Archive for the ‘Accounting’ Category

Pascal on Power and Justice (A Thought for the New Year)

posted by Frank Pasquale

The past few years I’ve tried to find an inspiring quote for the New Year for the blog. There’s a rich vein of insight to be mined from the Carnegie Council podcasts, which I recently discovered on iTunes. One speaker I particularly enjoyed was Krishen Mehta, a former partner with PricewaterhouseCoopers who is now the co-chairman of Global Financial Integrity’s advisory board. Asked about what motivated him to try to stop the shocking abuse of tax havens and mispriced trade by oligarchs, he said the following:

It really is a war against the poor. The inequity that has existed in the past is going to continue unless civil society is informed, asks the right questions of its government, of its business leadership, and asks for more responsibility. One of my favorite writers is Blaise Pascal, who said that “justice and power must be brought together so that whatever is just may be powerful and whatever is powerful may be just.”

A recent study concluded that, “For a salary of between £75,000 and £200,000, tax accountants destroy £47 in value, for every pound they generate.” Mehta, by contrast, is not only creating value, but doing so for the most vulnerable people. How appropriate that a thinker admired by both mathematicians and philosophers would inspire him.

Image Credit: Augustin Pajou. As described on Wikimedia Commons: “Blaise Pascal (1623–1662) studying the cycloid, engraved on the tablet he is holding in his left hand; the scattered papers at his feet are his Pensées, the open book his Lettres provinciales.”

  December 31, 2011 at 7:58 pm   Posted in: Accounting, Law and Inequality, Tax   Print This Post   One Comment

Will in Insolvency

posted by Lawrence Cunningham

In this week’s New Yorker, Nick Paumgarten, in the Talk of the Town, kindly draws on my work  about the cultural contingency of financial reporting; he quotes me on the need to update the idea of insolvency.  Usually defined as the ability to pay debts as they come due, or assets exceeding liabilities, there has always been a strong objective thrust to the notion.  The emphasis is on measured financial activity reduced to a verifiable expression of ability. 

But as Nick notes, equally important is a debtor’s will to pay.  The differences appear in the contrast between the United States and Greece.When  Standard & Poor’s recently lowered its credit rating of the U.S. Treasury by one notch, it registered doubt not so much about the country’s ability to pay its debt, but the will of its incumbant political class to do so. In contrast, Greece’s political elite seem committed to finding ways to meet that country’s debts; alas, its resources compared to its obligations raise real doubt about their ability to do so. 

Another example of the difference between the ability and the will to pay debts arose in the September 2008 tussle over what to do about American International Group. It was then the world’s largest insurance company and shortly before the crisis  boasted a market capitalization of $180 billion. Much of its trillion-dollar balance sheet was securely housed in walled-off insurance subsidiaries.  Read the rest of this post »

  August 22, 2011 at 10:30 am   Posted in: Accounting, Bankruptcy, Culture, Current Events   Print This Post   7 Comments

Accounting for Power

posted by Andrew Sutter

Recent revelations in Japan suggest just how important an understanding of accounting may be.

In a post in late March, I related that many Japanese were willing to give the benefit of the doubt to TEPCO, the operator of the damaged Fukushima Dai-Ichi nuclear plant, in the days following the March 11 earthquake and tsunami. The most common excuse in the language, “Shikata ga nai” (“It can’t be helped”), struck most people as apposite, given the historical rarity of 9.0 earthquakes and 15-meter killer waves.

