Pick up any Year 2000 briefing and you will quickly learn that the Year 2000 problem has multiple aspects: Funding. Human resources. Business systems. Information resources and even management issues. One part, however, has not received full consideration: the legal aspect.
The Problem
In a nutshell, the Year 2000 problem results from the fact that current computer software is not equipped to properly recognize the year change from 1999 to 2000. Generally, software has been designed to use only two digits to represent a year. So, the year 1996 is represented by the digits "96."
A computer assumes that the first two digits are "19." In the Year 2000, the computer will read the two last digits of the year, "00," and continue to assume that the first two digits of the year are "19" - incorrectly interpreting the year 2000 as the year 1900. This simple problem will cost U.S. business hundreds of billions of dollars to correct.
The date miscalculation will corrupt many date-sensitive calculations generated by a company's computers. Interest calculations, inventory controls, lease obligations, amortization schedules, billing and collection information and a host of other information will be affected.
At its most fundamental level, the Year 2000 problem threatens the integrity of financial information produced by an organization's computer systems. This corruption of financial data could potentially undermine an organization's credit rating, its ability to obtain an audited financial statement, to report financial information, to trade on regulated exchanges, to maintain systems that support the organization's cash flow and to service customers.
In short, the Year 2000 problem presents a legal minefield that will need to be negotiated with the utmost care.
The Legal Audit
Interaction with company auditors is certain to follow an internal assessment. For example, Ernst & Young's British arm has announced it will qualify the accounts of British companies that have not put in place adequate plans to address their Year 2000 problem. U.S. auditors will not be far behind.
Faced with this challenge, companies need to implement a legal strategy to avoid potential liabilities. The first step should involve a legal audit designed to assess potential liabilities and avoid them, as well as to explore avenues of cost recovery.
An initial challenge that will be faced by publicly traded companies: whether or not to disclose their Year 2000 problem publicly as a "material fact." While materiality will vary from company to company, the cost of the Year 2000 problem for most mid-sized companies will be an undertaking in the tens of millions of dollars. Many larger companies may spend well into the hundreds of millions.
Additional Impact
Aside from financial repercussions, however, this problem may need to be disclosed based on its anticipated impact on company operations. Given its pervasive nature, assessing company impact requires a sensitive analysis.
Recoupment of Costs
Avoiding securities class actions is only the beginning of the audit function. Recoupment of the substantial costs associated with the Year 2000 problem is equally essential. A complete review of all vendor, software, hardware and outsourcing contracts is the place to begin inquiry.
In as much as statutes of limitation may be running, it is imperative that an immediate assessment be undertaken to secure existing legal rights. The modest undertaking of a legal audit will allow the company to develop a unified approach to third parties, to assure that negotiations or other dispute resolution procedures are consistently analyzed.
Third Party Concerns
Finally, companies need to recognize that even if they are diligent in correcting their own Year 2000 problem, they are not immune from potential liabilities. Third party service providers to the company also must be compliant in order to assure that the company can continue meeting its financial and contractual obligations on Jan. 1, 2000.
For example, if a company's payroll vendor is not compliant and can't issue checks in the new year, liabilities will certainly follow. A comprehensive strategy to assess exposures relating to third party vendor compliance is a necessary component of a legal audit.
Team Protection
Prudent management will undertake to involve its legal advisers in managing this risk and protecting the company's assets and positions. In short, it is imperative that companies act now to secure their viability on Jan. 1, 2000.
Hancock Rothert & Bunshoft has formed a Year 2000 Team to assist companies with related legal problems. If you would like more information on Hancock's Year 2000 Team, or on the firm in general, please contact: Vito C. Peraino on Tel: 213-623-7777 or E-mail: Click Contact Link or visit the Hancock Rothert & Bunshoft website at Click Contact Link
Visit the Year 2000 website at Click Contact Link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
The Problem
In a nutshell, the Year 2000 problem results from the fact that current computer software is not equipped to properly recognize the year change from 1999 to 2000. Generally, software has been designed to use only two digits to represent a year. So, the year 1996 is represented by the digits "96."
A computer assumes that the first two digits are "19." In the Year 2000, the computer will read the two last digits of the year, "00," and continue to assume that the first two digits of the year are "19" - incorrectly interpreting the year 2000 as the year 1900. This simple problem will cost U.S. business hundreds of billions of dollars to correct.
The date miscalculation will corrupt many date-sensitive calculations generated by a company's computers. Interest calculations, inventory controls, lease obligations, amortization schedules, billing and collection information and a host of other information will be affected.
At its most fundamental level, the Year 2000 problem threatens the integrity of financial information produced by an organization's computer systems. This corruption of financial data could potentially undermine an organization's credit rating, its ability to obtain an audited financial statement, to report financial information, to trade on regulated exchanges, to maintain systems that support the organization's cash flow and to service customers.
In short, the Year 2000 problem presents a legal minefield that will need to be negotiated with the utmost care.
The Legal Audit
Interaction with company auditors is certain to follow an internal assessment. For example, Ernst & Young's British arm has announced it will qualify the accounts of British companies that have not put in place adequate plans to address their Year 2000 problem. U.S. auditors will not be far behind.
Faced with this challenge, companies need to implement a legal strategy to avoid potential liabilities. The first step should involve a legal audit designed to assess potential liabilities and avoid them, as well as to explore avenues of cost recovery.
An initial challenge that will be faced by publicly traded companies: whether or not to disclose their Year 2000 problem publicly as a "material fact." While materiality will vary from company to company, the cost of the Year 2000 problem for most mid-sized companies will be an undertaking in the tens of millions of dollars. Many larger companies may spend well into the hundreds of millions.
Additional Impact
Aside from financial repercussions, however, this problem may need to be disclosed based on its anticipated impact on company operations. Given its pervasive nature, assessing company impact requires a sensitive analysis.
Recoupment of Costs
Avoiding securities class actions is only the beginning of the audit function. Recoupment of the substantial costs associated with the Year 2000 problem is equally essential. A complete review of all vendor, software, hardware and outsourcing contracts is the place to begin inquiry.
In as much as statutes of limitation may be running, it is imperative that an immediate assessment be undertaken to secure existing legal rights. The modest undertaking of a legal audit will allow the company to develop a unified approach to third parties, to assure that negotiations or other dispute resolution procedures are consistently analyzed.
Third Party Concerns
Finally, companies need to recognize that even if they are diligent in correcting their own Year 2000 problem, they are not immune from potential liabilities. Third party service providers to the company also must be compliant in order to assure that the company can continue meeting its financial and contractual obligations on Jan. 1, 2000.
For example, if a company's payroll vendor is not compliant and can't issue checks in the new year, liabilities will certainly follow. A comprehensive strategy to assess exposures relating to third party vendor compliance is a necessary component of a legal audit.
Team Protection
Prudent management will undertake to involve its legal advisers in managing this risk and protecting the company's assets and positions. In short, it is imperative that companies act now to secure their viability on Jan. 1, 2000.
Hancock Rothert & Bunshoft has formed a Year 2000 Team to assist companies with related legal problems. If you would like more information on Hancock's Year 2000 Team, or on the firm in general, please contact: Vito C. Peraino on Tel: 213-623-7777 or E-mail: Click Contact Link or visit the Hancock Rothert & Bunshoft website at Click Contact Link
Visit the Year 2000 website at Click Contact Link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
