For the captains of industry, the day they must swear to the credibility of their companies’ bottom lines is fast approaching.
While willing to personally sign off on their firm’s financial statements, which most must do by Wednesday, some executives say the exercise might not be enough to soothe investor anxiety.
“I’d say that’s questionable. The mathematical phrase `necessary, but not sufficient,’ comes to mind,” said Michael Birck, chief executive and a co-founder of Tellabs Inc., whose autograph now is on the company’s filing with the Securities and Exchange Commission.
The SEC’s new oath is designed to clean up corporate America’s financial reports and restore market confidence in the wake of recent high-profile accounting fiascoes like Enron Corp. and WorldCom Inc., both of which have filed for bankruptcy protection.
Whether a signature will prevent future meltdowns is debatable. For one thing, the accounting process is a subjective exercise. Some firms may very well comply with the letter but not necessarily the spirit of accounting principles, and continue to mislead investors.
Still, it’s a step in the right direction, regulators, executives and investors say. The process is expected to expose reporting holes and strengthen corporate governance, they add.
“Immediately after WorldCom we decided we wanted to go back to the largest domestic companies and have them say, `Yes, what we filed was true and accurate,”‘ said Christi Harlan, SEC spokeswoman.
Although firms can apply for a deadline extension, the penalty for an untimely filing could be stiff in the court of investor opinion, which, in the current skittish climate, is inclined to sell first and ask questions later.
Consider the experience of Interpublic Group of Cos., one of the world’s largest advertising firms.
It announced Monday that it would delay its second-quarter earnings report by a week so that the firm’s audit committee could complete due diligence for SEC certification. Jarred investors quickly took note and sent shares tumbling almost 25 percent that day.
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For some chief executives, particularly those in the insurance business, certifying results is old hat and a requirement to do business in the state.
Al Zucaro, chairman and chief executive of Chicago-based insurer Old Republic International Group, which filed its certification Friday, doesn’t think the SEC requirement will make much difference.
“Investors have always felt that if a CEO reports on his company’s results, they have the right to assume he’s telling the truth,” Zucaro said.
Heidi Miller, chief financial officer of Chicago-based Bank One Corp., agreed.
“The only thing that restores confidence is the behavior over time of companies. Is it the one-shot panacea that will make everyone breathe easier and say, `Now we’re safe’? Clearly not.”
Still, with what’s at stake, few executives take the signing lightly.
Bank One, for example, is requiring the heads and chief financial officers of significant lines of business–about 40 people altogether–to sign financial statements about their areas.
“Signing the piece of paper makes people very sensitive to their responsibilities,” Miller says.
The SEC rule applies to about 1,000 public companies that reported $1.2 billion or more in revenue in their most recent financial statement. In the Chicago area, the requirement applies to 50 firms.
The Wednesday deadline applies to most of the firms and is based on a company’s fiscal year.
That means a firm like Chicago-based Sara Lee Corp., whose fiscal year ends in June, won’t certify until September.
The weeks leading up to that date will be put to use, says C. Steven McMillan, chairman, president and chief executive of Sara Lee.
“Most companies, and Sara Lee included in that group, will have a more aggressive due-diligence process.
“I can be frank–I don’t sit down and read word for word every filing we make,” McMillan said.
“In the future I will have to do that. We’ll have to go through everything in more painstaking detail, every footnote. It will be more tedious.”
As a result of accounting reform legislation signed July 30 by President Bush, the chief executives and chief financial officers of the roughly 15,000 publicly traded companies in the U.S. will have to sign such certifications on future financial reports filed with the SEC.
The legislation, known as the Sarbanes-Oxley bill, imposes a maximum penalty of $5 million and a prison term of up to 20 years on executives who knowingly file incorrect statements.
“It’s a gift-wrapped criminal case for prosecutors,” said Brad Bennett, a securities lawyer with Baker Botts in Washington, D.C.
Under current federal law, any willful misstatement to federal officials is a felony, though the offense carries a maximum prison term of five years.
“Sarbanes-Oxley is a sea change and probably the biggest change in securities law in the past 30 years,” Bennett said.
The SEC order and Sarbanes-Oxley do not force any changes at Tellabs, a Naperville-based telecommunications equipment-maker that certified its results on Aug. 2, almost two weeks early.
Tellabs already had its own document-signing program, requiring about 20 directors with financial responsibility within Tellabs to attest to the quality of their numbers.
Birck, the chief executive, said the step was necessary “to make sure we have traceability throughout.”
Birck was Tellabs chairman until recently when Richard Notebaert left his chief executive’s post in June to head Qwest Communications, the Denver-based phone company. Upon Notebaert’s departure, Birck resumed his CEO role, remaining Tellabs chairman.
“Even when Dick was here, I participated in monthly report discussions,” said Birck. “There aren’t many things I wasn’t aware of.”
Likewise, Jack Creighton, chairman and chief executive of UAL Corp., the parent of United Airlines, said that he has long believed it is important for CEOs to be involved in the preparation of financial results.
“We actually used this opportunity to enhance our due-diligence processes to ensure the integrity of our financial statements,” Creighton said.
Contrary to some of his peers, Creighton thought investor confidence would be restored as a result of seeing the chief executives stand behind the statement.
“I believe it is a prudent step … in these troubled economic times,” he said, noting that UAL will certify its results early this week.
Telephone and Data Systems Inc., a Chicago-based holding company that owns local phone companies and wireless carriers, plans to file the certificates with the SEC early this week.
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LeRoy T. Carlson Jr., the chief executive, said that he has always read the financial reports before his firm issued them, and “as a result of the government’s desire, I am giving them more review. I think this will certainly help the process.”
While Carlson thinks the SEC requirement is good, he said the new law that imposes greater penalties on corporate wrongdoing will do more to restore investor confidence.
The firm has felt direct fallout from the scandals because the bankruptcy of Global Crossing Ltd. had an effect on TDS’ first-quarter results, and its second-quarter results had to be restated after WorldCom Inc. filed for bankruptcy.
Charles Hinrich, vice president and chief financial officer of Smurfit Stone Container Corp. said the certification “doesn’t really mean anything to us internally because we already stand by our reports. But if it restores investor confidence, I’m all for it.”
Hinrich believes that the new law, Sarbanes-Oxley, has put teeth into penalties for corporate officials.
“But I’m not sure that even that is going to change the attitude of a corporate executive who is willing to commit fraud,” Hinrich said.
“I would hope that corporate executives and boards have not forgotten their responsibilities to the extent that they would need reminders such as this from the federal government,” he said.
Gregory Stoklosa, chief financial officer of Chicago-based R.R. Donnelley & Sons Co., cautions that investors have responsibilities, too.
“They need to be skeptical and critical about the things companies say about themselves,” Stoklosa said. “I suggest that people do their homework.”