The financial scandals at Enron, WorldCom and other companies led to the passage of the Sarbanes-Oxley Act and to the demand for greater integrity in financial reporting. At the same time, the office of the general counsel took on the primary responsibility for corporate governance. Since Andrew Fastow, Scott Sullivan and other chief financial officers had been at the center of most of the devious reporting schemes, prudence dictated that the governance activity be completely separate from the finance department.
Of course, any general counsel who wants to maintain a strong corporate governance function has to understand the revenue distortions that some clever executives have used to inflate reported earnings. In the most recent scandals, devious executives have used various schemes for manipulating reported earnings. There are at least seven forms of revenue distortions that in-house counsel should understand.
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