Week 4: Practicing Law Abroad in the Wake of Sarbanes-Oxley
By Elizbeth Pietanza
When the people of Enron were working their way through a financial debacle, I wonder if they considered that their actions could affect the legal practices of most developed economies throughout the world. Largely in response to Enron’s financial disaster, the U.S. enacted the Sarbanes-Oxley Act, which amends the Securities Exchange Act of 1934 regarding auditor independence. The Act restricts firms in the U.S. from offering legal services to audit clients. It also restricts law firms in foreign jurisdictions from offering non-audit legal services to SEC-registered audit clients.
For my clinical internship I am working at Deloitte, which is known as a global auditing and consulting firm. In Chile, Deloitte consists of the following departments: auditing, tax, legal, risk, consulting and outsourcing. There are several legal practice areas at Deloitte, including National Tax, Corporate, Insurance, Litigation and the International Tax Group, for which I work. In the past, Deloitte lawyers could also handle legal issues for auditing clients. However, since Sarbanes-Oxley Deloitte Chile has had to orient its law practice toward servicing non-audit clients or auditing clients that are not registered with the SEC. It is also trying to reorganize its legal practice in anticipation of new Chilean legislation proposing similar regulations as Sarbanes-Oxley.
The Superintencia de Valores y Seguridades, or Chile’s version of the SEC (which also regulates insurance), is examining the new bill. Like Sarbanes-Oxley, the aim of the bill is to prevent lawyers from representing clients for both auditing and legal services. By offering both services, conflicts of interest could arise from both serving the financial interests of company (as its auditor) and representing its legal position (as its attorney). An attorney who represents a client and knows the client will be sued in a large civil action provides an example of such a conflict of interest. The lawyer, having knowledge of the suit, has the incentive to work with auditors to downplay the financial condition of the company in anticipation of litigation. The upcoming law seeks to eliminate such motivation to stretch or break the law by separating auditing and legal services.
In response to the upcoming law, the International Tax Group of Deloitte Chile is focusing more on transactional work, such as mergers and acquisitions, joint ventures, establishing subsidiaries and international contracts for non-auditing clients. As part of my internship I am helping to research client issues concerning these subjects, as well as investigating the impact of the new Free Trade Agreement between Chile and the US on these transactions.
Having the perspective of a law student from the U.S., I get to see the manner in which events in the U.S. can affect legal practice throughout the world. I wonder if the actors at Enron could have foreseen the extent their alleged indiscretions would have on the global legal environment.
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