April 20, 2006

In-house counsel need a heightened awareness of the warning signs of financial wrongdoing, according to panelists at Wednesday’s InsideCounsel SuperConference session entitled, “Red Flags of Fraud.”  Jenner & Block Partner William D. Heinz made introductory remarks at the session. 

Panelist Lisa Sotir Ozkan, General Counsel for the National Education Association’s Member Benefits, highlighted some red flags indicating that management may be engaging in corporate wrongdoing.  “High employee turnover is one indication,” she said, especially if the turnover is in senior management or the board of directors.  She also pointed to “cultural concerns” within the company, such as an overly relaxed attitude toward compliance issues. 

Corporate leaders may be tempted to engage in questionable financial reporting practices for several reasons, said panelist David Hoffman, Partner at Ernst & Young LLP, including excessive pressure to meet analyst expectations or a compensation program that is dependent on achieving financial goals. 

The Sarbanes-Oxley Act of 2002 stipulates that if an in-house attorney discovers that management has made a material violation and breach of fiduciary duty, he or she must first report evidence of the violation to the Chief Legal Officer and/or the Chief Executive Officer, reminded panelist James C. Bays, Vice President and General Counsel of Ferro Corporation. 

The CLO, under the reform law, must then promptly launch an investigation of the alleged fraud, added panelist Neil E. Jenkins, Executive Vice President, Secretary and General Counsel of Lawson Products.  He noted that the SEC, prosecutors and auditors are increasingly insisting that independent, external counsel conduct such internal investigations.