Financial reporting and risk management in the 21st century

Fordham Law Review

Volumn 65, Issue 5, 1997, Pages 1987-2063

  Miller, Richard I ^a,b,c   Young, Michael R ^d,e,f  

^a General Counsel   (United States)

^b FORDHAM UNIVERSITY   (United States)

^c City College of the City of New York

^d Partner Patterson Balknap Webb T   (United States)

^e DUKE UNIVERSITY   (United States)

^f ALLEGHENY COLLEGE   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0031482732     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (399)

1. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
2. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
3. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
4. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
5. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
6. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
7. The underlying sentiment was captured fairly vividly in an article last April in Forbes. Financial writer William Davidow observed: To put it bluntly, reported profits have become increasingly meaningless. You won't get very far explaining this to your banker or to your shareholders, but it's undeniably true. Basically, profits measure the rate of change in a company's assets. Increase assets by $10 million and you report a $10 million profit. Write down $25 million in inventory and profits go down by the same amount. Double-entry bookkeeping, developed by Luca Pacioli in 1494, lets businesses keep track of changes in their asset base. But this system, still in use today, deals primarily with tangible assets such as cash, inventory, accounts receivable, factory plants and equipment. It ignores intangible assets: goodwill, employee knowledge, quality of management, customer relationships, information infrastructure, trade secrets, patents, etc. What companies report today are really "old profits" based on changes in tangible assets. But any meaningful measure of profits would have to include the rate of change in the total asset base-both tangible and intangible. William Davidow, Why Profits Don't Matter, Forbes ASAP, Apr. 8, 1996, at 24, 24; see also Andrea Gabor, The Man Who Discovered Quality: How W. Edwards Deming Brought the Quality Revolution to America - The Stories of Ford, Xerox, and GM 7 (1990) ("Another problem is that legally mandated financial statements are little more than 'a fuzzy approximation of a distant past,' notes Professor John Whitney of Columbia University Business School . . . ."); Justin Fox, Searching for Nonfiction in Financial Statements, Fortune, Dec. 23, 1996, at 39, 39 ("Financial statements - in particular the earnings numbers they produce - have actually become less reliable as a measure of corporate performance and value. . . . The Generally Accepted Accounting Principles, set by FASB, don't allow for some of the prime drivers of corporate success - investments in intangible assets such as know-how, patents, brands, and customer loyalty."); Jeffrey M. Laderman, Earnings Schmernings - Look at the Cash, Bus. Week, July 24,1989, at 56, 56 ("[S]ome savvy investors say the singular focus on net income is foolhardy."); Dana W. Linden, Lies of the Bottom Line, Forbes, Nov. 12, 1990, at 106, 106 ("Reported earnings have become virtually worthless in terms of their ability to tell us what's really going on at a company."); SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15 ("We need to investigate the current accounting model with a critical eye, because it is not keeping pace with the changes in the business world." (quoting SEC commissioner Steven M. H. Wallman)); Steven M.H. Wallman, Regulation for a New World, Bus. L. Today, Nov./Dec. 1996, at 8, 8 [hereinafter Wallman, Regulation for a New World] ("Disclosure requirements and accounting principles designed for stable industrial businesses are not necessarily cost-effective, or even appropriate, when applied to volatile knowledge-based start-ups.").
8. Special Committee on Financial Reporting, AICPA, Improving Business Reporting - A Customer Focus: Meeting the Information Needs of Investors and Creditors 5 (1994) [hereinafter Jenkins Committee Report].
9. Id.
10. The Jenkins Committee's proposed model contains five "major components": (1) "Financial and Non-Financial Data"; (2) "Management's Analysis of Financial and Non-Financial Data"; (3) "Forward-Looking Information"; (4) "Information about Management and Shareholders"; (5) "Background about the Company." Id. at 136.
11. See Jenkins Report Symposium, J. Acct, Sept. 1996, at 19, 19; see also Peter D. Fleming, What's Next for the Business Reporting Model, J. Acct., Dec. 1996, at 14, 14 ("[SEC Commissioner Steven Wallman] said the current financial reporting model was not working as well as it might and the one proposed by the Jenkins committee was worthy of review to see if it could provide users with better information.").
12. See Jenkins Report Symposium, J. Acct, Sept. 1996, at 19, 19; see also Peter D. Fleming, What's Next for the Business Reporting Model, J. Acct., Dec. 1996, at 14, 14 ("[SEC Commissioner Steven Wallman] said the current financial reporting model was not working as well as it might and the one proposed by the Jenkins committee was worthy of review to see if it could provide users with better information.").
13. John von Brachel, Reinventing the CPA, J. Acct., Nov. 1996, at 49, 50 (comments of Robert Mednick). For its part, the Jenkins Committee concluded that a consequence of the litigation risk "is to deprive users of information and inhibit the progress in business reporting that comes from experience with voluntary disclosure." Jenkins Committee Report, supra note 2, at 116.
14. John von Brachel, Reinventing the CPA, J. Acct., Nov. 1996, at 49, 50 (comments of Robert Mednick). For its part, the Jenkins Committee concluded that a consequence of the litigation risk "is to deprive users of information and inhibit the progress in business reporting that comes from experience with voluntary disclosure." Jenkins Committee Report, supra note 2, at 116.
15. The chilling effect of the litigation risk is very much in evidence in the Jenkins Committee Report itself. For example, while earnestly advocating greater emphasis on forward-looking information, the report cautioned that "[c]ompanies should not have to expand reporting of forward-looking information until there are more effective deterrents to unwarranted litigation that discourages companies from doing so." Jenkins Committee Report, supra note 2, at 57 (emphasis omitted). Subsequent to publication of the Jenkins Committee Report, Congress has enacted the Private Securities Litigation Reform Act of 1995, one of the purposes of which was to address this concern. Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.A. (West Supp. 1996)).
16. Board of Directors, AICPA, Charge to AICPA Special Committee on Assurance Services (Apr. 22, 1994). For a discussion of the work undertaken by the Elliott Committee, see The CPA Journal Symposium on the Future of Assurance Services, CPA J., May 1996, at 14, 14; Robert Mednick, Chair's Corner, The CPA Letter, Dec. 1996, at 9; Don Pallais, Assurance Services: Where We Are; Where We're Going, J. Acct., Sept. 1996, at 16, 16; Professional Growth Through New Assurance Services, The CPA Letter, Jan./Feb. 1996, at 5; Rick Telberg, CPA Leaders Forge New Vision, Acct. Today, Nov. 25-Dec. 15, 1996, at 1, 1; von Brachel, supra note 6, at 50-51.
17. Board of Directors, AICPA, Charge to AICPA Special Committee on Assurance Services (Apr. 22, 1994). For a discussion of the work undertaken by the Elliott Committee, see The CPA Journal Symposium on the Future of Assurance Services, CPA J., May 1996, at 14, 14; Robert Mednick, Chair's Corner, The CPA Letter, Dec. 1996, at 9; Don Pallais, Assurance Services: Where We Are; Where We're Going, J. Acct., Sept. 1996, at 16, 16; Professional Growth Through New Assurance Services, The CPA Letter, Jan./Feb. 1996, at 5; Rick Telberg, CPA Leaders Forge New Vision, Acct. Today, Nov. 25-Dec. 15, 1996, at 1, 1; von Brachel, supra note 6, at 50-51.
18. Board of Directors, AICPA, Charge to AICPA Special Committee on Assurance Services (Apr. 22, 1994). For a discussion of the work undertaken by the Elliott Committee, see The CPA Journal Symposium on the Future of Assurance Services, CPA J., May 1996, at 14, 14; Robert Mednick, Chair's Corner, The CPA Letter, Dec. 1996, at 9; Don Pallais, Assurance Services: Where We Are; Where We're Going, J. Acct., Sept. 1996, at 16, 16; Professional Growth Through New Assurance Services, The CPA Letter, Jan./Feb. 1996, at 5; Rick Telberg, CPA Leaders Forge New Vision, Acct. Today, Nov. 25-Dec. 15, 1996, at 1, 1; von Brachel, supra note 6, at 50-51.
19. Board of Directors, AICPA, Charge to AICPA Special Committee on Assurance Services (Apr. 22, 1994). For a discussion of the work undertaken by the Elliott Committee, see The CPA Journal Symposium on the Future of Assurance Services, CPA J., May 1996, at 14, 14; Robert Mednick, Chair's Corner, The CPA Letter, Dec. 1996, at 9; Don Pallais, Assurance Services: Where We Are; Where We're Going, J. Acct., Sept. 1996, at 16, 16; Professional Growth Through New Assurance Services, The CPA Letter, Jan./Feb. 1996, at 5; Rick Telberg, CPA Leaders Forge New Vision, Acct. Today, Nov. 25-Dec. 15, 1996, at 1, 1; von Brachel, supra note 6, at 50-51.
20. Board of Directors, AICPA, Charge to AICPA Special Committee on Assurance Services (Apr. 22, 1994). For a discussion of the work undertaken by the Elliott Committee, see The CPA Journal Symposium on the Future of Assurance Services, CPA J., May 1996, at 14, 14; Robert Mednick, Chair's Corner, The CPA Letter, Dec. 1996, at 9; Don Pallais, Assurance Services: Where We Are; Where We're Going, J. Acct., Sept. 1996, at 16, 16; Professional Growth Through New Assurance Services, The CPA Letter, Jan./Feb. 1996, at 5; Rick Telberg, CPA Leaders Forge New Vision, Acct. Today, Nov. 25-Dec. 15, 1996, at 1, 1; von Brachel, supra note 6, at 50-51.
21. Board of Directors, AICPA, Charge to AICPA Special Committee on Assurance Services (Apr. 22, 1994). For a discussion of the work undertaken by the Elliott Committee, see The CPA Journal Symposium on the Future of Assurance Services, CPA J., May 1996, at 14, 14; Robert Mednick, Chair's Corner, The CPA Letter, Dec. 1996, at 9; Don Pallais, Assurance Services: Where We Are; Where We're Going, J. Acct., Sept. 1996, at 16, 16; Professional Growth Through New Assurance Services, The CPA Letter, Jan./Feb. 1996, at 5; Rick Telberg, CPA Leaders Forge New Vision, Acct. Today, Nov. 25-Dec. 15, 1996, at 1, 1; von Brachel, supra note 6, at 50-51.
22. Special Committee on Assurance Services, AICPA, Report of the Special Committee on Assurance Services (1997) [hereinafter Elliott Committee Report]. The Elliott Committee Report has been published exclusively on the AICPA's Web site. See Elliott Committee Report (published Mar. 19, 1997) 〈http://www.aicpa.org/ assurance/scas/index.htm〉.
23. Id. at 〈http://www.aicpa.org/assurance/scas/comstud/effect/newopps.htm〉.
24. Users will need data assurance at points in time other than just at the end of a year or quarter. Some users may require "continuous audits" of a broad data set, others "just-in-time audits" of key transactions or data, and still others mixes of the two. When users' real-time access to databases becomes routine, they will need continuous data assurance. Id. The Committee anticipates that such enhanced financial information services may be paid for by the reporting entity, the financial information user, or both. Id. at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉. The subject of such real-time or "just-in-time" assurance was the focus of a talk this past December by SEC Commissioner Steven Wallman. In describing his vision of technology's impact on financial reporting, Wallman reportedly pointed to a shift to "process attestation" from "substance attestation" with certifications of data disseminated through new information technologies. Thus, accountants of the future would attest to the integrity of the system that a company uses to generate data relating to its operations, rather than to the integrity of the data per se. Rachel Witmer, SEC's Wallman Describes View of Technology's Impact on Accounting, 28 Sec. Reg. & L. Rep. (BNA) No. 48, at 1531, 1532 (Dec. 13, 1996).
25. Users will need data assurance at points in time other than just at the end of a year or quarter. Some users may require "continuous audits" of a broad data set, others "just-in-time audits" of key transactions or data, and still others mixes of the two. When users' real-time access to databases becomes routine, they will need continuous data assurance. Id. The Committee anticipates that such enhanced financial information services may be paid for by the reporting entity, the financial information user, or both. Id. at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉. The subject of such real-time or "just-in-time" assurance was the focus of a talk this past December by SEC Commissioner Steven Wallman. In describing his vision of technology's impact on financial reporting, Wallman reportedly pointed to a shift to "process attestation" from "substance attestation" with certifications of data disseminated through new information technologies. Thus, accountants of the future would attest to the integrity of the system that a company uses to generate data relating to its operations, rather than to the integrity of the data per se. Rachel Witmer, SEC's Wallman Describes View of Technology's Impact on Accounting, 28 Sec. Reg. & L. Rep. (BNA) No. 48, at 1531, 1532 (Dec. 13, 1996).
26. The Elliott Committee's risk-management proposals address risk management in the context of the full scope of assurance services analyzed and reported on by the committee. The discussion here is limited to aspects of the risk management proposals in the context of financial reporting.
27. Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/ scas/majtheme/svcliab/index.htm〉.
28. Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.A. (West Supp. 1996)).
29. "Information technology is probably the single most important factor affecting future information flows and CPA services. It affects all aspects of the CPA's work: how and when information is created, processed, stored, communicated, acquired, refined, and interpreted - as well as how CPAs will both produce and communicate assurance." Report of the Chairman of the AICPA Special Committee on Assurance Services to AICPA Council 4 (Oct. 1995).
30. See Davidow, supra note 1, at 24 ("New technologies have fundamentally changed the way we do business. . . . But while so much else has undergone a seismic shift, the way business continues to account for profits remains as outmoded as the clipper ship."); Steven M.H. Wallman, Regulating in a World of Technological and Global Change, Metropolitan Corp. Couns., Oct. 1996, at 1, 64 [hereinafter Wallman, Regulating in a World of Technological and Global Change] ("[T]he continued growth of the Internet presents even more of an opportunity for expansion in financial services through the use of technology."); Wallman, Regulation for a New World, supra note 1, at 8 ("Technology, and the Internet in particular as the first worldwide interactive mass communication vehicle, is especially critical in forcing us to refashion the way we think about regulation.").
31. See Davidow, supra note 1, at 24 ("New technologies have fundamentally changed the way we do business. . . . But while so much else has undergone a seismic shift, the way business continues to account for profits remains as outmoded as the clipper ship."); Steven M.H. Wallman, Regulating in a World of Technological and Global Change, Metropolitan Corp. Couns., Oct. 1996, at 1, 64 [hereinafter Wallman, Regulating in a World of Technological and Global Change] ("[T]he continued growth of the Internet presents even more of an opportunity for expansion in financial services through the use of technology."); Wallman, Regulation for a New World, supra note 1, at 8 ("Technology, and the Internet in particular as the first worldwide interactive mass communication vehicle, is especially critical in forcing us to refashion the way we think about regulation.").
32. See Davidow, supra note 1, at 24 ("New technologies have fundamentally changed the way we do business. . . . But while so much else has undergone a seismic shift, the way business continues to account for profits remains as outmoded as the clipper ship."); Steven M.H. Wallman, Regulating in a World of Technological and Global Change, Metropolitan Corp. Couns., Oct. 1996, at 1, 64 [hereinafter Wallman, Regulating in a World of Technological and Global Change] ("[T]he continued growth of the Internet presents even more of an opportunity for expansion in financial services through the use of technology."); Wallman, Regulation for a New World, supra note 1, at 8 ("Technology, and the Internet in particular as the first worldwide interactive mass communication vehicle, is especially critical in forcing us to refashion the way we think about regulation.").
33. SEC Commissioner Steven Wallman has recently observed: "I think we will really see innovation in this area, over the Internet and through proprietary systems, including: more real-time individual consumer securities trading; and the providing of more real-time disaggregated financial information through access to select portions of a company's management information system." Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64; see also Wallman, Regulation for a New World, supra note 1, at 10 ("Increasingly, we have issuers seeking 'just-intime capital,' as they have previously sought just-in-time inventory.").
34. SEC Commissioner Steven Wallman has recently observed: "I think we will really see innovation in this area, over the Internet and through proprietary systems, including: more real-time individual consumer securities trading; and the providing of more real-time disaggregated financial information through access to select portions of a company's management information system." Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64; see also Wallman, Regulation for a New World, supra note 1, at 10 ("Increasingly, we have issuers seeking 'just-intime capital,' as they have previously sought just-in-time inventory.").
35. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
36. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
37. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
38. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
39. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
40. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
41. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
42. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and
43. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
44. Already the vehicles of transmission of financial information are rapidly shifting from paper to computer. See Gerard R. Boyce, Offering and Trading Securities on the Internet, N.Y. L.J., May 9, 1996, at 3, 3 ("The Spring Street Brewing Company's Internet-based initial public offering and trading scheme has generated significant media attention."); Jack Egan, Ready, Set, Search, U.S. News & World Rep., Apr. 29, 1996, at 64, 68 ("'We'll also be able to provide access to valuable private information like Dun & Bradstreet business credit reports.' In tandem with IBM's 'cryptolope,' (for encrypted envelope) such value-added data will be sent over the Internet to users who pay a fee."); Michael Gianturco, Investing on the Web: Surf and Grow Rich!, Forbes ASAP, June 3, 1996, at 36, 36 ("There is a lot of free stuff for investors on the Internet. . . . [The INVESTools Website is] great for reading investment resources like investment newsletters, opinion pieces, helpful lists of money managers and advisers, and books and periodicals."); Journal Introduces Interactive Edition, Wall St. J., Apr. 29, 1996, at B1 ("The Wall Street Journal today introduces its Interactive Edition, an electronic newspaper that works through the burgeoning Internet to deliver high-quality, timely business news and information around the clock and around the globe."); Thomas McCarroll, Investors Rush the Net, Time, June 3, 1996, at 54, 56 ("[T]he movement to the Internet has tremendous momentum, and Wall Street knows better than to swim against the tide."); Vanessa O'Connell, Stock Answer, Wall St. J., June 17, 1996, at R8 ("Buying and trading securities on the Web could revolutionize the relationship between investors and brokerage firms."); Michael Selz, Small Stock Issuers Find a New Market on the Internet, Wall St. J., May 14, 1996, at B2 ("Entrepreneurs are creating Web pages that help investors purchase stock directly from small issuers, which don't interest most underwriters."); Rick Telberg, CPA Societies Click with Net Developer, Acct. Today, May 20-June 2, 1996, at 1, 1 ("More than 30 state CPA societies have signed on with a nascent Seattle-based Internet developer to join the traffic on the information superhighway."); Thomas E. Weber, Ernst & Young's Consulting Services to Be Sold on Internet for Annual Fee, Wall St. J., May 21, 1996, at B10 ("Ernst & Young is expected to begin selling its consulting services over the Internet, offering small businesses a chance to query the firm's experts electronically in exchange for a flat-fee annual subscription. The move, expected to be announced today, marks the first major effort by a Big Six accounting firm to embrace the Internet to distribute its services."). The transmission of financial information has come a long way: When Charles Dow and Edward Jones first launched their business-news enterprise in 1882, they disseminated the news on "flimsies," essentially sheets of carbon paper with the handwritten news on it. A clerk pressing hard on the paper could generate up to 24 flimsies at a time: runners carried these to businessmen and speculators . . . . John R. Dorfman, Sending News over Broad Tape, Wall St. J., May 6,1996, at C1.
45. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
46. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
47. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
48. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
49. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
50. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
51. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
52. This point is being made with increasing frequency. In September 1994, Robert Elliott observed, "[t]he audit also is threatened by the fact that annual printed financial statements may be destined for history's scrap heap because information technology permits far more frequent and timely reports." Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 75. More recently, the chairman of the Financial Accounting Foundation has commented: Your annual reports and even your 10Qs are pretty much ancient history by the time they're prepared and distributed. . . . All the effort that goes into preparing them and being sure they meet the requisite standards of accuracy and completeness is something of a wasted effort because by the time they reach the marketplace, the marketplace has long since absorbed the information from other sources. Glenn Cheney, Cook Defends Independence, Pushes for Global Standards, Acct. Today, Nov. 25-Dec. 15, 1996, at 16, 20 [hereinafter Cheney, Cook Defends Independence] (quoting chairman of the Financial Accounting Foundation J. Michael Cook). One popular anecdote involves a foods manufacturer that reportedly offered shareholders their choice of the company's annual report or a free pound of cookies. Most shareholders went for the cookies. Id. An obvious consequence of expedited systems of financial reporting is that, if the accounting profession is to keep up, there will not be enough time within the constraints of real-time financial reporting for an "audit" in the traditional sense to take place. It is for that reason, among others, that the emphasis will almost inevitably shift from audits of financial statements to assurance as to financial reporting systems. See discussion infra part III.C; see also Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("Real-time auditing, for example, will require a far better understanding of systems and systems reliability."); Professional Growth Through New Assurance Services, supra note 8, at 6 ("Information technology is probably the single most important factor influencing future information flows and CPA services. . . . In the future, investors, creditors and others with valid interests may be allowed access through [Electronic Data Interchange] to a company's data base . . . ."). As noted in the CPA Journal: This new paradigm in the world of the accounting profession starts with a decision maker making inquiries (or having direct access to the data base) of an enterprise and then seeking corroboration from the auditor that the information he or she obtained online on a real-time basis is true. It will look like a network of information flying around in various directions. The CPA Journal Symposium on the Future of Assurance Services, supra note 8, at 16. 20. If the liability implications are potentially staggering, so are the opportunities for fraud. Last May, for example, the Wall Street Journal described a company whose stock quickly quintupled as a result of "[o]ne positive earnings report and literally thousands of messages over The Motley Fool, an on-line bulletin board on America Online. . . . [S]ome of these cyberscribes, both bulls and bears, have taken liberties with the truth, adding to the stock's 'volatility.'" Roger Lowenstein, Who's the Fool in Iomega's Skyrocket?, Wall St. J., May 23, 1996, at C1; see also SEC v. Western Executive Group, Inc., No. 96-6938 (C.D. Cal. Oct. 7, 1996) (involving SEC procurement of a temporary restraining order in the largest reported Internet investment fraud to date); Richard Raysman & Peter Brown, Regulating Internet Advertising, N.Y. L.J., May 14, 1996, at 3, 3 ("The use of the Internet to transmit ads containing fraudulent claims or consumer 'scams' comprises an area of growing concern for federal and state authorities."); Jeffrey Taylor, SEC Has a Message for the Media: We Are Keeping Our Eyes on You, Wall St. J., Apr. 19, 1996, at C1 ("In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well").
53. Even under the conservative "Ultramares rule," one in privity with an accountant may potentially state a claim for negligent misrepresentation. See Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931); see also Credit Alliance Corp. v. Arthur Andersen & Co., 483 N.E. 2d 110 (N.Y. 1985) (reaffirming the Ultramares rule).
54. As one author recently has observed: And, just as events in Cyberspace thus take place "nowhere," they also can be characterized as taking place everywhere at once, in the sense that the effects of on-line activities are felt simultaneously in every corner of the global network. A World Wide Web page located on a machine in, say, Berlin can be accessed just as easily by users in Frankfort, Kentucky, as by those in Frankfurt, Germany. All jurisdictions simultaneously feel the effects, of the information posted there, and thus all would appear to have equal claims to make the law governing the content of this site - surely a recipe for international chaos. David Post, The New Electronic Federalism, Am. Law., Oct. 1996, at 93, 93; see also Wallman, Regulation for a New World, supra note 1, at 10 ("It is difficult and expensive to limit the geographic reach or audience in an Internet-based world.").
55. As one author recently has observed: And, just as events in Cyberspace thus take place "nowhere," they also can be characterized as taking place everywhere at once, in the sense that the effects of on-line activities are felt simultaneously in every corner of the global network. A World Wide Web page located on a machine in, say, Berlin can be accessed just as easily by users in Frankfort, Kentucky, as by those in Frankfurt, Germany. All jurisdictions simultaneously feel the effects, of the information posted there, and thus all would appear to have equal claims to make the law governing the content of this site - surely a recipe for international chaos. David Post, The New Electronic Federalism, Am. Law., Oct. 1996, at 93, 93; see also Wallman, Regulation for a New World, supra note 1, at 10 ("It is difficult and expensive to limit the geographic reach or audience in an Internet-based world.").
56. 189 N.Y.S. 743 (Sup. Ct. 1921), aff'd, 194 N.Y.S. 947 (App. Div. 1922), aff'd, 139 N.E. 714 (N.Y. 1923).
57. 189 N.Y.S. at 744.
58. Id.
59. Id.
60. Id.
61. Daniel v. Dow Jones & Co., 520 N.Y.S.2d 334, 335 (Civ. Ct. 1987).
62. Id.
63. Id. at 335-36.
64. Id. at 336.
65. Id. at 338, 340 (declaring the need to evaluate new forms of technology in accordance with established legal rules).
66. Id. at 335.
67. Restatement (Second) of Torts § 552(2)(a) (1977) [hereinafter Torts Restatement].
68. Daniel, 520 N.Y.S.2d at 336.
69. Id. at 337-38.
70. Id. at 338.
71. See First Equity Corp. v. Standard & Poor's Corp., 869 F.2d 175, 180 (2d Cir. 1989); First Equity Corp. v. Standard & Poor's Corp., 670 F. Supp. 115, 118 (S.D.N.Y, 1987), aff'd, 869 F.2d 175 (2d Cir. 1989); Gale v. Value Line, Inc., 640 F. Supp. 967, 971 (D.R.I. 1986); Daniel, 520 N.Y.S.2d at 336; Jaillet v. Cashman, 189 N.Y.S. 743 (Sup. Ct. 1921), aff'd, 194 N.Y.S. 947 (App. Div. 1922), aff'd, 139 N.E. 714 (N.Y. 1923); Gutter v. Dow Jones, Inc., 490 N.E.2d 898, 902 (Ohio 1986).
72. A claim predicated upon the negligence of an accountant will typically take one of two forms: a claim for negligent misrepresentation or a claim for negligence. The elements of each claim are in substance the same, see Standard Chartered PLC v. Price Waterhouse, Nos. 1 CA-CV 93-0461, 1 CA-CV 93-0442, 1996 WL 640702, at *24 (Ariz. Ct. App. Nov. 7, 1996) ("We have stated that the gravamen of [plaintiff's] auditor negligence claim is negligent misrepresentation."), though - depending on the law of the particular state at issue - other differences between the two claims may exist. In California, for example, only the accountant's client or a third-party beneficiary of the accountant's engagement contract may state a claim for negligence, whereas a somewhat broader class may state a claim for negligent misrepresentation. See Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992). The rule articulated in Jaillet would appear to apply to both negligence and negligent misrepresentation claims.
73. See First Equity Corp., 869 F.2d at 180 ("The publication at issue is a source of information disseminated to a wide public. . . . In such circumstances, we believe that a user is in the best position to weigh the danger of inaccuracy and potential loss . . . . That being the case, the user should bear the risk of failing to verify the accuracy of a summary in the absence of proof of a knowing misstatement."); First Equity Corp., 670 F. Supp. at 118 (applying Jaillet rule to Standard & Poor's, where "it is the fact that the size of [the user class] is indeterminate which raises the potential for unlimited liability, which concern is the foundation of the Jaillet rule"); Gale, 640 F. Supp. at 971 (holding that the publisher of a fairly widespread investment advisory newsletter would not be liable for an incomplete description of a warrant when "the information was simply and inadvertently omitted from the publication for a period of time"); Gutter, 490 N.E.2d at 902 (finding the Wall Street Journal not liable for an inaccuracy, stating that "we . . . conclude that a complaint alleging that a newspaper reader or subscriber relied to his detriment in making securities investments based on a negligent and inaccurate report in a newspaper does not state a cause of action in tort against the newspaper's publisher for 'negligent misrepresentation'").
74. First Equity Corp., 869 F.2d at 178. Although the Jaillet decision has been adopted by a number of jurisdictions outside New York, in In re Taxable Municipal Bond Sec. Litig., No. Civ. A. MDL No. 863, 1993 WL 591418, at *5 (E.D. La. Dec. 29, 1993), the United States District Court for the Eastern District of Louisiana observed that the Fifth Circuit had not adopted the doctrine.
75. First Equity Corp., 670 F. Supp. at 117.
76. Id. (quotations omitted).
77. Id. at 118 (quoting Torts Restatement, supra note 34, § 552(2)(a)); see also Bily v. Arthur Young & Co., 834 P.2d 745, 757-58 (Cal. 1992) (applying Restatement rule to negligent misrepresentation claim).
78. First Equity Corp., 670 F. Supp. at 118 ("The subscribers and readers of a newspaper or similar publication hardly constitute a limited class.").
79. Daniel v. Dow Jones & Co., 520 N.Y.S.2d 334, 336-38 (Civ. Ct. 1987).
80. Gutter v. Dow Jones, Inc., 490 N.E.2d 898, 901-02 (Ohio 1986).
81. Gale v. Value Line, Inc., 640 F. Supp. 967, 969, 971-72 (D.R.I. 1986).
82. First Equity Corp. v. Standard & Poor's Corp., 869 F.2d 175, 179 (2d Cir. 1989).
83. Gale, 640 F. Supp. at 969 (involving investment advisory newsletter - between 2200 and 4400 subscribers); see also First Equity Corp., 869 F.2d at 176 (involving loose-leaf summaries of business operations and finances - 7500 subscribers); Gutter, 490 N.E.2d at 899 (involving the Wall Street Journal).
84. First Equity Corp. v. Standard & Poor's Corp., 670 F. Supp. 115, 117 (S.D.N.Y. 1987); see also Gale, 640 F. Supp. at 972 (holding the publisher of Value Line, a publication that ranks convertible securities and includes purchase recommendations and warrant evaluations, not liable to a subscriber); Gutter, 490 N.E.2d at 902 (finding the publisher of the Wall Street Journal not liable to a subscriber).
85. First Equity Corp., 869 F.2d at 176. The court did distinguish a summary of such information from the actual information itself. Id. at 180.
86. Similarly, it is hard to distinguish, for the purpose of assessing the scope of the Jaillet rule, between an incorrect financial report that results in an overstated value of a company's stock, such as a negligent accountant might produce, and an incorrect description of (say) the terms of convertibility of a bond which results in an overstatement of bond value, a situation in which no liability for negligence has been imposed. See Gale, 640 F. Supp. at 971-72. If anything, the latter is arguably more obvious and egregious.
87. First Equity Corp., 869 F.2d at 179 (quoting Ultramares Corp. v. Touche, Niven & Co., 174 N.E. 441, 446 (N.Y. 1931)).
88. To anticipate a potential issue, it is not the case that the immunization of a media-disseminator from a negligence claim is limited to those jurisdictions following New York's conservative Ultramares rule, which allows only those in privity or those known to the disseminator to state a negligent misrepresentation claim. See Credit Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d 110, 118 (N.Y. 1985); Ultramares, 174 N.E. at 446. The rationale for the Jaillet rule is conceptually tied more to the Restatement than to Ultramares, and the Jaillet rule has been applied where the Ultramares rule has not. See Gutter, 490 N.E.2d at 900-01 (applying Jaillet rule). Incidentally, legal scholars may find interesting that a key New York decision on which Judge Cardozo based his opinion in Ultramares was the 1920 ticker-service case of Jaillet. See Ultramares, 174 N.E. at 446.
89. EDGAR is the SEC-owned database which contains the filings of SEC documents.
90. See Simpson v. Specialty Retail Concepts, Inc., 908 F. Supp. 323, 332 (M.D.N.C. 1995) (stating that whether an auditor owed a duty of care to public market investors was a "question of fact"); Grove Holding Corp. v. First Wisconsin Nat'l Bank, 803 F. Supp. 1486, 1504 (E.D. Wis. 1992) (shareholder stated claim for negligent misrepresentation); Boykin v. Arthur Anderson & Co., 639 So. 2d 504, 510-11 (Ala. 1994) (holding that individual shareholders may state a claim for negligence); Northwest Racquet Swim & Health Clubs, Inc. v. Deloitte & Touche, 535 N.W.2d 612, 619 (Minn. 1995) (allowing a claim for "very specific incidences of misrepresentation in [an] audit report on which [plaintiff] directly relied"). See generally Wayne Baliga, Courts Rule in Different Directions on Class Actions Against Accountants, J. Acct., Oct. 1996, at 27, 27 (comparing the holding in Specialty Retail Concepts, 908 F. Supp. 323, which found that an accounting firm could be liable to potential investors, to the holding in Scottish Heritable Trust v. Peat Marwick Main & Co., 81 F.3d 606 (5th Cir.), cert. denied, 117 S. Ct. 182 (1996), which dismissed a potential investor's claims against an accounting firm). The existence of these cases permitting a claim is not to suggest that they are correctly decided. For the reasons discussed above, the doctrinally correct view would seem to be that "the liability of auditors and accountants for negligence or negligent misrepresentation does not exten[d] . . . to the general investing public." Biben v. Card, No. 84-0844-CV-W-6 (W.D. Mo. 1985), quoted in Cammer v. Bloom, 711 F. Supp. 1264, 1298 (D.N.J. 1989); see also Scottish Heritable Trust, 81 F.3d at 613 (accountant owed no duty to an open-market investor); In re Crazy Eddie Sec. Litig., 812 F. Supp. 338, 360 (E.D.N.Y. 1993) (finding that an accountant's duty of care did not extend to "as-yet unidentified future open-market buyers of publicly-traded securities").
91. 81 Cal. Rptr. 519 (Ct. App. 1969).
92. Id. at 521.
93. Id.
94. Id.
95. Id.
96. Id.
97. Id. at 522.
98. Id.
99. Id.
100. AICPA, 1 AICPA Professional Standards, at AU § 508.08 (June 1, 1996).
101. Hanberry, 81 Cal. Rptr. at 523 n.1 (quoting Torts Restatement, supra note 34, § 311).
102. See, e.g., Winter v. G.P. Putnam's Sons, 938 F.2d 1033, 1037 & n.7 (9th Cir. 1991) (distinguishing Hanberry on facts); Yanase v. Automobile Club, 260 Cal. Rptr. 513, 518-19 (Ct. App. 1989) (same).
103. See, e.g., Gutter v. Dow Jones, Inc., 490 N.E.2d 898, 901 (Ohio 1986) ("More importantly, we believe that public policy . . . constraints support protection to newspapers for a negligent misstatement of fact . . . .").
104. See In re Scott Paper Co. Sec. Litig., 145 F.R.D. 366, 369-70 (E.D. Pa. 1992) (finding that Standard & Poor's, under the factors cited in the text, qualified for a journalist's privilege under the First Amendment); Daniel v. Dow Jones & Co., 520 N.Y.S.2d 334, 340 (Civ. Ct. 1987) (holding that the Dow Jones News/Retrieval, an on-line financial news service, was entitled to "the same [First Amendment] protection as more established means of news distribution").
105. See In re Pan Am Corp., 161 B.R. 577, 581-82 (Bankr. S.D.N.Y. 1993) ("The record allows no other conclusion but that S & P functions as a journalist when gathering information in connection with its ratings process . . . with the intent to use the material to disseminate information to the public . . . ."); In re Scott Paper, 145 F.R.D. at 370 ("[W]hatever the definitional limits of the press for First Amendment purposes, S & P falls within its umbrella of protection.").
106. It certainly seems something of a stretch to the SEC. In the 1970s and early 1980s, the SEC unsuccessfully sought to require certain newsletter authors to register as investment advisors. See Lowe v. SEC, 472 U.S. 181 (1985). Now, the spurt of investment information into the Internet, by all appearances, has given the SEC a whole new set of problems. The early indications are that the SEC will view Internet disseminators of financial information as potentially less worthy of First Amendment protection than those who disseminate financial information in print. Thus, a Wall Street Journal article observed last year: Once reluctant to impose its antifraud powers on newsletter authors and other journalists, the SEC is now scrutinizing media mavens of all sorts - and with greater success than in the past. The SEC has brought actions recently against an array of people whose media status once might have protected them, from newsletter editor Stephen Leeb and radio commentator Irwin "Sonny" Bloch to promulgators of Cyberspace communiques on the Internet. . . . . . . . In particular, regulators worry that the proliferation of media activity, in newsletters and on the Internet, allows people who are bearish on a stock to grind their axes in print and provide a road map for other bears to sell the stock as well. Taylor, supra note 20, at C1. Roger Lowenstein notes: But Kenneth Israel Jr., the SEC's district administrator in Salt Lake City, says, "Obviously, there is some concern with what is going on over the Internet generally - not to say there is anything illegal going on. This is a new world for everybody." What should the SEC look at? For starters, is aggressive and possibly manipulative promotion - an activity rightly regulated in traditional "public" forums - getting a free ride on the info highway? Lowenstein, supra note 20, at C1.
107. 520 N.Y.S.2d 334 (Civ. Ct. 1987).
108. See supra notes 28-37 and accompanying text.
109. 520 N.Y.S.2d at 335.
