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Stanford Law School, the Stanford Center on Ethics andThe National Law Journal hosted a panel discussion on Nov. 10 exploring the challenges posed for practitioners by the Sarbanes-Oxley Act. The panel was entitled “Sarbanes-Oxley: The Good, The Bad, The Ugly.” Discussion participants included: Joseph Grundfest, who addresses the requirements of managers and auditors concerning corporate internal controls; Deborah L. Rhode, who focuses on the whistleblower provisions for lawyers who suspect misconduct; and Jordan Eth, who will examine the law from a litigator’s perspective and how it has affected the liability landscape. The program is moderated by Pamela A. MacLean. The transcript has been edited for space considerations. Joseph Grundfest: I’m going to start with everybody’s very, very favorite section of Sarbanes-Oxley, 404. And what I’m going to try to do is explain what we can do to fix 404. One of the great debates about Section 404-which is the provision that requires that auditors, in effect, attest to the internal controls, and that management also attest to the internal controls of publicly traded corporations-is whether the costs of Section 404 exceed the benefits. It’s interesting to observe that when the rule was adopted, the SEC estimated that compliance with 404 would cost $1.2 billion. They were wrong. They weren’t wrong by a little. They were wrong by a lot. They were off by orders of magnitude. If you look at the Financial Executives [International], they estimate the [cost of] compliance [in] the first year of Sarbanes-Oxley has cost $24 billion. Twenty times more than the SEC had anticipated, and the American Electronics Association estimates the number at $36 billion, 30 times more. So, you know, even in the world of cost-benefit analysis, where the government will frequently get it wrong, and be off by 50% or 100%, to be off by a factor of 20 or 30 is really quite remarkable. And you can imagine what would happen to any one of us in our jobs, if in our budgeting process we just happened to miss our projections by a factor of 10, or 20 or 30. Now, there’s a debate about whether the cost of 404 exceeds the benefits. I’d like to suggest that that debate, while extraordinarily interesting and valuable, really misconstrues the nature of the problem. Because even among those people who believe that the benefits of 404 exceed the costs, there’s a broad consensus that the rules are not cost-effective. Even [Chairman William] McDonough, the head of the [Public Company Accounting Oversight Board (PCAOB)] has publicly said that the first year of compliance with 404 has cost far more than it should have. In other words, these rules have been adopted and implemented in such a way that companies are forced to spend money beyond the point at which the marginal benefits of these expenditures exceed the marginal costs of these expenditures. And the question becomes, how to introduce some rationality into the process. And here, I think we need two different types of fixes. We need a substantive fix, and a procedural fix. The substantive fix looks to a change in the rules that actually implement Section 404. If you read the statute, 404 is not self-executing. All it does is it authorizes the SEC and the PCAOB to go out and adopt rules and regulations that publicly traded companies have to comply with in order to comply with 404. So, the problem with 404 is not 404. The problem is the rules adopted by the PCAOB and, in particular, audit standard No. 2, which was then approved by the SEC. It is a long and difficult and turgid document. But if you take the time to read through it, and if you put your feet up, and you say, “What is driving this tremendous increase in costs to be far beyond what the SEC had anticipated?” what you realize is the problem is hard-wired into some of the core language of audit standard No. 2. Statement No. 2 requires that auditors search for what’s called “significant deficiencies.” And they issue adverse opinions of internal controls, if they identify what’s called material weaknesses. So, the devil is in the details, in the definition of what constitutes significant deficiencies and a material weakness. Look at the definition of significant deficiency. And if you haven’t seen this before, hold on to your chairs.
Participants Joseph Grundfest: W.A. Franke Professor of Law and Business at Stanford and a former commissioner of the Securities and Exchange Commission. Deborah L. Rhode: Ernest W. McFarland Professor of Law at Stanford and director of the Stanford Center on Ethics. Jordan Eth: A partner with Morrison & Foerster specializing in representing public companies and their officers and directors in class actions, SEC investigations and derivative suits. Pamela A. MacLean (moderator): California bureau chief for The National Law Journal.

