Magazine article Strategic Finance

SEC Proposal on Lawyer Reporting Criticized

Magazine article Strategic Finance

SEC Proposal on Lawyer Reporting Criticized

Article excerpt

NOW THAT THE SECURITIES & Exchange Commission (SEC) has finished its rulemakings on how internal and external auditors have to behave under Sarbanes-Oxley (SOX), it is turning its attention to lawyers. In-house attorneys are at the center of the "noisy withdrawal" rules that were the subject of a February hearing at the House Financial Services Committee. Both Democrats and Republicans on the Committee seemed to be unhappy with the direction the SEC appears to be heading.

The rules would apply to in-house corporate attorneys who find a material violation but who are ignored by corporate higher-ups. If the concerned attorney feared the material violation was about to result in "substantial injury to the financial interest of the company or investors," he or she would have to quit and report the violation to the SEC within one business day of cleaning out his/her desk. An alternative the SEC is also considering would require the company to report the departure of the attorney because of "professional considerations." Rep. Paul Kanjorski (D.-Pa.), top Democrat on the Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee, said, "Each one has the potential to alter the attorney-client privilege and could have a chilling effect on communications between management and counsel, making executives less likely to consult and speak frankly with lawyers. These proposals might also unintentionally reward those lawyers with lower ethical standards who would stretch the law beyond its reasonable interpretations and never withdraw from a client."

Senators Pursue Link Between Tax Shelters and Financial Statements

Just as the SEC is trying to clean up the rest of the remaining Sarbanes-Oxley rulemakings, some in Congress are beginning to think about SOX2. A next step, which has bipartisan support in the Senate, is a prohibition of public auditors rendering an audit opinion on the financial statement effects of any tax shelter arrangements that the auditing firm sells to an audit client. …

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