By now, the situation has almost been integrated into the everyday, at least for those of us far from the reactor. People speculate whether the government nuclear agency’s lead spokesperson is wearing a wig, and a cable news channel has a daily segment, “Kyou no genpatsu kiiwaado” – “Today’s nuke reactor keyword”. Any goodwill toward TEPCO has long since evaporated, thanks to its management’s sloth in apologizing, its spokespersons’ frequent misstatements and evasions in daily press conferences, and sympathy for the thousands displaced from the evacuation zone, their livelihoods derailed (and their pets and livestock reluctantly left behind to starve, an aspect of the story that has mobilized many activists here). But it turns out that even the initial goodwill was probably misplaced.
Read the rest of this post »

  May 9, 2011 at 10:24 am   Posted in: Accounting, Administrative Law, Current Events, Environmental Law, International & Comparative Law   Print This Post   2 Comments

From “Qui Pro Domina Justitia Sequitur” to “Elite Frauds Go Free”

posted by Frank Pasquale

Should they change the motto at the Department of Justice? John Ashcroft modestly covered a statue of lady justice during his tenure as AG. But a series of reports suggests that, at least when it comes to financial heavyweights, Domina Justitia has left the building.

Consider first Morgenson & Story’s article, “In Financial Crisis, No Prosecutions of Top Figures:”

As the crisis was starting to deepen in the spring of 2008, the Federal Bureau of Investigation scaled back a plan to assign more field agents to investigate mortgage fraud. That summer, the Justice Department also rejected calls to create a task force devoted to mortgage-related investigations, leaving these complex cases understaffed and poorly funded, and only much later established a more general financial crimes task force.

To be sure, the DOJ has talked a good game here, unleashing Operation Broken Trust to catch the small fry. But even in December of last year, Andrew Ross Sorkin was ringing alarm bells:

To hear Eric H. Holder Jr. tell it, the Justice Department is aggressively cracking down on financial fraud. . . . But after you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”? Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.)

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  April 17, 2011 at 4:14 pm   Posted in: Accounting, Criminal Law, Financial Institutions   Print This Post   3 Comments

Finance’s Revolving Door: Perfected or Passe?

posted by Frank Pasquale

Washington’s revolving door is legendary. Everyone knows the connections between lobbyists, members of Congress, staffers, and favored firms. They’ve been mapped in health care, oil, agriculture, and many other industries. Finance journalists chronicle a superclass shuttling from beltway to bourse and back. Yves Smith and Matt Taibbi post on “sleazewatches” and $2,200-a-ticket conferences where the regulated schmooze with the regulators.

But what if the revolving door is the wrong metaphor? What if, instead, there has been a fusion of state and corporate authority in the banking sector? What if Peter Orszag never left the government when he dropped the OMB Directorship to make at least ten times as much as a vice chairman at Citibank? Gabriel Sherman suggests as much when he describes a lucrative cursus honorum for DC elites:

The close alliance among Wall Street and the economics departments of the major universities and the West Wing of the White House is the military-industrial complex of our time. That it has an effect on our governance is beyond question. How pernicious and distorting these effects are, how cynical many of its participants might be, and what might be done to change the system are being fiercely debated in Washington. In fact, to the layperson, the most surprising thing might be the degree to which people like Peter Orszag see the government and Wall Street as, essentially, parts of the same industry.

Conservative Kansas City Fed President Thomas Hoenig has already argued that “big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities.” Texas Republican Randy Neugebauer has called eight banks “TSEs,” or taxpayer-supported entities. And at a recent conference on macroeconomics, Steve Randy Waldman made a legal point fundamental to all the economic dilemmas discussed.
Read the rest of this post »

  April 15, 2011 at 2:15 pm   Posted in: Accounting, Financial Institutions, Politics   Print This Post   2 Comments

Law & Econ’s Influence on Law & Accounting

posted by Lawrence Cunningham

The hottest book of the century, on corporate law, is in production, thanks to editors Brett McDonnell and Claire Hill, both of Minnesota. As part of a series investigating the economics of particular legal subjects, overseen by Richard Posner and Francesco Perisi, this Research Handbook on the Economics of Corporate Law, promises a comprehensive canvass of the broadest definition of this field of law as it has been structured by economic theories over the past forty years.

My contribution addresses the influence of law and economics on the sub-field of law and accounting, which I suggest takes the form of “two steps forward one step back.”  You can read a draft of my chapter (comments welcome!), available free here, accompanied by the following abstract:

Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That’s the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor duty.