A significant deficiency is defined as “a controlled deficiency or combination of controlled deficiencies that adversely affect the company’s ability to initiate, record, process, or report external financial data reliably in accord with generally accepted accounting principles, such that there is”-here it is, here it is, here’s the joker in the deck-”more than a remote likelihood that [inaccuracies] in the statement of the company’s annual or interim financial statements”-that is, more than inconsequential-”will not be prevented or detected.” Holy guacamole! The rules send the auditors out looking for processes that sit at the verge of a “remote likelihood” of something that is “more than inconsequential.” We’re talking about setting armies of auditors to work looking for things that have low probabilities of causing material events. So, if you want to know what the boundary is of the scope of concern of 404, it sits at the edge of the remote and the inconsequential. Now, we also know that the lower the probability, and the lower the magnitude of the process you look for, the more of them you’re going to find in any company. So, if you want to say, “Let’s look at the high-probability, high-magnitude events,” there will be a smaller number of them than if you’re looking for the remote-likelihood inconsequential events. It will proliferate, and there will be thousands of them within a corporation. So, as soon as the rule says you’ve got to look for significant deficiencies, and it defines significant deficiencies that way-game over. A material weakness is a subset of a significant deficiency. So, the real problem is significant deficiencies. Material weakness defined: significant deficiency or combination of significant deficiencies that result in a more than remote likelihood that a material misstatement of the annual financials will not be prevented or detected. So, a material weakness is, for you logicians in the room, a proper subset of a significant deficiency. But you’re still looking for a more than remote likelihood. Now, it gets more interesting still. What’s the definition of remote likelihood? If you were holding on to your seat before, hold tighter now. First, probable: The future event or events are likely to occur. Not certain, but likely. Reasonably possible: The chance of the future event or events occurring is more than remote, but less than likely. And remote: The chance of the event is slight. So, unless you can determine that the chance of the event is slight, it becomes an auditable control process under 404. No wonder we’re spending $24 billion or $36 billion on internal controls when we’ve written the rules that way. And it’s not Congress’ fault. Congress did not write these rules. It’s the regulators that adopted these rules. So, what’s the fix? Well, as a practical matter we need to raise the probability threshold and we need to raise the materiality standard. And as a practical matter, what you would do is amend statement No. 2 so that auditors should be required to test only for material weakness . . . where you define the material weakness as a weakness that creates a reasonable possibility or a probable likelihood that a material misstatement will not be prevented or detected. And remember the definition of materiality. Materiality is what investors care about. If it’s not material, it’s too small to care about. So, let’s look at rational probabilities of things that investors would care about. And if it doesn’t fall in that basket, it doesn’t belong as part of the 404 process. That’s the substantive fix. The procedural fix looks at the micro-structure of the audit industry. And here, what you have to understand is that the audit industry is subject to some very interesting pressures that rationally push the audit industry to apply Section 404 in a rather brawny and aggressive manner. Let’s be candid, the audit profession has been thrashed. It’s been thrashed in Congress. It’s been thrashed in the press. It’s been thrashed before the SEC. And the last thing in the world that the audit profession can tolerate is to be thrashed yet again because it didn’t adequately apply the rules and regulations that we find under Section 404. Second, you have to understand that these rules, even though they go on for pages and pages . . . are extraordinarily vague and ambiguous. There’s tremendous room for the exercise of judgment. So what you have is an industry that’s under a great deal of pressure and public scrutiny, that now has a very ambiguous and vague set of rules, and under those circumstances, they’re going to interpret the vagueness and ambiguity in such a way so as to lower their exposure profile. Third, this is an industry that is subject to a great deal of litigation pressure. By requiring that their audit clients do as much as they rationally can in terms of auditing their internal processes, the audit industry is, in effect, requiring that their clients go out and buy insurance against litigation risk that the audit industry cannot go into the marketplace and buy for itself. The thinking there very simply is, the more you can have your clients spend on internal process controls, the lower