PHASE II -- QUESTION 6
Coffee (2004) explains away the roles of attorneys and executive managers in financial irregularities and corporate scandals. On page 279, Coffee excuses attorneys from the role of true gatekeepers. Why? Do you agree with Coffee? Why or why not? How does SOX prescribe the future role of attorneys in the financial reporting process?
posted by Dr. Scott @ 9/20/2005 02:33:00 AM
25 comments
25 Comments:
Coffee excuses attorneys from the role of gatekeepers on Page 279. According to Coffee, an attorney is only classified as a gatekeeper if he or she pledges their professional reputation to a transaction. He make the exclusion, then, because the typical role of an attorney is that of a transaction enginneer, rather than serving as a reputational intermediary. Therefore, an attorney is not a gatekeeper as long as he or she does not offer their reputational capital and accept the risk of liability if he or she is wrong about a particular transaction.
According to section 307 of SOX, attorneys are required to report any evidence of fraud, mistrust, or a violation of the securities law of the company they are working for to the chief legal counsel or chief executive officer of that company. If those parties do not respond to the apparent violation, the attorney is then required to bring the company's violation to the audit committee or to another committee of the board directors that incompasses directors that are not employed directly/indirectly by the issuer or the board of directors.
I disagree with Coffee’s excuse of attorneys from the role of gatekeepers. According to Emily’s comment of SOX’s prescribed future role for attorneys, attorneys hold the responsibility of reporting evidence of fraud, mistrust, or violations of the securities law. Coffee explains that a gatekeeper “refers to intermediaries who provide verification and certification services to investors” (279). Therefore, an attorney’s role is exactly that of a gatekeeper, to inform investors of the financial activites occurring within a company, whether positive or negative, legal or illegal. Such services are very important to both businesses as well as their investors, keeping a balance between them and maintaining a standard of truthful financial reporting.
According to the article, gatekeepers are defined as the “intermediaries who provide verification and certification services to investors.”(Coffee, pg. 279) Coffee argues that attorneys are not the true gatekeepers. An intermediary is the one that reconciles differences between disputants (http://www.dictionary.com). Coffee believes this distinction because Coffee states that attorneys take part in gatekeepers as engineers. This kind of contradicts his argument because engineers are people who build property and take a neutral stance in the world of business. I disagree with Coffee because attorneys are the people who stand in the two positions: an advisor and an advocate. As an advisor, the attorney helps the client by stating their options and rights. On the other hand, as an advocate, the attorney fights the court presenting evidence to protect the client.
http://stats.bls.gov/oco/ocos053.htm
To state why Coffee writes in his article that attorneys are on a different path than gatekeepers, here is the analysis of his argument. Coffee states that gatekeepers provide certain services. These services such as evaluating the creditworthiness of the company and assessing the company's business, are much different than ones that attorneys or engineers provide. Engineers provide the blueprint of their object they are trying to build or make. In other words, they apply mathematics and science to solve the problem. Of course, engineers provide their part of the business by planning and constructing.
I strongly disagree with Coffee on his excusing attorneys from the role of gatekeepers. It is true that many of these attorneys are not good gatekeepers because, "they are typically paid by the party that they are supposed to monitor." However, the purpose to having an attorney there is almost like a check point where everything should match up right. Coffee wants to excuse attorneys as gatekeepers because they are generally paid off to falsify information, but I feel that instead of dismissing them for this reason, stricter laws should be made to prevent falsification. I think it would be better to fix the problem with attorneys than to just erase their responsibilities because they do not function properly. His option seems like the easy way out.
I am in full agreement with Coffee's opinion that attorneys should be excused from gatekeeping duties. I think the real question that we should be asking is, is it appropriate to have attorneys hold the position of gatekeeper? I do not think that attorneys should be considered gatekeepers. This is because when attorneys perform this role they are giving up their primary role of being loyal to their client. There is too much confusion as to what role an attorney should play because they have many duties. I think that it would be best if these duties were separated. Auditors and analysts are the primary gatekeepers and they should be the only ones who are held accountable if financial information is incorrect.
