Drinker Biddle's "How Planning Can Help CEO Transitions Succeed" is noteworthy for its focus on the importance of the CEO/CFO SOX certification process in preparing for and effecting a successful CEO succession. This process of educating and positioning an incoming CEO to certify to the financials - which is particularly challenging when the company is facing a restatement - is typically not baked into the traditional CEO succession checklist, but it should be.
While not required by law, most companies have instituted a subcertification process (as well as the SEC-recommended disclosure committee) to support the CEO/CFO certifications. The firm offers this sound guidance to companies on that process:
- Selection of sub-certifiers – Care should be taken to select the appropriate individuals who report directly to the CEO and CFO as sub-certifiers, down to their direct reports, and thereafter down to the appropriate level of the particular business model to act as a sub-certifier.
- Sub-certification documentation – The sub-certification documentation should provide appropriate and reasonable assurances regarding the contents of the financial statements and assurances regarding the sufficiency and effectiveness of internal control and absence of fraud.
- Training – A sub-certifier should receive training about the certification process and purpose upon assuming that role. Thereafter, all sub-certifiers should receive training on at least an annual basis in a timeframe that is in reasonable proximity to the start of the work related to the annual reporting.
- Officer review process – At a minimum, the CEO and CFO should review the sub-certifications and any supporting documentation from their direct reports. Depending on the size and the complexity of the organization, they may want to review all of the sub-certifications. The CEO and CFO should be empowered and encouraged to ask for any supporting documentation and to meet with or interview any sub-certifiers.
- Documentation – The diligence efforts of the CEO and CFO should be documented in an appropriate and reasonable manner. To the extent that any efforts throughout this process result in any potential for regulatory or litigation exposure, in-house or outside counsel should be engaged to establish and preserve privilege.
The firm also suggests companies use the subcertification process to support a management rep letter process that will optimally position the CEO/CFO to sign off on that letter for the auditor.
See these prior reports: "Disclosure Committee Composition & SOX Sub-certifications," "Disclosure Committee Practices" and "Quick Survey: SOX 302 Sub-Certifications"; and EY's "Unlocking the Potential of Disclosure Committees: Leading Practices and Trends." This post first appeared in the weekly Society Alert!