[Congressional Record Volume 143, Number 156 (Saturday, November 8, 1997)]
[Senate]
[Pages S12189-S12190]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ADDITIONAL STATEMENTS

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 NEW LEGAL AND ACCOUNTING DIMENSIONS OF THE YEAR 2000 COMPUTER PROBLEM

 Mr. MOYNIHAN. Mr. President, on Thursday, in the Wall Street 
Journal, two articles appeared highlighting additional facets of the 
year 2000 [Y2K] problem. While the computer and business industries 
have been the primary focus of news articles in the past, these reports 
focused on the legal and accounting fields. And today, in an editorial 
in the New York Post, the editors warn that ``attorneys hope to make a 
killing off the so called Year 2000 problem.''
  In the Journal article entitled ``Threat of Computer Glitch in 2000 
Has Lawyers Seeing Dollar Signs,'' the authors report that ``corporate 
lawyers are urging clients to review their information systems and 
write warranties into their contracts.'' The possibility of future 
litigation has caused New York law firms, such as Skadden, Arps, Slate, 
Meagher, Flom, to establish special groups of attorneys to ensure that 
all contracts contain Y2K warranties.
  The other article, ``CPA Group to Issue Guidelines on Costs of Year 
2000 Bug,'' reports that the American Institute of Certified Public 
Accountants will advise ``auditors on how to push corporations to 
disclose and account'' for Y2K costs. Further, many companies have yet 
to begin the process of changing their systems to alleviate the 
problem, and are unaware of the enormous costs that lie ahead. This 
could well lead to misstatement of profits or loses of 10 percent or 
more. Lastly, in their no-holds-barred manner, the Post editors write: 
``this [problem] could make the litigation over breast implants and 
asbestos look like chump-change wrangling.'' My dutiful peer, Senator 
Bennett of Utah, has been looking into these matters, as Chair of the 
Banking Subcommittee on Financial Services and Technology. And for that 
we are most grateful. Yet his voice, like that of Congressman Stephen 
Horn, is being lost among the din over many less pressing issues.
  Mr President, we are beginning to see the ripple-like effects of this 
most serious issue. The overall costs have been estimated as high as a 
half a trillion dollars, and that widespread failure to comply could 
lead to a global recession, in the opinion of New York Federal Reserve 
Bank President William J. McDonough.
  Above all, from our standpoint, we have an obligation to get our own 
house in order. The lagging response of the U.S. Government to this 
problem, a relative benchmark, as the United States is ahead of most 
countries, is without excuse. With just under 800 days left, we cannot 
have half of our agencies still assessing how many mission critical 
systems will be affected. This is but the first phase of three--
renovation and testing/implementation are the other two. We need an 
outside body to ensure this problem is fixed. My bill, S. 22, will do 
just that.
  I ask that the articles from the Wall Street Journal and the 
editorial from the New York Post be printed in the Record.
  The articles follow:

                 [From the New York Post, Nov. 8, 1997]

                  The Millennium Bug--and The Lawyers

       Plaintiff's lawyers plan to celebrate the millennium in a 
     big, and profitable, way--with the mother of all class-action 
     suits. And experts say this could make the litigation over 
     breast implants and asbestos look like chump-change 
     wrangling.
       The attorneys hope to make a killing off the so-called Year 
     2000 Problem: Many computer systems, especially older 
     mainframes, recognize only the last two digits of a year, so 
     when the century ends and the calendar flips over to double 
     zeros, the computers will crash or, even worse, produce crazy 
     outputs.
       This is a serious--and hugely expensive--worldwide problem, 
     affecting almost every industry and governmental operation, 
     from payrolls to nuclear-missile safeguards. Computer 
     consultants estimate the worldwide cost of fixing the 
     ``millennium bug'' at as much as $600 billion.
       The reality of a Year 2000 crisis has been creeping up 
     gradually on most firms in recent years. But now that it's 
     been widely recognized, the race is on for a solution: 
     Massive computer failure isn't in anyone's interests.
       Inevitably, of course, some firms will fall behind the 
     pack.
       Just as inevitably, the trial lawyers are licking their 
     chops.
       While computer consultants hunt through billions of lines 
     of code looking for YR2000 liabilities, a conference of 
     lawyers in San Francisco this week devoted itself to scoping 
     out possible litigation targets, the Wall Street Journal 
     reports.
       We're not surprised to find the tort bar gearing up. What's 
     even more disturbing is that the government is sitting on its 
     hands. Some federal agencies don't even know the extent of 
     their YR2000 problem.
       Congress issued a report card in September rating various 
     agencies' efforts to avoid millennial meltdown. Three failed, 
     including two Cabinet departments: Education and 
     Transportation.
       And that's not the bad news.
       The Pentagon got a ``C'' and the Energy Department and 
     Nuclear Regulatory Commission got ``Ds.'' It's hard to say 
     what would happen if defense and nuclear-monitoring computers 
     went berserk at the turn of the century--but it wouldn't be 
     anything pretty.
       Even in New York, the systems that control everything from 
     traffic lights to arrest-monitoring are poised to break down 
     or malfunction unless they are fixed soon.
       Government officials at all levels admit that it's unlikely 
     all the kinks will be ironed out in time.
       But the trial lawyers aren't getting excited: Taxpayers 
     have no class-action standing.
                                  ____