the probability that there’ll be a problem that leads to accounting-related litigation-which means the lower the probability that you as the audit firm will be sued. So there is an insurance component of 404. And from the audit firm’s perspective, you actually get the clients to spend the money that generates the externality of lowering their exposure. So, again, very rational profit-maximizing behavior on the part of the audit firms to try to push 404 to the limit, and make sure that you control as many of these processes as you can. And lastly, the audit industry makes money off of 404. Even if you’re the auditor, and you can’t do all the 404 prep work, work comes in from the other firms. The phrase is “everybody’s taking in everybody else’s laundry.” So the procedural fix, I think very simply is, once you have the substantive rules amended, and that’s the first step, when the PCAOB goes out and inspects the audit firms they need to look not only for examples of situations where the audit firms have failed adequately to apply 404 controls. And I think they’re not going to find many situations where that’s the case, because as I described, there are tremendous internal incentives for the audit firms to be very aggressive in applying 404. But rather, they need to look for situations where the audit firms went overboard, and required that clients engage in process controls and engage in processes that really are irrational. But as a practical matter, given the way the rules are written today, audit firms will be able to defend themselves by saying, “Look, you told us to go look at the borderline between the inconsequential and the remote. And we did.” You’re right, there’s a low probability this thing will ever cause a problem. But your rules tell us to go there. So, you’ve got to, No. 1, fix the substantive rules. And then you’ve got to change the process, the way the audit firms are actually audited by the PCAOB. Because of the natural incentives within the industry to take whatever the 404 rules are, and put them on steroids when you apply them in the real world. Deborah L. Rhode: I’m going to focus on a different section: the lawyer whistleblowing section. And there’s a lot not to like in the turgid language there. But just to give you a kind of frame for how I see the problems with Sarbanes-Oxley, good, bad and ugly. Well, good, on balance, I think from a public standpoint, although by no means exactly where we’d like to end up, I think, if we had disinterested folks doing the drafting. Bad, from the point of view of most practicing lawyers. But in reading the entrails, and most of the coverage, I would say that lawyers have been highly critical of this. And ugly, I would suggest, from the point of view of how the organized bar comes out of the process looking. And it really was the failure of the organized bar that led to the Sarbanes-Oxley provisions. And their response, which is a kind of reflexive-let’s show everyone how really bad it is-I think is just compounding the problem that got us here in the first instance. To put it in very brief context, the organized bar has long resisted any exceptions to lawyer confidentiality protections, for some obviously self-interested reasons. In general, when it’s clients paying the bill, you’d just as soon not have any obligations that run to folks other than clients, except in very, very narrow circumstances, where it would be a totally public-relations disaster if lawyers had no external social responsibilities, because that would be an invitation to outside regulation. And the way that the bar has resolved the confidentiality issue in the last couple decades has really been sort of the most minimal third-party responsibilities possible to pass the laugh test. So, the Model Rules of Professional Conduct, in Rule 1.6, which is the basic rule on confidentiality, say that lawyers only had discretion to disclose confidences in a very narrow circumstance; for example, a criminal act that was reasonably necessary to prevent imminent death or physical injury. And of course, there was an exception for lawyers to reveal confidences in order to sue for a fee, or establish their own claims in litigation with a client. And it’s kind of curious that those are the two exceptions the bar glommed onto-like preventing death and letting lawyers get a bigger fee. And after considerable experience with the limitations of that privilege, the American Bar Association was finally forced in early 2000 to drop the requirement that it be a criminal act. So now lawyers had discretion-no requirement, just discretion-to disclose in circumstances that were reasonably likely to lead to death or physical injury. And after all the Enron unhappiness broke, and Sarbanes-Oxley went onto the table, the ABA finally moved in the direction that a number of states had moved, and said the lawyer had permission-again, no requirement-to disclose to prevent crime or fraud reasonably certain to result in substantial financial injury to third parties, where a lawyer’s services had been used. So now you have a slightly wider set of permissive requirements. But they were permissive. With respect to organizations, the