110. Id. at 340.
111. Id.
112. Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 750, 762-63 (1985); see In re Pan Am Corp, 161 B.R. 577, 584 (Bankr. S.D.N.Y. 1993) (distinguishing Greenmoss and observing that the Greenmoss opinion had explicitly noted that "[t]he protection to be accorded a particular credit report depends on whether the report's content, form, and context indicate that it concerns a public matter" (quoting Greenmoss, 472 U.S. at 762 n.8)). The level of First Amendment protection applicable to a provider of financial information was recently thrown into more uncertainty by events occurring in the wake of the Orange County bankruptcy. Five months ago, the United States Bankruptcy Court for the Central District of California denied Standard & Poor's motion to dismiss the county's suit against it, holding that the First Amendment does not protect it from a $500 million lawsuit brought by Orange County. County of Orange v. McGraw-Hill Cos., 203 B.R. 983 (C.D. Cal. 1996). The bankruptcy court found S & P's argument that it was entitled to First Amendment protection to be "off target," because Orange County had complained that S & P had failed to fulfill its contractual obligations with the county in connection with a number of bond issues the county was considering, rather than asserting any claim relating to S & P's published ratings. Id. at 990.
113. See, e.g., New York Times Co. v. Sullivan, 376 U.S. 254, 279-80 (1964) (holding in the defamation-of-a-public-official context that "[t]he constitutional guarantees require, we think, a federal rule that prohibits . . . recover[y] . . . unless . . . the statement was made with 'actual malice' - that is, with knowledge that it was false or with reckless disregard of whether it was false or not").
114. See Daniel, 520 N.Y.S.2d at 337 n.1.
115. Moody's Investors Service (visited Nov. 1996) 〈http://www.moodys.com/ mdycpyrt.htm〉.
116. See Strong v. Retail Credit Co., 552 P.2d 1025, 1028 (Colo. Ct. App. 1976) ("[Plaintiff] must still establish that she was entitled to rely upon those misrepresentations. . . . One who makes a misrepresentation is not liable to those persons whom he has no purpose to reach or influence and when there is no special reason to expect that the misrepresentation will influence such persons.").
117. See infra notes 94-97 and accompanying text.
118. 640 F. Supp. 967 (D.R.I. 1986).
119. Id. at 969-70.
120. Id. at 970.
121. Id.
122. Id. By noting that the disclaimer was "not adequate," the court intimated that other disclaimers would be.
123. Id.
124. Id.
125. Id.
126. Id.; see also Fidelity Leasing Corp. v. Dun & Bradstreet, Inc., 494 F. Supp. 786, 788 (E.D. Pa. 1980) (exculpatory clause in subscription agreement with Dun & Bradstreet is "valid and enforceable"); Hong Kong Export Credit Ins. Corp. v. Dun & Bradstreet, 414 F. Supp. 153, 157-58 (S.D.N.Y. 1975) (same).
127. Restatement (Second) of Contracts § 195(1) (1981). But see Torts Restatement, supra note 34, § 496B (providing for express assumption of risk).
128. Restatement of Contracts, supra note 94, § 195(2).
129. Blankenheim v. E.F. Hutton & Co., 266 Cal. Rptr. 593, 599 (Ct. App. 1990).
130. See Burten v. Milton Bradley Co., 763 F.2d 461, 465 (1st Cir. 1985). The ambiguity regarding a claim for negligent misrepresentation stems from the court's declaration that it is "clearly against [Massachusetts] public policy" to allow one to disclaim for "its own misrepresentations," accompanied by its observation that "Massachusetts [law] has permitted individuals to contractually disclaim liability for mere negligence" if "the disclaimer has been clear and unambiguous to that effect." Id.; see also Bouvier Bros., Inc. v. Baker Protective Servs., No. 93421, 1994 WL 879634, at *3 (Mass. Super. Ct. Apr. 15, 1994) (finding that exculpatory clause protected alarm service company from liability for negligent misrepresentations).
131. See supra parts I.C-D.
132. See supra part I.E.
133. See supra part I.F. On the other hand, to the extent a disclaimer may preclude proof of justifiable reliance, it may operate to impede a fraud claim. See infra part II.F.
134. The basic theme of virtually any fraud claim against an accountant is that the accountant knuckled under to its client and issued a false report on misstated financial information. To the extent the "client" is the user of the financial information, that underlying theme is substantially dissipated. Though the precise configuration of these relationships is yet to be established by the profession, the Elliott Committee Report includes as an entirely foreseeable, if not likely, relationship one in which the professional is paid by the user. See Elliott Committee Report, supra note 9, at 〈http:/ /www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉.
135. See, e.g., First Equity Corp. v. Standard & Poor's Corp., 670 F. Supp. 115 (S.D.N.Y. 1987), aff'd, 869 F.2d 175 (2d Cir. 1989); Gale v. Value Line, Inc., 640 F. Supp. 967 (D.R.I. 1986); Daniel v. Dow Jones & Co., 520 N.Y.S.2d 334 (Civ. Ct. 1987).
136. See supra part I.F.
137. The legal implications of computer "signatures" are being explored in a variety of contexts. See David Bank, Social Security, Pitney Bowes to Test Filing of W-2 Forms on the Internet, Wall St. J., Oct. 25, 1996, at A9C ("The project will also test critical elements of electronic commerce on the World Wide Web, including the validity of digital 'signatures,' which haven't yet been accepted as legal by the agency.").
138. It is an important theme of both the Jenkins Committee and the Elliott Committee reports that financial statements be reconfigured to better accommodate the needs of users rather than the desires of reporting entities. See Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/majtheme/focus/index.htm〉; Jenkins Committee Report, supra note 2, at 4.
139. Interests of economic efficiency plainly seem to favor a shift from tort to contract theories of liability. The reason is that precisely-defined responsibilities and remedies - the sort found in a negotiated contract, but utterly lacking in a relationship defined by tort - allow for an allocation of resources precisely consistent with the economic interests of those concerned. It has even been suggested that an underlying rationale to Judge Cardozo's opinion in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), involved "the advantages of using private ordering as a supplemental means of allocating risk." John A. Siliciano, Negligent Accounting and the Limits of Instrumental Tort Reform, 86 Mich. L. Rev. 1929, 1941 (1988). See generally Victor P. Goldberg, Accountable Accountants: Is Third-Party Liability Necessary?, 17 J. Legal Stud. 295 (1988) (criticizing the expansion of third-party liability as to accountants and discussing the merits of the Ultramares doctrine); Siliciano, supra, at 1957-58 ("For most third parties, then, tort law might sensibly view private ordering as a viable alternative to a foreseeability-based negligence rule.").
140. Interests of economic efficiency plainly seem to favor a shift from tort to contract theories of liability. The reason is that precisely-defined responsibilities and remedies - the sort found in a negotiated contract, but utterly lacking in a relationship defined by tort - allow for an allocation of resources precisely consistent with the economic interests of those concerned. It has even been suggested that an underlying rationale to Judge Cardozo's opinion in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), involved "the advantages of using private ordering as a supplemental means of allocating risk." John A. Siliciano, Negligent Accounting and the Limits of Instrumental Tort Reform, 86 Mich. L. Rev. 1929, 1941 (1988). See generally Victor P. Goldberg, Accountable Accountants: Is Third-Party Liability Necessary?, 17 J. Legal Stud. 295 (1988) (criticizing the expansion of third-party liability as to accountants and discussing the merits of the Ultramares doctrine); Siliciano, supra, at 1957-58 ("For most third parties, then, tort law might sensibly view private ordering as a viable alternative to a foreseeability-based negligence rule.").
141. See Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 11 (1972) (referring to "ancient concepts of freedom of contract"); Winterstein v. Wilcom, 293 A.2d 821, 824 (Md. Ct. Spec. App. 1972) ("[T]here is ordinarily no public policy which prevents the parties from contracting as they see fit . . . ."); Torts Restatement, supra note 34, § 496B cmt. b (freedom to contract in the assumption-of-risk context); W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 68, at 482 (5th ed. 1984) [hereinafter Prosser on Torts] ("There is in the ordinary case no public policy which prevents the parties from contracting as they see fit . . . .").
142. Torts Restatement, supra note 34, § 496B cmt. b ("There is no general policy of the law which prevents the parties from agreeing that the defendant shall be under no such general or specific duty to the plaintiff."); Prosser on Torts, supra note 107, § 68, at 482 ("It is quite possible for the parties expressly to agree in advance that the defendant is under no obligation of care for the benefit of the plaintiff, and shall not be liable for the consequences of conduct which would otherwise be negligent."). But see FDIC v. Schoenberger, 781 F. Supp. 1155, 1157 (E.D. La. 1992) (holding that a professional's breach of duty constitutes a tort, and that a professional could not avoid liability by having contracted not to be liable for negligence).
143. See generally Torts Restatement, supra note 34, § 496B (stating that an agreement limiting a defendant's liability is valid "unless the agreement is invalid as contrary to public policy"); Prosser on Torts, supra note 107, § 68, at 482-83.
144. An important exception to the freedom of parties to contract as they desire limits the ability of agreements to exculpate one of the parties from willful, wanton, reckless, or gross misconduct or conduct that constitutes an intentional tort. See Prosser on Torts, supra note 107, § 68, at 484.
145. Id. § 1, at 2.
146. See Siliciano, supra note 106, at 1933-41 (tracing the history of the privity issue in accountant liability cases from 1931 to 1988).
147. Ultramares Corp. v. Touche, 174 N.E. 441, 444 (N.Y. 1931).
148. Prosser on Torts, supra note 107, § 43, at 280.
149. See Siliciano, supra note 106, at 1943 ("[T]he laws of physics generally limit the degree of physical harm caused by a tortious act."); cf. Ultramares, 174 N.E. at 445 ("In either view, however, what is released or set in motion is a physical force. We are now asked to say that a like liability attaches to the circulation of a thought or a release of the explosive power resident in words.").
150. The shortcomings of foreseeability as a useful concept to limit damages in the context of financial information were outlined by the California Supreme Court in Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992). The court stated: [F]oreseeability . . . is endless because [it], like light, travels indefinitely in a vacuum. . . . [It] proves too much. . . . Although it may set tolerable limits for most types of physical harm, it provides virtually no limit on liability for nonphysical harm. . . . It is apparent that reliance on foreseeability of injury alone in finding a duty, and thus a right to recover, is not adequate when the damages sought are for an intangible injury. Id. at 762 (quoting Thing v. La Chusa, 48 Cal. 3d 644, 659, 663-64 (1989)) (alterations in original).
151. See Ultramares, 174 N.E. 441.
152. See Credit Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d 110, 118-19 (N.Y. 1985) (reaffirming the Ultramares rule in New York).
153. See, e.g., Touche Ross & Co. v. Commercial Union Ins. Co., 514 So. 2d 315, 318-23 (Miss. 1987) (considering both the Ultramares/Credit Alliance and the Torts Restatement rules and rejecting both, approving instead a "reasonably foreseeable" rule, but also noting that "the auditor remains free to limit the dissemination of his opinion through a separate agreement with the audited entity"); Citizens State Bank v. Timm, Schmidt & Co., 335 N.W.2d 361 (Wis. 1983).
154. See Bily, 834 P.2d at 747, 767-74 (adopting the Torts Restatement rule for identifying prospective plaintiffs in negligent misrepresentation cases, but following the Ultramares rule for general negligence cases).
155. Torts Restatement, supra note 34, § 552.
156. See, e.g., Bily, 834 P.2d 745; N.J. Stat. Ann. § 2A:53A-25 (West Supp. 1996).
157. See, e.g., Touche Ross & Co., 514 So. 2d at 318-23; Citizens State Bank, 335 N.W.2d at 365-67.
158. 461 A.2d 138 (N.J. 1983).
159. See N.J. Stat. Ann. § 2A:53A-25.
160. See Ultramares Corp. v. Touche, 174 N.E. 441, 448 (N.Y. 1931). The Ultramares court held: Our holding does not emancipate accountants from the consequences of fraud. It does not relieve them if their audit has been so negligent as to justify a finding that they had no genuine belief in its adequacy, for this again is fraud. It does no more than say that, if less than this is proved, if there has been neither reckless misstatement nor insincere profession of an opinion, but only honest blunder, the ensuing liability for negligence is one that is bounded by the contract, and is to be enforced between the parties by whom the contract has been made. Id.; see Denzil Y. Causey, Jr. & Sandra A. Causey, Duties and Liabilities of Public Accountants 5-7 (5th ed. 1995 & Interim Supp. May 1996) ("Some courts hold that auditors are liable for fraud to foreseeable users of their reports since such uses should have been contemplated.").
161. To the extent access or justifiable reliance can be precluded either through electronic means or disclaimers, non-contractual but foreseeable users may thereby be prevented from recovery even on claims of fraud. See Union Bank v. Ernst & Whinney, 278 CaL. Rptr. 490, 499 (Ct. App. 1991) ("In this case, E & Y specifically disclaimed the type of reliance the Bank now argues that it placed on the review report. . . . Under these circumstances, it is inherently unreasonable for the Bank, as an experienced user of financial statements, to rely on the E & Y review report as an assurance that Z Best was financially sound."); Strong v. Retail Credit Co., 552 P.2d 1025, 1028 (CoLo. Ct. App. 1976) ("[Plaintiff] must still establish that she was entitled to rely upon those misrepresentations. . . . One who makes a misrepresentation is not liable to those persons whom he has no purpose to reach or influence and when there is no special reason to expect that the misrepresentation will influence such persons."); Evans v. Israeloff, Trattner & Co., 617 N.Y.S.2d 899, 900 (App. Div. 1994) ("Evans has not shown justifiable reliance on alleged misrepresentations made by the defendants in the compilations in making his investment decisions.").
162. See Goldberg, supra note 106, at 296 ("If the parties want assurance, they can expressly contract for it.").
163. The "expectation gap" in the accounting profession has been the focus of considerable attention. See Robert S. Kay & D. Gerald Searfoss, Handbook of Accounting and Auditing 45-24 (2d ed. 1989); Michael R. Young, The Liability of Corporate Officials to Their Outside Auditor for Financial Statement Fraud, 64 Fordham L. Rev. 2155, 2159 (1996); Eric R. Dinallo, Note, The Peculiar Treatment of Contributory Negligence in Accountants' Liability Cases, 65 N.Y.U. L. Rev. 329, 332 (1990) ("Accountants even have coined a term - 'expectation gap' - to describe the difference between the responsibilities auditors believe they assume in conducting an audit, and what the public and the courts perceive such an undertaking to entail.").
164. The "expectation gap" in the accounting profession has been the focus of considerable attention. See Robert S. Kay & D. Gerald Searfoss, Handbook of Accounting and Auditing 45-24 (2d ed. 1989); Michael R. Young, The Liability of Corporate Officials to Their Outside Auditor for Financial Statement Fraud, 64 Fordham L. Rev. 2155, 2159 (1996); Eric R. Dinallo, Note, The Peculiar Treatment of Contributory Negligence in Accountants' Liability Cases, 65 N.Y.U. L. Rev. 329, 332 (1990) ("Accountants even have coined a term - 'expectation gap' - to describe the difference between the responsibilities auditors believe they assume in conducting an audit, and what the public and the courts perceive such an undertaking to entail.").
165. The "expectation gap" in the accounting profession has been the focus of considerable attention. See Robert S. Kay & D. Gerald Searfoss, Handbook of Accounting and Auditing 45-24 (2d ed. 1989); Michael R. Young, The Liability of Corporate Officials to Their Outside Auditor for Financial Statement Fraud, 64 Fordham L. Rev. 2155, 2159 (1996); Eric R. Dinallo, Note, The Peculiar Treatment of Contributory Negligence in Accountants' Liability Cases, 65 N.Y.U. L. Rev. 329, 332 (1990) ("Accountants even have coined a term - 'expectation gap' - to describe the difference between the responsibilities auditors believe they assume in conducting an audit, and what the public and the courts perceive such an undertaking to entail.").
166. AICPA, Proposed Statement on Standards for Accounting and Review Services: Assembly of Financial Statements for Internal Use Only (Exposure draft Sept. 6, 1995).
167. Id. at app. A.
168. Id.
169. See Prosser on Torts, supra note 107, § 107, at 740-42. The significance of the Supreme Court's decision more than twenty years ago in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), is that it established the prerequisite of scienter for claims pursuant to section 10(b).
170. See Prosser on Torts, supra note 107, § 32, at 173-74.
171. Cf. Holland v. Arthur Andersen & Co., 469 N.E.Zd 419, 429 (Ill. App. Ct. 1984) ("Andersen contracted with ARC for a specific result, namely, disclosing any known irregularities, and breached that contract when it failed to provide that promised result."). See generally 3A Arthur L. Corbin, Corbin on Contracts § 707, at 327-28 (1960) ("The cause of a contractor's breach of his contract is seldom, if ever, material in determining whether or not his incomplete performance deserves to be described as 'substantial.'").
172. See generally Prosser on Torts, supra note 107, § 108, at 749-50.
173. Eldred v. McGladrey, Hendrickson & Pullen, 468 N.W.2d 218, 219-20 (Iowa 1991) ("While privity is not required, all three of plaintiffs' misrepresentation theories require that the plaintiffs justifiably rely to their detriment on some misrepresentation."); see also Causey, Jr. & Causey, supra note 126, at 194-97 (analyzing issue of reliance in accountant liability cases); Prosser on Torts, supra note 107, § 108, at 749 ("Not only must there be reliance but the reliance must be justifiable under the circumstances.").
174. The underlying problem is that [o]bviously, a third party who suffers harm when an audited client becomes insolvent has a strong incentive, ex post, to feign or exaggerate its reliance on the audit in an effort to recover losses from the accountant. Such claims are particularly difficult to test in the adjudicative process because they often consist of nothing more than the third party's oral representation that it relied on the audit rather than other factors in deciding to deal with the client. Siliciano, supra note 106, at 1947. See generally Prosser on Torts, supra note 107, § 108, at 749 ("There has been a vast amount of misunderstanding regarding the basis for the requirement of justifiability of reliance . . . .").