Analysis reveals how agency theory and finance theory often but not always point to the same policy implications; it reveals how finance theory’s assumptions and limitations are often but not always respected in policy development. As a result, while these theories sometimes produced policy changes that were both intended and desirable, some policy changes were both unintended and undesirable while others were intended but undesirable.  Examination stresses the power of ideas and how they are used and cautions creators and users of ideas to take care to appreciate the limits of theory when shaping practice. That’s vital since the effects of law and economics on law and accounting remain debated in many contexts.

Other contributions to the book similarly available in draft form are by Matt Bodie (St. Louis), David Walker (BU) and Charles Whitehead (Cornell).  The following scholars are also contributing chapters: Bobby Ahdieh (Emory), Steve Bainbridge (UCLA), Margaret Blair (Vandy), Rob Daines (Stanford), Steve Davidoff (Ohio State), Jill Fisch (Penn), Tamar Frankel (BU), Ron Gilson (Stanford/Columbia), Jeff Gordon (Columbia), Sean Griffith (Fordham), Don Langevoort (GT), Ian Lee (Toronto), Richard Painter (Minnesota), Frank Partnoy (SD), Gordon Smith (BYU), Randall Thomas (Vandy), and Bob Thompson (GT).

  March 4, 2011 at 9:46 am   Posted in: Accounting, Behavioral Law and Economics, Corporate Finance, Corporate Law, Jurisprudence, Legal Theory, Securities Regulation   Print This Post   No Comments

Creating Value

posted by Frank Pasquale

I’ve talked in previous posts about a “closed circuit” economy among the wealthy. A plutonomy at the top increasingly circulates buying power (be it luxury goods, real estate, gold, or securities) among itself. The middle class used to dream that a rising Wall Street tide would lift all boats; as Felix Salmon shows, that hope is fading. Whatever innovations arise out of these companies aren’t doing much for average incomes.

On the other hand, financial innovation has done wonders to extract purchasing power from the broad middle into the closed circuit at the top. Here, for example, is how one of our leading firms created enormous value in 2006:

Consider the tale of Travelport, a Web-based reservations company. [A] private equity firm and a smaller partner bought Travelport in August 2006. They paid $1 billion of their own money and used Travelport’s balance sheet to borrow an additional $3.3 billion to complete the purchase. They doubtless paid themselves hefty investment banking fees, which would also have been billed to Travelport.

After seven months, they laid off 841 workers, which at a reasonable guess of $125,000 all-in cost per employee (salaries, benefits, space, phone, etc.) would represent annual savings of more than $100 million. And then the two partners borrowed $1.1 billion more on Travelport’s balance sheet and paid that money to themselves, presumably as a reward for their hard work. In just seven months, that is, they got their $1 billion fund investment back, plus a markup, plus all those banking fees and annual management fees, and they still owned the company. And note that the annual $100 million in layoff savings would almost exactly cover the debt service on the $1.1 billion. That’s elegant—what the financial press calls “creating value.”

The corporate geniuses at Boeing offer another display of modern-day business acumen.

The more stories like this you read, the more you realize that massive unemployment isn’t a bug in our economic system; it’s a feature. A country can’t have legal rules that permit these moves without expecting to hemorrhage jobs. All the Michael Porter homilies in the world can’t put this Humpty Dumpty back together again.

  February 20, 2011 at 10:45 am   Posted in: Accounting, Corporate Finance, Corporate Law, Corruption, Economic Analysis of Law   Print This Post   One Comment

What Damages Can E&Y Afford and Survive?

posted by Lawrence Cunningham

Probably $1 billion, but not much more.   Let’s explore.

Global banks are settling US government lawsuits for what looks like big money. Goldman Sachs earlier this year settled a securities fraud claim for $550 million. UBS recently settled tax fraud charges for $750 million. And Deutsche Bank will now fork over $553 million to settle a similar case.

