On the eve of a highly anticipated Securities and Exchange Commission meeting that could bring about looser regulations for small businesses that have yet to comply with the Sarbanes-Oxley Act, a new study credits the 2002 law with cleaning up larger companies' internal controls and reducing the number of errors in financial statements.
In fact, the Glass Lewis & Co. report — released on Tuesday — says the number of restatements by larger companies fell 26 percent during the first nine months of 2006. The report's authors attribute this decline to the most contentious provision of Sarbox, Section 404, which requires management to attest that their company has adequate internal controls.
In parallel, the Department of Justice has issued the McNulty Memorandum that will provide more clear guidance on the rules for a federal prosecutor should they want to bring charges against a company. The Principles of Federal Prosecution of Business Organizations was created as a result of intense lobby efforts by business advocates in Washington, DC.
The new guidelines, which the department has dubbed the "McNulty memo," say that "prosecutors generally should not take into account whether a corporation is advancing attorneys' fees to employees or agents under investigation and indictment." The only exception, according to a footnote in the memo, is in "extremely rare" cases where the "totality of circumstances" show advancing fees to culpable employees was done with the intention to "impede a criminal investigation."
With respect to obtaining privileged information, federal prosecutors will have to go through a more rigorous approval process, similar to the process required of prosecutors seeking electronic wiretaps or subpoenas for reporters. For certain types of sensitive attorney-client information, such as the advice a defense attorney gave to the management of a corporation facing a fraud investigation, prosecutors are now required to obtain the approval of the Justice Department's No. 2 official in Washington -- currently McNulty.
For privileged factual material a company has obtained through an internal investigation into an alleged fraud, such as transcripts of interviews with culpable employees, prosecutors will need to obtain the approval of the local U.S. Attorney in their district, who can only sign off on such a request with the approval of the head of the DOJ's Criminal Division in Washington, currently Alice Fisher.
And just when KPMG thought they were being vindicated they have been served with a law suit from Fannie Mae. When the auditors start fighting against corporate management or vice-versa, the lawyers get in the middle and you can bet that hundreds of millions of dollars are at stake. In the end, there is only one winner; and it's not the investor.