Corporate lawyers are clearly not happy about being drafted into the war on corporate corruption.

Under the Sarbanes-Oxley Act, lawyers must reveal any evidence of wrongdoing to the top executives and board of directors. Lawyers are then required to tell the SEC they dumped a client due to unspecified “professional considerations.”

Specifically, both in-house and outside counsel would be required to report up the chain-of-command if they found evidence of a “material violation” or “breach of fiduciary duty” at a company.

And just how exactly does that work? First, an attorney would be required to report to the company’s chief legal counsel or chief executive. If neither responded adequately, then the attorney would have to make his concerns known to either the company’s board audit committee, a company legal committee, a committee of independent directors, or the full board of directors. In some cases, the so-called “noisy withdrawal” rule could be triggered, according to Reuters.

But with the deadline for commenting on the proposed rules fast approaching (Wednesday), lawyers are making it very clear they are not happy with these provisions.

The “professional considerations” notice would not betray a client’s confidences in detail, but would constitute, “albeit in clumsily coded form, an unmistakable message” to SEC investigators, said the law firm Cleary Gottlieb Steen & Hamilton in a recent statement on the regulation, according to a published account.

“For years now, there has been this pressure from the SEC to draft securities lawyers into helping to protect the public…” noted Joseph Lesko, special counsel at the law firm of Heller Ehrman and a former SEC staff attorney. “That would be a major shift in our traditional role as advocates.”

In a written comment to the SEC, Frederick Lipman, a partner at Blank Rome Comisky & McCauley in Philadelphia, reportedly stated that waving such a red flag “effectively requires an attorney to become a ‘whistleblower.'”

That may just be the point, however. Backers of the new SEC requirements say the lack of hard-and-fast rules governing the relationship between attorneys and corporate clients may have allowed some financial scandals to go unchecked.

Even so, a number of lawyers oppose the new rules because they don’t want to become judges of their clients’ businesses. They fear the rules will threaten attorney-client privilege and expose them to legal action.

Meanwhile, The American Bar Association is expected to weigh in on Wednesday with its own comments.

Kmart Singing the Blues

Now this is what you call a blue-light special.

Kmart’s stock has been marked down so much by investors the New York Stock Exchange is now booting the shares from its listings.

Beginning Dec. 19, the NYSE will suspend trading of the besieged retailer’s common stock and trust convertible preferred securities. Kmart shares will move over to the OTC Bulletin Board.

Management at Kmart said it expects that the Chicago Exchange and the Pacific Exchange will also suspend trading of its shares and begin delisting proceedings.

The bankrupt retailing giant also delayed filing its 10-Q for this quarter.

“We are working with the NYSE to facilitate a smooth transition to the OTCBB and do not expect the change in trading venue to affect our current operations or financial performance,” said James B. Adamson, Kmart chairman and CEO, in a statement.

Under NYSE rules, a company whose stock has an average closing price of less than $1 for 30 consecutive trading days is given a warning that it faces delisting. Typically, the company’s management is given six months to try to get its average share price back above $1.

Kmart was initially notified in July that it was not in compliance with listing requirements.

SEC Settles With Finance Executives

The Securities and Exchange Commission settled administrative cease-and-desist proceedings against Mercator Software, Inc. and two former finance execs.

The Commission accused former Chief Financial Officer, Ira A. Gerard, and former controller, Karen S. Harris, of intentionally understating expenses during the first two quarters of 2000 in order to meet analysts earnings estimates.

The SEC found that Gerard and Harris violated the antifraud provisions and caused Mercator’s violations of the periodic reporting, record-keeping and internal controls provisions of the federal securities laws.

Under the terms of the settlement, the SEC will assess no monetary penalties or fines against the company and the company will not be required to further restate any of its financial results.

On August 21, 2000, Mercator said results for the first half of 2000 were inaccurate due to the under-reporting of about four percent of total expenses, excluding amortization of intangibles, for the period.

Mercator agreed to the “cease and desist order” without admitting or denying the SEC’s findings. “We cooperated fully in the SEC’s investigation and are pleased to put this matter behind us,” said Mercator Chairman and CEO, Roy C. King, in a statement.