These are large nominal amounts but they will not remotely break the banks. These firms are financial titans, each commanding some trillion in assets and boasting bountiful annual revenue: Goldman Sachs $52 billion; UBS $44 billion; and Deutsche Bank $37 billion. Payments such as those are significant but not crippling.

The same cannot be said of similar amounts if they had to be paid by the world’s global auditing firms. Those firms (Deloitte, Ernst & Young, KPMG, and PWC) command financial assets trivial compared to those of the global banks, with firm value residing primarily in personal and professional reputation (so-called “human capital”). Revenues are much less than at banks too, about $20 billion for E&Y and KMPG and $25 billion for Deloitte and PWC.

That revenue costs more than bank revenue too and is spread across a far larger employee base. E&Y and KMPG employ about 140,000 apiece and the others about 170,000 each. By contrast, Goldman has a mere 35,000 employees, with 65,000 at UBS and 82,000 at Deutsche Bank. In addition, those financial firms have access to insurance to cover at least certain kinds of losses arising from legal liability, whereas the auditing firms lack that resource and instead self-insure.

Even so, the auditing firms have absorbed considerable payments in legal liability claims in the past decade. Each firm incurs up to a dozen or so settlements in the modest range of a few to ten or so million dollars in any given year. Occasionally larger payouts occur, with nine to date exceeding $100 million: $110 million, $125 million, $200 million, $217 million, $229 million, $250 million, $335 million, and $456 million. All those but the last involved single-company frauds—the latter, the record to date, is KMPG’s settlement of tax fraud charges akin to those Deutsche Bank and UBS likewise settled.

No doubt, those figures sting, but are affordable. It’s easy to infer that E&Y, roughly of equivalent capacity to KMPG, could pay $500 million or more, perhaps twice that, if it had to settle the case involving Lehman Brothers.  But amounts exceeding that could be crippling given the comparatively small asset base, fractional revenue, huge payroll,  and reliance on self-insurance.  The risk of a larger demand is realistic too, given the larger size of the  Lehman fraud  compared to the previous single-company cases the firms have settled.

  December 22, 2010 at 3:59 pm   Posted in: Accounting, Current Events   Print This Post   5 Comments

Cuomo Sues E&Y: Auditing Profession At Risk

posted by Lawrence Cunningham

Ernst & Young, one of the Big-4 auditing firms left in the world, faces a grave lawsuit filed a couple of hours ago by New York’s Andrew Cuomo, the incoming governor’s last major act as state attorney general.  The lawsuit is based on fraudulent accounting committed by Lehman Brothers, the failed investment bank, that E&Y either overlooked or condoned, as I explained last March.  

The AG seeks unspecified damages the audit failure caused, certainly running to the hundreds of millions and easily reaching into the billions.  Given that E&Y does not have external insurance to cover such losses, but self-insures, the lawsuit could put the firm’s survival at risk.   Even so, settlement talks, going off-and-on since March, failed, suggesting that the firm is banking on being exonerated.  That is quite a gamble. 

As I told the New York Times and readers of this blog in March, if the case impairs E&Y’s viability as a going concern, a corporate financial reporting crisis should be expected.  It would be acute compared to the modest scramble that corporate America faced after government prosecutors a decade ago drove from the profession the Big-5 firm, Arthur Andersen, auditor of Enron Corp.   Then, 1/5 of companies needed to find a new auditor and most were able to count on one of the remaining four with little trouble. 

Today, 1/4 of public companies would be obliged to find a replacement auditor; thanks to rules stated in the federal response to Enron, the Sarbanes-Oxley Act of 2002, about 1/3 of those would be unable to engage any of the 3 remaining firms because of conflicts of interest (those other firms provide internal control or tax advisory services making them ineligible to render financial audits).   Amid such a crisis,  and with only 3 available firms, the existing structure of the auditing profession would be unsustainable.     

It would be reassuring if the Securities and Exchange Commission could tell the nation that is has foreseen this contingency and developed plans for addressing it, as urged last March and in 2006.  Alas, I am not sure that it is prepared to do either.