Another reason that it is a bad idea to have attorneys as gatekeepers is because they are not regulated by a public board or counsel who is there to oversee and make sure that the public's best interest is being considered. Auditors are monitored by FASB and securities analysts are regulated by NASD and the NYSE. Therefore, auditors and analysts are more likely to stay within the law and think of the public before they think of their own gain. Attorneys are only regulated by private state bar associations, which do not have a lot of influence over them. The government should provide better regulation of attorneys, otherwise they should be excused from the role of gatekeeper.
I happen to disagree with both Transam and Caroline Predreaux. I disagree with Transam when he states, "stricter laws should be made to prevent falsification", because that is precisely the point of section 307 of SOX-to give attorneys greater responsiblity to uphold the law, in essence, being less loyal to their client, and helping out the investor. On that note, I disagree with Caroline because attorneys take an oath to uphold the law, even if that means being disloyal to their client.
I agree with Coffee because on Page 300, he explains that the central role of gatekeepers is to use information, both biased and unbiased, to affect the market. Attorneys have no control over what information is released to investors. The release of information is a primary job of analysts and auditors. Therefore, as long as attorneys are only assisting corporations with transactions, they should be excused from the role of gatekeepers.
I don't quite understand how Emily is in disagreement with both me and Caroline considering we are both on different sides of the issue. I "strongly disagree" with Coffee on his excusing attorneys from being gatekeepers. If the laws stated in section 307 of Sox are not enough to prevent the falsification of information by gatekeepers, like attorneys, then more laws need to be created to tighten the loopholes which mistakes are flowing through.
Coffee discusses the changing position of the gatekeeper during the 1990s. Based upon the above discussion, the role attributed to the attorneys, gatekeeper or tansaction engineer are mixed.
How does the transaction engineer contribute to the pervasive failures of the corporate governance system? If at all? If gatekeeper, wiil attorneys also acquiesce in managerial fraud in spite of apparent reputational losses?
Let us consider the breath of knowledge of attorneys. Did they really need the law to tell them to report fraud or other corporate wrongdoings, pre-SOX?
Who wrote the Sarbanes-Oxley Act, and what is their background?
To correct or compensate certain wrongs, where do we go to settle legal issues?
The corporate governance system seems to be riddled with conflicts of interests. How should we best handle conflicts of interests?
Are there other resources that offer an opinion on the matter?
To answer what Dr. Scott said about attorneys needing the law, I don't think that laws do have huge affects on their decisions, but if we made new laws and made the punishment for these laws extremely harsh, it may deter more of them from commiting fraud. You will not ever be able to eliminate all of the attorneys from commiting fraud, but at least reducing the number by making strict laws will help the situation. Not to say that the laws now are not harsh, but maybe make them more intense in places where there seems to be continuing fraud.
Paul S. Sarbanes and Michael Oxley co-wrote the Sarbanes-Oxley Act. They held a series of hearings that resulted in the enactment of the bi-partisan bill, which was created to transform the accounting and financial industry as well as rebuild investor trust. Sarbanes is Maryland’s Democratic senior Senator. He strongly believes opportunity and fairness are fundamental principles to a decent and just society. Congressman Oxley is in the House of Representatives, a Republican from Ohio. Oxley has a strong opinion and stance in financial matters, trade, telecommunications, and energy issues.
http://www.sox-online.com/basics.html
http://sarbanes.senate.gov/pages/biography_2004.html
http://oxley.house.gov/bio.asp
I think the only way to handle conflicts of interest in corporate governance is by have strictly enforced company policies and procedures. The policies should be written by people who represent the shareholders' interest, since they obviously have the company's interest in mind. Managers and employees need to be monitored on a regular basis to make sure that they uphold the company policies. The people that enforce the policies should be paid directly by shareholders so that they are not influenced by management.
