Wired Mosaic Soap Box, October 23, 2005


Lawyers Spreading Fear

Lawyers Bag the Riches is the title of an article from Financial Director Magazine by Robert Bruce. The thesis is that attorneys have exploited Sarbanes-Oxley to apply their greasy thumbprints to every business decision. Boards of European countries now desire security above all else. And so, "as wave after wave of regulation has rolled in they have accepted, and paid for, wave after wave of carefully crafted caveats provided by the law firms."

Mr. Bruce bases his argument on interviews with senior executives at European companies published in a KPMG report called The Pressure of Regulation on Business. In this report, the former CFO of GlaxoSmithKline suggests that the effect of regulation is to focus people on merely appearing to have done things, rather than really doing them. In this climate of over-regulation, lawyers extend their control by spreading fear of the consequences of not attending to every regulatory detail.

Lawyers also now stake a claim to the business counsel traditionally offered by accounting firms. These accounting firms have had to focus so extensively on auditing work (resulting from overregulation) that the remainder of their business has drifted into the hands of the lawyers. Unlike accountants, these lawyers think in terms of rules, not best practices. This is a "bad thing" because only auditors truly "understand the principle-driven purpose of business."

And the solution? It's simple, really. Financial directors everywhere, Bruce writes, "need to be brave, otherwise they will lose access to good impartial advice."

Bravery aside, ironies abound. First, Sarbanes-Oxley itself has been largely motivated by a principles-driven approach to accounting and to other business decisions. Section 108(d) of the Act itself mandates that the Securities and Exchange Commission study the adoption of principles-based accounting standards in the United States that more resemble the approach that prevails in Europe. The SEC issued its report in July 2003, concluding that adoption of principles-based accounting standards would be consistent with the reform vision of Sarbanes-Oxley and in conformance with the standards reforms adopted by the Financial Accounting Standards Board.

Second, the major accounting firms have not been sleeping while law firms take over their business. To the contrary, the largest law firms in the world are now inside the major accounting firms, and one might safely assume that they are now busy crafting wave after wave of caveats on their own.

Peter Schwartz is the President of Knowledge Mosaic. You can write to him at pschwartz@knowledgemosaic.com. The opinions he voices in The Soap Box are his alone, and do not necessarily reflect the views of Knowledge Mosaic LLC.

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