Archives for posts with tag: Legal

by Merlin Hernandez

Ethical dilemmas in corporate governance can arise from the need for truth in reporting. Issues of whether notional income from projected sales should be included on the income statement, the pressure to demonstrate financial health to stakeholders, or issues of social responsibility and the prevention of job loss if reports should illustrate a need for cut backs all have the potential to compromise a company’s ethical perspective and integrity. The Enron experience in the evolution of the US business regulatory environment was pivotal in that it brought business ethics and conflicts of interest into sharp focus. It was more than organizational malfeasance at one company but a systemic failure of the legal and regulatory structure that would provide the framework for corporate behavior and financial reporting.

Before the Enron debacle, the regulatory climate allowed an organizational culture that was inevitably self-destructive. Large firms like Enron contracted consulting services and allowed these same firms to audit both financial statements and processes – the consultants were signing off on their own work – while internal audits were conducted by employees of the firms. All possible avenues for preventing, detecting, and correcting failures in accountability were effectively contained within a management elite who were essentially laws into themselves. Against this backdrop, many businesses conducted their operations in a manner where fiscal controls and transparency were sacrificed in order to conceal inefficiencies and fraudulent activity, and to manipulate stock prices.

With the collapse of Enron, a maze of corporate fraud revealed inventive manipulations of partnerships with subsidiaries created to conceal huge debts and heavy losses, while published financial statements revealed robust fiscal health. The accounting firm, Arthur Andersen, operating as both financial consultant and external auditor, was implicated in what is now known as one of the largest frauds in corporate history. In response to the financial fall-out that resulted from Enron’s bankruptcy, the Sarbanes-Oxley Act was enacted in 2002 to provide a body of rules for Corporate Governance and to legislate accuracy and reliability in corporate disclosures for public companies. Violations can bring fines up to $500,000.00 and/or 20 years in prison. The Act mandates the company CEO and CFO to make an assessment of the internal controls they have in place while an external auditor must attest to the efficiency of those controls and issue a separate report to the SEC.

Both financial statements and process systems are auditable. CEO/CFO assessments involve documentation and implementation of the control environment. External auditors engage in the testing and reporting (attestation) of processes and transactional cycles, tracking all transactions back to the financial statement. The rules are designed to make all financial activity of publicly traded companies accurate, subject to checks and balances, made a part of the public record available for public scrutiny. But many privately held companies have embraced these rules to guide their corporate ethics.

Businesses, however, remain challenged by issues of corporate social responsibility, company loyalty, and the personal self-interest of managers, all of which can serve to blur the lines between what is ethical and what is expedient.


by Merlin Hernandez

Shipping is a vital component to logistics and supply chain management. With the rising strategic importance of global sourcing and international marketing, logistics planning has become a strategic priority. Shipping has thus assumed greater importance in the external environment with the globalization of commerce. The Internet has sped up communication and supported ease of information transmission for documentation and confirmations. Huge challenges remain, however, in delivery times, language and cultural differences, infrastructural capability (bureaucracies, roads), costs, payment methods, and currency exchange rates. Differences in legal systems and international laws can also influence import-export restrictions, duties, and tariffs that exist between and among countries.

Shipping and other logistics costs now account for more than 10% of sales revenues and are beginning to erode the economic advantage of operating internationally. This is fueled by the complexity of this aspect of business operations for which many companies do not have the expertise. Additionally, prior to going global, many large companies have had fragmented internal logistics that are siloed by brand or department. An overall enterprise-wide strategic approach to logistics management and greater attention to logistics planning may be indicated. The advantages are better management of economies of scale through improved consolidation and broader-based decision-making. This will be more readily achieved in a flatter organization with enhanced functional integration for more efficient procurement and order delivery. But even without any organizational re-structuring, a single shipping department can go a long way to leverage cost savings across the range of shipping needs.

Businesses seeking the advantages of global sourcing or to tap into lucrative international markets would find it especially useful to establish a long term relationship with a professional shipping firm like an international shipping broker or freight forwarder to help navigate the complex channels and legal requirements. This is especially beneficial to small businesses.

by Merlin Hernandez

Outsourcing has essentially been characterized as the transferring of US jobs to emerging economies like India, China, and The Philippines to take advantage of lower wages and taxes as well as environments that are less regulated. Outsourcing industries have spanned manufacturing, technology call centers, human resource administration, medical billing/coding, and health insurance benefit management to name a few.

