As scandal begets retribution, the CFOs of the 7,000 publicly traded companies in the US are in the spotlight as never before. The Federal Government and the Securities and Exchange Commission are mandating wholesale changes to the way CFOs go about their business. And, to incentivise the embattled CFO to be honest and upstanding, there are threats of long prison sentences and huge fines.
Is it any wonder many CFOs are handing back their keys to the executive restroom? Between April and June, around 125 CFOs quit, according to a survey by executive recruiter, Challenger Gray & Christmas. The company did not make a comparable study last year but decided on one now because of an increase in “help wanted”.
CFOs want out because they and their colleagues in the auditing profession are being portrayed as the villains in most of the new corporate scandals.
CFOs control the books, so they have become “the logical scapegoat when things go wrong”, says Challenger Gray & Christmas CEO John Challenger.
For those staying on, first on the agenda is compliance with new corporate fraud law set out in the Sarbanes-Oxley Act, which was signed into law by President Bush at the end of July. The act, a rare Washington bipartisan union, was named after its sponsors, Senator Paul Sarbanes, Democrat, of Maryland, and Representative Michael Oxley, Republican, of Ohio.
Sarbanes-Oxley aims to right a slew of corporate wrongs. The central provision, which went into effect when the law was signed, is the requirement that CEOs and CFOs certify annual and quarterly reports. It applies to all companies that file reports with the SEC – including non-US issuers.
Any report containing financial information must now be accompanied by a statement signed by the CEO and the CFO certifying it “fairly presents, in all material respects, the financial condition and results of operation of the issuer”.
The certification must state that the officers have read the report and must confirm it contains no mis-statements or omissions, as well as being a fair presentation. It must also provide statements regarding the company’s financial controls and confirm that the officers have made certain specified disclosures to the company’s auditors and audit committee. Those who knowingly make a false certification will be subject to fines of up to $5m and prison sentences of up to 20 years.
Another provision of Sarbanes-Oxley could hit CFOs in their wallets.
If financial results need to be re-stated because of misconduct, the CEO and CFO could be forced to pay back bonuses paid to them and profits from their stock sales during the year following the original reporting of the results.
Targeting abuses that came to light in the Enron debacle, Sarbanes-Oxley says periodic reports must include disclosures regarding the company’s internal controls, non-audit services provided by its auditor and material off-balance-sheet transactions, arrangements or obligations. Additionally, they must disclose whether a company has adopted a code of ethics for senior financial officers, and if not, why not.
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When President Bush signed the bill into law, he said: “Every corporate official who has chosen to commit a crime can expect to face the consequences.” But the consensus is that the act will not stop corporate fraud immediately.
As SEC chairman, Harvey Pitt, says: “I think this bill is just really a very important first step in restoring confidence. Now we have to implement it.”
As well as writing the rules that will make much of Sarbanes-Oxley a reality, the SEC wants to clear out corporate miscreants and give investors a truer picture of what is going on inside US boardrooms. For example, it has proposed a rule change to force CFOs to accelerate the dates on which they file their companies’ reports, from 45 to 30 calendar days after period-end for quarterly reports, and from 90 to 60 calendar days after fiscal year-end for annual reports.
Meanwhile, the SEC’s Enforcement Division is working overtime. The SEC recently announced it had filed a record 122 actions for financial reporting and issuer disclosure violations in the first 10 months of this fiscal year, a figure 20% higher than that for the whole of 2000. Although it cannot bring criminal actions, the SEC is part of the Corporate Fraud Task Force established by President Bush, which was set up to coordinate enforcement by the SEC and federal criminal authorities.
On top of pressure from the government and regulators, CFOs are being hounded by their CEOs. A recent survey by CFO.com revealed that 11% of respondents had been pressured by their CEOs more than three times in the past five years to misrepresent financial results. And Accountancy Age found that 16% of FDs have come under pressure to “talk up” company results.
While they might have agreed to some of these requests in the past, CFOs now have the image of a handcuffed Scott Sullivan, CFO of WorldCom to ponder. Many will not sleep soundly in the knowledge that the big house awaiting that CFO is not the multi-million dollar mansion he is building in Florida, but a rather smaller abode in a noisy high rise. In US slang “big house” means prison.
UK companies are over-reacting to Sarbanes-Oxley, according to a partner at the London office of law firm Dechert, writes Elspeth Wales.
As the act now stands, foreign companies that have securities publically traded in the US will have to comply. The provision causing most concern to UK companies is that which requires CEOs and CFOs to certify that their accounts comply with the rules and that their financial position is accurately reflected.
“One of the technical issues is whether interim reports that a UK company makes during the year have to be not only filed for information with the SEC but also certified,” says Dechert partner David Schulman.
If it becomes the case that interim reports have to be filed and certified it is likely to give UK directors a much greater problem because they won’t have the comfort of an audit, as they would for annual results.
Schulman thinks UK directors will be subject to the same potential prison terms and fines as their US counterparts, but only a test case will tell.
Dechert clients are expressing “disbelief” at the new rules but Schulman said, “there’s an element of over-reaction”. Companies are advised to work with their lawyers and accountants and to wait for publication of the final SEC regulations at the end of August.