How to Read Guarantees from Management on the Annual Financial Report

Management has been required to include a section in the annual financial report called “Corporate Responsibility for Financial Reports” or “Management's Responsibility for Financial Reports” since the financial reporting scandals of the late 1990s and early 2000s. When the Sarbanes-Oxley Act of 2002 passed Congress, this guarantee became more critical.

Today the chief executive officer and chief financial officer must prepare a statement to accompany the audit report to certify that, “based on such officer's knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report,” according to Section 302 of the Act.

Executives were asked to provide these letters in the past, but this new requirement must include a certified statement, signed and notarized for public view, indicating that management takes full responsibility and can be held legally accountable for what's in the financial reports.

Executives can now be held personally responsible for their actions and may face up to a five-year prison term, fines, and other disciplinary action. They may also face civil and criminal litigation, and the SEC may bar them from serving as a corporate officer or director.

CEOs and CFOs have responded to this new requirement by looking for ways to shield their money and property from shareholder lawsuits and federal prosecution. The key question not yet answered is whether the public will actually see this enforced and whether it will protect investors and the public from the corporate scandals seen in the past.

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