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In the recent spate of accounting imbroglios, mud has splattered on just about every rank of executive possible — except the general counsel. CEOs have been sued, VPs have been fired, and CFOs have been probed. But by and large, GCs have managed to stay squeaky clean, and to hold on to their jobs. How did they pull this off? After all, general counsel are the ones charged with keeping their companies out of the legal muck. The answer, according to several observers, may be that the in-house lawyers simply didn’t know about the fraudulent accounting practices at their companies — at least, not the details. In many cases, their innocence may have stemmed from their ignorance. But while that alibi has worked in the past, new requirements recently imposed by Congress and the SEC mean that it probably won’t be available in the future. In-housers often review a company’s filings with the SEC to ensure that the documents are in order and that the legalese makes sense. But they rarely scrutinize the underlying accounting. “That job,” says Lawrence Fox, a partner at Philadelphia’s Drinker Biddle & Reath, “belongs to the financial side of the business.” Fox, a former chairman of the American Bar Association’s ethics committee, adds, “Requiring a lawyer to understand the numbers in a 10-Q is like requiring a Boeing lawyer to understand the aerodynamics of airplane wings.” OFF THE HOOK? NOT YET The SEC won’t talk about the details of its various ongoing probes, nor will the U.S. Department of Justice or any of the in-house lawyers at the companies in trouble. But Frank Razzano, a lawyer at Washington, D.C.’s Dickstein Shapiro Morin & Oshinsky and a former SEC prosecutor, says that the current investigations probably aren’t focusing on the attorneys. However, Razzano warns that it’s too early to say that GCs are completely off the hook. Execs in the hot seat could start pointing fingers, claiming that their colleagues in the law department knew about a fraudulent accounting scheme and either supported it or failed to stop it. And indeed, some in-house counsel at companies that engaged in creative accounting haven’t gotten off scot-free. In June, the Justice Department indicted Franklin Brown, the former chief counsel at Rite-Aid Corp., for accounting fraud. The host of new laws and regulations coming out of the nation’s capital promises to increase the responsibilities — and liabilities — of all general counsel. In June, the SEC issued an order requiring CEOs to personally certify the accuracy of financial statements issued by their companies. David Braun, a lawyer at Detroit’s Butzel Long and a former SEC attorney, says that the rule will likely cause nervous chief executives to seek in-house legal advice more often, if only to ensure another layer of accountability. And in July the president signed the Accounting Industry Reform Act, which contains two far-reaching requirements for in-house lawyers. Of course, the roles of corporate counsel can only be expanded so much. “General counsel simply cannot police a company with hundreds of employees,” says the legal chief at one Fortune 50 company. “For every system a GC or CFO puts in place, there’s a bad apple who figures out a way to circumvent it.” Which, of course, is why companies need their lawyers in the first place.

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