Rules, Principles, and the Accounting Crisis in the United States

European Business Organization Law Review

Volumn 5, Issue 1, 2004, Pages 7-36

  Bratton, William W ^a  

^a GEORGETOWN UNIVERSITY LAW CENTER   (United States)

Author keywords

accounting and auditing general; corporation and securities law; illegal behaviour and the enforcement of law

Indexed keywords

EID: 33750624881     PISSN: 15667529     EISSN: 17416205     Source Type: Journal    
DOI: 10.1017/S1566752904000072     Document Type: Review

References (58)

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3. A. Levitt, 'Renewing the Covenant With Investors', Speech given at the New York University Center for Law and Business (10 May 2000) (available at 〈www.sec.gov/news/speech/spch〉 (last visited 25 January 2004)).
4. In re Cendant Corp. Sec. Litig., 109 F. Supp. 2d 235 (D.N.J. 2000).
5. C. Deutsch and R. Abelson, 'Xerox Facing New Pressures Over Auditing', N.Y. Times (9 February 2001) p. C1;
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8. J. Kahn, 'Accounting in Wonderland: Jeremy Kahn Goes Down the Rabbit Hole with G. E.'s Books', Fortune (19 March 2001) p. 37;
9. R.E. Silverman and K. Brown, 'Five Companies: How They Get Their Numbers', Wall St. J. (23 January 2002) pp. C1, C16.
10. J. Berardino, 'Enron: A Wake-Up Call', Wall St. J. (4 December 2001) p. A18.
11. J. Burns and M. Schroeder, 'Accounting Firms Ask SEC for Post-Enron Guide', Wall St. J. (7 January 2002) p. A16.
12. S. Liesman, 'SEC Accounting Cop's Warning: Playing By Rules May Not Ward Off Fraud Issues', Wall St. J. (12 February 2002) p. C1;
13. 'Leaders: The Lessons from Enron', Economist (9 February 2002) pp. 9-10.
14. H.L. Pitt, Testimony Concerning The Corporate and Auditing Accountability, Responsibility, and Transparence Act, Committee on Financial Services, House of Representatives p. 5. Available on the SEC website at 〈http: www.sec.gov/news/testimony/032002tshlp.htm〉 (last visited 26 January 2004).
15. Effective in 2005, listed companies in the EC will be required to report under IFRS.
16. Office of the Chief Accountant, Office of Economic Analysis, SEC, Study Pursuant to Section 108(d) of the Sarbanes Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accouting System (July 2003), available at 〈http://www.sec.gov/news/studies/principlebasedstand.htm〉 [hereafter cited as SEC Report] (last visited 26 January 2004).
17. M.A. Eisenberg, 'Legal Models of Management Structure in the Modern Corporation: Officers, Directors and Accountants', 63 Cal. L. Rev. (1975) p. 375.
18. The effects of industry concentration are a matter of debate. For the view that intense price competition among audit firms has contributed to low audit quality, see text accompanying n. 65 infra.
19. K. Schipper, 'Principles-Based Accounting Standards', 17 Accounting Horizons (2003) p. 61.
20. D.R. Herwitz and M.J. Barrett, Accounting for Lawyers: Materials, 3rd edn. (New York, Foundation 2002) pp. 67-70.
21. Financial Accounting Standards Board, Preliminary Views on Major Issues Related to Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value (1999);
22. S.Siegel, 'The Coming Revolution in Accounting: The Emergence of Fair Value as the Fundamental Principle of GAAP', 42 Wayne L. Rev. (1996) p. 1839.
23. F. Partnoy, Testimony Before the Senate Committee on Governmental Affairs (SSRN working paper [[A Revisionist View of Enron and the Sudden Death of "May", available at 〈http://papers.ssrn.com/sol3/papers.cfm?abstract-id=417261⟩ (last visited 26 January 2004)]].
24. FASB, Principles-Based Approach to U.S. Standard Setting, No. 1125-001 (21 October 2002) pp. 5-7 [hereafter cited as FASB, Principles Approach].
25. FASB, Statement of Financial Accounting Concepts No. 1, Objective of Financial Reporting by Business Enterprises (November 1978).
26. FASB, Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information (1980).
27. C.A. Frost and K.P. Ramin, 'International Accounting Differences', 181 J. Acct. (1996) p. 62.
28. L.W. Cunningham, 'The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Just Might Work)', 35 Conn. L. Rev. (2003) pp. 915, 975-76.
