08.02.2002

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Updates

This Perkins Coie Update summarizes the requirements of Section 906 certification and provides practical recommendations regarding the manner of filing and form of the certification and the Section 906 certification process.

Section 906 of the Sarbanes-Oxley Act requires that public companies include a specific written certification of the Chief Executive Officer and Chief Financial Officer in each periodic report containing financial statements. This certification requirement is effective immediately and, for most public companies, will apply to the quarterly report on Form 10-Q for the second quarter of 2002, to be filed on or before August 14, 2002.

What Does Section 906 Require?

Under Section 906, a company's CEO and CFO must certify that:

    • The periodic report containing financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    • Information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations.

A CEO or CFO who makes a certification knowing it is false will be subject to a fine of up to $1 million dollars and up to 10 years in prison. A CEO or CFO who willfully makes a certification knowingit is false will be subject to a fine of up to $5 million dollars and up to 20 years in prison.

Interplay with SEC June 27, 2002 Order for 947 Largest Public Companies

All public companies must comply with the Section 906 certification requirement. By contrast, only 947 public companies (generally those with revenues of more than $1.2 billion during their last fiscal year) must comply with the SEC's order issued June 27, 2002. The SEC order requires the CEO and CFO of those companies to file a sworn written statement by August 14, 2002 (for calendar year-end companies) certifying as to the accuracy of the most recent annual report on Form 10-K, all reports on Form 10-Q and Form 8-K and all definitive proxy materials filed subsequent to the most recently filed Form 10-K.

Manner of Filing and Form of Section 906 Certifications

Manner of Filing

We are generally recommending filing the Section 906 certifications as Item 99 exhibits to the periodic report. Section 906 requires that the certifications "accompany" the report being certified, but does not explain how to meet this requirement. As a result, companies have adopted different approaches to filing the certifications, which we discuss below.

Filing the Certifications as an Item 99 exhibit. This method discloses to shareholders and the public that the certifications have been filed and is consistent with the public-disclosure spirit of the Sarbanes-Oxley Act. Filing the certifications as exhibits to the periodic report will make them easy for investors and other market participants to locate to confirm that the CEO and CFO have complied with Section 906. To date, this approach appears to be the majority practice. Filing the certifications as exhibits does cause them to be part of the periodic report and, therefore, "filed" for purposes of the liability provisions of Section 18 of the Exchange Act. (Section 18 imposes potential civil liability on any person who makes a false or misleading statement with respect to a material fact in a periodic report.) The risk of additional civil liability is probably only incremental, however, because any civil claim regarding the content of the Section 906 certification is likely to be part of a broader claim with respect to the underlying report itself.

Submitting as a confidential correspondence filing. We understand that a number of companies to date have opted instead to file the certifications as a confidential EDGAR correspondence filing at the same time that they file the periodic report. These correspondence filings are not publicly disclosed. This approach appears to satisfy the requirement that the certifications "accompany" the report, and avoids the possible incremental liability that arises from the certifications being filed with the report. We do not think, however, that this approach is consistent with the spirit of the Sarbanes-Oxley Act, which seeks to encourage greater public disclosure by companies. As a practical matter, companies may find that the correspondence filing approach unnecessarily arouses the suspicions of investors because they will be unable to determine if the CEO and CFO submitted the required certifications.

Submitting as a correspondence filing and also furnishing on a Form 8-K. Another approach is to submit the certifications as confidential correspondence filings and also furnish them as Item 9 (Regulation FD) disclosures on a separate Form 8-K. This approach is less straightforward than filing the certifications as Item 99 exhibits, as it separates the public disclosure of the certifications from the report being certified. However, this approach satisfies the requirement that the certifications "accompany" the periodic report and the public disclosure objectives of the Sarbanes-Oxley Act, and also avoids the possible additional Section 18 liability that might arise if inaccurate certifications were filed with the report. Although more complex than filing the certifications as an Item 99 exhibit, this approach may be appropriate for CEOs and CFOs who are concerned about the possibility of incremental liability under Section 18.

Form of Certification: One or Two Documents?

A sample form of certification is attached at the end of this Update. One question several companies have asked is whether the certifications of the CEO and CFO should be made in the same document or in two separate documents. The language of Section 906 is ambiguous on this point. Although there is no substantive difference between these two approaches, we recommend that the CEO and CFO certify in separate documents. We note that the SEC, in the context of its order issued June 27, 2002, has suggested that CEOs and CFOs provide separate written statements.

