Many Companies Ask for Subcertification, Says a Study

Vouching for financial statements spreads beyond the C-suite. Also: PCAOB can't bark, suggests a crafty way to bite; Tyco restatement goes back, back, back; HBOC executives settle charges with SEC; and more.


The Sarbanes-Oxley Act requires CFOs and CEOs — and no one else — to certify their company’s financial statements.

That’s the law. The reality, however, is that many companies are asking other financial professionals to vouch for reported information as well, according to a survey by the Association for Financial Professionals. The AFP gathered responses from 425 corporate practitioners and 130 other financial professionals.

About one-third of financial professionals who provide information used in their company SEC filings are asked to “subcertify” the documents by signing an affidavit, the AFP found.

Clearly, these lower-level professionals take the process very seriously and respect the potential legal ramifications of their actions. Of respondents who are asked to sign an affidavit, nearly 80 percent expressed a “high” or “moderate” level of concern about their liability.

Another 21 percent have sought counsel from their company’s attorney and 2 percent from a personal attorney.

“I believe the prevalence of subcertification, while a direct result of Sarbanes-Oxley, reflects the increased level of importance that financial professionals hold within their companies,” said Jim Kaitz, AFP’s president and CEO, in a statement. (For more on the growing influence of one group in particular, read “Command and Controllers.”)

“Greater accuracy in financial reporting and increased accountability will ensure that most companies are honest and report earnings accurately,” added Kaitz. “This knowledge will ultimately lead to a more stable economic environment.”

PCAOB Can’t Bark, but Suggests a Crafty Way to Bite

Under the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board (PCAOB) cannot publicly reveal problems it uncovers at an accounting firm if the firm fixes the problems within 12 months. To say the least, this is not a popular feature among investors who want to know about sloppy auditing practices or lack of independence from clients, notes The Washington Post.

Now two PCAOB members have suggested a way to circumvent those restrictions. Kayla J. Gillan and Willis D. Gradison Jr. are “urging corporate directors to force accounting firms to turn over their inspection reports in order to win or keep the companies’ business,” reported the paper.

PCAOB chairman William J. McDonough did not comment on the proposal, although he did confirm he had talked to many people about the ban and understood that Congress was trying to create an incentive for the accounting firms to quickly address their deficiencies, according to the Post.

In other business at the hour-long meeting, the PCAOB said it is already scrutinizing the four major accounting firms and plans to perform annual reviews of firms that audit more than 100 public companies. It will review smaller firms that audit public companies every three years, according to the report.

The board added that special emergency teams can conduct quick investigations in the event of an audit blowup or corporate scandal.

Under yesterday’s proposals, auditing firms and accountants who are registered with the oversight board could be punished for breaking securities laws, failing to reasonably supervise other accountants, or refusing to cooperate with an investigation, according to the Post.

Disciplinary proceedings would be private, however, unless both sides consented to opening the proceedings to the public. Auditors and their firms could be suspended or barred from auditing public companies, hit with monetary penalties, forced to submit to independent monitoring, or required to undergo more training.

The PCAOB also said it is currently in discussions with the European Union and with Japanese and Canadian officials, all of whom oppose many of the board’s attempts to extend their regulatory reach overseas, according to Reuters.

For example, a number of months ago the PCAOB voted to require not only U.S.-based auditing firms, but also non-U.S. firms auditing companies listed on U.S. public markets, to register with the board.

“We have very active discussions taking place with the European Commission, with Canada, and with Japan. Very shortly we’ll have them with Australia,” McDonough reportedly told reporters after the board’s meeting. “I have full faith that we will be able to work out with the people outside the United States that we can carry out our responsibilities…without creating international difficulties.”

“None of this applies unless the foreign company is listed on an American exchange,” noted Sen. Paul Sarbanes (D-Md.) last week, according to Reuters. “It’s their act of coming into our capital markets that places them under the umbrella.”

