The Challenges of Law Firm Risk Management

The recent actions filed against lawyers in connection with the Enron and other corporate scandals are a clear reminder of the potential vulnerability of law firms to the actions or mistakes of individual partners. And the rapid collapse of Arthur Andersen is disturbing proof of the inherent fragility of all professional service firms.

But the new risks facing law firms go well beyond the problem of the so-called "rogue partner" arguably evidenced in these corporate scandals. In an effort to address the issues raised by Enron-type situations, Congress last year passed the Sarbanes-Oxley Act. Section 307 of the act requires the Securities and Exchange Commission to prescribe minimum standards of professional conduct for lawyers representing public companies. The SEC has now adopted such standards, imposing new obligations that effectively make lawyers responsible - in at least some circumstances - for the character and conduct of their clients.

These new rules significantly increase the risks of lawyers representing public companies and, in the view of some commentators, begin to treat the practice of law as if it were a regulated industry.