Day of truth is here for 695 firms

Deadline: Under a new SEC rule, today is the deadline for CEOs and CFOs of 695 companies to vouch for the accuracy of their financial statements.

August 14, 2002|By Kristine Henry | Kristine Henry,SUN STAFF

For the head of W.R. Grace & Co., signing off on his company's financial statements yesterday under the threat of 20 years in prison and $5 million in fines if the numbers are wrong was a bit like going through customs in some foreign countries.

"You know in your heart you have no reason to be nervous, because you haven't done anything wrong," said Paul Norris, chief executive of Columbia-based Grace. "But you see all these people standing around with machine guns and you think, `I hope nobody makes a mistake.'"

Today is the deadline, under a new Securities and Exchange Commission rule, for 695 companies to turn in statements from their chief executives and chief financial officers swearing that their most recent annual and quarterly financial statements are correct.

The regulation was a response to the recent spate of accounting scandals - Enron, WorldCom and the like - that have rocked Wall Street and shaken investors' confidence.

Some market experts say the new rule will work as intended and boost the public's appetite for snapping up stocks. Others say the new directive isn't necessary and could do more harm than good.

Norris said he doesn't expect the rule to have much effect on most companies' financial statements.

"We have been trying to accurately provide information in our filings since I've been here, and I think we have, so I think the new rule reaffirms what we're already trying to do," he said.

Still, before signing off, Norris and Chief Financial Officer Robert M. Tarola asked about 50 senior managers at the company to confirm that their divisions' past and current financial statements were correct. It wasn't anything too formal - no notary publics, as required of the two executives - and Norris accepted confirmations via e-mail.

At Magellan Health Services Inc. in Columbia, top executives have begun asking some of their subordinates to sign documents verifying that their numbers are truthful. But Magellan's CFO, Mark S. Demilio, said he didn't hesitate for a moment before certifying his company's financial statements.

"Absolutely not," he said. "I always had, as a result of this position, that level of responsibility. My accountably is the same as it's always been."

The stock markets have fallen drastically in recent months. The blue-chip Dow Jones industrial average is off about 20 percent from its 52-week high reached in March, and the Standard & Poor's 500 index is down more than a quarter from its 52-week high posted last August.

"The market right now is driven by emotions and psychology, so anything we can do to bolster the public's confidence in CEOs and accounting departments, I believe, will help people feel more confident about putting money into the market," said certified financial planner Kay Shirely, president of Financial Development Corp. in Atlanta.

She said she would be hard-pressed to say that chief executives are truly more informed about their companies' financial statements now that they must personally certify the numbers, but the public will perceive it to be so "and right now the market is functioning on perception."

Only a few ...

Portfolio manager Fred Siegel, author of the book Investing for Cowards and president of the Siegel Group Inc. in New Orleans, said he thinks 99 percent of companies are reporting accurate numbers but that the small percentage of those who have lied are shaking confidence in everyone.

"I believe [the new SEC rule] will help to restore confidence in the average investor and the big pension funds and Wall Street itself," Siegel said. "I have a thumbs-up for it."

The rule calls for the CEOs and CFOs of companies with revenue of more than $1.2 billion to formally certify their companies' financial statements. The certification must be submitted to the SEC within 45 days of the end of a fiscal quarter and within 90 days of the end of a fiscal year.

It affects 942 companies of the country's approximately 14,000 publicly held companies, but only 695 of those have fiscal quarters that ended June 30 and therefore have a deadline of today for filing the certifications.

Those companies are required to certify that their most recent annual reports are correct, along with subsequent filings. For most companies, that means their 2001 reports and their filings for the first and second quarters. The SEC said it hasn't adopted formal policies for handling refusals or late certifications.

The new rule won't address the underlying problem of the market, said John P. Hussman, portfolio manager of Ellicott City-based Hussman Strategic Growth Fund. The markets have fallen, he said, not because of shaky investor confidence but because stocks were overvalued in recent years and only now have investors started to again look critically at a company's performance relative to its stock price.

The new rule, he said, "is like putting a Band-Aid on your foot when you've cut your finger."

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