Harvey Pitt has likely ruined the summer vacations of many of America's top CEOs.
Securities and Exchange Commission's
latest edict requires written statements, under oath, from senior officers of the 1,000 largest public companies -- or those with revenue greater than $1.2 billion in their last fiscal year -- attesting to the accuracy of their financial statements and saying whether they had been reviewed with the companies' audit committee.
It comes amid a barrage of accounting scandals, the latest at
. Legal experts say it is an unprecedented step that will make it much harder for top corporate executives to claim they were unaware of fraud going on under their noses.
"They've never done anything like this in the past that I can recall in any way," said former SEC staffer Jay Dubow, a lawyer at Wolf Block Schorr & Solis-Cohen, a Philadelphia-based firm.
Others agree. "This is a very unusual use of their enforcement power," said Paul Maco, another ex-staffer and current securities lawyer at Vinson & Elkins, a Washington-based firm. "They are using their authority to conduct investigations to act expeditiously and answer questions that they have posed."
Looking for Answers
The SEC's order is part of an investigation to determine whether it will be necessary to adopt or amend the rules that govern corporate reporting and accounting practices.
Maco recalls other so-called 21A-type investigations in the past to get a detailed picture of market practice before engaging in rulemaking, but says they have never combined it with this type of order. In 1974, for example, the SEC authorized a 21-A investigation of New York City, which was on the verge of bankruptcy after it was unable to make payments on some short-term notes.
The new order will certainly increase the potential legal liability for CEOs, experts say.
"Considering the consequences that apply to someone who makes a false statement to the government during an investigation, there is going to be some very serious discussion between CEOs, their counsel, and audit committees regarding the new order," said Maco.
The consequences are potentially serious, if a CEO or CFO certifies something that turns out to be untrue. "It's unclear what procedural safeguards, if any, apply to someone submitting this order," said Maco.
With the issuance of this order, a layer of deniability has been removed for CEOs, experts say.
"If there is something in your financial statements that you could have known with a reasonable amount of diligence, you will be on the hook for it," said Dubow. "There is potential civil liability with the SEC, with private parties -- or class actions -- and possible criminal liability."
"CEOs have sometimes been able to rely on audit committees," said Thomas Hazen, a law professor at University of North Carolina. "This makes it clear they can't hide behind somebody else's numbers."
Even under existing rules, there is some liability for a false filing. Companies are responsible for their statements. Quarterly reports, or 10-Qs, must be signed by the CFO and an authorized officer, while annual reports, or 10-Ks, have to be signed by the CEO, CFO, controller or senior accounting officer, and the majority of the board of directors. But the new order takes it a step further.
"By putting CEOs and CFOs under oath, they are subject to prosecution for perjury," said Hazen. "This will make it easier to prove a criminal case. It puts them in the hot seat."