              [From the Wall Street Journal, Nov. 6, 1997]

   Threat of Computer Glitch in 2000 Has Lawyers Seeing Dollar Signs

                         (By Christopher Simon)

       The glitch that threatens to shut down computers in the 
     year 2000 and cause chaos in the business world has plenty of 
     people worried. But not lawyers. They see the millennium bug 
     as a business opportunity.
       As protection against any 2000 problems, corporate lawyers 
     are urging clients to review their information systems and 
     write warranties into their contracts with software vendors. 
     Plaintiffs' lawyers are exploring potential litigation 
     targets.
       There are even conferences on the subject. One starting 
     today in San Francisco will feature sessions on the potential 
     liability of the computer industry, consultants, financial 
     institutions, insurance companies and even landlords, as well 
     as the defenses that might be offered. Some lawyers predict 
     year 2000 litigation will dwarf the environmental and absetos 
     class actions of earlier decades.
       The problem, as everyone knows by now, is that computer 
     codes programmed to read dates only as two digits will be 
     unable to read the year 2000. Unless datesensitive software 
     and hardware are fixed soon, experts say, computers 
     controlling everything from credit-card billing records to 
     inventories will be confused and shut down.
       To fix the problem, Gartner Group, an information 
     technology consulting concern in Stamford, Conn., estimates 
     that $300 billion to $600 billion will be spent world-wide 
     reworking more than 250 billion lines of computer code.
       ``Whenever there's this kind of money involved, people 
     always start looking for people to shift the liability to,'' 
     says Stuart D. Levi, of Skadden, Arps, Slate, Meagher & Flom 
     in New York. In the spring, the firm established its own Y2K 
     Group (for year 2000) to help clients by writing warranties 
     into their contracts with software vendors and giving them 
     other advice.
       The New York law firm Milberg Weiss Bershad Hynes & Lerach, 
     known for bringing shareholder class actions, has set up an 
     in-house committee of computer experts and lawyers to explore 
     various legal actions if a crisis does occur. Possible 
     targets of litigation, says partner Melvyn Weiss, are 
     corporate directors and officers. Mr. Weiss says management 
     may be responsible for failing to disclose the costs of 
     fixing the problem to shareholders. ``Stockholders could be 
     blind-sided,'' he says.
       Just last month, in fact, the Securities and Exchange 
     Commission told companies and mutual funds they must keep 
     investors informed about the costs of adapting computer 
     systems to handle the change to the year 2000.
       Some people dismiss the idea of massive litigation as 
     wishful thinking by lawyers. ``The lawyers who are gleefully 
     rubbing their hands hoping to make millions in litigation are 
     wrong,'' says Harris N. Miller, president of the Information 
     Technology Association of America in Alexandria, Va. Computer 
     companies and their customers both ``have a very strong 
     incentive to solve [the problem] and will do so.''
       But attorneys say raising the legal issues of a potential 
     crash is part of the solution. Marta A. Manildi of Miller, 
     Canfield, Paddock and Stone in Detroit says her firm has sent 
     letters to hundreds of clients warning them about potential 
     problems with their software, part of a campaign coordinated 
     by the firm's Team 2000. She says advanced