ABA’s classic rule was in Model Rule 1.3, which gave lawyers discretion to report up to the highest authority an act that was likely to cause substantial harm to the client if it was in the best interest of the client to have the reporting occur. Again, discretionary, and that limitation on best interest of the client made clear that it was from the corporation’s point of view, not the public’s point of view. So if the lawyer was in a situation where the lawyer had some knowledge that the lawyer thought would never get out, in terms of third-party injuries, then it was obviously not in the client’s interest even for the lawyer to go up the chain and report. And it was that highly self-protective set of rules that I think triggered the Congress and then the SEC to say, “Well, come on guys, let’s at least impose a somewhat greater sense of responsibility to the public.” This, of course, in a context in which by the most recent conservative estimates available, just the losses caused by the 20 major companies that have been the subject of SEC investigations in recent years is upward of $236 billion. And lawyers were implicated in the vast majority of those transactions, in some way or another. And it is in part because lawyers had no substantial third-party responsibilities that they were able to punt in many instances on transactions that, how to put it nicely, had the odor of material misrepresentations of companies’ financial circumstances and the likelihood of fraud. So, that’s the context in which the Sarbanes-Oxley Section 205 was enacted. And basically, what does it now require lawyers to do? Well, it requires lawyers who might be involved in preparing documents that would be part of a filing to report to the chief legal officer, or the CEO, evidence of a material violation. And it is the definition of material violation, or evidence of material violation, that’s created the most laugh lines. The definition is that evidence of a material violation means credible evidence based upon which it would be unreasonable under the circumstances for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing or about to occur. I spend a fair amount of time with my students who are unseasoned in the ways of the SEC and have some trouble with the convoluted syntax, and the multiple probabilistic terms material, credible, unreasonable, reasonably likely, et cetera. But where it seems to take you is that lawyers could avoid the conclusion that a material violation is reasonably likely if there is one prudent and competent lawyer in a firm who has the opinion that there is not credible evidence of a reasonably likely material violation. So would that have gotten us anywhere in a classic case of Enron, for example? Doesn’t seem very likely that this standard would have addressed the very kinds of fraud that in theory Congress seemed to have in mind when it passed Sarbanes-Oxley. Well, how come we got this travesty of a drafting standard? The SEC wanted an objective standard. Evidence that would cause a lawyer to reasonably believe a violation is occurring. That, from the public standpoint, would seem to me the most reasonable. Nearly all practicing lawyers thought that that was way, way too demanding. And they wanted a subjective-knowledge standard. Only if the lawyer knew that the violation was occurring. So you’ve got this mishmash middle ground. And it’s quite unclear exactly what it means, and whether in practice, as implemented, it’s going to mean anything other than subjective knowledge. So I think the jury’s still out on how really bad the standard is, and there’s not a track record yet of any kind of compliance efforts, or even civil liability actions against lawyers, to know how this is really playing out. We do know, however, that in addition to the unresolved questions about what it actually covers, there are a couple of other ambiguities that the legislation has left hanging. One is a kind of unresolved question about what to do with the provision that’s been really the most controversial part of the regulation. This is Section 205.3(d)(2). It permits lawyers representing issuers for the SEC to reveal client confidences in order to prevent fraud in which the lawyer’s services have been used. So that’s a reporting-out possibility that’s permissive. And it conflicts with a number of state bar confidentiality rules, including those in California, which has some of the narrowest restrictions to the confidentiality privilege of anywhere in the country. And the bars in those states have taken the position that federal regulation is inconsistent with state ethics rules, which raises an interesting pre-emption question. It’s not at all clear how serious the problem is, because lawyers could, in theory, comply with both. Because the SEC provision is only discretionary. It doesn’t require lawyers to reveal confidences. It just gives them federal protection if they do so. So faced with a conflict between state and federal rules, the lawyer who sits tight, a corporate watchdog who doesn’t bark, is in a pretty OK situation. But it’s hardly an optimal resolution from the public’s point of view. And I don’t think it’s a stable one in the