If the economic boom of the late 1990s resembled a scene from Mel Brooks’ “The Producers,” the fall of 2002 looks like another Brooks farce, “High Anxiety.”

In executive suites from Wall Street to Sorrento Valley Road, chief executives are required to sign on the bottom line and certify that the books aren’t cooked, fried or sautéed. In a rush to “do something” before its August recess, Congress passed the Sarbanes-Oxley bill, requiring CEOs of more than 17,000 publicly traded companies to swear by their revenue and earnings statements or face criminal penalties.

Whether Sarbanes-Oxley will restore investors’ confidence in Wall Street is so far a puzzler, since the certifications themselves may bring to light more voodoo accounting. On Aug. 15, the day after the first batch of certifications rolled in, AOL-Time Warner confessed to “looking at” $49 million worth of transactions. The market shrugged and gained 75 points.

San Diego attorneys who advise corporate executives say the landscape now includes worrying about a call from the U.S. attorney (see sidebar) in addition to a shareholder suit from Bill Lerach.

“Sarbanes is the most significant piece of legislation to come out of Congress affecting companies since the 1934 Securities Act, because it reaches into the way public companies operate, puts more personal responsibility on senior executives, and ups the ante by throwing in a lot of criminal penalties that weren’t there before,” says Scott Stanton, a corporate lawyer with Gray Cary Ware & Freidenrich.

Sarbanes requires:

1) Any periodic report containing financial information “fairly represents, in all material respects, the financial condition and results of operation of the issuer.” An officer who knowingly makes a false certification may draw a fine of up to $5 million and imprisonment of up to 20 years.

2) Audit committees will be subject to higher independence standards, and companies are required to grant their audit committees control over the company’s relationships with auditors, including hiring, firing and spending authority.

3) Loans to directors and executive officers are prohibited, including the modification and forgiveness of currently outstanding loans. Insider transactions must be reported two business days from the date of the transaction.

4) Financial restatements arising from misconduct can result in forfeit of bonuses paid to the CEO and chief financial officer, and profits from their stock sales in the year following the report, even if the officers weren’t personally responsible.

5) The statute of limitations for private securities fraud litigation has been lengthened to two years from the date of discovery or five years from the date of the violation.

Stanton says the law means less sugar flowing from executive suites. “The absolute prohibition against loans is a big deal, because loans are frequently used as part of a compensation package,” he says. “A common thing to do would be to give a loan as a signing bonus and forgive it later. I think it’s going to be harder to find the right people to put on your board because the independence standards are tougher than they used to be.”

Nor is the bill itself the end of regulations. The Securities and Exchange Commission is expected to draft its own regulations, as are the Nasdaq and New York Stock Exchange.

“This bill was written to catch Ken Lay and Jeff Skilling,” Stanton concludes. “So many of the provisions are written so that if they had been in place, the Enron guys would have been caught. They’re trying to catch criminals who already got away from them.”

Is it a matter of good cases making bad law?

“It’s exactly one of those cases,” Stanton says.

Not all attorneys agree that Sarbanes-Oxley represents a sea change in business practice.

Pam Naughton, an attorney with Sheppard Mullin Richter & Hampton, says much of the hysteria about the bill is unwarranted, particularly the lengthening of the statute of limitations. “As a practical matter, you never see these shareholder matters filed in anything like that long a time,” she says. “They’re usually filed immediately upon a restatement or upon disclosure that the SEC is investigating, even if it’s an informal inquiry. All the filings before the SEC are followed on a daily basis by the plaintiff’s attorneys, so if the company sneezes, they’re going to see it.”

Although the criminal hammer is new, Naughton points out that the bill doesn’t include the imposition of joint and several liability favored by attorneys representing plaintiff shareholders. This provision allows plaintiffs to sue deep pocket business partners of the defendant company, in addition to the possibly bankrupt defendant. “The plaintiff’s bar was hoping for a lot more from the bill — they were looking for some of the things they lost in 1995 — so I think they’re going to go back for another crack,” she says.

Sarbanes-Oxley also does not require companies to expense stock options, which can, in the short run, inflate a company’s worth. But they must be disclosed to the board. Naughton says the valuation of options is a gray area that will require guidance from the SEC.

She also is critical of the provision that makes failing to maintain a financial record a crime. “It’s the lowest criminal standard I’ve ever seen,” she says. “You don’t have to destroy or have revised the record, you could have just lost it (or it) could have been burned in a fire. I don’t know if that one is going to pass muster because in the criminal law you need to have criminal intent.”

The bottom line for San Diego public companies, or those hoping to go public, could be a drain on brainpower and expenses.

“Certainly, it’s going to put a damper on anyone’s enthusiasm about serving on a board, let alone on the audit committee of a board,” Naughton says. “How many experienced auditors can you find to serve on boards of 17,000 public companies who aren’t already affiliated with an accounting firm? What’s the upside to that person? (To be) the target of numerous class actions? And oh, by the way, you might be investigated by the SEC, and the FBI, and you might go to jail for violating these new laws that don’t require any criminal intent. Would you take that job?”