  December 21, 2010 at 2:57 pm   Posted in: Accounting, Current Events, Securities, Securities Regulation   Print This Post   No Comments

Outsourcing Safety. . . to the Marshall Islands

posted by Frank Pasquale

Just when you thought the BP mess could not get more surreal, this comes up:

The Deepwater Horizon oil rig that exploded in the Gulf of Mexico was built in South Korea. It was operated by a Swiss company under contract to a British oil firm. Primary responsibility for safety and other inspections rested not with the U.S. government but with the Republic of the Marshall Islands — a tiny, impoverished nation in the Pacific Ocean. And the Marshall Islands, a maze of tiny atolls, many smaller than the ill-fated oil rig, outsourced many of its responsibilities to private companies.

Now, as the government tries to figure out what went wrong in the worst environmental catastrophe in U.S. history, this international patchwork of divided authority and sometimes conflicting priorities is emerging as a crucial underlying factor in the explosion of the rig.

Sounds a bit like asking a government to certify the safety of investments—and having it effectively delegate the job to Nationally Recognized Statistical Rating Organizations. Keeping authority in the US may have just made matters worse:

MMS depends largely on the self-reporting of oil and gas companies to determine how much they owe in royalties — a system the Interior Department’s former inspector general, Earl Devaney, described as “basically an honor system” in congressional testimony in 2007. . . . The MMS commonly negotiates settlements with petroleum companies over disputed royalties — but the process is often shrouded in secrecy. A 1996 inspector general report found that MMS officials kept no documents on nine out of 10 royalty settlements, to prevent disclosure under the Freedom of Information Act. In one case, the MMS could provide no records to explain why the agency reduced its estimate of a company’s royalty debt by $360 million. . . . [More errors] sparked outrage in Congress and yet another probe by Devaney, the inspector general. He later called the oversight a “jaw-dropping example of bureaucratic bungling” and said it could cost the government as much as $10 billion.

It has become fashionable of late to contrast enlightened, US-style “free market capitalism” with the “state capitalism” of petro-states like Russia. Anyone familiar with the work of David Cay Johnston or James K. Galbraith would suspect that analysis. Recent oil debacles complicate the distinction even further.

  June 18, 2010 at 12:23 pm   Posted in: Accounting, Administrative Law, Economic Analysis of Law   Print This Post   No Comments

Danger: Banks Politicize Accounting

posted by Lawrence Cunningham

Anyone who cares about the reliability of corporate financial information in the US—and everyone should—ought to oppose threatend Congressional action that would expressly politicize accounting standard setting.   Since the 1930s, accounting standards in the US have been set by a private, independent, non-political body called, since the mid-1970s, the Financial Accounting Standards Board (pronounced faz-bee).

Corporate America often hates what FASB requires—on subjects ranging, over the years, from accounting for pensions, mergers, stock options, and, today, financial instruments. It plies friends in Congress to push back against FASB when stakes are high enough. Sometimes that means FASB fights for its life.  (For a scholarly take on this, see Bill Bratton’s insightful BC Law Review piece here.)

An example: in the late 1990s, corporate America got Senator Joe Lieberman to threaten to preempt FASB if it required corporate America to account for stock options—a threat FASB heeded until after that period’s financial frauds restored its insulation from political pressure. (Since, FASB has required corporate America to account for stock options as an expense.  Then-SEC Chair Arthur Levitt recounts the story in his memoir Take on the Street.)

Banks are today’s most vehement proponents of turning accounting standards into political products—detesting FASB’s accounting standards concerning off-balance sheet financing, securitizations, and, especially, measuring financial instruments at fair value.  Banks want to politicize accounting standards because they are extremely good at influencing politicians, but have essentially no power to manipulate FASB directly.  One reason is Washington’s revolving door—banks have teams of lobbyists who formerly worked there, on the Hill or in agencies. Read the rest of this post »

  May 12, 2010 at 3:02 pm   Posted in: Accounting   Print This Post   2 Comments

You, Lehman’s Re-Po Magic, and Ernst & Young

posted by Lawrence Cunningham

Ernst & Young, one of four remaining large auditing firms, allegedly botched its financial audits of Lehman Brothers, the bankrupt investment banking firm. E&Y responds that its audits met legal and professional requirements.