175. See, e.g., Smolen v. Deloitte, Haskins & Sells, 921 F.2d 959, 964 (9th Cir. 1990) (finding that, to avoid summary judgment, "[a]ppellants must present some evidence establishing the element of causation, in the sense of actual and justifiable reliance"); Comeau v. Rupp, 810 F. Supp. 1127, 1143 (D. Kan. 1992); In re Wyse Tech. Sec. Litig., 744 F. Supp. 207, 210 (N.D. Cal. 1990) (dismissing plaintiffs' claim because "plaintiffs have not alleged that they received and relied on the financial statements prepared by Arthur Young"); Chrysler Credit Corp. v. Ruwart, 114 B.R. 725, 728-29 (Bankr. D. Colo. 1990) ("[T]here is little evidence that either creditor actually relied on the financial information contained in the statements. . . . [T]he creditor must demonstrate actual and reasonable reliance as to the false statements."); Cammer v. Bloom, 711 F. Supp. 1264,1297-98 (D.N.J. 1989) (claims of fraud and deceit dismissed as to plaintiffs who could not allege direct reliance on audit report); Stratton v. Sacks, 99 B.R. 686, 696 (Bankr. D. Md. 1989) ("Plaintiff has not in this case been able to point to evidence in the record showing that there is a reasonable probability or reasonable certainty that the acts complained of caused the losses suffered."), aff'd, 900 F.2d 255 (4th Cir. 1990); E.F. Hutton Mortgage Corp. v. Pappas, 690 F. Supp. 1465, 1475 (D. Md. 1988) ("Hutton as a sophisticated business entity can hardly claim losses allegedly resulting from its reliance on the audit reports when ordinary diligence on its part would have caused it to stop buying mortgage loans . . . ."); Stagen v. Stewart-West Coast Title Co., 196 Cal. Rptr. 732, 735 (Ct. App. 1983); Capell Assocs., Inc. v. Central Valley Sec. Co., 67 Cal. Rptr. 463, 468 (Ct. App. 1968); McGregor v. Wright, 3 P.2d 624, 627 (Cal. Dist. Ct. App. 1931); Bank of St. Helena v. Lilienthal-Brayton Co., 264 P. 546, 548 (Cal. Dist. Ct. App. 1928) (no justifiable reliance on financial information in a circular merely because "a copy of this circular was in possession of the bank"); Eldred v. McGladrey, Hendrickson & Pullen, 468 N.W.2d 218, 220 (Iowa 1991) ("We hold that this sort of vicarious reliance is too weak to support a finding of tortious misrepresentation."); Delmar Vineyard v. Timmons, 486 S.W.2d 914, 919 (Tenn. Ct. App. 1972) ("In the absence of any showing the complainants relied upon the defendants' audit, it becomes impossible to show complainants' damages were a direct consequence of defendants' negligence or breach of contract.").
176. See Bonhiver v. Graff, 248 N.W.2d 291 (Minn. 1976) (accountant's alleged representation made to state insurance commissioner rather than to plaintiff); Resolution Trust Corp. v. Castellett, No. 92-4635 (D.N.J. 1994) ("Because Colonial and federal regulators relied on the financial statements in the course of a proper business purpose, they were foreseeable users of the information, and BDO could be liable to them for their inaccuracy.").
177. See, e.g., FDIC v. Ernst & Young, 967 F.2d 166, 170 (5th Cir. 1992). The court rejected the argument that the institution had justifiably relied, however, after imputing an agent's knowledge to the institution.
178. Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988) ("Because most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action.").
179. See Kinnebrew v. Gulf Ins. Co., 67 Fair Empl. Prac. Cas. (BNA) 189, 190 (N.D. Tex. 1994) (enforcing an agreement limiting punitive damages); John D. Calamari & Joseph M. Perillo, Contracts § 14-3, at 589 (3d ed. 1987) ("Traditionally . . . punitive damages are not awarded in contract actions, no matter how malicious the breach.").
180. Werner F. Ebke, In Search of Alternatives: Comparative Reflections on Corporate Governance and the Independent Auditor's Responsibilities, 79 Nw. U. L. Rev. 663, 687 (1984) (citations omitted).
181. While their utility is without dispute, there is some question as to the circumstances in which indemnification clauses will be permitted. Since the 1930s, the SEC has held that a complete indemnification agreement impairs an auditor's independence in attest engagements. See Securities Act of 1933, Release No. 2498, 11 Fed. Reg. 10922 (1941); SEC Accounting Series, Financial Reporting Release No. 1, [1982] 7 Fed. Sec. L. Rep. (CCH) ¶ 73,274, at 62,910. The SEC has stated a belief that the threat of liability provides an incentive for auditors to perform work diligently, and that complete indemnification provides for an inappropriate mutuality of financial interest. The Ethics Committee of the AICPA has ruled that one form of limited indemnification is acceptable. Specifically, the Ethics Committee has concluded that an agreement to release, indemnify, defend, and hold harmless a member from any liability and costs resulting from knowing misrepresentations by management would not im-pair independence. See AICPA, 2 AICPA Professional Standards, at ET § 191.188-89 (June 1, 1996). The SEC has not precluded this position. See, e.g., SEC Release No. 2498, supra (focusing on impairment caused by immunity from "liability for his own negligent acts" (emphasis added)).
182. Howard M. Garfield & Thomas Weathers, A Survey of Accountant Malpractice: Breach of Contract or Tort?, in Accountants' Liability 1995, at 271, 274 (PLI Litig. & Admin. Practice Course Handbook Series No. H-526, 1995).
183. Lampf v. Gilbertson, 501 U.S. 350, 364 (1991).
184. Ohio Rev. Code Ann. § 2305.06 (Anderson 1991).
185. E.g., N.Y. Civ. Prac. L. & R. § 213.8 (McKinney 1990). See generally Prosser on Torts, supra note 107, § 30, at 166-67.
186. See 18 Samuel Williston, Williston on Contracts § 2021A (3d ed. 1978).
187. See Ely-Cruikshank Co. v. Bank of Montreal, 615 N.E.2d 985, 987 (N.Y. 1993) ("[T]he statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury." (citing Schmidt v. Merchants Despatch Transp. Co., 200 N.E. 824 (N.Y. 1936))). But see Cambridge Plating Co. v. Napco, Inc., 991 F.2d 21, 25 (1st Cir. 1993) (observing that generally, in the absence of a specific UCC rule to the contrary, a statute of limitation will not begin to run until notice of a claim in tort or contract), aff'd in part, vacated in part, 85 F.3d 752 (1st Cir. 1996).
188. 6A Corbin, supra note 135, § 1445, at 483 ("[P]arties can by agreement in advance limit the bringing of suit upon a contract to a shorter period than that fixed by the otherwise applicable statute of limitations, if the period agreed upon is not so short as to be unreasonable."). 153. See generally Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir.) ("If the [auditor's] misrepresentation is negligent rather than intentional, contributory negligence plays the same role it would play in an ordinary negligence case."), cert. denied, 459 U.S. 880 (1982); Halla Nursery, Inc. v. Baumann-Furrie & Co., 454 N.W.2d 905, 909 (Minn. 1990) ("[T]he persons who hire accountants, usually businesspersons, should also be required to conduct their business activities in a reasonable and prudent manner."); Causey, Jr. & Causey, supra note 126, at 197-99 (discussing the availability of contributory and comparative negligence defenses in accounting malpractice cases); David L. Menzel, The Defense of Contributory Negligence in Accountant's Malpractice Actions, 13 Seton Hall L. Rev. 292 (1983) (discussing the two factual variations where the defenses are available in accountant liability cases).
189. See, e.g., Stratton v. Sacks, 99 B.R. 686, 695 (D. Md. 1989) ("[T]he doctrine of contributory negligence is a complete bar to any recovery by the Trustee."), aff'd, 900 F.2d 255 (4th Cir. 1990); Coopers & Lybrand v. Trustees of the Archdiocese, 536 So. 2d 278 (Fla. Dist. Ct. App. 1988) (affirming jury apportionment of 40% of defalcation loss to client); Devco Premium Fin. Co. v. North River Ins. Co., 450 So. 2d 1216, 1219-20 (Fla. Dist. Ct. App. 1984) (recounting the trial court's finding that management, and not the auditor, had the primary responsibility to establish and maintain a system of internal accounting control, and approving the trial court's apportionment of 80% of the total damages to the company); Capital Mortgage Corp. v. Coopers & Lybrand, 369 N.W.2d 922, 925 (Mich. Ct. App. 1985) (upholding jury allocation of more than 68% of embezzlement loss to client).
190. See Causey, Jr. & Causey, supra note 126, at 197-99. Where the plaintiff is the accountant's client, the contributory negligence issue is sometimes complicated by the so-called "National Surety doctrine" providing that contributory negligence is only a defense where the client's conduct directly contributes to the accountant's failure to perform. See National Sur. Corp. v. Lybrand, 9 N.Y.S.2d 554, 563 (App. Div. 1939).
191. Becker v. Bancohio Nat'l Bank, 478 N.E.2d 776, 781 (Ohio 1985) (holding that contributory negligence was not a defense to an action for breach of contract); Dobson & Johnson, Inc. v. Von Weiland, 644 S.W.2d 394, 397 (Tenn. 1982) (same); cf. Robertson v. White, 633 F. Supp. 954, 971 (W.D. Ark. 1986) ("The court suspects that plaintiffs fear that if they are forced into a cause of action sounding in negligence, they will face defenses, i.e., contributory negligence, not ordinarily available to [an] action on a contract.").
192. 4 Corbin, supra note 135, § 947, at 814; see Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 453-54 (7th Cir.), cert. denied, 459 U.S. 880 (1982); Restatement (Second) of Contracts § 245 (1979). In Cenco, the court stated: Because these theories of auditors' misconduct are so alike, the defenses based on misconduct of the audited firm or its employees are also alike, though verbalized differently. A breach of contract is excused if the promisee's hindrance or failure to cooperate prevented the promisor from performing the contract. See Restatement (Second) of Contracts § 245 (1979). The corresponding defense in the case of negligence is, of course, contributory negligence. Cenco, 686 F.2d at 453.
193. Actually, the extent to which the plaintiff's conduct need hinder the auditor's performance to constitute contributory negligence in tort is a subject of notorious confusion. Two cases illustrate the problem: Craig v. Anyon, 208 N.Y.S. 259 (App. Div. 1925), aff'd, 152 N.E. 431 (N.Y. 1926), and National Sur. Corp. v. Lybrand, 9 N.Y.S.2d 554 (App. Div. 1939). In Craig v. Anyon, a brokerage house employee embezzled a large amount of money over a five-year period from the brokerage house commodities department. 208 N.Y.S. at 260. The brokerage house sued its auditors for negligence in failing to discover the theft. Id. The auditors asserted the brokerage house's negligence in its failure to supervise the embezzling employee. Id. at 260-61. The New York Appellate Division permitted the defense: The plaintiffs in effect contend that defendants are chargeable with negligence because of failure to detect Moore's wrongdoing, wholly overlooking the fact that, although they were closely affiliated with Moore, who was constantly under their supervision, they were negligent in failing properly to supervise his acts, or to learn the true condition of their own business and to detect his wrongdoing. Id. at 269. But the same court reached a different result under seemingly similar facts. In National Surety Corp. v. Lybrand, a cashier embezzled money from a brokerage house's petty cash account over a nine-year period. 9 N.Y.S.2d at 556. The cashier concealed the theft by "kiting" checks. Id. The brokerage house sued its auditors, claiming that, had the cashier's thefts been discovered during the audit, he would have been fired and further losses prevented. Id. at 557. The auditors claimed that the brokerage house's own negligence constituted contributory negligence. Id. at 557, 563. The court refused to permit the defense. Finding that auditors "are commonly employed for the very purpose of detecting defalcations which the employer's negligence has made possible," the court held that the employer's negligence is a defense "only when it has contributed to the accountant's failure to perform his contract and to report the truth." Id. at 563; see Shapiro v. Glekel, 380 F. Supp. 1053, 1056 (S.D.N.Y. 1974) ("The later cases, both in New York and elsewhere, do not attempt to clarify the apparent conflict between Craig v. Anyon and Lybrand or to reconcile their holdings. Indeed, these cases have been cited, perhaps erroneously, for the same legal proposition."); Dinallo, supra note 129, at 343-51 (discussing the confusion regarding the availability of a contributory negligence defense in accounting malpractice cases); Travis M. Dodd, Note, Accounting Malpractice and Contributory Negligence: Justifying Disparate Treatment Based upon the Auditor's Unique Role, 80 Geo. L.J. 909, 924-27 (1992) (same); see also Hall & Co. v. Steiner & Mondore, 543 N.Y.S.2d 190, 191-92 (App. Div. 1989) (citing both Anyon and Lybrand for the Anyon rule). Other jurisdictions outside New York have adopted the so-called National Surety rule. See Lincoln Grain, Inc. v. Coopers & Lybrand, 345 N.W.2d 300, 307 (Neb. 1984); Jewelcor Jewelers & Distribs., Inc. v. Corr, 542 A.2d 72, 79 (Pa. Super. Ct. 1988). Mercifully, the modern trend, at least in comparative negligence states, is simply to permit the defense and leave it up to the jury. See, e.g., Standard Chartered PLC v. Price Waterhouse, Nos. 1 CA-CV 93-0461, 1 CA-CV 93-0442, 1996 WL 640702, at *38 (Ariz. Ct. App. Nov. 7, 1996) ("We hold, therefore, that the National Surety doctrine does not apply in Arizona . . . ."); Scioto Mem. Hosp. Ass'n v. Price Waterhouse, 659 N.E.2d 1268, 1272-73 (Ohio 1996) (rejecting National Surety as inapplicable in a comparative negligence jurisdiction); see also Devco Premium Fin. Co. v. North River Ins. Co., 450 So. 2d 1216, 1220 (Fla. Dist. Ct. App. 1984) ("We decline to adopt [the National Surety] holding because [it] was decided on principles of contributory negligence, a doctrine which has been repudiated in this State."); Capital Mortgage Corp. v. Coopers & Lybrand, 369 N.W.2d 922, 925 (Mich. Ct. App. 1985) (rejecting a contributory negligence defense, stating "[w]ith comparative negligence the result is not so harsh and the policy considerations that accountants should not be allowed to avoid all liability due to some negligence on the part of the client are not present. We find the application of comparative negligence to be proper").
194. Causation: see Haven Assocs. v. Donro Realty Corp., 503 N.Y.S.2d 826, 830 (App. Div, 1986) ("It was Donro's burden to show that Haven's breach contributed in a substantial measure to its damages, whereupon the burden shifted to Haven to prove that some intervening cause . . . contributed to the damages."). But see Williams Enters., Inc. v. Strait Mfg. & Welding, Inc., 728 F. Supp. 12, 23 (D.D.C. 1990) ("Even if . . . other causes had made some contribution to the particular delay charged, defendants would remain liable because Smoot has proved that the action of defendants was a 'substantial factor' in causing injury to plaintiff."), aff'd in part, 938 F.2d 230 (D.C. Cir. 1991). Foreseeability: Kenford Co. v. County of Erie, 537 N.E.2d 176, 180 (N.Y. 1989) ("[D]amages which may be recovered by a party for breach of contract are restricted to those damages which were reasonably foreseen or contemplated by the parties during their negotiations or at the time the contract was executed." (citing Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854))); 5 Corbin, supra note 135, §§ 1007, 1009 (damages are recoverable only for injury that there was reason to foresee at the time of contracting).
195. For example, an engagement letter could provide that any third-party beneficiary could recover for breach of contract only to the extent that the third-party beneficiary acted reasonably.
196. See Robertson v. White, 633 F. Supp. 954, 972 (W.D. Ark. 1986) ("Interestingly, the resolution reached by Lincoln Grain - that the contributory negligence of the audited client is a defense only where it has contributed to the accountant's failure to perform the contract - bears strong resemblance to the contract doctrine that one is not responsible for his failure to perform if he was frustrated in doing so by the plaintiff.").
197. See Prosser on Torts, supra note 107, § 50, at 337-38; see also Musick, Peeler & Garrett v. Employers Ins., 508 U.S. 286, 288 (1993) (defendants in a Rule 10b-5 action have a right to contribution, or to collect "from other joint tortfeasors who have paid no damages or paid less than their fair share").
198. See Alexander Grant & Co. v. Tiffany Indus., Inc., 770 F.2d 717, 718-19 (8th Cir. 1985) ("Grant, a public accounting firm, alleges that it was injured as the result of a pervasive scheme of mail and wire fraud designed by Tiffany to obtain a favorable audit for the fiscal year 1977 . . . . Grant has standing to assert its claims."), cert. denied, 474 U.S. 1058 (1986); Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459 U.S. 880 (1982); In re Leslie Fay Cos. Sec. Litig., 918 F. Supp. 749, 766 (S.D.N.Y. 1996) ("BDO does not simply seek indemnification for its attorneys fees. BDO has identified other harms that it has suffered due to [the directors'] alleged negligent misrepresentation in connection with this lawsuit."); Coopers & Lybrand v. Shapira, No. 92-1938, slip op. at 14-16 (W.D. Pa. Jan. 11, 1993) ("[Coopers & Lybrand] contends that Shapira, in his position as Chief Executive Officer and Treasurer of Phar-Mor, had a duty to supervise the other defendants, to verify that the statements made by him and others in the comfort letters were accurate, and to take steps to ensure that the statements were in fact accurate. . . . [T]he motion to dismiss . . . will be denied at this stage of the proceedings."); In re Sunrise Sec. Litig., 793 F. Supp. 1306, 1321 (E.D. Pa. 1992) ("This case is similar to In re Cenco."); Alvarado Partners, L.P. v. Mehta, 723 F. Supp. 540, 554 (D. Colo. 1989) ("[S]uch claims are independently viable pendent state claims."); In re Wedtech Corp., 87 B.R. 279, 287 (Bankr. S.D.N.Y. 1988) ("The Cenco court . . . . understandably drew a distinction between the indemnity and tort claims."); cf. Cullen v. Riley, 957 F.2d 1020, 1033 (2d Cir. 1992) (holding that "although judgment reduction compensates a nonsettling defendant for his lost rights of indemnity and contribution, it does not necessarily compensate him for other lost claims"). See generally Seidman & Seidman v. Cenco Inc., 642 F. Supp. 539, 541 (N.D. Ill. 1986) (finding that a claim for fraud was not barred by a waiver of a right to seek indemnity, and stating that "[i]n the law, 'recovery under principles of contribution or indemnity' is, quite simply, a different animal from 'recovery under principles of direct tort liability.'"); Seidman & Seidman v. Cenco Inc., 601 F. Supp. 336, 340-41 (N.D. Ill. 1984) (holding that a waiver of a right to seek indemnity did not bar a claim for fraud); Young, supra note 129, at 2169-72 (discussing the viability of independent claims by accountants).
