As I explain in my book The Complete Guide to Sarbanes-Oxley, section 307 of Sarbanes-Oxley and the SEC rules thereunder require lawyers appearing and practicing before the Securities and Exchange Commission are under a duty to "report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof). If "the counsel or officer does not appropriately respond to the evidence" the attorney "must report the evidence to the audit committee of the board of directors of the issuer or ... to the board of directors."
I mention this because of the NY Times report on the internal investigation at Wal-Mart of corruption at their Mexico subsidiary:
Confronted with evidence of corruption in Mexico, top Wal-Mart executives focused more on damage control than on rooting out wrongdoing.
In one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive. Days later, records show, Wal-Mart’s top lawyer arranged to ship the internal investigators’ files on the case to Mexico City. Primary responsibility for the investigation was then given to the general counsel of Wal-Mart de Mexico — a remarkable choice since the same general counsel was alleged to have authorized bribes.
The general counsel promptly exonerated his fellow Wal-Mart de Mexico executives.
When Wal-Mart’s director of corporate investigations — a former top F.B.I. official — read the general counsel’s report, his appraisal was scathing. “Truly lacking,” he wrote in an e-mail to his boss.
The report was nonetheless accepted by Wal-Mart’s leaders as the last word on the matter.
Here's what inquiring minds want to know: Did the lawyers go to the audit committee? If not, will the SEC go after them?
Looks like there may also be SOX Section 404 issues, as well as major securities fraud issues, since Wal-Mart's internal controls seemingly have problems detecting and preventing corruption:
A confidential investigation, conducted for Wal-Mart in 2003 by Kroll Inc., a leading investigation firm, discovered that Wal-Mart de Mexico had systematically increased its sales by helping favored high-volume customers evade sales taxes.
A draft of Kroll’s report, obtained by The Times, concluded that top Wal-Mart de Mexico executives had failed to enforce their own anticorruption policies, ignored internal audits that raised red flags and even disregarded local press accounts asserting that Wal-Mart de Mexico was “carrying out a tax fraud.” (The company ultimately paid $34.3 million in back taxes.)
Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units. Kroll wrote another report that branded the units “ineffective.” Many employees accused of wrongdoing were not even questioned; some “received a promotion shortly after the suspicions of fraudulent activities had surfaced.”
As I explain in my book The Complete Guide to Sarbanes-Oxley, section 404 of Sarbanes-Oxley management must acknowledge its responsibility for establishing and maintaining a system of internal controls and procedures for financial reporting and an assessment, as of the end of the most recent fiscal year, of the effectiveness of the firm’s internal controls. How could Wal-Mart have provided a positive assessment of their internal controls in light of these problems?