Commentary > The Bottom Line
8/14: Don't believe the hype
The SEC's new edict requiring execs to sign off on their books won't amount to much.
July 31, 2002: 7:35 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

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PALO ALTO, Calif. Ask any World War II history buff the significance of Aug. 14, and, of course, you'll get the answer that it's the day in 1945 the Japanese formally surrendered unconditionally to the United States.

And you might not know that Aug. 14 also is Earvin "Magic" Johnson's birthday (in 1958) as well as the date in 1984 that IBM released MS-DOS, version 3.0, ultimately making Bill Gates (not an IBM executive), the world's richest man.

I'd argue that each of those events -- and a whole lot more you can find at a nifty Web site -- is more significant than this coming Aug. 14, which various market pundits would have you believe will be a milestone for the world's markets.

Aug. 14 is the day by which the Securities and Exchange Commission is requiring the senior executives of 947 companies with 2001 revenues of at least $1.2 billion to take an oath certifying that their financial statements are correct. This order, by civil servants who hopelessly failed to smoke out abuses by the likes of Enron and WorldCom, certainly is causing a commotion. Folks think that it will force CEOs to take responsibility and restore trust in corporate America.

Never mind that there's something more than a little un-American about requiring someone already installed in their non-governmental job to take an oath. (Imagine: 'While I cannot take the time to name all of the men in the executive suite who have been named as numbers fudgers, I have here in my hand a list of 205 known members of the Business Roundtable.') It doesn't promise to amount to much.

For example, Merrill Lynch strategist Rich Bernstein points out Aug. 14 isn't going stop companies from highlighting pro forma earnings, which often exclude very real operating costs (like, say, hiring a CEO or the writedown of bad investments). "Most companies aren't fraudulent in their financial statements," says Bernstein. "The issue is the spin on those financial statements to the public."

  graphic  Only 931 to go...  
CEOs and CFOs at these 16 companies have signed off on their books -- 947 have to by Aug. 14.
AK Steel Holding
Federal Express
Public Service Enterprise Group
Southwest Airlines
Texas Instruments

There are other shortcomings. Even with the deadline two weeks off, 16 CEOs already have signed their name to attest that "to the best of my knowledge" the numbers are correct (see table). But take a moment to peruse the actual statements, which the SEC helpfully is posting at its Web site, and you'll see for yourself that it's all boilerplate. Companies simply are aping what the SEC told them to say -- to the best of their knowledge.

The whole thing smacks of a joke, which is how some lawyers seem to be approaching it. Boris Feldman, a litigation attorney with Wilson Sonsini Goodrich & Roasati in Palo Alto, Calif., posted an "FAQ for the Perplexed" at a Web site for his clients.

Among his dead-serious questions a CEO might ask: "Am I better off if I know nothing?" Feldman, who has spent years defending corporations whose executives stand accused of misleading investors, offers this answer: "In my opinion, this is not a prudent approach to the order, although it might be justified by the literal terms of the certification." He goes on: "A cynic might call this the 'Sergeant Schultz' approach (in other words, 'I know nothing').

In fact, let's call the edict what it is: Grandstanding. It's grandstanding by the SEC, which surely already has at its disposal the means to punish executives who lie. It's also grandstanding by the goody-goody companies that rush to comply. The overwhelming majority will comply quietly on or just before Aug. 14. A few won't, and they'll be hounded by the media and the SEC in inquiries that will take months and probably still won't result in any indictments.

Speaking of no indictments, Enron is on the list of 947 companies because whatever its current fortunes, its 2001 revenues exceeded $1.2 billion -- which is why the company landed at No. 7 on the Fortune 500 this year.

Finding out who's honest about their accounting is a noble goal. But it won't really help investors figure out how to value stocks or who's got good businesses. It will, however, make for good headlines in the dog days of summer.

Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at

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