Institutional investors should view Aug. 14 as a May Day, a signal of both distress and reassurance. That is the deadline for chief executive officers and chief financial officers of 947 of the largest companies to file certifications, under oath, that the most recent financial statements of their corporations are complete and accurate. Or if they cannot, they must provide, also under oath, a written statement explaining why they cannot sign off on such a certification.
The Securities and Exchange Commission ordered the certifications in hopes of helping to reveal promptly how many companies have potentially questionable financial disclosures, while at the same time trying to assuage investor concern and restore confidence in the rest of the companies for which top executives swear to the quality of their financial reports.
The SEC will make the certification and the non-certification statements public soon after they are filed on a link from its website, www.sec.gov. As of July 30, the CEOs and CFOs of nine companies - AMR Corp., Corning Inc., Delphi Corp., Electronic Data Systems Corp., Federal Express Corp., Fiserv Inc., PepsiCo Inc., Qualcomm Inc. and Textron Inc. - filed certifications, attesting to the completeness and accuracy of their companies' financial statements.
The SEC order is unprecedented. It covers U.S. companies with annual reported revenues in excess of $1.2 billion. Although the SEC order doesn't define the companies by market capitalization, representatives of Frank Russell Co., Tacoma, Wash., and McGraw-Hill Cos.' Standard & Poor's, New York, said it covers most of the companies in the Russell 1000 index, nearly all of the companies in the S&P 500 and S&P 400 indexes, and a few companies in the S&P 600 index.
John Heine, SEC spokesman, couldn't say if the SEC would extend the order at some point to more companies beyond the initial 947.
Institutional investors could use this unprecedented order as a signal to dump immediately the stocks of those companies whose CEOs or CFOs - each one must file separate certifications - can't attest to the SEC order, while buying stocks of many of the companies whose CEOs and CFOs make the certification without equivocation.
Indexers will face a peculiar issue of how to deal with the filings. Being passive, they ordinarily ignore corporate events. But could indexers in this litigious era face the wrath of some clients for failing to dispose of companies that appear to report financial misstatement problems?
Since the CEO and CFO have to file separate statements, what will investors do should one of them attest to the certification, while the other dopesn't?
On Aug. 14, assuming most filings are revealed then, market volatility could make big swings and trading volume could swell; in the ensuing days, the market could calm down, investors at last having greater certainty that all the bad news is out on the misreported accounting.
"I think it's very significant," Robert D. Barkley, director-client development, Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, said of the order. The firm managed some $25.5 billion in equities and $2.5 billion in fixed income for pension funds and other tax-exempt institutional investors, as of Jan. 1. "I think the market will be watching that."
Mr. Heine declined to speculate about what the SEC will do with companies whose CEO or CFO doesn't certify the financial statements. The market likely will punish those companies, demanding an explanation.
Investors now may be speculating how significant Aug. 14 will prove to be.