My view, reported in today’s New York Times, wonders, suggesting E&Y offers a “technical compliance defense,” when what’s needed is an objective judgment, based on professional skepticism, of whether financials provide a fair presentation.

Though the allegations sound esoteric, it is easy to translate them into simple terms.  When considering the following analogue between Lehman’s deals and your personal finance, think about how an independent accountant would assess what I suppose you are doing.

Read the rest of this post »

  March 15, 2010 at 11:56 am   Posted in: Accounting, Corporate Finance, Current Events, Securities Regulation   Print This Post   One Comment

SEC Should Calm Markets, Ahead of Possible Audit Crisis

posted by Lawrence Cunningham

If you thought the 2008 credit crisis that temporarily froze global debt markets wrought havoc, watch out for the next shoe to drop.  At stake is the viability of global equity and other financial markets that could freeze if one of the four large auditing firms goes extinct.

And the existence of one of them, Ernst & Young, is threatened, as it faces the prospect of billion dollar liability for botched audits of Lehman Brothers, the defunct investment bank struggling in bankruptcy. It is an eerie echo of the fate of erstwhile big auditing firm Arthur Andersen, which dissolved after its culpability in 2001’s Enron fraud emerged.

Today, only four auditing firms have the resources and expertise to audit the vast majority of thousands of large public corporations. If one of those dissolved, its clients would have to scramble to find a replacement. Some of the remaining three lack requisite expertise for some of those corporations and others would be disqualified from auditing due to consulting work they do for them.

The result would be hundreds, possibly thousands, of large corporations who could not get their financial statements audited as required by US federal securities law. Stock markets could go berserk, along with other financial markets. The costs now, of moving from four firms to three, would dwarf those incurred when Andersen’s dissolution moved the total from five to four.

It does not appear that the US government, specifically its Securities and Exchange Commission, has any plans to deal with this prospect. It should. And it should announce them promptly to get ahead of any market crisis the failure of E&Y, or of the other three, would wreak. 

If not, the credit crisis of 2008 will look mild in comparison. After all, the credit crisis was readily addressed by government pumping enormous amounts of capital to rejuvenate liquidity; an auditing crisis cannot by solved by throwing money at it. Read the rest of this post »

  March 15, 2010 at 9:22 am   Posted in: Accounting, Bankruptcy, Corporate Finance, Current Events, Securities Regulation   Print This Post   One Comment

A Whopper of an Assumption in Free Enterprise Fund v. PCAOB

posted by Tuan Samahon

In his dissent in Free Enterprise Fund v. PCAOB, D.C. Circuit Judge Brett Kavanaugh characterized the SEC – Public Company Accounting Oversight Board (PCAOB) relationship as “Humphrey’s Executor squared.” His analysis assumes that two firewalls shield the PCAOB’s exercise of executive power from presidential control. First, PCAOB members can be removed only for cause by SEC commissioners. That’s clear enough. Second, SEC commissioners can be removed only for cause by the President.

The strange thing is that no statute says that the President may remove SEC commissioners only for cause. The idea that the President may not remove SEC commissioners except for cause turns out to be only a whopper of an assumption. Removing that erroneous assumption, there is only the PCAOB-SEC firewall to presidential control of the PCAOB and so understood that arrangement looks no worse than Humphrey’s Executor to the first power. Unless the Court is prepared to abandon Humphrey’s Executor altogether, this part of the challenge looks like a loser at this point in time.

The significance of the assumption was not lost on the Court during oral argument.

