New certification requirements arrived at the corporate suite in the summer of 2002 in the form of a one-time SEC Order and the watershed Sarbanes-Oxley Act (SOA). CEOs and CFOs of public companies must personally certify to disclosure/internal controls and the material accuracy and completeness of their companies' financial statements. This commentary uses the phrase "material accuracy and completeness of the financial statements" to refer to the financial information covered under the SEC's CEO/CFO certification order and the three certifications of the Sarbanes-Oxley Act of 2002. Although we believe this is an accurate paraphrase that captures the scope and intent of the CEO/CFO certification requirements, readers should refer to the specific document for the precise wording of the covered items. (1)
Our commentary introduces the SEC Order as the predecessor to the SOA's triple-certification regime, and analyzes and contrasts the SOA certifications. We also identify and critique some rapidly evolving best practices and, where appropriate, offer suggestions on certification compliance. We then highlight some of the long-term impacts of the SOA certifications on both management and the accounting profession, and, last, we identify several areas for future research.
WHAT LED TO THE CHANGE IN FINANCIAL REPORTING REQUIREMENTS?
Probably more than any one single catalyst of the new certification requirements was the Congressional testimony of former Enron CEO Jeffrey Skilling. Testifying in front of the U.S. Senate Banking and Commerce Committee in 2002 about the reasons for Enron's sudden implosion, Mr. Skilling claimed to be totally ignorant about the details of Enron's accounting. In fact, when asked about certain accounting matters, his response was, in essence, "That's not my area of expertise. That's why we have a top CFO like Andrew Fastow and good auditors." In his testimony, Skilling maintained that detailed financial reporting and disclosure vigilance was not the proper domain of a CEO, but that of the brigade of Enron's accountants and lawyers.
This unconvincing response to financial reporting and disclosure responsibility quickly opened the door to vigorous probing by the Congress about Skilling's educational training. Although he acknowledged having an M.B.A. from Harvard, he argued that this pedigree gave him little or no appreciation for accounting. Little did Skilling know at the time that his remarks would move Congress ever closer to including the mandatory CEO/CFO certification requirements in the SOA signed into law just five months later. Concurrently, ousted WorldCom CEO Bernie Ebbers undoubtedly furthered Congress' resolve by allegedly being totally unaware of his CFO's financial reporting wrong-doing.
Even if Enron and WorldCom were above reproach in regard to financial reporting and disclosure, CEOs in the past two decades were typically not individuals with strong accounting and finance backgrounds. Corporate boards placed more emphasis on CEOs "drumming up deals, customers and investors, and serving as the corporation's public face" (Hopkins 2002). As a result, CEOs came to the office with resumes heavy on sales and marketing experience, but light on accounting and finance. Not surprisingly, CEOs pushed more of their financial responsibility off of their plates and onto those of the company's CFO and Controller. Without Congressional intervention in the form of the SOA certifications, this slippery slope of CEO financial reporting abdication could have led to the further compromise of financial reporting and disclosure integrity, particularly in light of the fact that roughly 80 percent of financial statement fraud involves the company's CEO or CFO (Ceniceros 2003).
THE UNPRECEDENTED SEC CERTIFICATION ORDER
On June 27, 2002, in the wake of the Enron disaster and initial revelations by WorldCom that its earnings, equity, and assets had been overstated by several billion dollars, the SEC issued a onetime, retrospective order requiring CEOs and CFOs of the largest U. …