29. FASB, Statement of Financial Accounting Standards No. 141, Business Combinations (June 2001) (ending pooling treatment for mergers).
30. M.W. Nelson, J.A. Elliott, and R.L. Tarpley, 'Where Do Companies Attempt Earnings Management, and When Do Auditors Prevent It?' This working paper is available at 〈http://papers.ssrn.com/sol3/papers.cfm?abstract-id=248129〉 (last visited 26 January 2004) (showing that auditors pass on these treatments as GAAP compliant).
31. FASB, Consolidated Financial Statements: Purpose and Policy (proposed 23 February 1999).
32. FASB, Consolidation of Certain Special Purpose Entities - an Interpretation of ARB No. 51 (proposed 1 July 2002).
33. FASB, Interpretation No. 45, Guarantor's Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (25 November 2002).
34. K. Eichenwald, 'A Higher Standard for Corporate Advice', N.Y. Times (23 December 2002) pp. A1, A20
35. G.R. Simpson, 'Deals That Took Enron Under Had Many Supporters', Wall St. J. (10 April 2002) pp. A1, A13
36. S. Burkholder, 'Accounting: Outlook 2002', 34 Sec. Reg. & L. Rep. (2002) pp. 214, 215.
37. FASB, Summary of Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (September 2000).
38. W.C. Powers, Jr., et al., 'Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.' available at 2002 WL 198018 (2002) p. 98.
39. FASB, Statement No. 57, Related Party Disclosures, paras. 2, 24(f) (March 1982).
40. FASB , Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (March 1975) para. 5:
41. FASB, Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others (March 1981);
42. Ernst & Young, Financial Reporting Developments; Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - FASB Statement 140 (May2001) p. 29.
43. 'Administrative Policy on Financial Statements, Accounting Series Rel. No. 4', 11 Fed. Reg. 10,913 (S.E.C. 1938)
44. 'Codification of Financial Reporting Policies, s. 101', reprinted in 7 CCH Fed. Sec. L. Rep. para. 72,921 (18 May 1988).
45. The GAAP authorities are EITF Topic D-14, 'Transactions involving Special Purpose Entities', EITF 90-15, 'Impact of Nonsubstantive Lessors, Residual Value Guarantees and Other Provisions in Leasing Transactions', and EITF 96-21, 'Implementation Issues in Accounting for Leasing Transactions involving Special Purpose Entities'.
46. D.J. Ragone III, 'Current Accounting Projects', 2000 Conference on SEC Developments (4 December 2000).
47. T.F. Malloy, 'Regulation and the Compliance Norm', UCLA Law School working paper, 2003 (on file with author).
48. A. Levitt, Take On the Street: What Wall Street and Corporate America Don't Want You to Know, What You Can Do to Fight Back (New York: Random House 2002) pp. 106-115.
49. We must put to one side Arthur Andersen's Joe Berardino, who publicly and unsuccessfully acted out the role of the CEO trying to quell an organizational conflagration.
50. The incentive problem stems from underwriting and other rent streams flowing from the issuers of financial reports to the employers of analysts. It is not clear that the problem admits of an easy solution. Absent that corrupting rent flow, it is not clear that resources exist to support an adequate flow of critical analysis. Restating the point, reform implies a new pricing structure for the audit.
51. S. Sunder, 'Rethinking the Structure of Accounting and Auditing', Yale ICF Working Paper No. 03-17 (29 May 2003) (available at 〈http://papers.ssrn.com/sol3/papers.cfm?abstract-id=413581〉) (last visited 26 January 2004).
52. See W.W. Bratton, 'Berle and Means Reconsidered at the Century's Turn', 26 J.Corp.L. (2001) pp. 737, 746.
53. G.E. Maggs, 'Karl Llewellyn's Fading Imprint on the Jurisprudence of the Uniform Commercial Code', 71 U. Colo. L. Rev. (2000) p. 541.
54. W.W. Bratton, 'Venture Capital on the Downside: Preferred Stock and Corporate Control', 100 Mich. L. Rev. (2002) pp. 891, 933-934.
55. L. Kaplow, 'Rules versus Standards: An Economic Analysis', 42 Duke L.J. (1992) pp. 557, 570-77.
56. C.R. Sunstein, 'Problems With Rules', 83 Cal. L. Rev. (1995) pp. 953, 995.
57. Testimony of Sir David Tweedie Before the Senate Committee on Banking, Housing and Urban Affairs (14 February 2002).
58. D. Kennedy, 'Form and Substance in Private Law Adjudication', 89 Harv. L. Rev. (1976) p. 1685