But to Kurt Kicklighter, a lawyer who represents banks and other financial institutions at Luce, Forward, Hamilton & Scripps, Sarbanes is a case of déjà vu.

“It’s really ironic, but if you remember the savings and loan disaster between 1989 and 1994, there were not a lot of new banks, and you couldn’t raise money to save your life,” he recalls.

In 1989, Congress adopted black coffee legislation intended to sober up the banking industry, similar to Sarbanes.

“A lot of us thought at the time that the legislation would lead to people not serving on boards — we went through the same thing. What happened is costs went up a little bit, but to everyone’s surprise, people are still serving on boards despite tremendous personal responsibility for being on a bank board if things go bad. So, based on that history, I think that things that people like me worry about are not going to happen.”

In August, Kicklighter helped close an $11.5 million offering for Landmark National Bank. “Regional and local bank stocks are going up about 20 percent over the last year and a half,” he says. “Southwest just raised money, and Cuyamaca raised money last year. There’s a good argument local bank stocks are still underpriced.”

Not that the benefit of hindsight makes it any easier for corporate managers in the post-Enron world.

Charles Dick of the San Diego office of Baker & McKenzie is steering his clients through the new rules. “One thing that is particularly startling that represents a big change is the requirement that the CEO and CFO make certification with any report that is filed with the SEC,” he says. “They’ve always been signing these documents, but now they have an added layer of certification, not only that everything in that report is correct but also that they have put in place the control and systems that inform them of any irregularity.”

For example, suppose a company in its financial report speaks in glowing terms about the sales team for its hot new product, but actually has internal personnel issues, as many companies do. “You have to ask yourself,” Dick says, “does this fairly represent the condition of the company? Or, what’s the difference between puffery and honest expressions of optimism about your future?”

Dick also says that companies should expect more conservatism from their accountants, if only out of self-defense. “An awful lot of what accountants do involves a great deal of judgment; there are often no bright line answers to how a particular transaction should be treated,” he says. “In the past, accountants have been more inclined to go along with management’s aggressive solutions to those issues than they will be tomorrow.”

While the administration of Sarbanes is sorted out in regulations, Dick offers these gratis bullet points for public companies:

• Spend extra effort in rethinking the internal control mechanisms for monitoring financial reporting.
  
  
• Audit committees will have to be composed of these outside directors. Companies should learn to appreciate the value of independent directors and steer away from dominance of insiders on the board.
  
  
• Venture capitalists should take a critical look at whether they want to serve on boards.

When the dust settles, Dick says, “the real question will be: ‘Is the government going to prosecute these cases or are these going to be statutes that sit on the books?’”

The conventional wisdom says tougher times for public companies mean fewer investors will put their cash in startups. With the so-called new economy nothing more than a fond memory, companies sparked by innovation will be subject to the tar of the new economy brush. As the president of the San Diego Venture Group, attorney Mike Hird of Pillsbury Winthrop is sensitive to the effect Sarbanes will have on San Diego’s developing companies.

“When the public markets aren’t robust, that mood filters into the private capital markets, and all of our startup clients suffer,” he says.

But, as was the case with banks, Hird says Sarbanes can be a positive for developing companies “because it will be very eye-opening for the public to realize the exposure of officers, directors, accountants and attorneys.”

And if it takes longer for developing companies to reach Nasdaq, so be it.

“If you look back at the last five years prior to the boom, it took quite a bit of incubation before a company would venture into public capital markets,” he says. “As the heat of the economic boom created a voracious appetite for IPOs, the investment banks reached further and further back into startup companies and began taking those companies public. To the extent that you’re taking companies that haven’t finished that incubation, let alone reached maturity, and you’re putting them into a public market, and then you add on top of that the notion of a new economy in which the various metrics that you judge companies by are up for debate, a lot of factors combined for some very uncertain times.”

In the post-Sarbanes era, fewer companies going public may be better, and the payoff greater. “In a robust economy, you solve problems with money; in the current environment, you need to use ingenuity to solve problems that confront you. Folks that are joining companies now are looking for a company that has a fundamentally sound business plan, rather than looking to become Internet millionaires.”

Developing companies may be more likely to seek a big brother.

“Mergers are more likely for a variety of reasons,” Hird says. “It’s not real easy to go out and build your own company. People that have very good ideas can find platforms that already exist and they might combine at an earlier stage.”

The current cycle may even benefit developing companies, because when the market swings back, they’ll be the players with loaded guns. Their publicly traded competitors may empty their pistols trying to stay alive in a down market. “So the entrepreneurs are staying in their garages for a longer period of time,” Hird says. “This is a great time to start a company, the perfect time to have your head down doing research and development.”