long run. So we’re likely to see some more action. The bar association, in an effort to stave off any further intrusive requirements, has set up a commission on the attorney-client privilege, which is by the charter of that commission’s standards designed to collect evidence to establish the harms to the attorney-client privilege that have resulted from recent legislative incursion. So that gives you a little sense of how disinterested the organized bar is in assessing the facts at this point. It is sort of unclear what the facts are, in terms of how this rule has affected candor within corporations. And of course, the bar association’s explanation for why the limited-disclosure requirement is that lawyers will be left out of the loop if you impose too great a mandate on them. And that’s a legitimate concern. We just don’t know how legitimate it is under circumstances where, as a practical matter, it’s often impossible to leave the lawyers out of the loop, or you can do so only at substantial jeopardy. And oftentimes, lawyers have access to information that doesn’t come directly from the client’s own statements, the ones that will be, in theory, chilled by more exceptions to the privilege. What else do we know about where the conflict points are likely to come? Well, one has to do with what’s a reasonably likely investigation once the lawyer reports up. There are a host of issues surrounding how you best conduct these investigations. Should it be by internal counsel, who are likely to be most familiar, and can do internal investigations at least cost? Or, do they always have to go to outside counsel? And if they do go to outside counsel, can they use outside counsel who has previously been involved in any of the transactions? That of course, was one of the biggest problems with Enron, and Vinson & Elkins, which had done the bulk of the work there. When a whistleblower within the company raised some problems with the accounting practices, Vinson & Elkins, which had papered many of those same deals, was the law firm that was asked to do the investigation, and, not entirely surprisingly, gave the company a reasonably clean bill of health. So, you want to prevent that. And there are obviously issues of credibility as well as cost that need to be taken into consideration. So I think there are a number of obvious lessons to be drawn from even this kind of partial history to date. One is that if the organized bar doesn’t do a better job in self-regulation, others are going to do it for them, and not necessarily in a way that the bar would like. And secondly, that lawyers, I think, are now in a different social and legal climate than they were [before] the moral meltdowns of the 2000s. And it is just increasingly clear that a see-no-evil, hear-no-evil posture is not going to wash in either civil liability proceedings, or in agency proceedings, if the SEC moves to put any teeth into this at all. It’s not enough that somebody else blessed the transaction. I think that’s been lawyers’ historic view of where their obligations are. And I think we’re in a new regulatory environment. And it’s probably one that on balance is going to be good for the public. And it’s probably going to be one where lawyers can adapt their practices in an appropriate sort of way. And the real question is whether the organized bar is going to continue to be more of the problem than the solution. Jordan Eth: Professor Rhode correctly guessed my position on Sarbanes-Oxley. As a practicing litigator, my view is that it is bad and ugly. I don’t think that we’re going to be a great country by having lots of accountants. But I guess that’s what the authors of Sarbanes-Oxley thought. When you have [senators] Barbara Boxer [D-Calif.] and Trent Lott [R-Miss.] together on any issue, that tells you that you’ve got a problem. It’s just a tax on public companies, and it’s a tax on their officers and directors. Every one of them now faces greater costs . . . and greater exposure. And who is it a subsidy for? Accountants. And lawyers. Thank you very much Congress. That’s terrific. As much as I’m saying it’s bad and ugly, it pays the bills. First issue. Fraud is still illegal. People went to prison for fraud violations before. So this is nothing new. Fraud is still occurring. The idea behind Sarbanes-Oxley is that now we would have this new era when everyone complies, and all this money is going to be great, we’re going to spend it all on internal controls. It’ll be terrific. You know how many securities class actions get filed against companies every year? Roughly 200. You know how many before Sarbanes-Oxley? Roughly 200. You know how many before the reform act? Roughly 200. It’s the speed of Bill Lerach’s printing press. I mean, it’s not all these statutes. Are you getting deterrence from the SEC? Well, you have more SEC actions than ever. That means there’s more fraud than ever? Probably means you have more cops than ever, is what it really means. And you have new litigation risks. And I’m going to come down from some of the proposals we heard, and be superpractical on some of these things, for the litigators in the audience. Here’s one thing you’ve got in Sarbanes-Oxley. You