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The Aug. 14 deadline for top execs to certify that their financial statements are accurate is shaping up to be a nonevent for the markets. With only one day left, the Securities & Exchange Commission order has yet to trigger a wave of financial restatements. Failing to sign on the dotted line would be stock-market suicide and almost all CEOs and CFOs are expected to file on time.
"There is still a little bit of trepidation about how it all turns out, but not as much as there was a month ago," says Arthur Hogan, chief market analyst at Jefferies & Co. Hogan originally thought 5% to 10% of companies would restate earnings as a result of the order, but so far there have been just a few low-profile postponements.
The only one that made any headlines was Interpublic Group (IPG
) which said on Aug. 5 that it would postpone releasing second-quarter results to give its audit committee more time to review the financials before certification. The announcement triggered a sharp selloff in the shares -- which made it even less likely that other companies would delay certifying.
SPURNED GIFT. While it is certainly good news that Aug. 14 is unlikely to trigger a new round of financial scandals, it also seems unlikely that, by the time the date is long past, the SEC order will have done much to improve investor confidence.
Much of that is because top executives failed to take advantage of what should have been taken as a gift. Essentially the SEC offered top management a chance to do some good old-fashioned chest-thumping and proclaim -- early and often -- that their statements are accurate. Some high-profile CEOs, including Citigroup's Sandy Weill and Cisco System's John Chambers, have stated publicly that they are signing. But most companies have already missed an opportunity to get ahead of the deadline.
For the record, the first company to certify its books was automotive systems maker Delphi (DPH
) on July 18. Next came FedEx (FDX
) on July 22, American Airline's parent AMR Corp. (AMR
) and Fiserv (FISV
) on July 24. PepsiCo (PEP
)certified July 25 and Qualcomm (QCOM
), Textron (TXT
)and EDS (EDS
) certified July 26. Yet by Aug. 12, according to the SEC's special Web site, only 161 of the 947 companies required to file -- or less than 20% -- had done so. (About one-third of the affected public companies have a due date later than Aug.14 because they report on a fiscal, not a calendar, year.)
WHY THEY WAIT. "We don't have enough heroes," a frustrated Byron Wien, senior investment strategist at Morgan Stanley, said during an Aug. 6 conference on restoring confidence in the markets. "We don't have enough CEOs saying, 'I'm stepping out ahead of the regulation to do the right thing.'" He compared the Aug. 14 deadline to the time limit on taking an exam -- if you know your stuff, you finish early. "Why are they waiting?" he asked. "If they knew the answers, they could sign now."
CEOs are waiting on the advice of teams of securities lawyers, who are still busy trying to interpret all the ins and outs of the new legal requirement for top management to certify financial statements going forward. The SEC's requirement overlaps with Congress' Sarbanes-Oxley Act, which was just signed by President Bush on July 30 (while the SEC's order was issued June 27) and requires top execs to certify financial results each quarter.
The strict and some say hastily drafted new law sets penalties of up to $5 million in fines and 20 years in prison for executives who intentionally submit false financial reports. Of course, it's always been illegal to file fraudulent financials, but the harsh penalties, new legal wording, and increased scrutiny have created a wave of anxiety in the corporate suite. That's mainly because the law seems to subject CEOs to liability if there is a problem in financial reports even if they didn't know about it or if it isn't material to investors, says David Schaefer, chairman of law firm Loeb & Loeb's corporate department.
Not surprisingly, companies are initiating new procedures to make sure their financial statements are in order. Some are even requiring division heads to sign certifications of their own ahead of the CEO. "In fairness, it takes a while to sort some of this out and come to a conclusion in time to be responsive to the Aug. 14 deadline," says Schaefer.
MISSED CHANCE. Morgan Stanley's Wien thinks CEOs have been overly focused on personal legal liability at the expense of the reputation of their companies. To restore investor confidence, "you can't be defensive, you have to be offensive," he says. "Every once in a while you have to stand up and do what is right."
Signing early would have been a good investor relations move, says Louis Thompson, president of the National Investor Relations Institute, a trade group. "It shows leadership," he says. "It's not only appropriate, but it's advisable to do it early."
Clearly, most companies already have missed that opportunity. And, in the end, the passing of Aug. 14 will likely have done little to restore investor confidence. In fact, many investors are confident there won't be a rash of last-minute restatements on Aug. 14 for very cynical reasons. Hedge Fund manager Thomas Brown opined on his Web site on Aug. 7: "Trust me, everybody's going to sign their forms by that Aug. 14 deadline, the way they're supposed to -- even the ones (and they're there, believe me!) who spend their daylight hours cooking the books."
If he's right, eventually that will get sorted out in this new era of vigilance by investors and regulators determined to ensure that financials are valid. And investors still nursing their wounds over the disappointments of the market so far this year will be relieved to see Aug. 14 come and go without a rash of earnings restatements. But, they should be a little bit annoyed that corporate leaders let what could have been a real opportunity to restore investor faith in the market slip through their fingers.
Stone is an associate editor of BusinessWeek Online and covers the markets as a Street Wise columnist and mutual funds in her Mutual Funds Maven column Edited by Beth Belton
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