In response to Dr. Scott’s comment, if attorneys are considered gatekeepers, they will acquiesce to managerial fraud in spite of reputation losses. On page 280 of the Cornell Law Review, it states that the gatekeeper traditionally vouches for a company’s transactions and gains reputation capital by doing it well for a number of years. They would be unwise to risk that reputation capital for the gains of only one firm when they have thousands of clients. However, it is stated that experience in the 1990s has proven this logic to be wrong because gatekeepers/attorneys still engage in this fraud. It is done because they see prospective annual fees in their clients and want to continue doing business with them. On page 285 it is stated that earnings restatements increased in the 1990s causing managers to take more risks which left the gatekeepers in the middle of interests of shareholders and managers. Because of these things, attorneys/gatekeepers will continue to engage in managerial fraud.
Sources: Cornell Law Review
In response to Jordan's comment, while I think her idea is good I don't know how it would be implemented. First, how do we find someone who represents all of the shareholders? Where do they come from and how do they find out what the shareholders want? Also, I feel even if these people were to be paid by shareholders I think they could still be persuaded by the managers. Shareholders want the company to do well and if the managers adjust the numbers a little then shareholders will be happy, under a lie of course but happy none the less, and pay may increase for their representative.
In response to Dr. Scott’s question about whether the lawyers really needed the law to tell them to report fraud or other corporate wrongdoings, pre-SOX, my opinion is no. I feel that anyone who is a witness to fraud should report it immediately but I think that lawyers don’t because even if the fraud is discovered the punishments for being involved aren’t severe. According to the Cornell Law Review, “the first year following the passage of the PSLRA, the SEC found that, ‘secondary defendants, such as accountants and lawyers, are being named much less frequently in securities class transactions,’ which I feel is due to lack of punishment. Overall I think fraud should always be reported and if lawyers aren’t willing to reveal this information without laws to hound them then I think that is what is needed regardless of whether a lawyer is considered gatekeeper or not.
Cornell Law Review
A good example of a company that has an effective "conflict of interests" policy is Halliburton. Halliburton is one of the world's largest providers of products and services to the oil and gas industries. On their company website they define and prohibit possible scenerios in which a conflict of interest may arise. For example, "Obtains a significant financial or other beneficial interest in one of the Company's suppliers, customers or competitors without first notifying the Company and obtaining written approval from the Chief Executive Officer or his or her designee." The company makes employees aware of temptations that may arise and formally prohibits them in their Code of Business Conduct. They then periodically require certain employees to certify to the Company that they have complied with all requirements of the Code of Business Conduct. Any employee that violates the Code is terminated. This makes it difficult for employees to get away with taking advantage of company property or information. The company's Conflicts of Interest rules can be found at http://www.halliburton.com/about/conflicts_interest.jsp.
Personally, I disagree with lisa d regarding whether attorneys need the law to tell them to report fraud. Before SOX, attorneys did not have that big of a problem going outside the law to withhold their information of fraud. Attorneys know when the decision they make is illegal, unethical, and/or immoral. If they still choose to make that decision, then laws are obviously needed to overpower an attorney's personal greed.
I agree with Jordan’s comment that in order to solve problems in companies you need to have someone else outside of the company make and enforce laws/policies for the company. Investor-hired auditors have true interest in accuracy of financial statements and have integrity to do what’s right. Unlike Lisa D, I do not think that managers would be able to persuade these people because they actually care about doing the right thing and have investors’ best wishes in mind.
http://www.findarticles.com/p/articles/mi_qa4048/is_200401
Jordan states that any conflicts of interest would be solved by hiring a third party which is paid by the shareholders. But how does it solve anything? If this company was worth investing in, a system would already be in place to spot discrepencies and mistakes made by managers and employees. That's why people have superiors that they answer to; if an employee tries to take advantage of their company, they should be fired anyway.
If managers and executives are taking advantage of company policy who is going to fire them? A third party whose job it is to evaluate executives actions and report back to the shareholders would be able to inform shareholders of any wrongdoings. As for company policy, I agree that it needs to be implemented as soon as the company goes public, if not sooner. Companies need to establish reputations of integrity.
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