But many of the tech jobs did not go overseas but were outsourced to overseas companies operating in the US. For example, some call centers remained in the US but the work was contracted to Indian companies and workers were brought in from India to do the work. With the level of unemployment in the US, it would seem bizarre for H1B visas to be granted to foreign workers. The argument in favor of the practice is that these “guest” workers are contract professionals brought in to fill shortages in the tech industry, and fast-tracked for US residency ostensibly to maintain the level of proficiency in the workforce.

Many analysts question whether there is a shortage of US technology workers. They suggest that firms operating in the industry prefer to hire younger foreign workers at lower wages while more experienced professionals are sidelined as being too expensive. Supporters maintain that H1B visas secure the best talent to keep US innovation alive and American business competitive in the global market. But it has been found that may visa workers were doing non-technical jobs that could have gone to the average US college graduate.

The obvious question is why this is allowed when there are USCIS stipulations that jobs under H1B can only be offered to a foreign worker if no US worker can be found to perform the job. The answer apparently lies in the fact that H1B workers are paid less than industry norms and come at a much lower overall cost. H1B legally mandated prevailing wages have not caught up with the realities of the tech industry and fall way below the market wage – sometimes more than 50% lower. Moreover, workers may not receive benefits like health insurance and pension plans, and employers do not have to pay into unemployment insurance. Foreign workers not only cost less but under the terms of their visas, they are not free to leave the contracting employer till the end of the contract, and longer if they are awaiting US residency status – a veritable modern day indentureship system to provide a stable body of cheap expertise.

With increasing numbers of foreign workers seeking H1B visas and sustained public outcry against outsourcing in general, the USCIS intensified its scrutiny of applications by US businesses to import workers, and imposed more stringent visa policies. The cost of visas almost doubled to $4,500 per application and the rate of H1B admissions dropped significantly. The vigilance is part of the government’s move to limit work visas to foreign nationals as a way of addressing domestic unemployment. At the same time there is a Senate proposal for tax incentives to businesses for repatriating outsourced services. Not to be left out in the cold, Indian outsourcing firms began to hire US workers for their US operations where their most lucrative customers are based. These firms have gone even one step further to network with universities to better prepare students for tech jobs.

As the US economic recovery gains momentum in 2013, it can be expected that the insourcing of previously outsourced American jobs will escalate. US investors, looking for opportunities in growth industries are likely to compete aggressively for a greater share of the outsourcing pie.

by Merlin Hernandez

See article on Internet transactions published on October 8, 2012

After reading my article on Internet Transactions, one of my friends expressed surprise that there was no real comprehensive legal framework for internet transactions. Some transactions are subject to existing contract laws but interstate and international commerce where laws may be different present problems – which state/country’s laws apply. Hence the CISG umbrella for international arbitration. The area of privacy, however, is particularly volatile. I think the issue of the differences in laws relating to both domestic and international internet transactions is also one of the main reasons why there seems to be an overall reluctance by the US judicial system to wade in an enact legislation to govern privacy considerations in internet usage.

But perhaps a more salient issue is the rate of new technological inventions and applications. The changing landscape might essentially make draft legislation outdated before it even becomes law. The current legal framework for online privacy rests mainly on two federal laws, the Electronic Communication Privacy Act of 1968, and the Children’s Online Privacy Protection Act. Since then, new and emerging internet technologies and usage have created a minefield of inquiry that has essentially stumped the judicial system and the FTC itself.

Part of the problem appears to be that legal architects are of necessity seeking to legislate behaviors within a fragmented approach. There is really no overall statutory structure for internet privacy, sites are not required to have privacy policies, and there is no generalized “right of privacy” unless there are violations that are paralleled in an offline setting. Perhaps in order to give some form to the inquiry, the first order of business might be to create some kind of charter of internet privacy rights and develop a body of law that would safeguard them.

The fluidity of internet usage which influences the structure of internet marketing will continue to have lawmakers struggling to catch up. In such an open-ended environment, arbitration is probably the most viable form of dispute resolution.

by Merlin Hernandez

I was beginning to feel that the entire system of credit risk and ratings is a runaway train and that the banking industry has essentially conceded its duties concerning credit risk to the almost arbitrary rating system of the credit reporting agencies. For banks and other financial institutions to knowingly continue to rely on the inefficiencies that plague the credit reporting agencies, is an injustice to the banking population. Banks have not only a fiscal but an ethical responsibility to protect the interests of their clients. It would seem that the public is being forced to accept the obvious flaws in the system with all the medieval-themed ads advising us to monitor our own credit because the reporting agencies do not get it right.