Read the rest of this post »

  March 8, 2010 at 5:09 pm  Tags: separation of powers  Posted in: Accounting, Administrative Law, Supreme Court   Print This Post   3 Comments

The Globalization of Securities Regulation: Competition or Coordination?

posted by Robert Ahdieh

Thanks to Danielle, Dan, and entire Concurring Opinions team, for having me back for a return stint.

I write from the University of Cincinnati Corporate Law Center’s 23rd Annual Symposium, on the subject of The Globalization of Securities Regulation: Competition or Coordination?

Our host is Professor Barbara Black, and other panelists include Bill Bratton, Chris Brummer, Hannah Buxbaum, Eric Chaffee, Andrea Corcoran, Steve Davidoff, Jim Fanto, Robert Patterson, and my colleague, Fred Tung.

I mention all this because, for those who may be interested, the symposium is being webcast as I type (and listen to Hannah’s presentation, on The ‘Global Enterprise’ in Cross-Border Securities Litigation).  You can find it here:

https://www.uc.edu/ucvision/event.aspx?eventid=245

And if you have questions you’d like raised, you can e-mail them to Barbara here: corporatelawsymposium@law.uc.edu.

Hope you can join the discussion!

  March 5, 2010 at 9:08 am   Posted in: Accounting, International & Comparative Law, Securities Regulation   Print This Post   No Comments

Hawkins v. McGee and the Costs of Healthcare

posted by Nate Oman

One of the joys of being a contracts prof is that you get to teach Hawkins v. McGee, the hairy-hand case of Paper Chase fame. Reading this week’s Economist briefing on health care has got me thinking about the meaning of the holding in that case for the current health care debates. Read the rest of this post »

  February 22, 2010 at 8:39 am   Posted in: Accounting, Contract Law & Beyond, Health Law, Insurance Law   Print This Post   7 Comments

New Journal: Accounting, Economics, and Law

posted by Lawrence Cunningham

Scholars like me interested in law as it interacts with accounting and economics will be excited to learn of a new joural offering to link these three fields and many others. Called the Journal of Accounting, Economics and Law, this is a welcome new forum to celebrate study of the relation, too often under-appreciated, among these subjects. The journal’s founding editors are three scholars I’ve come to know and admire, Michigan law prof Reuven Avi-Yonah, Yale accounting prof Shyam Sunder and University of Paris business economics prof Yuri Biondi.  

I’m flattered to have  been asked to serve on the Advisory Board, which boasts many luminous scholars from around the world, including, from the US, Sudipta Basu (Temple, accounting); Jonathan Glover (Carnegie Mellon, accounting); David Kennedy (Harvard, law); my colleague Larry Mitchell (GW, law); Roberta Romano (Yale, law); Martin Shubik (Yale, economics); and Lynn Stout (UCLA, law).

Following is a description of the journal.   Manuscript submissions are encouraged!

“The Journal of Accounting, Economics, and Law aims to encourage a comprehensive understanding of the relationship between individuals, organizations, and institutions in economy and society.

Financial, economic and legal techniques and languages play an influential and neglected role in this relationship. Concerns of finance, control, accountability, responsibility, valuation, regulation, and governance will be raised in their connection with accounting, economics, law, sociology, anthropology, history, finance, political science, and the management and policy sciences.

The journal encourages works that seek to recombine disciplinary domains in response to practically relevant issues, while encouraging theoretical advances and insights, and comparative historical perspectives.”

  January 18, 2010 at 5:50 pm   Posted in: Accounting, Economic Analysis of Law, Education, Law School (Scholarship)   Print This Post   One Comment

Finance Theory and Accounting Policy

posted by Lawrence Cunningham

Amid the financial crisis, considerable debate attends the enduring validity of Modern Finance Theory, including assumptions of capital market efficiency, reliability of recognized risk measurement tools and models of risk reduction through diversification.  There’s little doubt that MFT has had considerable effects on positive law and legal scholarship in the past three generations.  Looming are questions about whether those policies warrant reconsideration given ongoing discoveries of potential deficiencies in those models.

