As most public company executives know, two sections of The Sarbanes-Oxley Act of 2002—Sections 302 and 906—require that principal executive and financial officers certify financial data in quarterly and annual reports. But according to a review of regulatory filings conducted by Raisch Financial Information Services in Newton, Mass., some companies have gone “above and beyond” the requirements by providing a third certification in addition to that of the CEO and CFO.
Raisch
“We discovered the anomaly while analyzing the titles of executives who had been making the 302 and 906 certifications,” said Robert Raisch, principal at Raisch Financial Information Services. “We had noticed that some certifications appeared to be coming from generals counsel and directors, and we were looking to gather data on how widespread the phenomenon might be.”
To those ends, the firm reviewed 10-K and 10-Q reports of companies within the Russell 3000 index, and discovered that the overwhelming majority of filings in the past year were indeed certified by the CEO and CFO; it was relatively uncommon for a certification to be filed by lower-ranking executives. “In such cases,” says Raisch, “the individual submitting the certification appears to have been acting as the top executive or financial officer in a company that didn’t have anyone holding the CEO or CFO titles.”
Two CEOs, Three Certs.
More notable are the companies that have provided three certifications, instead of the usual two.
William Sherman, a partner with the law firm Morrison & Foerster in Palo Alto, Calif., told Compliance Week that there might be occasions in which someone other than the CEO or CFO provided an additional certification—such as when one person held the title of CEO while another person had the responsibilities usually associated with that position.
Sherman
“It would be very unusual, but seemingly redundant or duplicate certificates might result when one person had the functional duties of CEO or CFO but someone else had the title,” Sherman said.
In addition, some companies might think that an additional certification is warranted when the job of CEO or CFO changes hands during a quarter. But such a policy “isn’t grounded on anything in the regs,” said Sherman, noting that individuals who provide an unnecessary certification are subjecting themselves to potential liability in the event the numbers provided to the SEC don’t add up.
Sherman said that, on some occasions, a third certification has been filed when there is a company with a co-CEO or co-CFO. As examples, he cited American Eagle Outfitters, which had co-CEOs at the time of its April 2003 filing, and UnitedGlobalCom, which had co-CFOs at the time of its March 2004 filing.
‘Persons Performing Similar Functions’
Under SOX, financial information contained in annual and quarterly reports must be certified by the “principal executive officer or officers and principal financial officer or officers of the issuer, or persons performing similar functions, at the time of filing of the report.”
SEC officials declined to be interviewed about how the Commission defines “persons performing similar functions,” deferring to a “Frequently Asked Questions” release from November 2002 and other Commission statements that leave the phrase undefined.
However, companies seem to have adopted a common sense approach.
For example, Great Southern Bancorp, a bank holding company based in Springfield, Mo., had its treasurer, Rex Copeland, certify the financials in the November 2004 annual report. Great Southern does not have anyone with the CFO title.
Similarly, New York-based Keryx Biopharmaceuticals, which also does not have anyone holding the CFO title, had its financials certified under SOX by Ron Bentsur, who is the company’s vice president of finance and investor relations.
The Third Certification
The Medicines Co., a pharmaceutical company based in Parsippany, N.J., is among the small number of issuers that have filed more than two certifications under SOX.
In its March 2004 annual report, The Medicines Co.’s then executive chairman, Dr. Clive Meanwell, certified the financials along with CEO David Stack and CFO Steven Koehler.
Company spokesman Michael Mitchell told Compliance Week that, as executive chairman, Meanwell “was involved with much of the day-to-day operations of The Medicines Company.” Meanwell, who founded the company, now holds the title CEO.
Talk America Holdings, which offers local and long distance phone services to residential and small businesses, provides another example. The Reston, Va.-based company’s financials were certified in its November 2004 quarterly report by CEO Edward Meyercord III, CFO David Zahka and Gabriel Battista, the executive chairman of the board of directors.
Aloysius Lawn, Talk America’s general counsel, said that the extra certification resulted from a “transition period” in which Battista was the principal executive officer while Meyercord was the CEO. “We wanted to be belt and suspenders,” Lawn said, noting that, in 2005, certifications will come from just the CEO and CFO.
Poss
Securities lawyer Stephen Poss, a partner with Boston’s Goodwin Procter, said “having more than two certifications isn’t really necessary,” but he said he understood why a company would feel inclined to file a third certification if the chairman of the board was the senior executive officer.
Poss noted that there may also be situations where a CEO or CFO, having taken over at the end of a quarter, didn’t feel comfortable taking responsibility for an entire period when they had only just joined the company.
The SEC has provided little guidance on the subject. The Commission’s Division of Corporation Finance, in its November 2002 FAQ, did address a related question: “A company has a CEO who is resigning at the end of the year and is no longer performing the function of CEO although he is still employed with the company. In the interim, the company has another individual [who] is performing the functions of CEO. Can that other individual sign the certification despite the fact that the company still has another person with the CEO title?”
The SEC’s answer is that the individual “performing the function of CEO at the time of the filing should provide the certification. If it is not the person with the title of CEO, the company should disclose in the filing that the other individual is performing that function.”
The complete SEC FAQ is available from the box above, right. In addition, Compliance Week recently launched a searchable database of certifications—including the names and titles of executives—to assist subscribers in understanding how their peers are addressing the issue. (Also see box above, right.)
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