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Over the past several months, general counsel have been piling up CLE credits by attending seminars and conferences on the new corporate reform legislation and accompanying rules and proposals. One message, still ringing rather uncomfortably in everyone’s ears, is that general counsel, and the legal departments they manage, will have greater responsibility going forward for financial disclosure and ensuring transparency with respect to related party transactions. Do general counsel need to acquire some new skills in order to meet these new responsibilities? Many do. Have the job specifications changed? Definitely. The old saw has it that “a little knowledge is a dangerous thing.” And so it is most of the time. However, when it comes to accounting questions and financial disclosure, it is just what general counsel need in the new environment. Assuming that most GCs will never match CFO-levels of accounting expertise, it has now become critically important for general counsel to know enough about accounting to be able to spot issues and ask the right questions. At a minimum, GCs should become familiar with accounting issues relating t revenue recognition (“when can we book a sale?”), accounting for acquisitions, treatment of good will, and, the most sensitive of all, accounting treatment of the murky reaches of executive compensation. Do most in-house lawyers know enough about these issues to discharge their responsibilities in the post-reform era? I’m a little nervous that the answer is no. Certainly the more senior GCs with significant in-house experience have probably acquired these skills along the way and are well equipped to handle the new responsibilities, if they haven’t already been doing so. However, each should make an honest assessment of their knowledge in this area and determine if a little continuing education in the accounting field might be in order. With respect to younger GCs who have recently entered the in-house arena, the issue is more problematic. We have found that corporate clients often screen general counsel candidates very rigorously when it comes to knowledge of securities laws and regulations. And most of the successful candidates are well versed in securities law. But there is a difference between understanding what data needs to be disclosed and assessing the quality and accuracy of the data that is disclosed. Clients should not assume that a good securities lawyer is aware of the fundamental accounting rules governing financial disclosure, much less that that person is capable of applying those rules in complex factual situations. Going forward, candidates for general counsel positions should expect significantly more screening on these issues. When asked to read income statements and balance sheets, if a GC candidate can’t get much further than “See Spot Run,” the job will be lost. The good news is that acquiring sufficient accounting skills to discharge the new responsibilities is easily done. Accounting For Lawyers classes are widely available in the continuing education world. And, while not without nuance, the body of knowledge that needs to be mastered (beyond the basics, but short of expertise) is well within intellectual reach. It will take some investment of time, but for those GCs who do not possess sufficient knowledge of accounting, it’s time to hit the books. THE INTANGIBLES Some of the intangible skills that are also crucial for GCs to possess will carry even greater importance in the post-reform era. Three of the most critical are accessibility, credibility and durability. Even in relatively small companies, general counsel, and legal departments generally, need to rely on employees to bring their concerns and questions to the attention of the in-house lawyers. This is especially true in a post-reform era where the lawyers have increased responsibility for preventing fraud and unethical conduct. If middle- and lower-level managers do not feel comfortable approaching the in-house lawyers, they are less likely to alert the legal department to potential problems. Similarly, if more junior staff attorneys in large legal departments view the GC as a remote imperial figure, the migration of information up the chain may get bottled up. General counsel and legal departments need to be accessible to employees up and down the company. If an assistant controller out in the field fails to pass along to the legal department a concern or a question related to an issue of revenue recognition or purchase accounting, then there has been a failure of management. Part of this can be solved by putting in place policies and procedures that encourage communication, but part of it is also attitudinal. Legal departments that are culturally alienated from middle- and lower-level management will be compromised in their ability to enforce high standards of business conduct, let alone to meet the new minimum requirements of the law. Of course, in-house lawyers can draft policy manuals that are masterpieces of the genre. They can provide on-going educational seminars on corporate responsibility packed with rules and procedures. But, if no one is listening, the effort is wasted. Credibility is at the core of any successful corporate compliance effort. And credibility is the product of two elements, a mastery of a body of specialized knowledge and the ability to apply that knowledge where it is needed most. In-house lawyers must know what they are talking about, and they must talk about it in a way that reveals their understanding of underlying business realities. Pursuit of the irrelevant, however technically correct, offends the business mind. The job of an in-house lawyer does not come to a magisterial halt on the threshold of making a business judgment, after the law itself has been explained. It really just begins. In the post-reform era, companies will place an even greater premium on the ability of their in-house lawyers to move beyond the frontiers of specialized knowledge and into the messier realm of making hard judgment calls. Those in-house lawyers who possess this skill will enjoy credibility throughout the ranks of their company, which, in turn, will greatly increase the chance that the policies and procedures that are put in place will be honored. Finally, GCs are going to need some stamina going forward. At many companies, particularly young technology companies with fiercely entrepreneurial cultures, general counsel will meet resistance to the imposition of more rigorous compliance programs. The culture in many of these companies is highly allergic to any constraining influences, particularly those that carry a legal stamp. GCs should be prepared for a long haul. The establishment of effective compliance programs, and policies and procedures that improve accuracy and transparency in financial disclosure, will take time and repeated efforts. In-house lawyers should be prepared to fight a few political battles and nurse a few scars along the way. This is an easy area to give up on — write the manual, run the seminar, build the file; but it would be an abdication of responsibility to do so. GCs will need to be durable and, through leadership, persuade the employee base to stick with the program. In the current climate it is important for every legal department, and every in-house lawyer individually, to make an honest assessment of their capability to meet the new requirements. If gaps in individual skill sets need to be filled, the resources are there to fill them. If structural changes are needed to improve the delivery of services, the raw materials and personnel are out there to provide the needed support. The changes in the way GCs provide legal support to their companies will not need to be overly dramatic, but they will need to be structurally sound, and implemented in deliberate, thoughtful and relevant ways. Jon Escher is the co-founder of Solutus Legal Search in Palo Alto, Calif. His e-mail address is [email protected].

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