199. See Causey, Jr. & Causey, supra note 126, at 197-99; 4 Corbin, supra note 135, § 947, at 814 ("To one who is sued for non-performance of his promise it is a defense if he can prove that his performance was prevented or substantially hindered by the plaintiff.").
200. For an overview of alternative dispute resolution ("ADR") techniques potentially applicable to accountant malpractice litigation, see American Arbitration Ass'n, Resolving Professional Accounting and Related Services Disputes: A Guide to Alternative Dispute Resolution (Dec. 1993); AICPA, Alternative Dispute Resolution, A Guide for State Societies (1993); CPR Institute for Dispute Resolution, The ABCs of ADR: A Dispute Resolution Glossary, 13 Alternatives 147 (1995) (describing the various forms of ADR); Richard C. Reuben, The Lawyer Turns Peacemaker, A.B.A. J., Aug. 1996, at 55 (describing current trends in ADR, specifically regarding mediation and arbitration); Hans U. Stucki, Measuring the Merit of ADR, 14 Alternatives 81 (1996) (providing hard data demonstrating the cost savings of ADR over a multi-year period).
201. For an overview of alternative dispute resolution ("ADR") techniques potentially applicable to accountant malpractice litigation, see American Arbitration Ass'n, Resolving Professional Accounting and Related Services Disputes: A Guide to Alternative Dispute Resolution (Dec. 1993); AICPA, Alternative Dispute Resolution, A Guide for State Societies (1993); CPR Institute for Dispute Resolution, The ABCs of ADR: A Dispute Resolution Glossary, 13 Alternatives 147 (1995) (describing the various forms of ADR); Richard C. Reuben, The Lawyer Turns Peacemaker, A.B.A. J., Aug. 1996, at 55 (describing current trends in ADR, specifically regarding mediation and arbitration); Hans U. Stucki, Measuring the Merit of ADR, 14 Alternatives 81 (1996) (providing hard data demonstrating the cost savings of ADR over a multi-year period).
202. For an overview of alternative dispute resolution ("ADR") techniques potentially applicable to accountant malpractice litigation, see American Arbitration Ass'n, Resolving Professional Accounting and Related Services Disputes: A Guide to Alternative Dispute Resolution (Dec. 1993); AICPA, Alternative Dispute Resolution, A Guide for State Societies (1993); CPR Institute for Dispute Resolution, The ABCs of ADR: A Dispute Resolution Glossary, 13 Alternatives 147 (1995) (describing the various forms of ADR); Richard C. Reuben, The Lawyer Turns Peacemaker, A.B.A. J., Aug. 1996, at 55 (describing current trends in ADR, specifically regarding mediation and arbitration); Hans U. Stucki, Measuring the Merit of ADR, 14 Alternatives 81 (1996) (providing hard data demonstrating the cost savings of ADR over a multi-year period).
203. See United States v. Arthur Young & Co., 465 U.S. 805, 817-18 (1984). In Arthur Young, the Supreme Court stated: By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. . . . [The CPA] owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. . . . [The CPA fills a] role as a disinterested analyst charged with public obligations. Id. 167. The SEC appears to be following closely the work of both the Jenkins and the Elliott Committees. Last April, Commissioner Steven Wallman, who has taken a strong interest in the evolution of financial reporting systems, commented: "The work of both the AICPA special committee on financial reporting and the special committee on assurance services strongly influences thoughts on providing additional relevance to financial statements." SEC Sponsors Discussions on Future of Financial Reporting, J. Acct., Apr. 1996, at 15, 15.
204. A reorientation of financial reporting more toward "a forward looking perspective" is a common theme of modern financial analysis. Jenkins Committee Report, supra note 2, at 5, 22-23. It is not difficult to conceptualize a financial reporting system in which financial information users are plugged directly into the reporting entity's MIS and receive, over a computer network, real-time information as to sales or other activity and, at the same time, immediate translation of reporting-entity transactions into bottom-line earnings per share. In such a context, three-month old financial data probably would seem ancient.
205. In his September 1994 article entitled The Future of Audits, Robert Elliott observed: Once capital suppliers have real-time access to an enterprise's databases, they will have little interest in annual financial statements - and, by extension, auditors' opinions on them - issued well after the entity's fiscal yearend. What they might be far more interested in is real-time assurance from the auditor that either the information in the enterprise's databases is reliable or the system itself is highly likely to produce reliable data. Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 76; see Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("The profession's information-technology competencies will have to broaden
206. In his September 1994 article entitled The Future of Audits, Robert Elliott observed: Once capital suppliers have real-time access to an enterprise's databases, they will have little interest in annual financial statements - and, by extension, auditors' opinions on them - issued well after the entity's fiscal yearend. What they might be far more interested in is real-time assurance from the auditor that either the information in the enterprise's databases is reliable or the system itself is highly likely to produce reliable data. Robert K. Elliott, The Future of Audits, J. Acct., Sept. 1994, at 74, 76; see Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/constr.htm〉 ("The profession's information-technology competencies will have to broaden and deepen even to provide traditional services let alone to provide new assurance services. Real-time auditing, for example, will require a far better understanding of systems and systems reliability.").
207. The practical implications of such a transformation are many, including the potential elimination of "disappointing earnings" cases premised upon earnings that unexpectedly do not fulfill analysts' expectations.
208. The risks associated with forward-looking information were illustrated graphically last year when, faced with a now-defeated California ballot initiative that would have made easier the prosecution of securities class actions based on forward-looking information, Intel Corporation simply announced the elimination of forward-looking statements in its financial disclosures and abruptly cancelled a meeting with analysts. See Intel Eliminates Forward-Looking Statements and Cancels Analyst Meeting Due to California Ballot Initiative, Bus. Wire, Oct. 7, 1996, available in LEXIS, News Library, BSWIRE File. The Wall Street Journal described Intel's action as follows: Technology stocks got a boost three weeks ago when Intel said its future looked brighter than analysts had forecast. But if California voters approve a measure slated for the November ballot, that may be the last rosy outlook Wall Street hears from the leading computer-chip maker. Intel is following the lead of another Silicon Valley technology company, Novellus Systems, in refusing to discuss its prospects with investors for fear of the potential effect of Proposition 211. Intel, which Wall Street counted on for the best forward view of the semi-conductor industry, on Monday canceled an Oct. 31 meeting with analysts and announced it will report on its results only after the fact. Patrick McGeehan, California Measure Causes Silence in Silicon Valley, Wall St. J., Oct. 9, 1996, at C1.
209. The risks associated with forward-looking information were illustrated graphically last year when, faced with a now-defeated California ballot initiative that would have made easier the prosecution of securities class actions based on forward-looking information, Intel Corporation simply announced the elimination of forward-looking statements in its financial disclosures and abruptly cancelled a meeting with analysts. See Intel Eliminates Forward-Looking Statements and Cancels Analyst Meeting Due to California Ballot Initiative, Bus. Wire, Oct. 7, 1996, available in LEXIS, News Library, BSWIRE File. The Wall Street Journal described Intel's action as follows: Technology stocks got a boost three weeks ago when Intel said its future looked brighter than analysts had forecast. But if California voters approve a measure slated for the November ballot, that may be the last rosy outlook Wall Street hears from the leading computer-chip maker. Intel is following the lead of another Silicon Valley technology company, Novellus Systems, in refusing to discuss its prospects with investors for fear of the potential effect of Proposition 211. Intel, which Wall Street counted on for the best forward view of the semi-conductor industry, on Monday canceled an Oct. 31 meeting with analysts and announced it will report on its results only after the fact. Patrick McGeehan, California Measure Causes Silence in Silicon Valley, Wall St. J., Oct. 9, 1996, at C1.
210. Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.A. (West Supp. 1996)).
211. 552 F.2d 797, 806 n.28 (8th Cir.), cert. denied, 434 U.S. 857 (1977).
212. Id. at 803.
213. Id. at 806 n.28.
214. Id.
215. 802 F.2d 49 (2d Cir. 1986).
216. Id. at 56.
217. Id.
218. Id.
219. Id. (alterations in original).
220. Id.
221. Romani v. Shearson Lehman Hutton, 929 F.2d 875 (1st Cir. 1991).
222. I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759 (2d Cir. 1991).
223. In re Donald J. Trump Casino Sec. Litig. - Taj Mahal Litig., 7 F.3d 357 (3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994).
224. Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204 (4th Cir. 1994).
225. Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994).
226. Mayer v. Mylod, 988 F.2d 635 (6th Cir. 1993).
227. Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243 (8th Cir. 1991).
228. In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994), cert. denied, 116 S. Ct. 277 (1995).
229. Saltzberg v. TM Sterling/Austin Assocs., Ltd., 45 F.3d 399 (11th Cir. 1995).
230. See Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392, 1404-06 (7th Cir. 1995); see also United States v. Morris, 80 F.3d 1151, 1167 (7th Cir.) ("Although Harden implicitly recognizes the viability of the 'bespeaks caution' doctrine in this circuit as a defense in securities fraud cases, we have yet to encounter a case where the doctrine applied to negate the materiality of a misleading statement as a matter of law."), cert. denied, 117 S. Ct. 181 (1996).
231. See Gollomp v. Trump, 510 U.S. 1178 (1994).
232. In fact, the bespeaks-caution doctrine is entirely consistent with the Court's recent observation that otherwise-actionable misstatements will not support liability if accompanied by sufficient objectively true statements, so that the true statements "would exhaust the misleading conclusion's capacity to influence" a reasonable investor. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097-98 (1991). In its most basic form, moreover, the bespeaks-caution doctrine is a fairly straightforward application of well-established principles of law regarding the elements of a fraud claim. It is one of the most basic prerequisites, for example, that the statement at issue be materially false or misleading. See 17 C.F.R. § 240.10b-5 (1996). The central inquiry is "whether defendants' representations, taken together and in context, would have misled a reasonable investor." McMahan & Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir. 1990), cert. denied, 501 U.S. 1249 (1991). In addition, a plaintiff must show that he relied on the false statement or omission to his detriment and that such reliance was reasonable. See Central Bank v. First Interstate Bank, 511 U.S. 164, 180 (1994). At its root, the bespeaks-caution doctrine is the logical application of these principles in the context of forward-looking information. See Worlds of Wonder, 35 F.3d at 1414 ("[T]he doctrine, when properly construed, merely represents the pragmatic application of two fundamental concepts in the law of securities fraud: materiality and reliance.").
233. See Floyd Norris, Junk Bond Ruling Could Aid Companies in Fraud Suits, N.Y. Times, Oct. 16, 1993, at 39.
234. In re Donald J. Trump Casino Sec. Litig. - Taj Mahal Litig., 7 F.3d 357, 364-65 (3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994). See generally Michael R. Young, When Investors Rely on Financial Projections: Ruling Gives New Protection from Lawsuits, J. Acct., Feb. 1994, at 26, 26 (discussing the potential significance of the Trump decision to the accounting profession).
235. Trump, 7 F.3d at 370.
236. Id. at 364.
237. Id. at 370.
238. Id.
239. Id. at 364.
240. Id. at 365.
241. Id. at 366.
242. Id. at 371.
243. Id. at 369.
244. Id.
245. Id. at 371.
246. Courts have also applied the bespeaks-caution doctrine to "fraud on the market" claims, in which the plaintiff claims to have relied not on any particular statement but rather on the integrity of the market. See, e.g., Sinay v. Lamson & Sessions Co., 948 F.2d 1037 (6th Cir. 1991).
247. See In re ZZZZ Best Sec. Litig., 864 F. Supp. 960, 974-75 (C.D. Cal. 1994). The ZZZZ Best court noted: Logically, the doctrine would best apply to predictions and statements that are speculative in nature because of the inherent risk in predicting the future. . . . The information . . . had nothing to do with future predictions or speculative conclusions. . . . . . . [T]his Court finds that the bespeaks caution doctrine is not applicable in this case. Id. 210. The clarity of the proposition that the bespeaks-caution doctrine applies only to forward-looking information has recently been muddied. Last December, the Fourth Circuit issued an opinion suggesting that the doctrine may apply to misstatements of historical fact. Gasner v. Board of Supervisors, 103 F.3d 351 (4th Cir. 1996). In Gasner, the state government issued municipal bonds to finance the purchase of equipment for a new waste treatment facility. Id. at 354. Revenue from the facility fell short of expectations; the project was abandoned; and the issuer defaulted on the bonds. Id. Investors sued. Id. at 355. They claimed that the prospectus's assurance that the facility would employ "proven" technology was an actionable misrepresentation because the technology was in fact experimental. Id. at 356-57. The Fourth Circuit concluded that, even to the extent the assertion as to "proven" technology was false, it was rendered immaterial by cautionary language concerning the future viability of the project. Id. at 359. The court reached this conclusion even though the cautionary language did not concern the track record of the technology being used. Id. The dissent argued that the bespeaks-caution doctrine did not apply to such misrepresentations of historical fact, and that "cautionary language regarding predictions of the Facility's future success does not excuse the [issuer's] alleged misrepresentation of current and existing facts regarding the nature of the technology." Id. at 364-65.
248. Trump, 7 F.3d at 371. SEC chairman Arthur Levitt has recently observed that reporting entities appear to be relying too heavily on boilerplate, and that "[g]ood cautionary language should provide the reader with disclosure through the eyes of management, not litigation counsel." Levitt Outlines Ideas for Modernizing the 1933 Act, SEC Today, Jan. 27, 1997, at 1.
249. Mayer v. Mylod, 988 F.2d 635, 639 (6th Cir. 1993). The court stated: Material statements which contain the speaker's opinion are actionable under Section 10(b) of the Securities Exchange Act if the speaker does not believe the opinion and the opinion is not factually well-grounded. See, e.g., Hanon v. Dataproducts Corp., 976 F.2d 497 (9th Cir. 1992); cf. Virginia Bankshares [v. Sandberg, 501 U.S. 1083] (1991) (opinions are actionable under Section 14(a) of the Securities Exchange Act). Whether the statements here were true or false is not an issue to be decided under Rule 12(b)(6). Ehrenberg and Mayer assert as a fact, in paragraph twenty of their complaints, that numerous Michigan National statements, which were either purely factual or which contained the speaker's opinion, were false, or were misleading due to material omissions. These assertions are sufficient for purposes of Rule 12(b)(6) because material statements of opinion, if not truly believed and not supported by available facts, are actionable under Section 10(b) of the Securities Exchange Act. 988 F.2d at 639.
250. Griffin v. McNiff, 744 F. Supp. 1237 (S.D.N.Y. 1990), aff'd, 996 F.2d 303 (2d Cir. 1993).
251. Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392 (7th Cir. 1995).
252. Id. at 1405 (quoting Raffensperger's application of the defense) (first alteration in original).
253. Id. at 1405-06.
254. Fed. R. Civ. P. 9(b). Rule 9(b) provides that "[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally." Id. A number of states, including Delaware, Florida, Massachusetts, Michigan, New Jersey, and Ohio, have enacted similar provisions. See Del. Super. Ct. R. 9(b); Fla. R. Civ. P. 1.120(b); Mass. R. Civ. P. 9(b); Mich. Ct. R. 2.112(B)(2); N.J. Ct. R. 4:5-8(a); Ohio R. Civ. P. 9(B).
255. In re Donald J. Trump Casino Sec. Litig. - Taj Mahal Litig., 7 F.3d 357, 372 (3d Cir. 1993) (citing Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991)), cert. denied, 510 U.S. 1178 (1994).
256. Ebke, supra note 144, at 682 ("The process of expanding auditor's liabilities therefore appears to be one of socializing losses and individualizing profits.").
257. See supra note 173 and accompanying text.
258. Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.A. (West Supp. 1996)).
259. 15 U.S.C. § 77a-ll (1994).
260. Id. § 78a-ll.
261. See H.R. Conf. Rep. No. 369, 104th Cong., 1st Sess. 31, 43 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 742 and in James Hamilton, CCH, Private Securities Litigation Reform Act of 1995: Law & Explanation 59, 68 (1996) ("The Conference Committee safe harbor . . . is based on aspects of SEC Rule 175 and the judicial created 'bespeaks caution' doctrine.").
262. The Reform Act has other provisions of direct interest to the accounting profession. See generally Quinton F. Seamons, Audit Standards and Detection of Fraud Under the Private Securities Litigation Reform Act of 1995, 24 Sec. Reg. L.J. 259 (1996).
263. As one commentator has noted, however, it is not certain that courts will give effect to such statements of legislative intent. See John C. Coffee, Jr., The Future of the Private Securities Litigation Reform Act: Or, Why the Fat Lady Has Not Yet Sung, 51 Bus. Law. 975, 975-76 (1996).
264. See H.R. Conf. Rep. No. 369, at 46, reprinted in 1995 U.S.C.C.A.N. at 745 and in Hamilton, supra note 224, at 70 ("The Conference Committee does not intend for the safe harbor provisions [of the Reform Act] to replace the judicial 'bespeaks caution' doctrine or to foreclose further development of that doctrine by the courts.").
265. Modern watchers of securities litigation are familiar with a new phenomenon, in which securities cases of the sort that traditionally would have been brought in federal court are now shifting into state courts with the federal claims having been jettisoned completely. See Coffee, supra note 226, at 999. One possible effect may be that state courts, though theoretically left unaffected by the Reform Act, will show an increasing willingness to incorporate the bespeaks-caution doctrine into state common law. See, e.g., Rubin v. SI Management L.P., No. 10893/92 (N.Y. Sup. Ct. June 23, 1993).
266. See generally 15 U.S.C.A. §§ 77z-2(i)(1), 78u-5(i)(1) (West Supp. 1996).
267. According to the legislative history of the Reform Act, boilerplate warnings will not suffice as meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statement, such as, for example, information about the issuer's business. H.R. Conf. Rep. No. 369, at 43, reprinted in 1995 U.S.C.C.A.N. at 742 and in Hamilton, supra note 224, at 68.
268. 15 U.S.C.A. §§ 77z-2(c)(1)(A), 78u-5(c)(1)(A) (West Supp. 1996).
