The metaphor "D-Day" obviously refers to June 6, 1944, when Allied forces began the invasion of western Europe during World War II. I suppose these analysts thought the day momentous because a vast majority of executives did indeed sign the certifications and because stock prices generally rose that day, leading some to believe that "prosperity is just around the corner."

 

What poppycock! Readers should understand that the certification process had no substance and the "D" in this "D-Day" actually stands for Drivel.

To begin, the certifications were ad hoc and possibly with no legal substance. No law exists that required these certifications, as can be seen when SEC officials admit that they have no idea what would happen to those managers who do not file certifications. With no consequences, there will be no change in behavior.

Securities laws already prohibit fraud. Both the Securities Act of 1933 and the Securities Exchange Act of 1934 criminalize securities fraud; these laws plus amendments to them over time suffice to define accounting responsibilities of CEOs and CFOs. The certification process added not one iota of liability to these corporate officers.

 

More significantly, if officials lie in their financial statements, why wouldn't they lie in these certifications? I still think that there are dozens and dozens of corporate financial statements out there with exaggerated numbers. The culture of the 1990s that encouraged "management of earnings" still has at least its vestiges found in the artifacts we call financial reports. I remain suspicious of many corporate financial statements, so I am apprehensive of their certifications. 

 

If the rising stock prices on August 14 -15 reflect growing investor confidence, I doubt that it has much to do with these certifications; instead, they more likely reflect confidence that evil doers have a higher probability of prosecution, as seen in the arrests of managers at Adelphia, WorldCom, and IMClone. As managers see other managers whisked away in handcuffs with some possibility of doing prison time, they will adjust their behaviors with respect to accounting.  Enforcement of the laws is what is important; not the PR job seen in recent days.
 

So why did the SEC require these certifications? The best spin that one can give is that, while symbolic, SEC officials thought it would build investor morale and shore up the stock markets. Symbolic acts sometimes help the human psyche (but substantive actions are what the economy really needs). The less favorable spin is that Harvey Pitt has found himself under attack and wanted to demonstrate that he has the fortitude and resilience to restore faith in the markets. My guess is that the latter motivation played the greater role in developing this certification process.

I suggest that the SEC quit worrying about PR and focus on enforcement issues. We are still waiting for arrests in the cases of Waste Management, Global Crossing, and of course Enron. Enforcement actions against those who perpetrated fraud in these cases will go a very long way in restoring investor confidence.

 

J. EDWARD KETZ is associate professor of accounting in Penn State's Smeal College of Business Administration. Check out his column, where you'll find more articles on controversial, cutting-edge topics.