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News < Back Sarbanes Oxley : Law New Federal Sentencing Guidelines Put Directors in the Hot Seat Under New Federal Sentencing Guidelines due November 1, Boards of Directors Must Assume Responsibility for Effectiveness of Corporate Compliance Programs,Says BDO Seidman, LLP?s Corporate Internal Investigations Practice
?Just as Sarbanes-Oxley places additional responsibility on corporate boards for the integrity of a company?s financial controls, the new organizational sentencing guidelines seek to make boards responsible for promoting the effectiveness of a corporation?s legal and ethical controls,? said Mr. Sprung, a former federal prosecutor in the Southern District of New York who prosecuted companies under the current guidelines and now helps them avoid law enforcement problems at the outset.? ?Rather than seeing the new guidelines as yet another onerous legal requirement, corporate boards should use the guidelines as an opportunity to move their companies further down the road towards organizational integrity,? Mr. Sprung added. The U.S. Sentencing Commission, an arm of the federal judiciary, issued the current guidelines in 1991 to instruct federal judges in the sentencing of organizations.? Last spring, the Commission issued amendments to the guidelines, scheduled to go into effect starting November 1 absent last-minute contrary action by Congress. Under the current guidelines, a corporation convicted of a federal offense may seek leniency if it has maintained an effective program to prevent and detect violations of the criminal laws.? To take advantage of this provision, the company must prove that it has the following checks in place:
The amendments strengthen the requirements of an effective compliance program in several ways.? New Role for Board of Directors, Higher Profile for Compliance Matters Whereas the original guidelines give management personnel overall responsibility for overseeing compliance, the amendments shift that duty to the board of directors, who must educate themselves about the organization?s? compliance and ethics programs.? As for senior management, the amendments require them to participate in the implementation of the programs, ensure that compliance officials have adequate resources, and report periodically to the board about the effectiveness of the programs.? ?The new sentencing guidelines should raise the profile of the compliance function within the corporation, as Sarbanes-Oxley has done for the role of internal audit,? stated Mr. Sprung. At the same time, the new role for the board contemplated by the guidelines increases the risk of liability in the event of serious compliance lapses.? ?Historically, the organizational sentencing guidelines have greatly influenced developments outside the criminal justice arena, as government regulators, courts and industry standard-setters have incorporated their requirements into other settings, including the law of fiduciary duty.? It is likely that this trend will continue under the new guideline amendments,? predicted Mr. Sprung. Broader Coverage and Sharper Teeth While the original guidelines encourage organizations to use due diligence to prevent and detect criminal conduct, the amendments add the requirement that corporations develop an ?organizational culture? that promotes ethical conduct and compliance with the law.? This change reflects the view that efforts solely to suppress criminal conduct are unlikely to succeed, and that it is necessary to adopt a more comprehensive approach that addresses employee attitudes and ?tone at the top.?? It is not enough for the compliance plan to exist on paper; it must have an actual impact.? To achieve this result, the amendments set detailed standards covering training programs, employee performance incentives, and communications and reporting systems.? ?This approach fits neatly with our experience in fraud prevention ? corporations should employ a wide array of prophylactic and educational measures to ensure that ethical values permeate the entire organization,? stated Mr. Sprung. Open the Windows and Let the Information Flow The amendments provide that the elements of the organization?s compliance standards and procedures must be communicated effectively throughout the company.? As under Sarbanes-Oxley, the organization is obliged to implement a system for its employees and agents to report misconduct without fear of retaliation, providing confidentiality guarantees as necessary.? ?In many of our fraud investigations, we find that certain employees were aware of the wrongdoing but were afraid to report it.? The new guidelines make senior management responsible for addressing this persistent problem,? observed Mr. Sprung. Cleaning House, and Keeping It That Way Under the amendments, organizations must use due care to identify miscreants and not put them into positions of authority.? If a violation of the company?s standards and procedures is detected, the company must respond vigorously, disciplining wrongdoers and strengthening internal controls as appropriate.? ?The new guidelines reinforce the imperative, commenced by Sarbanes-Oxley, in which the board and senior management must continuously police corporate integrity,? said Mr. Sprung. Assessing Risks and Measuring Results The amendments discourage organizations from adopting a rigid ?one size fits all? approach to compliance programs.? Instead, detailed risk assessments should be conducted continuously to determine the scope and nature of risks of violations of law associated with the organization?s activities, and the results of the assessment should inform the design and implementation of the program.? Similarly the amendments require corporations to constantly monitor, audit and evaluate the effectiveness of their compliance programs.?? ?As public companies are required to do under Sarbanes-Oxley with respect to financial controls and disclosures, corporations should have independent specialists audit their compliance and ethics programs annually,? recommended Mr. Sprung. Making Necessity a Virtue ?While an effective compliance and ethics program is a strong shield against regulatory or law enforcement action, a corporation with a demonstrated commitment to integrity also significantly enhances its shareholder value,? stated Mr. Sprung. 
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