At issue is the reach of not only the SEC but also the new board created by Congress to oversee the auditors. With the large audit firms set up as limited partnerships, auditors outside the United States are accustomed to operating under local rules and regulatory frameworks. The oversight board will have the responsibility of creating audit standards, investigating audit-firm conduct, and disciplining the firms if necessary. “I think it has been demonstrated that the U.S. does not have the right answers to all these problems,” says Rake.
Looks like regulatory reform could be one more issue for the old world and the new to argue about. —A.O.
Signing on the Dotted Line
The pressure on auditors to sign off on aggressive accounting practices by corporate managers was immense during the 1990s bull market. One tactic that the Securities and Exchange Commission hopes will help reduce some of that pressure is to force senior executives to swear by their financial statements. The CEOs and CFOs of 947 companies with revenues of more than $1.2 billion will have to sign a written statement under oath certifying that their company’s most recent 10-K filing, and any 10-Qs or 8-K filings since the year-end report, are complete and accurate. For most companies (those with December fiscal year-ends), the deadline was August 14. And with the passage of the Sarbanes-Oxley Act, all public companies will eventually have to certify their statements.
The SEC’s order is being embraced by many corporate managers. “It goes with the territory,” says Joe Martin, CFO of Fairchild Semiconductor. “It will make us all more cognizant of our responsibilities to shareholders.” Other companies, many not on the list of 947, have also announced that they will certify their financial filings. “People want the markets to hear that they are standing behind their financial statements,” says Dixie L. Johnson, a partner at Fried Frank Harris Shriver & Jacobson. She is advising senior-executive clients to keep a file on all their efforts to review the financial statements, including attestations from people within and outside the company as well as a record of meetings and discussions they have had as part of their due diligence. “The quality of the review they undertake will correlate with the quality of their defense if they’re ever charged,” says Johnson.
Not every C-level executive is keen on the new order. Sun Microsystems CEO Scott McNealy reportedly complained that it will force him to spend too much time slogging through financial statements rather than generating new business. Those executives who do not certify their financial statements, whether because their companies are in bankruptcy or undergoing a period of restructuring, must supply reasons for not doing so. Of course, CEOs and CFOs already sign off on financial statements, and are potentially liable for misrepresentations therein to shareholders. Under the Sarbanes Act, executives who “willfully” certify statements they know to be false can now be criminally charged with perjury or making false statements to the U.S. government, and can face jail terms of up to 20 years and fines of up to $5 million.
That could also take some heat off auditors. —A.O.