269. Id. §§ 77z-2(c)(1)(B), 78u-5(c)(1)(B).
270. Id. §§ 77z-2(b)(2)(A), 78u-5(b)(2)(A).
271. Id. §§ 77z-2(b)(2)(C), 78u-5(b)(2)(C).
272. Id. §§ 77z-2(b)(2)(D), 78u-5(b)(2)(D).
273. Id. §§ 77z-2(b)(2)(E), 78u-5(b)(2)(E).
274. Id. §§ 77z-2(a), 78u-5(a).
275. See W. Edwards Deming, Quality, Productivity and Competitive Position 22 (1982) ("Quality comes not from inspection, but from improvement of the process."); John O. Whitney, The Economics of Trust: Liberating Profits and Restoring Corporate Vitality 22 (1994) ("The challenge to leaders is to understand fully the system they are managing, to understand the interdependence of the various components, to spend their creative energy improving the interface between the components as well as improving the components themselves."). One text notes: Deming's system, known as the Fourteen Points, ties together disparate process-oriented management ideas into a single, holistic vision of how companies can anticipate and meet the desires of the customer by fostering a better understanding of "the process" and by enlisting the help of every employee, division, and supplier in the improvement effort. Andrea Gabor, supra note 1, at 5.
276. See W. Edwards Deming, Quality, Productivity and Competitive Position 22 (1982) ("Quality comes not from inspection, but from improvement of the process."); John O. Whitney, The Economics of Trust: Liberating Profits and Restoring Corporate Vitality 22 (1994) ("The challenge to leaders is to understand fully the system they are managing, to understand the interdependence of the various components, to spend their creative energy improving the interface between the components as well as improving the components themselves."). One text notes: Deming's system, known as the Fourteen Points, ties together disparate process-oriented management ideas into a single, holistic vision of how companies can anticipate and meet the desires of the customer by fostering a better understanding of "the process" and by enlisting the help of every employee, division, and supplier in the improvement effort. Andrea Gabor, supra note 1, at 5.
277. Modern manufacturing quality assurance has moved away from an inspection-and-rework strategy and now relies heavily on a strategy of product and/or process redesign to eliminate all possible sources of defects. This proves to be both more effective (creating higher and continuously improving levels of quality) and more cost effective. Similarly, modern data quality assurance will move away from data assurance and toward system assurance. Elliott Committee Report, supra note 9, at 〈http://www.aicpa.org/assurance/scas/comstud/effect/newopps.htm〉.
278. See The CPA Journal Symposium on the Future of Assurance Services, 66 CPA J., May 1996, at 14, 16; see also Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64, 65 nn.1-2.
279. See The CPA Journal Symposium on the Future of Assurance Services, 66 CPA J., May 1996, at 14, 16; see also Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64, 65 nn.1-2.
280. In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994), cert. denied, 116 S. Ct. 277 (1995).
281. Id. at 1412.
282. Id. at 1416-17.
283. Id. at 1417.
284. Id.
285. In re Worlds of Wonder Sec. Litig., 814 F. Supp. 850, 865 (N.D. Cal. 1993), aff'd in part, rev'd in part, 35 F.3d 1407 (9th Cir. 1994), cert. denied, 116 S. Ct. 277 (1995).
286. Worlds of Wonder, 35 F.3d at 1417.
287. See, e.g., id. at 1414 (quoting the district court opinion, 814 F. Supp. at 858); see also 15 U.S.C.A. § 78u-5(c)(1)(A)(i) (West Supp. 1996) (stating that a forward-looking statement must be "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement").
288. 864 F. Supp. 960 (C.D. Cal. 1994).
289. Id. at 974.
290. 109 Stat. 737.
291. 15 U.S.C.A. §§ 77z-2(b)(2)(A), 78u-5(b)(2)(A) (West Supp. 1996).
292. See H.R. Conf. Rep. No. 369, 104th Cong., 1st Sess. 31, 43 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 742 and in Hamilton, supra note 224, at 59, 67.
293. Hamilton, supra note 224, at 70.
294. See H.R. Conf. Rep. No. 369, at 46, reprinted in 1995 U.S.C.C.A.N. at 745 and in Hamilton, supra note 224, at 70.
295. See supra note 194.
296. In re Worlds of Wonder Sec. Litig., 814 F. Supp. 850 (N.D. Cal. 1993), aff'd in relevant part, rev'd in part, 35 F.3d 1407 (9th Cir. 1994), cert. denied, 116 S. Ct. 277 (1995).
297. Id. at 862.
298. See Delta Holdings, Inc. v. National Distillers & Chem. Corp., 945 F.2d 1226, 1250 (2d Cir. 1991) (noting that "loss reserves are not like a debt with fixed payments of principal and interest," and that "[i]nformed guesswork is an accepted basis for determining such reserves"), cert. denied, 503 U.S. 985 (1992); First Nationwide Bank v. Gelt Funding, Corp., 820 F. Supp. 89, 95-96 (S.D.N.Y. 1993) ("[T]he taking of loan loss reserves is based on managerial guesswork" and is "an inherently speculative and unreliable measure of actual [losses] because reserves do not represent realized losses, but rather a contingent estimate of anticipated future losses."), aff'd on other grounds, 27 F.3d 763 (2d Cir. 1994), cert. denied, 115 S. Ct. 728 (1995).
299. Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir. 1996).
300. In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir. 1996).
301. In In re Westinghouse Sec. Litig., 832 F. Supp. 948 (W.D. Pa. 1993), aff'd in part, rev'd in part, 90 F.3d 696 (3d Cir. 1996), the United States District Court for the Western District of Pennsylvania applied the bespeaks-caution doctrine to dismiss a fraud claim based on a prospectus' alleged misrepresentation that loan loss reserves "should be adequate to cover future losses that may occur." Id. at 986 (quoting Westinghouse's prospectus). The district court's treatment of such a statement as forward-looking, and therefore within the ambit of the bespeaks-caution doctrine, was hardly unreasonable - as the court noted, loss reserves are "a type of 'soft information,' consisting essentially of predictions about the future performance of receivables." Id. at 970-71. Nevertheless, the Third Circuit - the same court that decided the Trump case - reversed this aspect of the district court's decision. Westinghouse, 90 F.3d at 710. The rationale was that the cautionary statements did "not sufficiently counter the alleged misrepresentations, i.e., that the defendants knowingly or recklessly misrepresented the adequacy of the loan loss reserves and compliance with GAAP." Id. at 709. The First Circuit reversed a Massachusetts district court's decision that the bespeaks-caution doctrine applied to a statement in a prospectus that a company believed "the remaining restructuring reserve . . . is adequate to cover presently planned restructuring actions." Wilensky v. Digital Equip. Corp., 903 F. Supp. 173, 177 (D. Mass. 1995) (emphasis omitted) (quoting prospectus supplement), aff'd in part, rev'd in part sub nom. Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir. 1996). The First Circuit recognized that the statement about the "adequacy" of the reserves had "both a forward-looking aspect and an aspect that encompasses a representation of present fact." Shaw, 82 F.3d at 1213. The court also noted that the plaintiffs' fraud claim was not premised upon a forward-looking statement; rather, the plaintiffs alleged that the statement about the adequacy of reserves was a misrepresentation of a present fact, because the defendants allegedly knew that the reserves were in fact inadequate. Accordingly, the court found that the accompanying cautionary language did not render the misrepresentation immaterial as a matter of law. Id. at 1213-14.
302. See Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64 ("Technology also has had a profound effect on the globalization of the financial markets. Simply put, the walls between competitors built by geographic boundaries and time zones which once dictated and furthered nationalistic views toward commerce are now generally nonexistent."); Wallman, Regulation for a New World, supra note 1, at 8, 10 ("Nothing is changing more rapidly today than information technology, and new communications vehicles like the Internet know no borders. Consequently, the premise of our regulatory framework - controlling information flows grounded in a sovereign right based on geographic jurisdiction - becomes more tenuous."); see also Glenn Cheney, FEI Panel Warns Risk Management Will Get Harder, Acct. Today, Nov. 11-24, 1996, at 17, 17 ("Risk is created by the complexity of doing business in a global world where technology and speed create a more intense business environment."); Peter Huber, Cyberpower, Forbes, Dec. 2, 1996, at 142, 142 ("Virtual establishments on the Web already offer incorporation in Belize, bank accounts in Switzerland, currency trading in Germany, brokerage accounts in New Zealand. International 800 numbers are proliferating.").
303. See Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64 ("Technology also has had a profound effect on the globalization of the financial markets. Simply put, the walls between competitors built by geographic boundaries and time zones which once dictated and furthered nationalistic views toward commerce are now generally nonexistent."); Wallman, Regulation for a New World, supra note 1, at 8, 10 ("Nothing is changing more rapidly today than information technology, and new communications vehicles like the Internet know no borders. Consequently, the premise of our regulatory framework - controlling information flows grounded in a sovereign right based on geographic jurisdiction - becomes more tenuous."); see also Glenn Cheney, FEI Panel Warns Risk Management Will Get Harder, Acct. Today, Nov. 11-24, 1996, at 17, 17 ("Risk is created by the complexity of doing business in a global world where technology and speed create a more intense business environment."); Peter Huber, Cyberpower, Forbes, Dec. 2, 1996, at 142, 142 ("Virtual establishments on the Web already offer incorporation in Belize, bank accounts in Switzerland, currency trading in Germany, brokerage accounts in New Zealand. International 800 numbers are proliferating.").
304. See Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64 ("Technology also has had a profound effect on the globalization of the financial markets. Simply put, the walls between competitors built by geographic boundaries and time zones which once dictated and furthered nationalistic views toward commerce are now generally nonexistent."); Wallman, Regulation for a New World, supra note 1, at 8, 10 ("Nothing is changing more rapidly today than information technology, and new communications vehicles like the Internet know no borders. Consequently, the premise of our regulatory framework - controlling information flows grounded in a sovereign right based on geographic jurisdiction - becomes more tenuous."); see also Glenn Cheney, FEI Panel Warns Risk Management Will Get Harder, Acct. Today, Nov. 11-24, 1996, at 17, 17 ("Risk is created by the complexity of doing business in a global world where technology and speed create a more intense business environment."); Peter Huber, Cyberpower, Forbes, Dec. 2, 1996, at 142, 142 ("Virtual establishments on the Web already offer incorporation in Belize, bank accounts in Switzerland, currency trading in Germany, brokerage accounts in New Zealand. International 800 numbers are proliferating.").
305. See Wallman, Regulating in a World of Technological and Global Change, supra note 16, at 64 ("Technology also has had a profound effect on the globalization of the financial markets. Simply put, the walls between competitors built by geographic boundaries and time zones which once dictated and furthered nationalistic views toward commerce are now generally nonexistent."); Wallman, Regulation for a New World, supra note 1, at 8, 10 ("Nothing is changing more rapidly today than information technology, and new communications vehicles like the Internet know no borders. Consequently, the premise of our regulatory framework - controlling information flows grounded in a sovereign right based on geographic jurisdiction - becomes more tenuous."); see also Glenn Cheney, FEI Panel Warns Risk Management Will Get Harder, Acct. Today, Nov. 11-24, 1996, at 17, 17 ("Risk is created by the complexity of doing business in a global world where technology and speed create a more intense business environment."); Peter Huber, Cyberpower, Forbes, Dec. 2, 1996, at 142, 142 ("Virtual establishments on the Web already offer incorporation in Belize, bank accounts in Switzerland, currency trading in Germany, brokerage accounts in New Zealand. International 800 numbers are proliferating.").
306. The International Accounting Standards Committee ("IASC") is a private-sector organization whose members consist of 116 accountancy organizations from 86 countries. The IASC-U.S. Comparison Project: A Report on the Similarities and Differences Between IASC Standards and U.S. GAAP 39-41, 49, 74-78 (Carrie Bloomer ed., 1996). "IASC['s] mission is to formulate accounting standards, to promote their worldwide acceptance and observation, and to work generally for the improvement and harmonization of accounting regulations, standards, and procedures worldwide." Id. at 41. IASC's United States members are the AICPA, The Institute of Internal Auditors, and the Institute of Management Accountants. Id. at 78.
307. LASC's present goal is to develop a core set of international accounting standards by March 1998. Once those core standards are developed, IASC intends to present them to the International Organization of Securities Commissions ("IOSCO") to be considered for acceptance by IOSCO members, including the United States SEC, for cross-border securities listings. The expectation is that the SEC's acceptance of those standards would result in foreign firms that prepare financial statements based on IASC standards competing in United States capital markets with United States firms whose financial statements are based on United States GAAP. One unresolved question is the extent to which "IASC standards could eventually enter the hierarchy of U.S. GAAP for U.S. companies." See id. at 6; see also Cheney, Cook Defends Independence, supra note 19, at 16 ("Within a year and a half we'll have . . . an assessment of international standards in the U.S., and it's very possible that the rules of the game could change.").
308. "'Increasingly, you have domestic deals placed overseas, and foreign deals in the U.S.,' says Mark Seigel, the head of world-wide bond syndication at Morgan Stanley. 'So capital markets, and more particularly new issues, are increasingly global by nature, which in itself leads to more transactions.'" Gregory Zuckerman, Bond Professionals Go 'Round-the-Clock, Wall St. J., Nov. 25, 1996, at C1; see also Elizabeth MacDonald, Universal Accounting Rules Seem Elusive, Wall St. J., Dec. 6, 1996, at B9E ("Even with the tough U.S. accounting rules, the number of foreign companies listing on the Big Board has nearly tripled in the last five years to 285 today. Since 1990, the number of foreign companies registering with the SEC has risen to 856 from 434.").
309. "'Increasingly, you have domestic deals placed overseas, and foreign deals in the U.S.,' says Mark Seigel, the head of world-wide bond syndication at Morgan Stanley. 'So capital markets, and more particularly new issues, are increasingly global by nature, which in itself leads to more transactions.'" Gregory Zuckerman, Bond Professionals Go 'Round-the-Clock, Wall St. J., Nov. 25, 1996, at C1; see also Elizabeth MacDonald, Universal Accounting Rules Seem Elusive, Wall St. J., Dec. 6, 1996, at B9E ("Even with the tough U.S. accounting rules, the number of foreign companies listing on the Big Board has nearly tripled in the last five years to 285 today. Since 1990, the number of foreign companies registering with the SEC has risen to 856 from 434.").
310. Congress has recently demonstrated a fairly strong interest in the facilitation of global capital markets through the standardization of international accounting standards. Section 509(3) of the recently-enacted National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416, 3449-50 (1996), provides that "establishment of a high-quality comprehensive set of generally accepted interna-tional accounting standards in cross-border securities offerings would greatly facilitate international financing activities." Id. § 509(3). Pursuant to the Act, the SEC is to report to Congress on progress in the development of international accounting standards "not later than 1 year after the date of enactment of this Act," i.e., by October 1997. Id. § 509(5). See generally SEC Must Report on Writing of Core International Accounting Standards, 28 Sec. Reg. & L. Rep. (BNA) No. 43, at 1360 (Nov. 1, 1996) (discussing the obligations under and ramifications of section 509 of the Act).
311. 1 The Europa World Y.B. 1996, at 3-4 (Europa Publications Ltd.).
312. One caveat is in order. This discussion does not seek to set forth all law applicable to the international dissemination of financial information in each of the nations of the world. Nor would such a discussion make sense - simply understanding the laws of the United States requires individual consideration of both federal law and the law of each of the fifty states (plus territories). What this section does seek to do is to identify important issues that may be encountered in foreign courts and their poten-tial significance to international risk management.
313. Restatement (Third) of the Foreign Relations Law of the United States § 421(1) (1987) [hereinafter Foreign Relations Restatement] ("A state may exercise jurisdiction through its courts to adjudicate with respect to a person or thing if the relationship of the state to the person or thing is such as to make the exercise of jurisdiction reasonable."). See generally Andreas F. Lowenfeld, International Litigation and Arbitration 147 (1993) [hereinafter Lowenfeld, International Arbitration] (discussing generally the subject of a foreign court's "jurisdiction to adjudicate").
314. Compare Foreign Relations Restatement, supra note 270, § 421(2) with N.Y. Civ. Prac. L. & R. § 302 (McKinney 1995) ("Personal jurisdiction by acts of non-domiciliaries").
315. Foreign Relations Restatement, supra note 270, § 421(2)(h)-(k). To put aside a potential issue, a foreign court ought not to assert jurisdiction over a United States-based accounting firm based exclusively on the activities of the United States firm's affiliate within the foreign court's nation. Courts - at least courts in the United States - have repeatedly declined to uphold personal jurisdiction under analogous circumstances. See Young v. Jones, 816 F. Supp. 1070, 1075-77 (D.S.C. 1992), aff'd sub nom. Young v. FDIC, 103 F.3d 1180 (4th Cir. 1997); Flair Resources Ltd. v. Peat Marwick Int'l, No. 87-105-RE, 1988 U.S. Dist. LEXIS 17481 (D. Or. Feb. 8, 1988), aff'd, 891 F.2d 294 (9th Cir. 1989); Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241, 1253-54 (S.D.N.Y. 1984); Cocklereece v. Moran, 500 F. Supp. 487, 489 (N.D. Ga. 1980); Express One Int'l, Inc. v. Certified Dive Travel, Inc., No. 93-19297(18) (Fla. Mar. 21, 1996); Hotel Partners v. Streit, No. 90-08081-M (Tex. Aug. 7, 1991).
