SEC Order on Certification

In response to the most recent revelations regarding accounting improprieties, the U.S. Securities and Exchange Commission (SEC) recently commenced an investigation into the conditions and practices relating to the financial statements and accounting practices of certain large publicly traded companies. As part of its investigation, on June 27, 2002, the SEC issued File No. 4-460, Order Requiring the Filing of Sworn Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934. This order will require certain executive officers to certify as to the completeness and accuracy of their company’s most recently filed reports. Officers who make false certifications will face personal liability.

Under the order, written statements, under oath, will be required from the chief executive officer and the chief financial officer of over 900 companies (all companies with revenues in excess of $1.2 billion during their latest fiscal years). These sworn statements will apply to the most recently filed Form 10-K and all subsequently filed Form 10-Qs, current reports on Form 8-K, and definitive proxies (collectively referred to as “covered reports”). The certifications must be filed with the SEC (filing via EDGAR is not permissible) no later than the first day, on or after August 14, 2002, on which the company would be required to file a Form 10-K or Form 10-Q. However, if a due date extension has been granted for the filing of the Form 10-K or Form 10-Q, a similar extension would be afforded the certification.

Each of the two officers will be required to provide a separate written statement (joint filings are not permissible) declaring that, to the best of his or her knowledge, based upon a review of the covered reports, none contain an untrue statement of material fact or omit to state a material fact necessary to make the statements not misleading. If that is not the case, the officer will be required to submit a statement describing the facts and circumstances that would make such a statement incorrect. The statement will also require each officer to indicate whether or not he or she has reviewed the contents of the statement with the company’s audit committee, or in the absence of an audit committee, the independent members of the board.

To address the certification order, we recommend that all public companies consider the following steps:

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Take Ownership of Covered Reports

Given the serious consequences of false certification, the chief executive officer and chief financial officer must take ownership of covered reports by participating directly in the review and evaluation process. Their review procedures should encompass more than a mere re-reading of the filings, and the procedures should be documented. Any questions raised as a result of the review process should be fully resolved before certification is given. Suggested review procedures include the following:

• Carefully read the covered reports
  The chief executive officer and chief financial officer should be able to conclude that the reports provide an accurate and complete picture of the company’s financial condition and performance. Tools, such as financial statement and MD&A disclosure checklists, should be used to ensure the adequacy and completeness of the disclosures provided throughout the reports, both in the financial and non-financial sections. Once completed by the company’s accounting staff, the checklists should be submitted to the chief executive officer and chief financial officer for their review.



• Consider whether the company’s reporting process ensures the accuracy of financial disclosures
  Document and review the procedures in place to collect, process and disclose the information required in the covered reports. Factors to consider are whether there are adequate controls to reduce risk of fraud, and whether deficiencies, if any, raised by the company’s internal audit staff or outside auditors have been adequately addressed. Going forward, the company should consider establishing a committee, consisting of the principal accounting officer, the general counsel, and chief investor relations officer, to evaluate the effectiveness of the procedures and communicate the results to senior management and the board of directors.



• Ask direct questions of those responsible for preparing the covered reports
  Ask what steps were taken to ensure the accuracy of the reports and to address key areas of risk. Ask whether there are any areas of disclosure that they do not feel were adequately addressed in the reports, and whether there are any questionable areas of accounting or financial reporting contained in the reports.



• Obtain representations from key personnel
  Written representations as to accuracy and completeness should be obtained from the key people involved in preparing the underlying financial information for inclusion in the covered reports and from those who prepare the reports. Financial and other executives of subsidiaries whose results are included in consolidated results should also be required to provide written assurances as to the financial information they provide.



• Focus on key disclosure areas
  If there are areas of the company’s disclosures that have raised questions in the past, either by the SEC or by the company’s internal or external auditors, determine whether they have been adequately addressed in the covered reports. In addition, disclosure areas that have been problematic for the company’s industry should be adequately addressed. Finally, determine whether the disclosure areas specifically noted by the SEC in recent months to be deficient have been adequately addressed by the company, including critical accounting policies, pro forma earnings, impairment and restructuring charges, reserves, revenue recognition policies, liquidity, off-balance sheet financing, contractual obligations and commercial commitments, trading activities and related party transactions.

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Involve the Audit Committee

The review process should be discussed with the audit committee, as well as the requirement to certify as to whether the audit committee has reviewed the statement. This discussion should be in sufficient detail to enable the committee to determine the adequacy of the review process.

Involve the Auditors

The auditors should review the covered reports, as well as the company’s review process, and discuss any issues with the chief executive officer, the chief financial officer, and the committee described above. In addition, the company could request an SEC specialist to perform an independent review of the Form 10-Q.

Contact Outside Counsel

If the review process raises any areas of concern, outside counsel should be consulted.

The new order, as well as several proposed rules issued within the past few months, are part of the SEC’s efforts to respond quickly to the post-Enron environment and restore investor confidence, which has been badly shaken in light of the recent reports of accounting irregularities at companies like Enron, Tyco, and, most recently, WorldCom. The order, as well as an alphabetical listing of the affected companies, can be viewed on the SEC’s website (http://www.sec.gov/rules/other/4-460.htm).

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