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Reaction to Pitt's Proposal Is Mixed


NEW YORK — A plan by government regulators to make top executives personally certify the accuracy of their companies' financial reports wouldn't eliminate accounting scandals, but it could keep chief executives of troubled firms from claiming that bookkeeping was somebody else's job, experts said.

WorldCom Inc.'s $3.9-billion earnings restatement this week--allegedly one of the biggest accounting frauds in U.S. history--prompted Securities and Exchange Commission Chairman Harvey L. Pitt to fast-track his earlier proposal to require CEOs and chief financial officers to attest with their signatures not only that their numbers are correct, but also that they aren't omitting anything important.

The exact wording of the proposal is expected to be unveiled today, SEC spokesman John Nester said. The rule would apply to 965 U.S. companies with annual revenue of $1.2 billion or more, he said. It would take effect Aug. 15 after an accelerated approval process.

CEOs and CFOs already are required to sign annual and quarterly financial statements known as forms 10-K and 10-Q. The new rule would add "an extra level of intensity," said Charles Gradante, president of Hennessee Group, an investment advisory firm.

"I know from running my own business, as soon as you ask somebody who submits anything to you to sign off on it, you see how fast they start proofreading it," he said.

But some in the business community questioned whether the certification procedure is workable.

One chief executive, who would be required to sign the new certification, said the proposal doesn't address what happens when a CEO has questions about whether GAAP--generally accepted accounting principles--truly reflects a company's financial status.

Wells Fargo & Co. Chairman and Chief Executive Richard M. Kovacevich said in an interview that his bank had a dispute with its auditor over the accounting treatment of a venture capital investment when its paper value ballooned during the Internet bubble. The dispute, he said, involved a legitimately debatable issue.

"What are we signing off on?" Kovacevich asked. "How I think something should be stated or what GAAP says?"

Big corporations are so complex that even the most conscientious executive can fail to grasp all the details, Thomas Donohue, president of the U.S. Chamber of Commerce, said Thursday.

"If the CEO of a $50-billion corporation operating in 112 countries is required to sign a document saying he guarantees under penalty of law that all these numbers are correct, there's not a CEO in America that will sign it," Donohue said.

The new rule might make it easier for civil plaintiffs or prosecutors to sweep aside an executive's protestations of ignorance, but it isn't a magic bullet against fraud, legal experts said.

"It allows the prosecutor to say you claimed to have knowledge and you affirmed that everything was legal and correct," said Theodore Sonde, a former SEC enforcement lawyer now in private practice. "But it doesn't prove the case that the CEO knew the books were cooked."

Ted Fiflis, law professor at the University of Colorado at Boulder, said the rule at least would make an executive think twice about relying on the assurances of an underling.

"No CEO is going to let his own neck be wrung because the CFO does something wrong," Fiflis said.

In the case of Enron Corp., top executives have pleaded ignorance of accounting maneuvers that helped bring down the company.

One aspect of the proposal that has been ignored is that the signed declaration could give the top brass of a well-run company "the opportunity to say you do things right," the SEC's Nester said.

In that sense, the rule change could help boost investor confidence, he said.

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