Warmer Regulatory Climate May Bend SarbOx

 
 
By Chris Nolan  |  Posted 2005-06-02
 
 
 
Are CEOs going back to being heroes?

Maybe. Just maybe. No ones ordering any shiny new armor or getting out the white stallions, but two events this week could mark the beginnings of a subtle shift in how politicians see government involvement in corporate scandal. The popular idea that all corporate behavior is, almost by definition, corrupt appears to be waning.

On Tuesday, the U.S. Supreme Court said the conviction of Arthur Andersen, the accounting firm once trusted with conducting corporate audits and other kinds of financial oversight on the part of shareholders—was improper.

The firm was charged with obstruction for the role it played in destroying documents from its client Enron Corp., and it argued that its employees didnt know of any pending government investigations when it destroyed records.

The decision, which was unanimous, could well mean that the Andersen case will go down as one of the biggest miscarriages of justice—the firm went out of business and more than 25,000 people lost their jobs—in corporate American history.

The Supreme Court rarely speaks unanimously; such rulings are taken as evidence of serious misinterpretations of the law.

Now, the court didnt say that Andersen wasnt guilty. Instead, it said that a judges instruction—that the jury didnt have to determine whether the firm or its employee knew they were acting illegally—was, itself, illegal.

In other words, the jury should have had to determine that Andersen knew it was breaking the law before it voted to convicted it of doing things to impede an investigation.

The ruling has almost certainly come too late for Andersen, which has closed its doors. But it could well affect the now-pending appeal of Silicon Valley investment banker Frank Quattrone.

As the New York Times reported Wednesday, the instructions that Quattrones jury was given were similar to those given to the jury that convicted Arthur Andersen. One of the charges Quattrone faces—obstruction of justice—is the same as that lodged against Andersen.

Click here to read Stan Gibsons commentary on what Sarbanes-Oxley compliance could mean for outsourcing.

The Quattrone case, while important to Silicon Valley and to tech folks, is a sidelight, however. If the appellate court rules that Quattrones case is similar to the Andersen case, it will probably serve as another indication of a change in the way businesspeople are treated by the courts (and of course, by extension, by the public). But its impossible to know what the court will do.

In the meantime, the resignation of Securities and Exchange Commissioner Chairman William Donaldson, announced Wednesday, could be an very important step in what many businesses—particularly small startup businesses—see as necessary relief from the regulatory burdens imposed by the Sarbanes-Oxley Act of 2002, a corporate governance bill passed in the wake of the Enron and other corporate scandals, thats familiarly known as SOX.

The SEC votes on Regulation NMS, rule changes regarding equity securities. Read more here.

Its an overstatement, but not much of one, to say that Sarbanes-Oxley is hated by tech startups. But when U.S. Secretary of the Treasury John Snow hinted last winter that some provision of the bill might be loosened, he got no support for that idea from Donaldson. The SEC, the agency Donaldson has run for just over the past two years, is charged with implementing the provisions of Sarbanes-Oxley.

Having one of the bills main proponents step aside is going to help those who are lobbying for changes in the legislation. As SEC chairman, Donaldson spoke before Congress and other regulatory bodies about the need for stricter enforcement and rules. And he pretty much rejected arguments made by U.S. businesses about the rules threat to investment by foreign companies.

Donaldsons departure—its scheduled for the end of the month—in combination with the Andersen decision is going to have an impact, said Mark Heesen, president of the National Venture Capital Association. "When you put those two things together, I do think it makes for a more liberal interpretation of Sarbanes-Oxley, he said.

Heesen is cautious: The Andersen ruling is unlikely to mean that Sarbanes-Oxley will be substantially modified, he said. It does mean, however, that Congress will probably not look for ways to expand the laws reach and may well not get too upset to see accommodations made at the SEC for startups.

Donaldson was aware of the problems the legislation had created for small companies, Heesen said. But his emphasis on enforcement didnt give Congress—or accounting firms like Andersen—cover to apply more liberal interpretations of the law. That change—a loosening, an understanding that exceptions might be possible, if not welcome—makes a subtle but important shift.

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