Mistakes appear to be made with impunity and a monitoring and correction industry now exists to right the “mistakes”. However the system started, the model seems to have degraded to the point that personal intervention (at a price) is necessary in order to maintain some kind of accuracy. Something is very amiss here. I believe it is a failure of both the banking and credit systems for relying on the credit reporting agencies, as well as the regulatory authorities for not holding credit reporting agencies fully accountable for errors and imposing stronger guidelines for the way they operate. Someone has to say to these agencies, do it right or get out of that business. The problem just might be that there is no legal definition of what constitutes ‘doing it right’.

The Fair Credit Reporting Act (FCRA) of 1971 and its amendment in 2003 with the Fair and Accurate Transactions Act (FACT) outlined the responsibilities of credit reporting agencies. Financial institutions, however, are not typically credit reporting agencies and may not have the same obligations under the regulations. The regulations themselves have not subjected the reporting agencies to an adequate level of oversight with penalties for failing to meet established standards of reporting. In other words, the laws do not go far enough but more importantly, there has been no mechanism for enforcement.

Finally in July 2011, after years and thousands of complaints, the Consumer Financial Protection Bureau (CFPB) was formed to regulate financial products and services under the Dodd–Frank Wall Street Reform and Consumer Protection Act (2010). It was announced in July, 2012 that the companies that determine credit scores will come under government oversight under the CFPB which has rule-making authority. Of note is that the CFPB not only has an administration function but is also responsible for enforcing compliance with FCRA provisions. The new rules took effect on September 30, 2012. We might now look forward to some new regulations that will make the credit reporting agencies more accountable.

by Merlin Hernandez

In today’s fluctuating economy, business faces many challenges, not the least if which is the need to reduce costs in order to maximize profit margins. Unfortunately, one of the more facile ways employers have chosen to stay afloat is workforce reduction. Though research has shown that a 10% reduction in workforce would yield only 1.5% in cost savings, this strategy has remained a primary approach.

The cost of employee separation, however, can spiral exponentially if the risks are not given careful consideration – severance packages, accrued vacation, employee outplacement services, and the possibility of claims of discrimination. It becomes incumbent on employers to reduce legal liability by closely examining attendant risks and dealing with any complaints of discrimination quickly and carefully. Such complaints, even if they do not prevail, can lead to workplace tensions, decreased employee morale, adverse publicity, loss of business, government investigations, and costly legal battles with consequent damages and/or settlements. In the end the reduction could cost more that some of the re-structuring options that would have kept the workforce intact.

The key is not to strategize for contraction but for recovery, using the period of contraction as an opportunity for mitering so that when the rough patch is over the business is more effectively streamlined to meet its challenges. Strategic cost management that may involve cost cutting but with an eye on maintaining competencies. The re-design of business processes for greater efficiencies often provide the cost savings that can forestall reductions in the workforce. Other strategies would include hiring and wage freezes, reduction of hours/shorter work weeks, work- sharing, re-assignments, and temporary shutdowns.

by Merlin Hernandez

With reports of inappropriate online activities by employees, and suspected lost productivity and data breaches because of it, numerous software applications are available to monitor employees’ internet use. The practice of non-work browsing remains of major concern to both employers and employees. The essential conflict revolves around the employer’s need to ensure a high level of productivity and employee assertions that their privacy should not be violated.

It is predominantly unregulated territory with federal laws that are not well-defined and/or do not go far enough. There is the tendency to lean more in favor of employers – courts have held that employees do not have a reasonable expectation of privacy in e-mail while employers are expected to review e-mail messages on their networks in order to defend against any charge of vicarious liability in cases of sexual harassment. A 2007 survey by the American Management Association and the ePolicy Institute found that two thirds of employers monitor their employees’ website visits…and 65% use software to block connections to websites determined to be inappropriate like those with sexual content, shopping, sports, and social networking. In some states, the employee needs to be notified of the monitoring, especially if it is used for future training purposes. Some employers do notify about computer and telephone monitoring, as a matter of course, through memos, handbooks and union contracts. But in most cases, the employee only discovers the monitoring during a performance evaluation exercise.

The conventional wisdom is that the employer, as owner of the equipment, has the right to know what activities are conducted on their computers. There are some clear restrictions, however. Union contracts may limit the employer’s right to monitor, while public sector employees may have some protection under the Fourth Amendment which safeguards unreasonable search and seizure. In addition, according to a New Jersey Supreme Court ruling in March, 2010, an employer can be in violation of the privacy rights of an employee by reading password-protected e-mails that fall under the category of “protected communication” as that between an employee and his/her attorney.