Practical Due Diligence Considerations for Certification

To support Section 906 certification, the CEO and CFO should conduct a reasonable diligence process. The appropriate procedures to support Section 906 certification will depend on a company's particular management, financial reporting and organizational structures, and will vary by company. Here are some practical procedures to consider:

    • Carefully review the report being certified and understand the procedures used to prepare the report. The CEO and CFO should carefully review the report being certified, and interview or obtain information from company personnel that prepared the report to understand how it was prepared. In particular, the CEO and CFO should understand how the information in the report was gathered and checked and how the report was drafted and reviewed.

    • Identify appropriate personnel to help in the certification process. The CEO and CFO will want appropriate personnel to participate in the review of the report. Consider including in the review process those officers or senior managers who have decision- or policy-making authority over the business divisions, units or functions that may significantly affect the company's financial results or operations. Also consider including those sales or financial managers that can help the CEO and CFO review the company's procedures for gathering and reporting the financial information included in the report. At a minimum, the company's principal accounting officer, general counsel, principal risk management officer and chief investor relations officer should be included on the review team. Depending on the company's circumstances, it may be appropriate to involve the company's primary audit partner or audit personnel from its external, independent accountants in the review process.
    • Meet or communicate with appropriate personnel to review the report and the financial reporting procedures that generated the report. The personnel identified to help in the certification process should carefully review the report. After this review, the CEO and CFO should meet or communicate with these personnel to review the process for preparing the report and the accuracy and completeness of the disclosures in the report. The reviewing personnel should be prepared to discuss the disclosures in the report generated by them or by personnel under their supervision, or that relate to corporate functions in which they have a significant role. The reviewing personnel in financial management or sales should review with the CEO and CFO the procedures for gathering and reporting the financial information included in the report. Topics for discussion may include:

      • Financial reporting issues that are significant to the company;
      • The "Management's Discussion and Analysis" section of the report, including the company's critical accounting policies, any known trends, uncertainties or events that could have a material impact on revenues, income or liquidity, and the company's liquidity and capital resources;
      • Internal audit procedures and adequacy of internal controls;
      • Procedures used to ensure that financial statements comply with applicable accounting principles; and
      • Material financial reporting matters where the chief accounting officer, either alone or in consultation with the auditors, made significant judgments.
    • Subcertification. The CEO and CFO should consider whether to obtain "subcertifications" from appropriate company personnel. In subcertifications, selected personnel certify information to support the CEO's and CFO's certifications under Section 906. The scope and content of the subcertifications and the personnel chosen to provide them will vary based on the information included in the report being certified, and the company's management structure and particular circumstances. As an alternative, the CEO and CFO should consider whether it would be more practical to obtain oral representations from company personnel, which could be memorialized in a written report, to support the CEO and CFO certifications.
    • Meet with auditors (external and internal). The CEO and CFO should consider meeting independently with the company's outside auditors (and internal auditors, if any) to discuss whether they have any material concerns about the accuracy, completeness and reliability of the financial or other information in the report, the process of preparation of the report, or the internal controls and financial systems that generated the information in the report. The CEO and CFO should conduct follow-up discussions with relevant company personnel, if necessary. In addition, the CEO and CFO should consider apprising the audit committee members of the review process undertaken for Section 906 certification.
    • Legal compliance review. The CEO and CFO should work with the company's appropriate legal and financial reporting personnel to confirm that the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act.
    • Documentation. The company's chief accounting officer and general counsel should consider preparing a memorandum detailing the procedures used to review the report and the process followed to support the Section 906 certification, including a description of the meetings held as part of the process.

Additional Certification Under Section 302-Delayed Effectiveness

An additional certification requirement, under Section 302 of the Sarbanes-Oxley Act, will be effective by no later than August 29, 2002. Under Section 302, public company CEOs and CFOs will be required to certify in each annual and quarterly report filed with the SEC that:

    • They have read the report; and

    • Based on their knowledge,
      • the report does not contain any material misstatements or omissions;
      • the financial statements and other financial information included in the report fairly present in all material respects the company's financial condition and results of operations; and
      • they have designed and reviewed the effectiveness of internal controls to ensure that they receive material information and they have disclosed to the audit committee any fraud and all significant deficiencies in the design or operation of the internal controls.

The SEC will issue final rules by August 29, 2002 to implement the Section 302 certification requirement.

Text of the Act

Further discussion of the Sarbanes-Oxley Act, and other recent laws and regulations of interest to public companies on our website.