316. See CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1268 (6th Cir. 1996) ("Someone . . . who employs a computer network service like CompuServe to market a product can reasonably expect disputes with that service to yield lawsuits in the service's home state."); Inset Systems, Inc. v. Instruction Set, Inc., 937 F. Supp. 161, 164 (D. Conn. 1996) ("The court concludes that advertising via the Internet is solicitation of a sufficient repetitive nature to satisfy . . . the Connecticut long-arm statute . . . thereby conferring Connecticut's long-arm jurisdiction . . . ."); Maritz, Inc. v. CyberGold, Inc., 947 F. Supp. 1328, 1334 (E.D. Mo. 1996) ("[T]he Court concludes that defendant CyberGold, through its internet activities, has purposefully availed itself of the privilege of doing business with this forum such that it could reasonably anticipate the possibility of being ha[u]led into court here."); Susan J. Kohlmann & Kerry A. Brennan, Internet: Electronic Contacts May Lead to Court, Metropolitan Corp. Couns., Oct. 1996, at 8, 8 (reviewing CompuServe decision); David E. Rovella, Internet Use Can Confer Jurisdiction, Nat'l L.J., Aug. 12, 1996, at B1 (same). But see Bensusan Restaurant Corp. v. King, 937 F. Supp. 295 (S.D.N.Y. 1996). In finding that the establishment of a Web site did not confer jurisdiction, a New York district court stated: As set forth above, King has done nothing to purposefully avail himself of the benefits of New York. King, like numerous others, simply created a Web site and permitted anyone who could find it to access it. Creating a site, like placing a product into the stream of commerce, may be felt nationwide - or even worldwide - but, without more, it is not an act purposefully directed toward the forum state. See Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 112, 107 S. Ct. 1026, 1032, 94 L. Ed. 2d 92 (1992) (plurality opinion). There are no allegations that King actively sought to encourage New Yorkers to access his site, or that he conducted any business - let alone a continuous and systematic part of its business - in New York. There is in fact no suggestion that King has any presence of any kind in New York other than the Web site that can be accessed worldwide. Bensusan's argument that King should have foreseen that users could access the site in New York and be confused as to the relationship of the two Blue Note clubs is insufficient to satisfy due process. See [Fox v. Boucher], 794 F.2d at 37; Beckett v. Prudential Ins. Co. of Am., 893 F. Supp. 234, 239 (S.D.N.Y. 1995). Although CompuServe Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996), a recent decision of the United States Court of Appeals for the Sixth Circuit, reached a different result, it was based on vastly different facts. In that case, the Sixth Circuit found personal jurisdiction proper in Ohio over an Internet user from Texas who subscribed to a network service based in Ohio. The user, however, specifically targeted Ohio by subscribing to the service and entering into a separate agreement with the service to sell his software over the Internet. Furthermore, he advertised his software through the service and repeatedly sent his software to the service in Ohio. Id. at 1264-65. This led that court to conclude that the Internet user "reached out" from Texas to Ohio and "originated and maintained" contacts with Ohio. Id. at 1266. This action, on the other hand, contains no allegations that King in any way directed any contact to, or had any contact with, New York or intended to avail itself of any of New York's benefits. Accordingly, the exercise of personal jurisdiction over King in this case would violate the protections of the Due Process Clause. Id. at 301 (footnote omitted). The court noted that "[i]n CompuServe, the Sixth Circuit explicitly wrote that it was not addressing the issue of whether the Internet user 'would be subject to suit in any state where his software was purchased or used . . . .'" Id. at 301 n.3 (quoting CompuServe, 89 F.3d at 1268); see Paul M. Barrett, Suit Involving Internet Site Is Dismissed, Wall St. J., Sept. 10, 1996, at B10 (discussing the Bensusan decision).
317. See CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1268 (6th Cir. 1996) ("Someone . . . who employs a computer network service like CompuServe to market a product can reasonably expect disputes with that service to yield lawsuits in the service's home state."); Inset Systems, Inc. v. Instruction Set, Inc., 937 F. Supp. 161, 164 (D. Conn. 1996) ("The court concludes that advertising via the Internet is solicitation of a sufficient repetitive nature to satisfy . . . the Connecticut long-arm statute . . . thereby conferring Connecticut's long-arm jurisdiction . . . ."); Maritz, Inc. v. CyberGold, Inc., 947 F. Supp. 1328, 1334 (E.D. Mo. 1996) ("[T]he Court concludes that defendant CyberGold, through its internet activities, has purposefully availed itself of the privilege of doing business with this forum such that it could reasonably anticipate the possibility of being ha[u]led into court here."); Susan J. Kohlmann & Kerry A. Brennan, Internet: Electronic Contacts May Lead to Court, Metropolitan Corp. Couns., Oct. 1996, at 8, 8 (reviewing CompuServe decision); David E. Rovella, Internet Use Can Confer Jurisdiction, Nat'l L.J., Aug. 12, 1996, at B1 (same). But see Bensusan Restaurant Corp. v. King, 937 F. Supp. 295 (S.D.N.Y. 1996). In finding that the establishment of a Web site did not confer jurisdiction, a New York district court stated: As set forth above, King has done nothing to purposefully avail himself of the benefits of New York. King, like numerous others, simply created a Web site and permitted anyone who could find it to access it. Creating a site, like placing a product into the stream of commerce, may be felt nationwide - or even worldwide - but, without more, it is not an act purposefully directed toward the forum state. See Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 112, 107 S. Ct. 1026, 1032, 94 L. Ed. 2d 92 (1992) (plurality opinion). There are no allegations that King actively sought to encourage New Yorkers to access his site, or that he conducted any business - let alone a continuous and systematic part of its business - in New York. There is in fact no suggestion that King has any presence of any kind in New York other than the Web site that can be accessed worldwide. Bensusan's argument that King should have foreseen that users could access the site in New York and be confused as to the relationship of the two Blue Note clubs is insufficient to satisfy due process. See [Fox v. Boucher], 794 F.2d at 37; Beckett v. Prudential Ins. Co. of Am., 893 F. Supp. 234, 239 (S.D.N.Y. 1995). Although CompuServe Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996), a recent decision of the United States Court of Appeals for the Sixth Circuit, reached a different result, it was based on vastly different facts. In that case, the Sixth Circuit found personal jurisdiction proper in Ohio over an Internet user from Texas who subscribed to a network service based in Ohio. The user, however, specifically targeted Ohio by subscribing to the service and entering into a separate agreement with the service to sell his software over the Internet. Furthermore, he advertised his software through the service and repeatedly sent his software to the service in Ohio. Id. at 1264-65. This led that court to conclude that the Internet user "reached out" from Texas to Ohio and "originated and maintained" contacts with Ohio. Id. at 1266. This action, on the other hand, contains no allegations that King in any way directed any contact to, or had any contact with, New York or intended to avail itself of any of New York's benefits. Accordingly, the exercise of personal jurisdiction over King in this case would violate the protections of the Due Process Clause. Id. at 301 (footnote omitted). The court noted that "[i]n CompuServe, the Sixth Circuit explicitly wrote that it was not addressing the issue of whether the Internet user 'would be subject to suit in any state where his software was purchased or used . . . .'" Id. at 301 n.3 (quoting CompuServe, 89 F.3d at 1268); see Paul M. Barrett, Suit Involving Internet Site Is Dismissed, Wall St. J., Sept. 10, 1996, at B10 (discussing the Bensusan decision).
318. See CompuServe, Inc. v. Patterson, 89 F.3d 1257, 1268 (6th Cir. 1996) ("Someone . . . who employs a computer network service like CompuServe to market a product can reasonably expect disputes with that service to yield lawsuits in the service's home state."); Inset Systems, Inc. v. Instruction Set, Inc., 937 F. Supp. 161, 164 (D. Conn. 1996) ("The court concludes that advertising via the Internet is solicitation of a sufficient repetitive nature to satisfy . . . the Connecticut long-arm statute . . . thereby conferring Connecticut's long-arm jurisdiction . . . ."); Maritz, Inc. v. CyberGold, Inc., 947 F. Supp. 1328, 1334 (E.D. Mo. 1996) ("[T]he Court concludes that defendant CyberGold, through its internet activities, has purposefully availed itself of the privilege of doing business with this forum such that it could reasonably anticipate the possibility of being ha[u]led into court here."); Susan J. Kohlmann & Kerry A. Brennan, Internet: Electronic Contacts May Lead to Court, Metropolitan Corp. Couns., Oct. 1996, at 8, 8 (reviewing CompuServe decision); David E. Rovella, Internet Use Can Confer Jurisdiction, Nat'l L.J., Aug. 12, 1996, at B1 (same). But see Bensusan Restaurant Corp. v. King, 937 F. Supp. 295 (S.D.N.Y. 1996). In finding that the establishment of a Web site did not confer jurisdiction, a New York district court stated: As set forth above, King has done nothing to purposefully avail himself of the benefits of New York. King, like numerous others, simply created a Web site and permitted anyone who could find it to access it. Creating a site, like placing a product into the stream of commerce, may be felt nationwide - or even worldwide - but, without more, it is not an act purposefully directed toward the forum state. See Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 112, 107 S. Ct. 1026, 1032, 94 L. Ed. 2d 92 (1992) (plurality opinion). There are no allegations that King actively sought to encourage New Yorkers to access his site, or that he conducted any business - let alone a continuous and systematic part of its business - in New York. There is in fact no suggestion that King has any presence of any kind in New York other than the Web site that can be accessed worldwide. Bensusan's argument that King should have foreseen that users could access the site in New York and be confused as to the relationship of the two Blue Note clubs is insufficient to satisfy due process. See [Fox v. Boucher], 794 F.2d at 37; Beckett v. Prudential Ins. Co. of Am., 893 F. Supp. 234, 239 (S.D.N.Y. 1995). Although CompuServe Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996), a recent decision of the United States Court of Appeals for the Sixth Circuit, reached a different result, it was based on vastly different facts. In that case, the Sixth Circuit found personal jurisdiction proper in Ohio over an Internet user from Texas who subscribed to a network service based in Ohio. The user, however, specifically targeted Ohio by subscribing to the service and entering into a separate agreement with the service to sell his software over the Internet. Furthermore, he advertised his software through the service and repeatedly sent his software to the service in Ohio. Id. at 1264-65. This led that court to conclude that the Internet user "reached out" from Texas to Ohio and "originated and maintained" contacts with Ohio. Id. at 1266. This action, on the other hand, contains no allegations that King in any way directed any contact to, or had any contact with, New York or intended to avail itself of any of New York's benefits. Accordingly, the exercise of personal jurisdiction over King in this case would violate the protections of the Due Process Clause. Id. at 301 (footnote omitted). The court noted that "[i]n CompuServe, the Sixth Circuit explicitly wrote that it was not addressing the issue of whether the Internet user 'would be subject to suit in any state where his software was purchased or used . . . .'" Id. at 301 n.3 (quoting CompuServe, 89 F.3d at 1268); see Paul M. Barrett, Suit Involving Internet Site Is Dismissed, Wall St. J., Sept. 10, 1996, at B10 (discussing the Bensusan decision).
319. Foreign Relations Restatement, supra note 270, § 421(2)(h)-(j). See generally Andreas F. Lowenfeld, International Litigation and the Quest for Reasonableness 82 (1994) [hereinafter Lowenfeld, The Quest for Reasonableness] ("If I rent a car here in The Hague and run down a pedestrian crossing the Mauritskade, there can be no doubt that the court in The Hague will have jurisdiction in a civil claim for damages against me arising out of the accident, even if I am long back in New York . . . ."); Linda J. Silberman, Judicial Jurisdiction in the Conflict of Laws Course: Adding a Comparative Dimension, 28 Vand. J. Transnat'l L. 389, 396-400 (1995) (providing two examples of foreign countries' grounds for establishing "specific jurisdiction": England's Order 11 of the Rules of the Supreme Court, and the European Community's Brussels Convention on Jurisdiction and the Enforcement of Judgments).
320. See Lowenfeld, International Arbitration, supra note 270, at 46.
321. The lack of any governing treaties is discussed infra part IV.E.
322. See generally Russell J. Weintraub, Commentary on the Conflict of Laws (2d ed. 1980).
323. Foreign Relations Restatement, supra note 270, § 402.
324. See William L. Prosser, Interstate Publication, 51 Mich. L. Rev. 959, 971 (1953) ("The realm of the conflict of laws is a dismal swamp, filled with quaking quagmires, and inhabited by learned but eccentric professors who theorize about mysterious matters in a strange and incomprehensible jargon. The ordinary court, or lawyer, is quite lost when engulfed and entangled in it."), quoted in Weintraub, supra note 277, at 3.
325. See Ebke, supra note 144, at 698 ("[T]he choice of law principles in cases of auditors' liability are rather blurred and far from uniform.").
326. See Foreign Relations Restatement, supra note 270, § 402; see also id. § 402 cmt. d (stating that "[j]urisdiction with respect to activity outside the state, but having or intended to have substantial effect within the state's territory," may be sufficient to give a foreign nation jurisdiction to prescribe).
327. See Restatement (Second) of Conflict of Laws § 148 (1971); see also Rhode Island Hosp. Trust Nat'l Bank v. Swartz, 455 F.2d 847, 851 (4th Cir. 1972) (finding that where "reliance on [statements] and subsequent injury took place" in Rhode Island, "[u]nder such circumstances . . . the law of Rhode Island governs" (citation omitted)).
328. See Foreign Relations Restatement, supra note 270, § 402 cmt. d ("The effects principle is not controversial with respect to acts such as shooting or even sending libelous publications across a boundary."); cf. United States v. Aluminum Co., 148 F.2d 416, 444 (2d Cir. 1945) ("Both agreements would clearly have been unlawful, had they been made within the United States; . . . both were unlawful, though made abroad, if they were intended to affect imports and did affect them."). See generally Lowenfeld, International Arbitration, supra note 270, at 46 (discussing the concept of "jurisdiction to prescribe," which "explore[s] the extent and limits of the reach of a nation's laws").
329. 15 U.S.C. § 77a-ll (1994).
330. Id. § 78a-ll.
331. 17 C.F.R. § 240.10b-5 (1994).
332. See, e.g., Schemmer v. Property Resources Ltd., [1975] Ch. 273. In Schemmer, the court stated: The 1934 Act is . . . a penal law of the United States of America and, as such, unenforceable in [English] courts. . . . [I]t was passed for public ends . . . enacted not merely in the interest of the nation as an abstract or political entity, but to protect a class of the public. . . . [I]n the absence of specific legislation founded on treaties, preventive criminal justice is no more a proper subject of international enforcement than retributive criminal justice. Id. See generally Lowenfeld, The Quest for Reasonableness, supra note 274, at 30 ("States don't apply the public law of other States.").
333. See Lowenfeld, The Quest for Reasonableness, supra note 274, at 171-72.
334. Lowenfeld, International Arbitration, supra note 270, at 46.
335. See, e.g., Ebke, supra note 144, at 705 (in the context of German law).
336. See The Toronto Stock Exchange, Toward Improved Disclosure: A Search for Balance in Corporate Disclosure 45 (Dec. 1995) [hereinafter Toronto Exchange Report].
337. See id. at 44-50.
338. Id. at 45.
339. Id. at iv.
340. Id. at 45.
341. See Ebke, supra note 144, at 687, 705 (England and Germany, respectively); Bernhard Grossfeld & Werner Ebke, Controlling the Modern Corporation: A Comparative View of Corporate Power in the United States and Europe, 26 Am. J. Comp. L. 397, 419 (1978); Hans Smit, The Explosion in International Litigation, Metropolitan Corp. Couns., Oct. 1996, at 59, 59 ("[C]ontingency fee arrangements . . . are largely forbidden abroad.").
342. See Ebke, supra note 144, at 687, 705 (England and Germany, respectively); Bernhard Grossfeld & Werner Ebke, Controlling the Modern Corporation: A Comparative View of Corporate Power in the United States and Europe, 26 Am. J. Comp. L. 397, 419 (1978); Hans Smit, The Explosion in International Litigation, Metropolitan Corp. Couns., Oct. 1996, at 59, 59 ("[C]ontingency fee arrangements . . . are largely forbidden abroad.").
343. See Eugene J. Silva, Practical Views on Stemming the Tide of Foreign Plaintiffs and Concluding Mid-Atlantic Settlements, 28 Tex. Int'l L.J. 479, 480 n.4 (1993) (citing examples); see also Rudolph B. Schlesinger et al., Comparative Law: Cases-Text-Materials 352-54 (5th ed. 1988).
344. See Smit, supra note 296, at 59.
345. See Ebke, supra note 144, at 687, 704-05.
346. See Toronto Exchange Report, supra note 291, at 44-46.
347. See Smit, supra note 296, at 59 ("[A] foreign forum may be selected because it has no jury in civil cases . . . .").
348. Cf. Ebke, supra note 144, at 688-89.
349. See Smit, supra note 296, at 59.
350. See generally Hans Stoll, Consequences of Liability: Remedies, in 11 International Encyclopedia of Comparative Law, Torts §§ 8-107 to -116 (André Tunc ed., 1983) (comparing the role of "exemplary damages" in English and American law, as well as in other countries' legal systems). In discussing punitive damages under English law, for example, one commentator has observed: In ENGLAND exemplary damages have never played the same role as in the UNITED STATES. Recently the House of Lords sharply curtailed the whole institution in the case of Rookes v. Barnard . . . . In this case Lord Devlin observed at the outset that the House of Lords had never approved an award of exemplary damages. However, in Lord Devlin's view, this legal institution could not be completely abandoned in light of the fact that it had been theretofore employed by the courts and recognized in various statutes. Yet he emphasized that, except for the cases governed by statute, exemplary damages should be awarded only in two special situations. The first involves arbitrary excess of state authority. Depending upon the circumstances, it may be proper to give the particular state official a reminder in the form of exemplary damages. The second situation concerns a wrongdoer's willingness to assume the risk of liability in view of the prospect of benefits exceeding the loss. In this case the award should be assessed so as to foil the tortfeasor's calculation. Finally, the severe remedy of exemplary damages, in any event, should be invoked only if the award of compensatory damages does not adequately sanction the tortfeasor's misdeed. It appears that these limitations imposed by ENGLISH law reduce exemplary damages to virtual insignificance. Id. § 8-112 (citation omitted) (footnote omitted); see also Lowenfeld, The Quest for Reasonableness, supra note 274, at 187-89 (comparing the American tradition of awarding civil punitive damages to German law's refusal to do so).
351. See G.D.S. v. E.S., 118 BGHZ 312, 312-13 (Bundesgerichshof 1X Civ. Sen. 4 June 1992) (translation: "A United States judgment of punitive damages in a not-inconsiderable amount that is granted along with an award of damages for material and immaterial injury cannot, in Germany in the regular course, be declared enforceable."); see also Lowenfeld, The Quest for Reasonableness, supra note 274, at 187 (discussing the G.D.S. decision and its merits in light of other alternatives); Harald Koch & Joachim Zekoll, Zweimal amerikanische 'punitive damages' vor deutschen Gerichten, IPRax, No. 5, 288 (1993) (discussing the treatment of American courts' awards of punitive damages in German enforcement actions).
352. Toronto Exchange Report, supra note 291, at 44. See generally Ebke, supra note 144, at 687-89, 704-05 (comparing accountant liability in the United States to that in Germany).
353. See Toronto Exchange Report, supra note 291, at 21-22.
354. Id. at iv.
355. See 1972 O.J. (C 131) 49; 1 Common Mkt. Rep. (CCH) ¶ 1401 (1983).
356. See 1983 O.J. (C 240) 2, discussed in Ebke, supra note 144, at 666-67. See generally Werner F. Ebke & Dirk Struckmeier, The Civil Liability of Corporate Auditors: An International Perspective 25-26 (1994) (describing the failed attempts to unify the laws regarding accountant liability in the European Union).
