Question

14. A CFO and CEO potentially are subject to huge financial penalties if they incorrectly certify to the SEC that their company’s internal controls function properly, and they do not. They similarly are subject to huge penalties if they certify that their company’s financial statements fairly present its financial position, but they do not. Should these executives be allowed to obtain insurance that will reimburse them for the amount of these penalties if they mistakenly submit a certification to the SEC that proves to be erroneous? Identify the pros and cons of insurance coverage being available.

Answer 1

Yes, actually they should be allowed to obtain insurance that can reimburse them for the amount of penalties that may be imposed upon them by SEC if if they mistakenly certify that their company's internal controls functions properly. Since, the penalties imposed in those cases are huge it may create a lot of financial stress on those individual if any of the certification given by them proved to be wrong mistakenly. Further , no one can guarantee the accuracy of internal controls there may be loopholes in them which may not have come to the attention of CEO or CFO, so they should have some sort of protection against those cases in the form of insurance cover for such an instance.

Pros of insurance coverage :-

1 . They can be safeguarded against huge penalties when penalty have been imposed even when they have not defaulted.

2. They can concentrate on their work rather than thinking unnecessarily on these penalties.

Cons of insurance coverage :-

1 . Since these officers are in full control of internal controls, they may involve themselves in any fraudulent scehem and try to show it as if it has been done by mistake.

2 . They may not take proper care in strengthening the internal controls of the company because if any fraud take place because of internal controls these officers will not have any rest of penalties because of insurance and thus this may lead to weakening of internal controls.