The certification process required under the Sarbanes-Oxley Act of 2002 (SOX) has ramifications for credit departments, even though the act doesn’t specifically single out credit professionals. Scott Blakeley, Esq., of Blakeley and Blakeley LLP, pointed out that some public companies are requiring sub-certifications related to SOX that sometimes filter down to credit departments.
CEOs and CFOs are in the crosshairs of liability under SOX, Blakely noted. They are required to certify the accuracy of their financial records and validity of their company’s internal accounting controls. Therefore, in order to protect CEOs and CFOs from the representations of lower-level officials that they must rely upon in the financial reporting process, a system of sub-certifications has evolved. Sub-certifications involve others in the chain of command that have control over the accounting process to certify that the reports and numbers accurately reflect the true financial picture of the company. Blakeley pointed out this pushes the risk resulting from fraud or false information down to the level of those charged with providing it. Some sub-certifications reach into credit departments of public companies. For example, credit departments are often involved in determining if all revenue that is recognized actually earned or if it be adjusted for estimated rebates and discounts. Credit professionals may be responsible for certifying the accuracy of receivables too. In doing so there must be, for example, adequate provisions for doubtful and uncollectible accounts. On the issue of whether company officials can be compelled to sign sub-certifications Blakeley said, "A company can be in its right to require you to sub-certify or they can remove you."
On the issue of how SOX directly impacts credit departments, Blakely also pointed to Section 409 of the act that requires prompt disclosure of a material event. Such a material event could be the removal or resignation of a corporate director, termination of a material contract or delisting from a stock exchange. "If you’re a credit professional, learning of (a customer’s) section 409 disclosure may cause you to re-evaluate (that customer’s) credit risk." He advised inserting language in credit applications that give the company the right to elect to switch a customer from credit to cash terms in the event of a section 409 disclosure.
Source: Tom Diana, NACM Staff Writer and Scott Blakeley, Esq.