Some SarbOx Sanity?
December 11, 2006 | Filed Under Regulation, In the News
First, the picture that’s worth a thousand words:
SEC chairman Christopher Cox is taking a first step to rationalize Sarbanes Oxley for smaller companies. The New York Times
reports that the chairman will proposed revised standards later this week. Not a total exemption for these companies, but one that might lower some of the costs of compliance.
The proposal will, for the first time, impose a “materiality standard” — that is, auditors will be advised to scrutinize only those controls that could have a reasonable risk of having a material impact on the financial statements. It is expected to encourage auditors to rely on prior years’ work as a basis for testing controls and discourage auditors from multiple testing of the same controls. And it will encourage the auditors to use a “risk assessment” to focus the audit on the areas of greatest potential concern.
Commission officials said last week that the proposal would not be an unequivocal victory for smaller companies because it would not give them what they wanted most: a blanket exemption from Section 404. Nor would it impose a sharp restriction that would limit the auditors to looking at the design of the financial controls.
It will be interesting to see how this develops and how Chairman Cox works with the new Democratic majority. SarbOx namesake Sen. Paul Sarbanes is retiring; no word on what he thinks about changes to his signature piece of legislation.
A New Specter on Corporate Crime
December 8, 2006 | Filed Under Regulation, Compliance
Senator Arlen Specter weighs in on righting some of the wrongs in the prosecution of corporate crime. There may be some reason for optimism.
According to the New York Sun, the legislation introduced yesterday by Senator Specter:
[…] would nullify portions of corporate crime guidelines issued to federal prosecutors in 2003 as part of the response to business frauds, such as the collapse of Enron. The directive, authored by the deputy attorney general at the time, Larry Thompson, has come under fire from many quarters as an erosion of attorney-client privilege.
[..] would also bar the Justice Department from making prosecutorial decisions based on a company’s provision of legal fees or legal counsel to its employees. In March, a federal judge in Manhattan, Lewis Kaplan, ruled that prosecutors violated the constitutional rights of defendants in a tax shelter case by pressuring the accounting firm where they worked, KPMG, not to pay for their legal defense. The government’s appeal of that ruling is pending before the 2nd Circuit.
However, since Senator Specter is the outgoing chairman of the Judiciary Committee, it is not clear that this legislation will ever see the light of day.
And the NFL owners are probably happy about that…
Blue Ribbon Red Flag?
November 30, 2006 | Filed Under Regulation, Governance
The Wall Street Journal is providing a preview this morning of an interim report from the Committee on Capital Markets Regulation. The New York Times also gives it a once-over.
The full report is here (danger: 152 page pdf). The three page press release is here for those of us who preferred Cliff’s Notes to Canterbury Tales.
The punch line: excessive regulation and transactional costs are making U.S. companies less competitive in global capital markets.
You think?
Sarbanes-Oxley reform is mentioned, although some say that issue is too hot of a political potato. (Or is it potatoe?)
This nugget warmed my heart (from the WSJ):
The report’s overarching theme is a change in regulatory philosophy. The revised philosophy is one based more on general principles than prescriptive rules, more aware of costs as well as benefits of new rules and less intrusive. It lauds Britain’s Financial Services Authority, which uses “principles”-based regulation and oversees all British financial firms, in comparison with the U.S.’s multiple federal and state banking and securities regulators.
The Wired GC studied philosophy and is a big fan of principles over rules. Why?
– You can never have enough rules.
Many members of Congress, and most regulators I have met, prefer rules. Rules need regs and regs need interpretive guidance and all that needs lawyers inside of government to legislate and promulgate. Then lawyers outside of government are needed to postulate and navigate.
A great example is the aforementioned Sarbanes-Oxley, largely a knee-jerk reaction to notorious financial shenanigans like Enron and WorldCom. But much of what happened in those cases was already actionable under current law. The business community (99%+ of whom try to do the right thing) gets punished for the misdeeds of the errant few.
