcing officers to sign their company’s financial documents, says Sporkin, “is like pushing a dog’s nose in his urine.”

Perhaps. But will investors soothed by sworn oaths accept the simpler certification after the SEC’s order expires? One SEC staffer, speaking anonymously, says of the certification rule, “I think it is window dressing. I don’t know what it adds beyond [CEOs and CFOs] having to sign the 10-K.” After Enron and WorldCom, investors, sick of seeing company officers taking oaths in front of Congress, might insist that they take them regularly in their offices instead.