SEC: Signature Should Mean Something

Commission wants to hold CFOs, CEOs accountable for their accounting; also keen to improve 8-Ks.

The stakes could soon be raised substantially for chief executive and chief financial officers when they sign off on their companies’ books.

The Securities and Exchange Commission on June 13 proposed rules that would hold a company’s CEO and CFO responsible for certifying the contents of their company’s quarterly and annual reports.

In a statement, the Commission noted that the proposed rules are intended to enhance investor confidence. False certification could expose executives to both civil and criminal legal action, SEC Commissioner Harvey Pitt reportedly said in a PBS interview.

“The CEO of a company should not be able to say ‘Gee, I didn’t realize’ or ‘I wasn’t aware’ or ‘I’m flying at 50,000 feet and therefore wasn’t paying attention to specific disclosures,”‘ Pitt asserted.

As predicted back in January, the SEC also moved to get information to investors faster — particularly material information. Yesterday, the Commission proposed that several new items be reported in a company’s 8-K to improve the “quality, amount and timeliness of public disclosure of extraordinary corporate events.”

The SEC wants the 8-K filed within two business days instead of the current five to 15 days (see below for more on the proposed changes to 8-K filings).

The proposed CEO/CFO certification rules are consistent with a key provision of President Bush’s 10-point “Plan to Improve Corporate Responsibility and Protect America’s Shareholders,” announced March 7.

That plan states that CEOs should personally vouch for the veracity, timeliness and fairness of their companies’ public disclosures, including financial statements. As you recall, Chairman Pitt was nominated for his current post by President Bush last year.

Under the SEC’s proposed rules, the CEO and CFO must certify that they have read the company’s quarterly and annual reports, the information is true and the reports contain all information deemed “important to a reasonable investor.”

And just what constitutes information “important to a reasonable investor?” According to the SEC, there is a substantial likelihood that a reasonable investor would view the information as significantly altering the total mix of information in the report, and the report would be misleading to a reasonable investor if the information was omitted from the report.

In addition, a company will be required to maintain procedures to provide reasonable assurance that the company is able to collect, process and disclose the information required in the company’s reports, and also require a periodic review and evaluation of these procedures.”

“This annual evaluation would need to be presented to the company’s principal executive officer and principal financial officer, and these individuals would be required to certify in the company’s annual report that they have reviewed the results of the evaluation,” the SEC noted in its statement.

Proposed 8-K Rule Changes

The SEC’s proposals regarding the new 8-K rules would require current reports for 11 new items or events. They are:


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