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While some in Congress have seized on the implosion of Enron as reason to attempt the overhaul of securities and accounting laws, a group of lawyers and ethics experts met March 8 to begin what could be one of the more effective reform efforts to emerge from the collapse of the Houston-based energy firm. The Organizational Guidelines Ad Hoc Advisory Group, formed by the U.S. Sentencing Commission, has been given an 18-month mandate to evaluate the effectiveness of Chapter 8 of the U.S. sentencing guidelines, used by federal judges to assess financial penalties on entire companies or organizations. One mission of the committee will be to determine whether changes in the guidelines could provide a better road map for companies seeking to create internal whistleblower, monitoring and compliance mechanisms. Such programs could prevent the alleged abuses that led to the collapse of Enron and the March 14 indictment of its former auditor, Arthur Andersen. “I’m aware that everyone else, Congress and the people who set the accounting standards are looking at their own areas,” said commission Chairwoman Diana E. Murphy, a judge on the 8th U.S. Circuit Court of Appeals. She said that although the reform effort had been planned since summer, the Enron collapse made it all the more urgent. “You don’t know what any of the big fish are going to do, but you have your own operation to look at,” she said. “A lot of times there is a lot of noise from some, and no resolution.” Mandating huge fines for companies with no internal policing mechanisms while giving big breaks to those who have compliance programs, the guidelines have been highly effective since their inception in 1991, said proponents. They have spawned internal compliance, ombudsman and whistleblower protocols at companies across the country, said Murphy. Its protocols have been adopted and expanded by the Securities and Exchange Commission, the U.S. Department of Health and Human Services and the U.S. Department of Justice. The guidelines instruct judges to weigh fines by the seriousness of an offense — itself measured by pecuniary gain — and culpability, which is determined by the “steps taken by the organization prior to the offense to prevent and detect criminal conduct.” The guidelines are used in antitrust, environmental and government program fraud cases, such as those involving commercial billing of the U.S. Department of Health and Human Services. “The impact of the guidelines is more of modification of behavior then actual sentencing results,” said committee member Richard S. Gruner, a professor at Whittier Law School in Costa Mesa, Calif. “They were set up to give incentives for the prevention of illegal conduct and for forming internal programs,” he said. MORE CARROT THAN STICK Murphy opened the advisory group’s March 8 meeting, officially handing off responsibility to chairman Todd Jones, a former U.S. Attorney for the District of Minnesota and a partner at the Minneapolis law firm Robins, Kaplan, Miller & Ciresi. The committee is obligated to make an interim report during its 18-month tenure. While Murphy said that subcommittees were formed at the first meeting, Jones and several other members of the 15-member group refused to comment for this story. Committee member Gruner said, however, that the incentives provided by the guidelines are the key to their effectiveness. He noted that the amount of a fine levied under the guidelines can be reduced by as much as 95 percent if reasonable efforts at compliance are shown. “We’re clearly talking millions or hundreds of millions of dollars taken off a fine as the difference between firms that have created programs and those that haven’t,” he said. But he added there is no clear map for companies seeking to build such programs. “There is some sort of confusion as to what sort of things should be included in these programs,” he said, saying there is a need to define standards for evaluating compliance programs. “The whole incentive thing is dependent on this being clear.” Approximately 300 organizations are sentenced under the organization guidelines annually, but Gruner notes that the guidelines’ biggest influence may be behind the scenes, in plea negotiations where companies realize that they could face apocalyptic fines, like the $500 million penalty against Hoffman-LaRoche in 1999 for its part in an international vitamin price-fixing scam. PRECEDENT EMERGES Court rulings concerning the guidelines have begun to appear following the U.S. Supreme Court’s decision in 1999 creating an affirmative defense against punitive damages for companies accused of employment discrimination. The defense is available if the organization can show that it made reasonable efforts to create a compliance program. Kolstad v. American Dental Association, 527 U.S. 526. Since then, lower courts have been trying to decide what constitutes a reasonable effort, or “deciding what is and is not a good enough compliance program,” said Gruner, noting that the 4th and 10th circuits have touched on the issue. Lowry v. Circuit City Stores Inc., 206 F.3d 431 (2000 ); Deters v. Equifax Credit Information Services Inc., 202 F.3d 1262. Murphy said the advisory group likely will look for guidance from similar regulations developed by other federal agencies, and hopefully will attempt to make it easier for companies to create compliance programs. While some companies rely on an ombudsman’s office, general counsel or committees responsible to the board of directors to supervise internal employee behavior, “you don’t know what is an ideal circumstance,” said Murphy. Patti Lynch, president of the Hillsborough, N.J.-based Ombudsman Association, said that more companies are expressing interest in forming compliance programs. As corporate ombudsman for Pratt & Whitney, an East Hartford, Conn.-based jet engine manufacturer, she is on the front line of corporate efforts to comply with the guidelines. Her office serves as an independent entity within her company and is the centerpiece of Pratt & Whitney’s internal policing and whistleblower systems. She said such offices are intended to be a confidential resource for employees seeking to reveal wrongdoing without risking their jobs. Though she said that most ombudsmen receive complaints of harassment and discrimination, rather than allegations of accounting irregularities, Enron has caused more companies to contact her group for information. “A lot of institutions are taking a look at their internal financial audit systems,” she said.

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