The Value of HR

Organizations that align their HR strategies with their business strategies are more profitable. Guess who said this in a recent PricewaterhouseCoopers survey?

Correct — HR professionals.

The consulting firm said companies need to effectively address three key organizational and people management issues to plump up the bottom line: An HR strategy that is documented and integrated into the business strategy; people policies and practices that help deliver the business strategy across the organization, and an HR function that is part of the leadership team and can influence the business.

“Our research demonstrates that effective people management does add value to organizations by putting the right policy and practices in place to create a good employment environment,” said James Hatch, Human Resource Services partner with PricewaterhouseCoopers, in a statement. “In turn, this has a positive effect on a range of issues, including improving profitability.”

The firm surveyed 1,000 organizations in 47 countries.

Specifically, PwC claims that a company’s revenue per employee is 35 higher if it has a documented HR strategy compared with companies where no such strategy exists. A documented strategy is also associated with more effective reward systems, better performance management systems and reduced absenteeism, it added.

PwC said its research also revealed clear and positive links between the ‘feel good’ factor of HR people being satisfied with their contribution to the business and profit margins.

In organizations where HR people are very satisfied with their department’s influence on business strategy, profit margins were 46 percent higher than for those who are not satisfied with their contribution.

Other findings from the survey:

• 67 percent of HR leaders are now members of the highest-ranking leadership team in their organization. “It is clearly important that HR leaders have the required competencies, such as the ability to influence, to justify their place at this level,” PwC noted.

• There is a strong link between lower absenteeism and better profit margins. For example, organizations with an average five days absence per employee per year have profit margins that are 60 percent higher than organizations with an average 10 days absence per employee per year.

“Despite this strong, and in some ways obvious result, only 61 percent of participants report on absenteeism, with no increase from 2000,” PwC pointed out.

• Many organizations still do not measure or report on key people issues.

For example, the consulting firm noted that the HR community believes they make the most important and measurable contribution to business performance through increasing employee satisfaction and controlling costs. “Few actually measure success in this area, with only 43 percent regularly reporting on employee satisfaction and just over half (55 percent) reporting on workforce costs,” the survey found.

• Just one-third of survey participants have all employees completing performance reviews; 12 percent have no performance appraisal process at all.

• 43 percent of organizations said they measure employee satisfaction, up from 37 percent in PwC’s 2000 survey.

GASB Publishes Exposure Draft
The Governmental Accounting Standards Board (GASB) published an exposure draft that would require governments to report the effects of capital asset impairment in their financial statements when they occur.

The proposed guidance also would improve the ability to compare financial statements between governments by requiring all governments to account for insurance recoveries in the same manner.

The comment period for the exposure draft from GASB, which sets accounting standards for state and local governments in the U.S, concludes on February 28, 2003.

“Capital assets represent the largest category of assets on the statement of net assets of most governments,” said GASB project manager, Roberta E. Reese. “The public has long expressed concern about the condition of those capital assets, especially roads and bridges, sewer and water systems, and schools. This change will ensure that government financial statements reflect the reduction in service capacity when impairment of capital assets occurs.”

The proposed statement would require state and local governments to evaluate major events affecting capital assets to determine whether they are impaired. Those events include physical damage, changes in legal or environmental factors, technological changes or obsolescence, changes in manner or duration of usage and construction stoppage.

Impairment would be measured using the method that best reflects the value-in-use for the capital asset. The measurement methods in the proposed Statement include the restoration cost approach, the service units approach and deflated depreciated replacement cost. “These measurement methods are designed to isolate the historical cost of the capital asset’s service capacity that has been rendered unusable by impairment,” the GASB elaborated.

It explained that the proposed guidance includes several disclosure requirements that would assist users of financial statements in understanding the nature and impact of impairment of capital assets.

Disclosures would be required for impairment losses that are not evident from the face of the financial statements, for impaired capital assets that are idle, and for insurance recoveries that are not evident from the face of the financial statements, the GASB added.