Markets and Credit Agencies Brace for SEC Deadline

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Today is the deadline set by the Securities and Exchange Commission (SEC) for CEOs of 745 major public companies to certify the accuracy of their companies' financial statements. So far, fears of a wave of restatements have not materialized. But Fitch Ratings warns that companies that fail to file by 5:30 pm, or file with nonstandard language, may face market reactions and liquidity concerns that can affect their credit ratings.

Fitch believes market reactions are likely for companies that miss SEC's deadline because: (1) Market reactions have been harsh and immediate for companies, such as WorldCom and Qwest Communications, that have previously announced accounting irregularities. (2) Investors will know almost immediately if any company fails to comply with the certification request.

Investors can access the filings on a real-time basis in the EDGAR system maintained on SEC's Web site. The results will be posted with a slight delay on the CEO and CFO certification summary sites. Companies may request extensions of time, but Fitch believes any company requesting an extension will also be subject to adverse publicity.

Some companies are at more risk than others. As a general rule, Fitch believes failures to meet the SEC's deadline will take the heaviest tolls on companies that are active users of the commercial paper market, face pending debt maturities, and have "negative outlooks" or "rating watch negative" designations. To provide investors with an order of magnitude, Fitch estimates that approximately 77 companies affected by the certification requirement currently carry "negative outlooks," and another 19 are listed on "rating watch negative" for reasons other than the SEC certification requirement. Of these 96 companies, 23 have active commercial paper programs.

Fitch has attempted to reassure nervous investors, saying it expects the overwhelming majority of companies will meet the certification deadline. But it believes additional steps are needed to restore investor confidence in the capital markets. Specifically, Fitch advocates the development of a comparability benchmark for each industry or sector, where each company's principal accounting practices and assumptions would be publicly available and compared to industry established norms.

-Rosemary Schlank

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