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SOX legal costs; when should law departments create accounts outside their budget

When the accountants for Adecco, a $20 billion temp agency, said they were not prepared to sign the company’s accounts for 2003 because there were material weaknesses, they triggered a $120 million accounting and legal review. [Economist, May 21, 2005 at pg. 72]

At one point, “there were three sets of lawyers employed to cover the accountants’ backs, checking that their work would not lead to lawsuits after the fact. The bills of 15 different law firms, pricing their services at rates of up to $800 an hour, were paid by Adecco. According to a senior executive, the firms were “charging like raging bulls. It was a fee fest.”

Two observations: SOX legal compliance can cost dearly. Second, should a law department, whose budget is busted by such an unforeseeable expense, create a separate general ledger account for the charges?