now have a longer statute of limitations. Now, what does that have to do with Enron and WorldCom? It’s usually considered slow if a plaintiffs’ lawyer files in 48 hours rather than 24 hours. So did we really need a new statute of limitations? Used to be that if you issued a statement today, three years from now, you are done. You couldn’t be sued under 10(B) for that, no matter what. You could say, “Thank God we’ve survived, that’s it.” And it’s one year from the time when your stock collapses. If your stock goes down today on bad news, you wait a year, if you’re not sued, you’re not going to be sued. Congress decided it’s now going to be a 2-5 rule. It’s a five-year statute. It only applies to fraud claims. It applies to a 10(B)(5) claim. It doesn’t apply to a Section 11 claim, well, sometimes, or a 12 claim. Litigators love this stuff. They eat it up. We bill for it. You know, it’s terrific. What it has led to is longer class periods. And that’s a serious problem. Before Sarbanes-Oxley, about 3% or 4% of cases had class periods of three years or longer. Now, it’s about 20%. Nothing like working on a case where you’ve got a 4 1/2-year class period. And no one who worked there even knows what’s going on, and the systems are changed, and the software is different, and the damages are higher, and it’s harder for you to insure the risk because you don’t even know how long we could be sued for something we said 4 1/2 years ago? What was going on 4 1/2 years ago? Well, that’s a problem. Another issue. Private right of action, under Section 304. This is a statute that says if there’s a restatement-remember, restatements-that’s like an admission of criminal wrongdoing, practically. All right, a restatement, if it’s caused by misconduct, the [CEO and CFO] have to forfeit bonuses and profits from sales of stock. Now, we don’t know what misconduct means here. We don’t know whose misconduct. I put this all under the no good deed goes unpunished category. If you’re the CFO, you come into the office, you say to the CEO, “We found a mistake with our lease accounting. There was a problem, technical problem, we have to capital this, and we should have expensed it.” And you decide to change it. But then you go, “But wait a minute. That’s my bonus. And those are my stock sales.” So, the question is: If the SEC has a right to go after CEOs and CFOs whenever there’s a restatement, what about private plaintiffs? Well, Congress didn’t say, so we have a new decision from the Eastern District of Pennsylvania saying that there is no private right of action. On Halloween, there was another one in the Southern District of New York. So, if you’re in front of those two judges, you don’t have to worry about this. But anywhere else in the country, it’s an open question. And we know what the plaintiffs’ bar is going to do. They’re going to push it, and they’re going to push it all around the country, until they get a circuit split. And I don’t know, 10 years from now, 15 years from now, we’ll have a little clarity on that. Certifications. You all know about certifications. Here’s the fundamental litigation problem with them. You lose defenses. Important defenses. The CEO, [when there was] an accounting problem, used to be able to say, “What do I know about accounting? I’m actually out there doing marketing, product development, helping with sales.” Now, you say, “Well, you signed this thing that says you devised internal controls, and you designed them, and you certify the accuracy.” So, either you have your CEO actually doing all that, and not doing real business, or they’re violating that, and you run into problems with all these defenses. Because the tricky thing in private litigation has always been showing that individual officers were actually involved in accounting, and knew about it; were aware of different things. And now you’ve got a certification requirement. It makes it more difficult for them to avoid that. We now have a new protected class of employees, the disgruntled employee. We now have this new protected class of whistleblowers. And it’s really pretty stunning. If you now get a complaint from an employee, you know, in the old days, you said, “That’s Sally, you know, we can’t trust that.” Oh, no. Now, you have to raise all of the questions Professor Rhode did. Can we have our own lawyers look at this? Do we need to have a new set of lawyers look at it? Do we need forensic accountants to look at it? Is it really, you know, do we really have to do it? Because now, you have rules that are actually even stronger in this area. If they can show that in assisting an investigation, they assisted [it] by providing information, and then they were discriminated against in their employment, they can bring a claim. And the company has a burden of clear and convincing evidence to show that no, we fired the person because he’s incompetent, not because they assisted. And what is the agency with the expertise in financial reporting that handles this? It must be OSHA. And that’s what it is. [Laugh.] The Occupational Safety and Health [Administration]. And I can tell you from personal experience in a real case that this is absolutely crazy. I