357. Ebke, supra note 144, at 665-66.
358. Ebke & Struckmeier, supra note 310, at 27-29, 39.
359. A German scholar has observed: The question of accountants' liability to third parties is now a favorite subject in the law of both common law and civil law countries. The United States has perhaps the most advanced body of law in this area. The development of the law in other English-speaking jurisdictions, such as England, Canada, Australia, New Zealand, and South Africa, has been, however, by no means less vital. In Japan, too, there is considerable discussion of the subject. In Western Europe, the law of the independent auditor's liability to third parties is currently in an evolving and experimental phase. The law in some countries, such as the Federal Republic of Germany, allows recovery only if the auditor acted with the intent to mislead the third person. However, the law of other countries, such as France, Italy, the Netherlands, and Switzerland, is, at least as far as substantive rules are concerned, more favorable to the injured third party, although the number of cases that have been tried under these laws is very small. Ebke, supra note 144, at 665-66 (footnotes omitted).
360. See Ebke & Struckmeier, supra note 310, at 29-31; Ebke, supra note 144, at 666. But see Caparo Indus. PLC v. Dickman, [1990] 2 W.L.R. 358, 1 All E.R. 568 (appeal taken from Q.B.) (refusing to impose liability on accountants unless plaintiff could prove accountants knew of the plaintiff and its reliance for a specific purpose).
361. See Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931).
362. Torts Restatement, supra note 34, § 552(1).
363. These different rules regarding who may sue are discussed supra part II.C.
364. See Touche Ross & Co. v. Commercial Union Ins. Co., 514 So. 2d 315, 318-24 (Miss. 1987); Citizens State Bank v. Timm, Schmidt & Co., 335 N.W.2d 361, 366 (Wis. 1983).
365. See discussion supra parts I.B-C.
366. See, e.g., First Equity Corp. v. Standard & Poor's Corp., 670 F. Supp. 115, 117-18 (S.D.N.Y. 1987), aff'd, 869 F.2d 175 (2d Cir. 1989) (discussed supra part I.C).
367. Carsten Thomas Ebenroth & Thomas Daum, Die rechtlichen Aspekte des Ratings von Emittenten und Emissionen, 5 Wertpapier-Mitteilungen (Oct. 1992).
368. See First Equity Corp. v. Standard & Poor's, 869 F.2d 175, 178 (2d Cir. 1989) ("[T]he First Amendment require[s] appellants to demonstrate that [Standard & Poor's] had published the allegedly false summary [with malice] . . . ."). See generally discussion supra part I.E. The SEC, in contrast, would probably feel more at home in Germany. The recent tidal wave of investor information onto the Internet may be causing the SEC to take a harder look at those whose media status has historically resulted in First Amendment protection. See Taylor, supra note 20, at C14 ("[T]he SEC has filed many media-related cases lately, including at least one newsletter case, a radio case and five involving the Internet. . . .").
369. See Ebke & Struckmeier, supra note 310, at 26 ("The law of the member states of the European Union concerning the independent auditors' liability to third parties is still in an evolving and experimental phase.").
370. See Henderson v. Merrett Syndicates Ltd., 1992 Folio 1496 (Oct. 31, 1995). Compare Caparo Indus. PLC v. Dickman, [1990] 2 W.L.R. 358, 1 All E.R. 568 (appeal taken from Q.B.) (judgment by Lord Jauncey of Tullichettle) ("[F]oreseeability of likely harm is not in itself a sufficient test of liability in negligence."); James McNaughton Papers Group Ltd. v. Hicks Anderson & Co., [1991] 2 W.L.R. 641, 1 All E.R. 134 (C.A.) (following Caparo reasoning) and Morgan Crucible Co. PLC v. Hill Samuel Bank Ltd., [1991] 2 W.L.R. 655, 1 All E.R. 148 (C.A. 1990) (same). See generally Ebke & Struckmeier, supra note 310, at 17-19 (discussing, prior to Henderson, the Caparo ruling and its implications).
371. See Henderson, 1992 Folio 1496.
372. Ebke & Struckmeier, supra note 310, at 31.
373. 13 U.L.A. 265 (1986); see also N.Y. Civ. Prac. L. & R. §§ 5301-5309 (McKinney 1995) (sections spanning Article 53 of New York's Civil Practice Law and Rules, entitled "Recognition of Foreign Country Money Judgments"). See generally 6 Jack B. Weinstein et al., New York Civil Practice: CPLR 53-1 to -34 (1996) (discussing N.Y. Civ. Prac. L. & R. Article 53).
374. See generally Briane N. Mitchell, Foreign Judgments, Litig., Summer 1996, at 43 (discussing the uniform act along with related issues of jurisdiction and public policy defenses).
375. N.Y. Civ. Prac. L. & R. § 5303 (McKinney 1995).
376. See Weinstein et al., supra note 327, at 53-17 to -22 (discussing New York's application of this requirement); see also Mitchell, supra note 328, at 44-45 (discussing the high standard required to invalidate a foreign judgment on the basis of proceedings that might implicate due process concerns).
377. N.Y. Civ. Prac. L. & R. § 5304 (McKinney 1995). See generally Mitchell, supra note 328, at 44-45 (providing examples where due process implications factored into the decision of whether to disregard a foreign judgment, and concluding that only in rare instances will such arguments prevail).
378. 585 N.Y.S.2d 661 (N.Y. Sup. Ct. 1992).
379. Id.
380. Id. at 665.
381. Id. at 662.
382. Id.; see N.Y. Civ. Prac. L. & R. § 5304 (McKinney 1995).
383. See Daniel v. Dow Jones & Co., 520 N.Y.S.2d 334 (Civ. Ct. 1987) (discussed supra part I.E).
384. Jeremy Maltby, Juggling Comity and Self-Government: The Enforcement of Foreign Libel Judgments in U.S. Courts, 94 Colum. L. Rev. 1978, 1981-82 (1994).
385. See generally Charles Platto & William G. Horton, Enforcement of Foreign Judgments Worldwide (2d ed. 1993) (setting forth the requirements for enforcing a foreign judgment in more than 35 jurisdictions around the world).
386. See generally Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 615 (1985) ("The mere appearance of an antitrust dispute does not alone warrant invalidation of the selected forum on the undemonstrated assumption that the arbitration clause is tainted."); Scherk v. Alberto-Culver Co., 417 U.S. 506, 519-20 (1974) ("For all these reasons we hold that the agreement of the parties in this case to arbitrate any dispute arising out of their international commercial transaction is to be respected and enforced by the federal courts in accord with the explicit provisions of the Arbitration Act."); Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) ("Thus, in the light of present-day commercial realities and expanding international trade we conclude that the forum clause should control absent a strong showing that it should be set aside."); Lowenfeld, International Arbitration, supra note 270, at 281-367.
387. Most international commercial arbitrations . . . are conducted under the auspices of institutions that are either devoted entirely to arbitration and related means of dispute settlement, such as the London Court of International Arbitration (LCIA) and the American Arbitration Association (AAA), or have arbitration as one of their important functions, such as the International Chamber of Commerce (ICC) or the Stockholm Chamber of Commerce. Lowenfeld, International Arbitration, supra note 270, at 333.
388. Id. at 282.
389. Id. at 332. An important qualification is that a country may have "the right to refuse enforcement of an award where the 'recognition or enforcement of the award would be contrary to the public policy of that country.'" Mitsubishi Motors Corp., 473 U.S. at 638 (quoting the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(2)(b), 21 U.S.T. 2517, 2520).
390. Lowenfeld, International Arbitration, supra note 270, at 343-44; see also David W. Rivkin, Avoiding the Uncertainty of Foreign Courts, CCM Am. Law. Corp. Couns. Mag., Aug. 1996, at 52A, 53A ("Arbitration awards are final and binding, and, under the New York Convention, it is exceedingly difficult to set aside an arbitration award.").
391. Lowenfeld, International Arbitration, supra note 270, at 338.
392. Id. at 281.
393. Id.
394. Id.; see, e.g., Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) ("[W]e conclude that the forum clause should control absent a strong showing that it should be set aside."); Unterweser Reederei G.M.B.H. v. Zapata Off-Shore Co., [1968] 2 Lloyd's Rep. 158 (C.A.) ("It is always open to parties to stipulate . . . that a particular Court shall have jurisdiction over any dispute arising out of their contract."). The level of certainty normally associated with choice-of-law and choice-of-forum clauses in international agreements was recently thrown into some level of chaos due to a Virginia district court's decision, in the context of a proposed settlement involving Lloyd's of London, that an agreement providing for British courts and British law was unenforceable. Allen v. Lloyd's of London, No. CIV. A. 3:96CV522, 1996 WL 490177, at *22-26 (E.D. Va.), rev'd, 94 F.3d 923 (4th Cir. 1996). In a brief order, the Fourth Circuit reversed. The circuit court stated: "[T]he court's decision rests on its determination, to be articulated in a later opinion, that the contractual provisions among the parties selecting the law of and a forum in the United Kingdom should be enforced . . . ." Allen v. Lloyd's of London, 94 F.3d 923, 926 (4th Cir. 1996). The Fourth Circuit remanded the case to the district court with instructions to dismiss. Id. See generally Rachel Witmer, Reversal of Injunction Removes Threat to Lloyd's Reorganization, Lloyd's Says, 28 Sec. Reg. & L. Rep. (BNA) 1060-61 (Aug. 30, 1996) (discussing the Allen decision); John J. Fialka, SEC Claims Parts of Lloyd's Pact Violate Securities Laws of the U.S., Wall St. J., Aug. 13, 1996, at B7 (describing the Allen controversy generally, including the dispute over the exclusive jurisdiction provision). Subsequently, a fractured three-judge panel in the Ninth Circuit, in a different case involving Lloyd's, held that choice-of-law and choice-of-forum provisions would not be given effect insofar as they would operate as an improper waiver of the protection of the United States securities laws. The court stated: "The Securities Acts' antiwaiver provisions themselves render the Choice Clauses void, making it unnecessary to examine whether enforcement of the clauses would be reasonable . . . ." Richards v. Lloyd's of London, Nos. 95-55747, 95-56467, 1997 WL 94054, at *7 (9th Cir. Mar. 6, 1997). While conceding that its holding would likely cause Lloyd's to be "more circumspect in raising capital in the United States," the court explained that it did "not believe that we should turn the clock back to 1929 or introduce caveat emptor as the rule governing the solicitation in the United States of investments in securities by residents of the United States." Id. at *8. In a strongly-worded dissent, one member of the Ninth Circuit panel asserted "[t]he same reasoning would bring protections under our securities laws to anyone who loses his or her savings betting on chicken fights in Zamboanga." Id. at *10 (Goodwin, J., concurring and dissenting). Pointing out that the "implications of this holding on international business transactions are not likely to lubricate commerce," the dissent concluded that the majority's holding was "strange, and troubling." Id. at *11. According to one press report, Lloyd's intends to seek a rehearing before the full Ninth Circuit. See John J. Fialka, Appeals Court Rules Americans Can Sue Lloyd's of London in U.S., Wall St. J., Mar. 10, 1997, at B9.
395. Id.; see, e.g., Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) ("[W]e conclude that the forum clause should control absent a strong showing that it should be set aside."); Unterweser Reederei G.M.B.H. v. Zapata Off-Shore Co., [1968] 2 Lloyd's Rep. 158 (C.A.) ("It is always open to parties to stipulate . . . that a particular Court shall have jurisdiction over any dispute arising out of their contract."). The level of certainty normally associated with choice-of-law and choice-of-forum clauses in international agreements was recently thrown into some level of chaos due to a Virginia district court's decision, in the context of a proposed settlement involving Lloyd's of London, that an agreement providing for British courts and British law was unenforceable. Allen v. Lloyd's of London, No. CIV. A. 3:96CV522, 1996 WL 490177, at *22-26 (E.D. Va.), rev'd, 94 F.3d 923 (4th Cir. 1996). In a brief order, the Fourth Circuit reversed. The circuit court stated: "[T]he court's decision rests on its determination, to be articulated in a later opinion, that the contractual provisions among the parties selecting the law of and a forum in the United Kingdom should be enforced . . . ." Allen v. Lloyd's of London, 94 F.3d 923, 926 (4th Cir. 1996). The Fourth Circuit remanded the case to the district court with instructions to dismiss. Id. See generally Rachel Witmer, Reversal of Injunction Removes Threat to Lloyd's Reorganization, Lloyd's Says, 28 Sec. Reg. & L. Rep. (BNA) 1060-61 (Aug. 30, 1996) (discussing the Allen decision); John J. Fialka, SEC Claims Parts of Lloyd's Pact Violate Securities Laws of the U.S., Wall St. J., Aug. 13, 1996, at B7 (describing the Allen controversy generally, including the dispute over the exclusive jurisdiction provision). Subsequently, a fractured three-judge panel in the Ninth Circuit, in a different case involving Lloyd's, held that choice-of-law and choice-of-forum provisions would not be given effect insofar as they would operate as an improper waiver of the protection of the United States securities laws. The court stated: "The Securities Acts' antiwaiver provisions themselves render the Choice Clauses void, making it unnecessary to examine whether enforcement of the clauses would be reasonable . . . ." Richards v. Lloyd's of London, Nos. 95-55747, 95-56467, 1997 WL 94054, at *7 (9th Cir. Mar. 6, 1997). While conceding that its holding would likely cause Lloyd's to be "more circumspect in raising capital in the United States," the court explained that it did "not believe that we should turn the clock back to 1929 or introduce caveat emptor as the rule governing the solicitation in the United States of investments in securities by residents of the United States." Id. at *8. In a strongly-worded dissent, one member of the Ninth Circuit panel asserted "[t]he same reasoning would bring protections under our securities laws to anyone who loses his or her savings betting on chicken fights in Zamboanga." Id. at *10 (Goodwin, J., concurring and dissenting). Pointing out that the "implications of this holding on international business transactions are not likely to lubricate commerce," the dissent concluded that the majority's holding was "strange, and troubling." Id. at *11. According to one press report, Lloyd's intends to seek a rehearing before the full Ninth Circuit. See John J. Fialka, Appeals Court Rules Americans Can Sue Lloyd's of London in U.S., Wall St. J., Mar. 10, 1997, at B9.
396. Id.; see, e.g., Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) ("[W]e conclude that the forum clause should control absent a strong showing that it should be set aside."); Unterweser Reederei G.M.B.H. v. Zapata Off-Shore Co., [1968] 2 Lloyd's Rep. 158 (C.A.) ("It is always open to parties to stipulate . . . that a particular Court shall have jurisdiction over any dispute arising out of their contract."). The level of certainty normally associated with choice-of-law and choice-of-forum clauses in international agreements was recently thrown into some level of chaos due to a Virginia district court's decision, in the context of a proposed settlement involving Lloyd's of London, that an agreement providing for British courts and British law was unenforceable. Allen v. Lloyd's of London, No. CIV. A. 3:96CV522, 1996 WL 490177, at *22-26 (E.D. Va.), rev'd, 94 F.3d 923 (4th Cir. 1996). In a brief order, the Fourth Circuit reversed. The circuit court stated: "[T]he court's decision rests on its determination, to be articulated in a later opinion, that the contractual provisions among the parties selecting the law of and a forum in the United Kingdom should be enforced . . . ." Allen v. Lloyd's of London, 94 F.3d 923, 926 (4th Cir. 1996). The Fourth Circuit remanded the case to the district court with instructions to dismiss. Id. See generally Rachel Witmer, Reversal of Injunction Removes Threat to Lloyd's Reorganization, Lloyd's Says, 28 Sec. Reg. & L. Rep. (BNA) 1060-61 (Aug. 30, 1996) (discussing the Allen decision); John J. Fialka, SEC Claims Parts of Lloyd's Pact Violate Securities Laws of the U.S., Wall St. J., Aug. 13, 1996, at B7 (describing the Allen controversy generally, including the dispute over the exclusive jurisdiction provision). Subsequently, a fractured three-judge panel in the Ninth Circuit, in a different case involving Lloyd's, held that choice-of-law and choice-of-forum provisions would not be given effect insofar as they would operate as an improper waiver of the protection of the United States securities laws. The court stated: "The Securities Acts' antiwaiver provisions themselves render the Choice Clauses void, making it unnecessary to examine whether enforcement of the clauses would be reasonable . . . ." Richards v. Lloyd's of London, Nos. 95-55747, 95-56467, 1997 WL 94054, at *7 (9th Cir. Mar. 6, 1997). While conceding that its holding would likely cause Lloyd's to be "more circumspect in raising capital in the United States," the court explained that it did "not believe that we should turn the clock back to 1929 or introduce caveat emptor as the rule governing the solicitation in the United States of investments in securities by residents of the United States." Id. at *8. In a strongly-worded dissent, one member of the Ninth Circuit panel asserted "[t]he same reasoning would bring protections under our securities laws to anyone who loses his or her savings betting on chicken fights in Zamboanga." Id. at *10 (Goodwin, J., concurring and dissenting). Pointing out that the "implications of this holding on international business transactions are not likely to lubricate commerce," the dissent concluded that the majority's holding was "strange, and troubling." Id. at *11. According to one press report, Lloyd's intends to seek a rehearing before the full Ninth Circuit. See John J. Fialka, Appeals Court Rules Americans Can Sue Lloyd's of London in U.S., Wall St. J., Mar. 10, 1997, at B9.
397. See Lowenfeld, International Arbitration, supra note 270, at 281-82.
398. See generally Domke on Commercial Arbitration, § 44:01 (Gabriel M. Wilner ed., 3d ed. 1995 & Supp. 1996) (discussing arbitration agreements for international transactions, noting that "[o]ther matters that, depending on the circumstances, might usefully be indicated in the arbitration clause include . . . possible acceptable remedies such as liquidated damages"). But cf. St. Luke's Hosp. v. SMC Computer Sys., Inc., Nos. 92-1205, 92-1206, 1993 WL 188457, at *10 (6th Cir. June 1, 1993) ("There is no doubt that an arbitrator, if he so decides, may indeed refuse to enforce such a damage limitation clause on the ground of unconscionability or on other grounds . . . .").
399. As one scholar on international litigation has said: For a variety of reasons, an American forum has proven to be especially attractive to foreign litigants. Among the factors that have attracted foreign litigants are contingency fee arrangements that are largely forbidden abroad, strict liability rules, the ability to obtain punitive damages which are generally not provided for abroad, the possibility of having a jury, broad pre-trial discovery, and the rule that unlike the rule prevailing abroad, a loser need not pay the attorney's fees of its opponent. Conversely, a foreign forum may be selected because it has no jury in civil cases, there is no pre-pre-trial discovery, and the losing party must pay its opponent's attorney's fees. Smit, supra note 296, at 59.