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Ever been in an earthquake? The ground shifts beneath your wingtips, tassled loafers or — on casual day — boat shoes. As you’re steadying yourself, you have one question — how bad was it? After reading the tremor-causing Sarbanes-Oxley Act of 2002 dealing with corporate governing and accounting reform — a benign enough sounding name, don’t you think? — signed into law on July 30 by President George W. Bush, we have an answer: pretty bad. Here’s the equation: a depressed Dow Jones Index and anemic Nasdaq + political convenience + sloppy legislative drafting = a corporate counsel’s nightmare. And the problems may start in the GC’s office. A new class of employee-plaintiff is created by the law, and many of them are sitting in offices down the hall. The law prohibits any type of discrimination or adverse employment action against an employee (including in-housers) for blowing the whistle on securities fraud or otherwise assisting in any proceedings dealing with securities fraud. The whistleblower is protected if he or she blows the whistle to any federal regulatory or law enforcement agencies; any member of Congress or any committee of Congress; or any person in supervisory authority over the employee. This portion of law was written so expansively that it protects employees who don’t blow the whistle themselves, but who “otherwise assist” in a fraud investigation. A winning plaintiff gets reinstatement, backpay and compensation for special damages. Companies were tossed a few bones, including a short statute of limitations (90 days), and a “dirty hands” defense if the employee uses unlawful means to expose the fraud. And that’s not all, folks. Sarbanes-Oxley is littered with directives to the Securities and Exchange Commission to come up with rules of professional responsibility for attorneys practicing in “any way” before the SEC. The rules are due within 180 days. It reminds you of those sitcoms from the 1960s, where the stay-at-home mom, frustrated at her rebellious and difficult children, points her finger at them and yells, “Just wait till your father gets home!” The big difference is that a sitcom dad was usually a marshmallow; not so with the SEC rules barreling down the pike. According to Sarbanes-Oxley — let’s just call it SOA — the SEC must adopt a rule requiring a lawyer to report “evidence” of a material violation of the securities laws or a breach of fiduciary duty or similar violation by a company or any of its agents to the GC or the CEO. Report “evidence?” Talk about a low threshold. When SOA was being masticated in conference committee, it originally provided that the SEC would promulgate a rule only requiring an attorney to blow the whistle whenever he or she had “knowledge” of securities violations. Unfortunately, the much more expansive language of “reporting evidence” was adopted. The second SOA-mandated rule requires a lawyer — if the GC or CEO doesn’t respond appropriately — to snitch on them to the board of directors. While we agree with Fyodor Dostoevsky that a lawyer is a “conscience for hire,” this takes it way too far, requiring lawyers to arguably violate attorney-client confidences. Lawyers turned into snitches, just like in the prison yard. Rough sledding all around. As if you didn’t already have enough on your desk, SOA places the CEO on the hot seat, and the CEO isn’t going to sit there. He’ll be looking to you to make sure he is complying with what the law requires him to do. No wonder. SOA provides that top executives can be fined between $1 million to $5 million and put in the slammer for 10 to 20 years. For what, you might ask? Each periodic report dealing with financial statements must — no if, ands or buts — be accompanied by a written statement by the CEO and the CFO (or their “equivalents”) that the “periodic report containing the financial statements fully complies with the [securities laws] and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations.” Can you spot the weasel words that make federal prosecutors ecstatic? Sure you can: “fully complies”; “fairly presents”; and “in all material respects.” They’re all elastic terms, just like Play-Doh, twisted around to suit a purpose. SOME HOMEWORK And that’s not all. (We know, you’re just as tired of hearing this phrase as we are of using it, but it’s fitting.) SOA directs the SEC to promulgate rules that the CEO and CFO “certify” in each annual quarterly report that the person signing his or her name has reviewed the report; that based on that person’s “knowledge,” the report does not contain any untrue statement of a material fact or omit to state a material fact (as Ben Franklin said, “half the truth is often the biggest lie”) necessary to make the statements made not misleading; and that based on the CEO and CFO’s knowledge, the financial statements and other financial info in the report “fairly present,” in all material respects, the financial condition of the company. Let’s all take a deep breath and understand just what that