Question

Recent legislation requires CEOs of public corporations to sign an affidavit, a sworn statement, stating that all accountings put forth by the company are accurate and not misleading; not to the best of their knowledge, but that they are accurate and not misleading. Obviously, the CEO of most public corporations can't personally perform all aspects of these accountings. Instead, they must rely on the accuracy of employees assigned to perform such tasks at various levels. The legislation makes the CEO PERSONALLY liable, even criminally liable, for inaccurate accountings. Considering this, is it fair or equitable to find a CEO liable if a subordinate has committed fraud or a mistake in the preparation of the accounting?

Answer 1

Overview

Recent accounting scandals have caused investors to distrust corporations, a fraud case could be resolved by paying the fine out of the company’s coffers. In some cases, shareholder lawsuits accusing companies of fraud could be settled using money from an insurance policy. Executives rarely had to pay out of their own pockets.The certifications will certainly require more due diligence for the CEO, the CFO, the audit committees, internal auditors, and the auditors in reviewing the financial statements and the underlying process in preparing the statements as well as at all other levels of financial management. And in the event of another failure like WorldCom or Enron, the certification by the CEO and CFO is unlikely to protect the auditors, the audit committee, and other senior accountants from legal liability.

Is it fair to find a CEO liable if a subordinate has committed fraud or a mistake in the preparation of the accounting?

In view of the recent upheavals in corporate reporting, it would be prudent to make the CEO liable for proper implentation of internal controls and ensuring that the risk of financial misstatements has been adequately mitigated. A case to case review would need to be done in case a fraud has been detected to determine if the CEO had taken all necessary actions to put in place preventive controls. Only after this has been established can the CEO be exonerated from personal liability.