Tyco to Restate Results Back to 1998

In a clear attempt to put its troubles completely behind it, Tyco International announced that it will restate financials dating back to 1998.

In a regulatory filing, the embattled conglomerate said that the restatement includes two charges, which had been recorded in the quarter ended March 31, 2003, related to its ADT business. The charges reflecting a change in the amortization method for customer contracts acquired through the ADT dealer program ($364.5 million pre-tax) and a change in accounting for the ADT dealer program connect fee ($265.5 million pre-tax).

Tyco had previously said that it is restating pre-tax charges of $434.5 million recorded in the quarter ended March 31, 2003, for items related to prior periods, and pre-tax charges of $261.6 million recorded in the quarter ended December 31, 2001.

In addition, the company is restating prior periods for $71.5 million in pre-tax charges primarily related to workers’ compensation and general liability accruals recorded in the quarter ended March 31, 2003. The restatement of prior period results also includes $46.6 million of pre-tax charges related to split-dollar life insurance arrangements for former senior executives. The previously announced charges have also been adjusted for a total tax benefit of $116 million as of March 31, 2003.

The restatements will reduce the company’s previously reported results for fiscal years 1998 through 2001, and will improve previously reported results for fiscal 2002 and the first six months of fiscal 2003.

Tyco added that it does not anticipate that the restatement will have any adverse impact on its operating results or cash flows for the remainder of fiscal 2003 or future years.

HBOC Executives Settle Charges with SEC

The former chief financial officer as well as another former executive of HBO and Co. (“HBOC”) settled charges stemming from the SEC’s investigation into the health care company’s accounting fraud case.

Jay Gilbertson, former CFO and president, and Dominick DeRosa, a former executive vice president for enterprise sales, were enjoined from future violations of the federal securities laws and barred from serving as a director or officer of any public company.

In addition, Gilbertson was ordered by Judge Martin J. Jenkins in San Francisco to disgorge $733,360, plus prejudgment interest, and to pay a civil penalty of $1 million. The court ordered DeRosa to disgorge $325,312, plus prejudgment interest, and to pay a civil penalty of $50,000.

Both judgments were the result of settlements in which Gilbertson and DeRosa, without admitting or denying the allegations in the commission’s complaint, consented to the entry of judgments against them.

Back in September 2001 the SEC filed fraud charges against Gilbertson and five other executives at HBOC, stemming from an accounting scandal that sliced $9 billion from the market capitalization of health services giant McKesson Corp., which bought the company in 1999 for $12 billion.

The commission had alleged that Gilbertson, DeRosa, and other officers of HBOC misrepresented the company’s sales revenue, expenses, and income by making false entries in the company’s accounting records and by hiding the terms of sales contracts in side letters to make the sales appear eligible for revenue recognition.

The court action is still pending against Albert Bergonzi, co-president of HBOC and subsequently president of the HBOC division of McKesson Corp.

Short Takes

  • The Tennessee Valley Authority issued $1 billion in 10-year global notes, led by Citicorp Global Markets Inc. and Morgan Stanley. The notes, rated Aaa by Moody’s and AAA by Standard & Poor’s, were priced at 4.815 percent, 50 basis points over comparable Treasurys.
  • NiSource Inc. filed a shelf registration to issue up to $2.5 billion in debt securities, common and preferred stock, and other securities. The energy company said it plans to use the net proceeds for general corporate purposes, including additions to working capital and repayment of existing debt.
  • Maxtor Corp. named Robert Edwards executive vice president and chief financial officer. He was most recently the senior vice president, CFO, and chief administrative officer of Imation Corp., where he is credited for his role in the data storage company’s turnaround.
  • ENSCO International Inc. announced that James “Jay” Swent has been named senior vice president and chief financial officer. He previously held various financial executive positions at Memorex Corp. and Nortel Networks, and served as CFO and CEO of both Cyrix Corp. and American Pad and Paper Corp.
  • The monthly consumer confidence figure slipped to its lowest level since March, according to the Conference Board.

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