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Two years ago, catering to mature, public companies was about as exciting for Silicon Valley lawyers as watching a pre-Pentium-powered computer boot up. But thanks to the regulatory morass brought on by the Enron Corp. debacle, Valley lawyers who specialize in public companies are suddenly on the front lines. Companies are combing through their accounting practices and rewriting their financial disclosures in regulatory documents, while at the same time scrutinizing the roles of their directors and audit committees. “A few years ago, if it wasn’t an Internet provider, it wasn’t an interesting securities project, but this points out how interesting the securities area can be for an existing public client,” said Horace Nash, a partner with Palo Alto, Calif.’s Fenwick & West. “In a way, it makes me feel like a start-up lawyer who has more general guidance to give to a company,” Nash said. There’s a downside, though. With so many issues still up in the air when it comes to new regulations, corporate lawyers find they’re at times flying blind. “The clients fundamentally understand that they’re in the middle of a major trend,” Nash said. That trend should last for some time as the Securities and Exchange Commission and Congress wrestle with change while they grapple with the scope of the accounting and corporate governance problems left in Enron’s wake. Gray Cary Ware & Freidenrich partner Scott Stanton is checking in with the SEC daily looking for rules changes, interpretations or proposals — and predicts the rest of the year will require additional vigilance. In the meantime, though, there’s still a great deal of uncertainty, especially when it comes to disclosing a company’s accounting decisions in year-end filings. For companies that operate on a calendar year, last week was the deadline to file 10-K annual reports, and crafting them this year was a difficult endeavor. Stanton surveyed 75 year-end documents of companies that filed prior to the deadline and discovered the degree of disclosure about accounting still runs the gamut from vague to overly detailed. “The variance in the quality of disclosure of critical accounting is astounding,” Stanton said. “It’s clear no one knows the right way to do it yet.” Many clients called special meetings of the boards and of the audit committees, where the company’s auditors were usually subject to intense queries, Stanton said. After one such special meeting, the audit committee instructed company management to rethink the way it has discussed accounting decisions in prior securities filings, Stanton said. “It’s a common practice to use last year’s disclosure and mark it up,” Stanton said. That’s not the case anymore, and while Stanton’s client didn’t start from scratch, it ended up adding a lot more information about accounting choices it made. And the special meetings are only the beginning for audit committee members, who will find in the coming months that they will need to devote more time to their responsibilities, Stanton said. “They can’t just check in at meetings once a quarter for two hours,” Stanton said. The headaches aren’t limited to uncertainty at the company level, however. Company auditors seem to be gun-shy when it comes to signing off on company financials, said Alan Mendelson, a partner in Latham & Watkins’ Menlo Park, Calif., office. “The degree to which auditors are trying to get the lawyers to give them comfort on what a contract means is something I’ve never seen before,” Mendelson said. Auditors are asking for formal legal opinions on a variety of issues — like interpreting contract terms or a company’s manner of logging revenue — that didn’t require lawyers before the Enron debacle, Mendelson said. “The degree to which issues are being beaten into the ground is stunning,” he said. Mendelson is holding firm, however, and not issuing additional legal opinions at the request of auditors. “I tell them to do their jobs,” he said. The extra work all of these questions have generated for lawyers has been nice for the bottom line at law firms. With directors more involved and asking more questions, meetings are more spirited and are lasting twice as long as they used to, said Kenneth Guernsey, a partner with Palo Alto-based Cooley Godward. “I’ve certainly noticed a change for the better in the amount of energy that directors are putting into their work,” Guernsey said. “Even though it’s more exciting, more in the spotlight, more in the action,” Guernsey said, “it’s also scarier than it was before.”

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