[[Page S12190]]

     planning may allow clients to secure favorable tax treatment 
     for any expenditures they incur in fixing the problem.
       And at least one suit seeking damages for an alleged 
     inability of a computer to recognize dates after the year 
     2000 has already been filed. Produce Palace International 
     Inc., which operates a grocery store in Warren, Mich., claims 
     in a suit filed in state court in Macomb County, Mich., that 
     cash registers it purchased in 1995 aren't capable of reading 
     credit cards with expiration dates after the year 1999. The 
     suit names TEC America Inc. of Atlanta and All American Cash 
     Register Inc. of Inkster, Mich., as defendants.
       Mark Yarsike, who owns Produce Palace, says he was dismayed 
     to discover a problem with the high-tech cash registers, 
     which cost $150,000 and are capable of tracking inventory, 
     among other things. The entire network crashes, he says, 
     whenever a customer tries to use a credit card with an 
     expiration date later than 1999. Mr. Yarsike is seeking 
     $10,000 in damages.
       TEC denies that its system is flawed and has filed a cross-
     complaint against All American Cash Register, which installed 
     the machines, claiming that any problems were caused during 
     installation and maintenance. A lawyer for All American Cash 
     Register declined to comment.
       Ms. Manaldi, the attorney for TEC, notes that the lawsuit 
     has received a lot of media attention for being possible the 
     first to make a year 2000 claim and calls the allegations 
     about a millennium bug a stunt to generate publicity. Produce 
     Palace's attorney, Brian P. Parker of Bingham Farms, Mich., 
     defends the action. ``I just wrote the complaint based on 
     what [my client] was telling me,'' he says. ``A lot of 
     lawyers are salivating over this. I'm not into that.''
                                  ____


              [From the Wall Street Journal, Nov. 6. 1997]

        CPA Group to Issue Guidelines on Costs of Year 2000 Bug

                        (By Elizabeth MacDonald)

       The American Institute of Certified Public Accountants will 
     issue guidelines today advising auditors on how to push 
     corporations to disclose and account for year-2000 costs.
       Computer experts say the year-2000 software bug, by causing 
     systemwide failures when the clock strikes midnight on New 
     Year's Eve in 1999, could cost billions of dollars to fix. At 
     that time, many computers will read ``00'' as 1900 instead of 
     2000 and subsequently process data incorrectly or shut down 
     altogether.
       The problem is many companies have yet to address the 
     issue, and the accounting industry is getting anxious. The 
     new ``tool kit'' by the accounting industry's largest trade 
     group summariles all of the year-2000 accounting, disclosure 
     and auditing standards now in place and describes companies' 
     and auditors' responsibilities in reporting the associated 
     costs.
       The guidelines state that auditors must get ``reasonable 
     assurance'' from corporate-audit clients that their financial 
     statements ``are free of material misstatements'' involving 
     likely year-2000 problems and how much it will cost to fix 
     them. ``Material misstatements,'' such as inflated 
     inventories, could prompt companies to overstate or 
     understate profits.
       Under the guidelines, however, auditors need to get the 
     assurances only for these material misstatements, errors that 
     some accounting experts say could result in losses of about 
     10% or more of a company's pretax profit. ``Auditors could 
     argue that they're not liable for smaller losses resulting 
     from the year-2000 problem because the amounts are not 
     material,'' says J. Edward Ketz, an associate professor of 
     accounting at Pennsylvania State University's Smeal College 
     of Business. ``But if they don't detect a problem that 
     results in losses greater than 10% then they may be held 
     responsible.''
       Last month, the Securities and Exchange Commission related 
     disclosure guidelines that instruct companies to ``consider'' 
     disclosing their year-2000 costs to investors in their annual 
     reports or to indicate how the year-2000 problem might hurt 
     future profits. The Financial Accounting Standards Board 
     passed an accounting rule, which took effect last year, that 
     lets companies immediately write off these costs.
       But so far only a few corporations, including New England 
     Power Co. and Equitable of Iowa Cos. have quantified their 
     year-2000 costs and disclosed them in their quarterly 
     reports, according to a study by the Analyst's Accounting 
     Observer, a stock analysts' publication in Baltimore.
       Auditors are afraid they could be hit with shareholder 
     lawsuits if they don't flag the problem for corporate 
     clients. Such suits could add to the Big Six accounting 
     firms' $30 billion in legal claims stemming from allegedly 
     flawed audits. ``That's why the profession is now publicizing 
     what their responsibilities are, which could protect them 
     against investor lawsuits,'' Prof. Ketz says.
       Alan Anderson, chairman of AICPA's year-2000 task force, 
     says, ``Clearly, the year-2000 problem is not just an 
     accounting issue but a business issue with global 
     implications.'' Larry Martin, chairman of Data Dimensions 
     Inc., a Bellevue, Wash., computer-consulting firm, says of 
     the problem, ``A third of the companies in this country will 
     either fail or face significant reductions in their business 
     operations.''

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