may mean. A vague law, coupled with the power and discretion of the federal government, targeting your boss. If that’s not a new world, we don’t know what is. By the way, there’s homework. The person signing off on the financial report is responsible for establishing and maintaining internal controls; explaining to the top execs the substance of the internal controls; evaluating the effectiveness of the controls within 90 days prior of a financial report; and presenting in the report his or her conclusions about the effectiveness of the internal controls. If the controls are deficient, the executives must tell the audit committee of the board of directors. To keep everyone honest, SOA requires the SEC to come up with rules that each financial report signed off on by the executives discloses all off-balance-sheet transactions that have a material current or future effect on the financial health of the company. So, anything like that will have to come to light. No more Enrons. Well, perhaps your CEO is thinking, “This is all tough, and I accept it, but you know what, I still have my perks. Life is good.” Not quite. Under SOA, it’s unlawful for a company directly or indirectly, including through any subsidiary shell game, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any executive officer of the company. No more loans. One small loophole: If a loan exists as of the day the law was signed, an extension is not prohibited, as long as there is no material modification to the term of the original loan. Also, if a company must restate its financial statement, the boss is required to forfeit bonuses and incentive compensation. The boss can’t count on the bankruptcy laws as a refuge: Any judgments against him for securities law violations or fraud in connection with buying or selling a security can’t be discharged in bankruptcy. As your CEO is heading for cover, Congress is focusing its bright light on the office down the hall, namely the CFO. In another one of those “wait till your father gets home” scenarios, the SEC is charged with coming up with a code of ethics for senior financial officers of a company, including its principal financial officer and comptroller or principal accounting office or persons performing similar functions. If the company doesn’t, it must explain why it doesn’t need an ethics code, and “we just don’t feel like it” won’t work. The code of ethics must include rules necessary to promote the following: honest and ethical conduct, including dealing with actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed; and compliance with applicable governmental rules and regulations. So that nothing is passed by a sleepy audit committee, at least one member of the committee must be a “financial expert” who can’t be bamboozled by financial mumbo jumbo. The law also gives us a new entity, the Public Company Accounting Oversight Board, which will oversee the auditing of public companies that are subject to the securities laws. This oversight board will be a living, breathing entity, with the power to sue, investigate, adopt whatever rules it wants and police accounting firms and auditors. Here’s something to be on the lookout for in this regard. If the board decides to suspend or disbar an accountant or auditor, a company can’t become associated with that person and must exercise reasonable care not to. So, when hiring for financial positions, be aware that you need to check on suspension or disbarment. When hiring auditors, it’s unlawful for accounting firms to provide to a company, contemporaneously with the audit, any non-auditing services, including appraisal or evaluation services, management functions or human resources. (This may put up an insurmountable roadblock to multidisciplinary practices.) In addition, the revolving door now has a door jamb. You cannot hire an accounting firm to perform any audit if a CEO, controller, CFO, chief accounting officer or any person in an equivalent position was employed by that firm and participated in any capacity in the audit of your company during a one-year period preceding the date of the initiation of the audit. The revolving door also applies to those on the board of directors. If a member of the board serves on the audit committee, then the person may not accept any consulting, advisory or other compensatory fee from the company or be an affiliated person of the company or any subsidiary thereof. We started this column by talking about earthquakes. At the end of the day, though, what survives is what is fundamentally sound. A corporate culture — which goes on an automatic ethical pilot — is the one that survives, and all the laws in the world wouldn’t make a difference in what they do and how they do it. Michael P. Maslanka is chairman of the labor and employment section at Godwin Gruber ( www.godwingruber.com) in Dallas and writes theTexas Employment Law Letter , which can be accessed at HRhero.com. Burton D. Brillhart is a participating associate at the firm.

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