CEOs will have to swear to numbers

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    This was reported in the WALL STREET JOURNAL on Friday (5 JULY 2002), but has not received much airplay to date:

    CEOs will have to swear to numbers

    New SEC order unprecedented in scope

    By Paul Beckett

    July 5 — Some of the nation’s most powerful CEOs are being forced to sign on the dotted line. In a little-noticed move amid the din of corporate-accounting scandals, the Securities and Exchange Commission last week implemented an order that could have major implications — civil penalties or jail time — for errant chief executive officers and chief financial officers at the nation’s biggest companies. It also could lead to a spate of financial restatements in the next few weeks as companies scramble to review their recent results

    THE NEW ORDER requires CEOs and financial chiefs at companies with more than $1.2 billion in revenue last year to swear under oath in writing that the numbers in their companies’ recent financial reports are correct. Companies must comply with the order at the time of their next SEC financial filing, which for most companies will be Aug. 14.

    The requirement, which applies to 947 companies, could expose corporate chieftains to civil charges of fraud, or to criminal charges of lying to the government or possibly perjury, if their companies’ numbers turn out to be bogus, lawyers say. The SEC can’t bring criminal charges itself, but regularly refers cases to the Justice Department for prosecution.

    Meanwhile, the SEC has proposed a rule that would apply to future filings and could require senior executives of all public companies to certify the accuracy of financial results. That proposal will be taken up by the agency after a comment period ends on Aug. 19.

    Currently, top executives at many companies do not sign every filing with the SEC, and when they do it is on behalf of the company and not a personal endorsement, lawyers said.

    “We support the SEC’s efforts to restore confidence in the financial markets and it’s an unfortunate sign of the times that the SEC has to ask for this type of certification from America’s largest companies,” said Martin McGuinn, chief executive of Mellon Financial Corp. of Pittsburgh. “There shouldn’t be any impact on CEOs and CFOs if they’ve been doing their job correctly but it will force them to focus if they haven’t been,” he said.


    As the crisis of investor confidence in accounting and financial reporting sparked by Enron Corp.’s demise late last year has exploded, the SEC often has been criticized for not doing enough to clamp down on corporate impropriety. The latest move could be a sign that in the wake of the WorldCom Inc. scandal the government is taking a tougher and more vocal line. President Bush next week is expected to deliver a major speech denouncing corporate shenanigans and to send a message that the government won’t tolerate them. Last week, telecom giant WorldCom admitted to misallocating $3.8 billion in operating costs, and the SEC has brought civil charges of accounting fraud against the company.

    To comply with the SEC’s new order, executives at companies from A.G. Edwards Inc. to Zions Bancorp will have to swear in writing that “to the best of my knowledge” no report contained a material untrue statement or omitted a material fact necessary to make the report not misleading. A material fact is generally viewed as one that a reasonable investor would want to know.

    Exactly how the phrase “to the best of my knowledge” will be interpreted remains unclear. But lawyers say the SEC will expect signers of the sworn statements, which will be made public, to conduct due diligence on the accuracy of their companies’ results.

    Law firm Wachtell, Lipton, Rosen & Katz, in a note to clients, recommends that executives review financial statements themselves and question staff and outside auditors “with respect to anything that the reviewing officer does not understand.”

    After the sworn statements are submitted, subsequent revisions of financial reports could potentially expose executives to criminal charges, lawyers said. They added that a criminal case based on lying in a sworn statement is generally much easier to prove than a complex accounting fraud. Companies usually carry directors-and-officers liability insurance, but such coverage may be denied by insurers in cases of fraudulent acts or criminal wrongdoing.

    The SEC is expected to use the new order to make examples of prominent corporate wrongdoing. “I have to assume this is a first step, and that the follow-up could be cherry-picking a few CEOs and bringing them before a grand jury on perjury charges,” said Theodore Sonde, a lawyer in the Washington office of Crowell & Moring and a former SEC enforcement official. “How many CFOs are going to have sleepless nights between now and mid-August?”

    To give the order even more teeth, the SEC has made it retroactive to include some financial reports already on file with the agency. Executives will have to swear to their companies’ most recent annual report and any quarterly, material-event and proxy filings since then.

    “I think it’s completely appropriate in light of the very sad deterioration of investor confidence that has resulted from the accounting mischief that’s gone on in a variety of industries,” said James Murren, chief financial officer at MGM Mirage in Las Vegas.

    Mr. Murren, who was a Wall Street analyst for 14 years before joining MGM, said that the prospect of signing his name to the company’s financial reports won’t have much impact on his review of the numbers. “I read every word of every draft anyway,” he said.

    The rule change could spark a flurry of corporate earnings revisions over the next few weeks, as companies scramble to review past financial reports in advance of having the boss swear to them. “The intent here is if you’ve got any questions about your 2001 annual report or quarterly reports since then, you ought to look over it real, real hard before you send in a sworn certification,” said SEC spokeswoman Christi Harlan.

    Executives do have one out:

    Rather than swearing to the accuracy of the results, they can give reasons why they can’t sign. If, for instance, they joined the company after the previous financial reports were filed, they wouldn’t be forced to sign. Also, companies that are granted filing extensions will have more time to submit the sworn statements.

    Lawyers who have reviewed the SEC’s new order say it is unprecedented in its scope. Fried Frank Harris Shriver & Jacobson, the former law firm of SEC Chairman Harvey Pitt, issued a note to clients raising doubts about the SEC’s authority to take this action.

    The note contends that the SEC’s authority to require sworn statements relates to specific matters the agency is investigating. Currently, there is no indication the SEC is investigating all of the nation’s 947 largest companies. “This raises a question as to whether the SEC has authority to do this,” said Dixie Johnson, a Fried Frank partner in Washington and co-author of the note.

    “We absolutely have the authority to do this,” countered the SEC’s Ms. Harlan.

    In any case, companies aren’t expected to challenge the legality of the order. “In the current environment of public mistrust,” Ms. Johnson said in her note, “it is unlikely that any public company officer will refuse to certify that his or her company’s financial statements are not fraudulent.”

    Indeed, companies are expected to go into overdrive to ensure that their financial reports have every “i” dotted and every “t” crossed. “We’re working very diligently to ensure we’re in compliance with this new order,” said Chuck Mulloy, spokesman for Intel Corp. “We need to study our financials quite closely to make sure the CEO and CFO can sign off” on them.

    Copyright © 2002 Dow Jones & Company, Inc.
    All Rights Reserved.

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