worked on a case-we were doing an internal investigation. Very first thing we did, we went to the salesperson who was accused of writing a side letter. And yes, during the interview, we were able to beat it out of him that, yes, he had written a side letter and never provided it to accounting. What does he do? He sues the company, after the company fired him. Why? Because he was a whistleblower by providing information to the people investigating him. That’s literally what happened. We got on the phone with the OSHA person who was doing it. These inspectors, by the way, if they decide that there’s a problem, they can reinstate the person right then, before any hearing. Downright un-American. And so, what did the OSHA inspector say? What were the trenchant questions the person asked? “Now, can you explain to me again what the audit committee does? [Laugh.] I’m really not sure.” I mean, we’re talking basics. And it was given to OSHA. It’s just a crazy thing. Mandatory paper trail. As a litigator, I will tell you that you know documents are just the bane of our existence. Never write when you can speak. Never speak when you can wink. But what this statute has done has made you say more to the public, and made you keep more documents. Now, you have internal audit, and you have 404 compliance. And you have subcertifications, you’ve got all these things. That’s not even talking about the e-mail. People are talking about how stupid this stuff is, and how crazy it is, and how it ruins their weekends. You’ve all got that, and now, your auditors now have all this. And they have to keep it for seven years. So they’re keeping documents, you’re keeping documents. Everyone’s keeping documents. The SEC, of course, is now empowered. They have more people. More people equals more fraud. That just goes without saying. Officer/director bars are much easier. Used to be that . . . the SEC had to prove you were substantially unfit to serve as a director, and then you can be barred from doing that in the future. They’ve gotten rid of the word substantially. I guess now you could be minimally unfit, barely unfit, and they could bar you. And that’s what they want in all their negotiations. First thing they want; can’t be an officer for five years. That’s considered light, a light sentence. They have the disgorgement power we talked about. How about a severance package? That is an extraordinary payment. So you’re a CEO or CFO in this environment. You know what the environment’s like. You know how difficult it is. You negotiate a severance package. There’s a restatement on your watch. For whatever reason, you resign, you’re fired, who knows? You say, “All right, well I’m not going to be working for a little while. What about my severance?” Oh, that’s an extraordinary payment. And the SEC can go out there and freeze it, and then they can bring charges, and then you don’t get it, you may never get it, and that’s for years. So, the SEC has a lot more weapons. So, what we really have is what I call the new CYA [cover your ass] world. Used to be everyone was together in the boat, trying to move it forward. Now, they’ve got employees who are whistleblowers, you’ve got management getting subcertifications, people saying, “I’m relying on you, at the shipping dock. You’d better be really careful, or else you’re going to be sued, where I’m covered by insurance. Indemnification.” You’ve got all those fun questions. You’ve got the board and the management now. Board has its lawyers and the audit committee has its lawyers and management has its lawyers. Auditors in the company, and Joe was absolutely right about auditors. They have the hammer. They can just say, “We’re not quite sure about this Q that’s gonna go out. We have a few little questions. What we’d like you to do is go hire a firm you’ve never heard of to spend six weeks, to find everything you possibly can, on your nickel, to protect us.” And that happens every day. Every day the auditors say that. Because they know that if the auditors, if they resign, if they walk away, if they say something, it’s a disaster for the company. And then, you’ve got lawyers, who now are told, you know, our client is the American investor. I used to think my client was the company, or the board, or whoever. Now it’s actually easier for me as a litigator. Because as a litigator, I’m going to defend it. I mean, if we can defend murderers, we can defend companies. Now the corporate lawyers might be something different. Maybe a little bit different. They shouldn’t be committing fraud. That’s always been the law. So we have the new issues to litigate. And I’ve just outlined a few. They have all these new fun places to litigate, the PCAOB and OSHA, and administrative proceedings. Ken Lay? Is he behind bars yet? I don’t think so. And this is our No. 1 college major now in the United States: Accounting. Now, if that’s in the public interest, to turn this into a nation of bean counters, then I think people in some other countries are laughing at us. Thank you. [Laugh.]

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LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

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