Some of these implications appear in contexts covered by the broad subject called Law and Accounting, topics within securities regulation, corporation law and financial reporting policy. In writing a paper addressing the influence of MFT on L&A, I’m trying to identify the most significant subjects. In outlining a draft, I’ve identified the following as the most consequential, and would be delighted to hear, through comment or email, alternative suggestions or criticisms of this initial compilation.  Read the rest of this post »

  January 18, 2010 at 4:48 pm   Posted in: Accounting   Print This Post   3 Comments

Accounting 101 and the New Bank Tax

posted by Lawrence Cunningham

Christine Hurt and Erik Gerding have several good posts at Conglomerate on how the White House tomorrow will formally propose a tax on banks to recover losses government incurred providing capital infusions under the so-called Troubled Asset Relief Program (TARP).

It appears the tax would be computed based on a bank’s total liabilities other than its insured deposits, although some reports say the tax could be based on profits. Aside from recouping costs, the liability approach suggests creating an incentive for banks to avoid incurring liabilities deemed riskier than insured deposits, though without appearing to distinguish among risk types.

Aside from the inevitably contentious debate about the merits, fairness or efficiency of such a proposal, a particularly strange feature is how, according to a Wall Street Journal report, liabilities other than insured deposits would be calculated. The report says that liabilities would be calculated as “the difference between a firm’s assets and its combined equity and insured deposits.” Isn’t this a convoluted way of speaking?

Anyone vaguely familiar with business or accounting knows that owners’ equity equals total assets minus total liabilities. For five hundred years, bookkeepers have used this relationship to define the fundamental equation of accounting. Contemporary corporate law students describe equity as the residual claim on firm assets, reflecting that same subtraction of liabilities from assets.

Isn’t it confusing and backwards then to propose to measure liabilities as the difference between assets and equity (setting aside insured deposits)? Assets and liabilities are the normative categories forming the substantive content of accounting’s fundamental equation. Equity is only the difference between them.

So if you want to impose a tax on liabilities, there is no need to think of them as the difference between assets and equity. Apart from looking forward to hearing the President tomorrow defend the proposal’s merits and spell out its details, I’d like to know whether this reported feature appears and, if so, why it makes any sense.

  January 13, 2010 at 4:39 pm   Posted in: Accounting   Print This Post   4 Comments

Rep. Garrett Meddling with FASB

posted by Lawrence Cunningham

On Monday, I criticized political interference with US accounting standard setting and this morning I referenced innovative securitization deals that contributed to the credit crisis. Now I read that Rep. Scott Garrett (R-NJ) yesterday offered an amendment to the House financial reform bill to require the accounting standard setter to prepare a written study on the effects of its new accounting standards for securitizations!

The current financial crisis, plus the Enron calamity earlier this decade, made clear the vitality of having accounting standards, for securitization and similar financial transactions, that make a company’s debt obligations transparent to investors. The Financial Accounting Standards Board has done just that by issuing two new accounting standards governing such deals. As always, FASB did so after extensive study, deliberation, solicitation and evaluation of comment letters from anyone interested in providing them.

Garrett’s proposed amendment would now impose a legal obligation on FASB to do a more particular study, in cooperation with various federal regulatory agencies, on the effects of the new standards on companies who do securitization deals. This is objectionable for at least the following reasons: (1) it is inherently objectionable political intermeddling into the independent accounting standard setting process; (2) it is the result of lobbying campaigns by banks and others in the business of securitization; and (3) it caters to those lobbying interests rather than focusing on those for whom accounting standards are written: investors.

Rep. Garrett says he’s worried that making securitizations more transparent to investors would make it more difficult for banks and other financial institutions to do them. That would, in turn, mean reduced availability of consumer credit. It is as if the Representative has not read a single newspaper in the last two years. After all, it does not appear that the biggest problems in the country the past decade were consumers borrowing too little or banks doing too few opaque financing deals.

  November 19, 2009 at 10:45 am   Posted in: Accounting   Print This Post   No Comments

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