If nothing else, the Committee report reminds people that it isn’t Fortress America any longer. Companies can go private, or organize or raise capital under laws of more market-friendly jurisdictions. Don’t think for a minute that many members of the Committee (with a heavy New York tilt) aren’t aware of the acsendancy of London as a premiere world capital market. Hence the mention of Britain’s FSA.
Former Goldman CEO and current Treasury Secretary Henry M. Paulson Jr., while not a member of the Committee, has already made these issues a priority.
The report, according to the New York Times, gets it right on the issue of corporate prosecutions:
The report calls on the Justice Department to change its policy on corporate prosecutions. That approach is contained in a memorandum by Larry Thompson, who was deputy attorney general when the corporate scandals erupted. At the moment, prosecutors, in determining whether to bring criminal charges against a company, are permitted to consider whether the company waived lawyer-client privileges to aid the government’s investigation and whether the company is paying defense costs for current or former executives facing criminal charges.
Instead, the report said, the Justice Department should prohibit prosecutors from seeking waivers of lawyer-client privilege or the denial of legal fees for company officials.
Abusing privilege waivers, now there’s a real crime.
Lawyers on the 22 member Committee included Ira Millstein of Weil Gotshal and Thomas Russo, chief legal officer of Lehman Brothers.
The Committee also utilized a Legal Advisory Group:
– John Bostelman, Sullivan & Cromwell
– Adam Chinn, Wachtell Lipton
– Kris Heinzelman, Cravath
– Leslie Silverman, Cleary Gottlieb
– Jeffrey Small, Davis Polk
At least the Committee was able to find seven lawyers who really want reform…
(Update 1 Dec 06): Walter Olson agrees that it’s London Calling. Soon-to-be Gov. Spitzer says of the status quo: worked for me.
Listen to the Whistle Blow
May 1, 2006 | Filed Under Regulation, Compliance, In the News
Can you hear it?
The news media is tracking the issue of what companies are doing to balance the orderly administration of compliance programs with federal laws such as Sarbanes-Oxley.
And the take is somewhat anti-business; consider this treatment of arbitration provisions:
Another tactic firms are using is to require employees to sign contracts that compel any who exhaust the Labor Department’s process to submit allegations of Sarbanes-Oxley violations to binding arbitration rather than filing suit in federal court.
A year after the law was passed, Salomon Smith Barney, the brokerage arm of Citigroup, won its bid to force into arbitration a former research analyst who claimed he was fired for refusing to alter a research report. The allegation clearly is covered by Sarbanes-Oxley, the court held, but that doesn’t override the contract the worker signed agreeing to arbitration.
There’s a fine line between encouraging employees to bring forward concerns and having some reasonable chance to hear about it and correct any issues before the Feds come knocking on the door.
Look Before You Leap In-house
April 25, 2006 | Filed Under On The Dock, Regulation
So says Scott Wiegand.
And from his harrowing days as GC at PurchasePro, he should know. That experience included a criminal trial on federal charges; Mr. Wiegand was acquitted on all of them.
In an excellent and straightforward article in Corporate Counsel magazine, Mr. Wiegand provides six “lessons learned” to once and future GCs, who should consider the downside before grabbing the alleged gold in-house ring when it is seductively dangled in front of them.
I won’t summarize all six; Mr. Wiegand and his coauthors (attorneys on his defense team from Nutter McClennen & Fish) do so very ably.
Item #2, looking closely at the CEO and CFO are key, particularly in the post-Sarbox world. Item #4, talking privately to outside auditors is a great idea; but I wonder how that would work during the courtship that is the recruitment and interview process for a C-level position.
Item #5 is the key for me, albeit one that works only after you’ve accepted a GC position: remember that you are the company’s lawyer. That is a perennial challenge for GCs, particularly with smaller companies facing difficult issues.
Mr. Wiegand is now associate general counsel at Harrah’s Entertainment Inc. He is moving on, but notes the financial toll such charges can take. It’s gratifying to know that there are employers out there who see baseless charges for what they are, and keep a good lawyer regardless.
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