The GAO Report and Stoneridge – My Audacious Hope

Hope is not blind optimism.” Pause.
“Hope is not sitting on the sidelines or shirking from a fight.” Pause.
“Hope is that thing inside of us that insists, despite all the evidence to the contrary, that there is something greater inside of us.”
It’s no secret that my hope for the Stoneridge decision was related specifically to the potential for the Big 4 to be held responsible for their contribution to the failures of so many of our corporations and to the scandals and malaise that are now negatively affecting the global economy.
It was not to be.
Maybe the narrow reading of the law was appropriate. The Harvard Corporate Governance blog, via J. Robert Brown of the Race to the Bottom blog, explains it for non-lawyers like me. But Brown shares my disappointment with what he sees as the “legislative” versus judicial tone of the Court in restricting private causes of action under Rule 10(b) and 10b-5. Maybe the plaintiffs’ bar does need to go back to their desks and get better at explaining why actors such as the auditors should be responsible. They need to get better at making the direct link between the auditor’s actions or inaction and someone’s reliance on them to their detriment.
And then there was my hope for the GAO report. I’ll be honest, I had forgotten they were working on it. But when I saw that it was published, I assumed that it would come to the obvious conclusions and start the process of finding a solution. How much money was spent with no value received, supposedly with the objective of advising Congress on such an important issue as the concentration of the Big 4 with regard to audits of public companies and its consequences for fees, choice, and quality of information available to investors? In the end, the lack of any recommendation for action in the face of so much evidence to the contrary was a major cop-out. I know others think we should cut Walker some slack. But I disagree on this point. If not our government agencies and departments that are charged to advise Congress and act as a monitors, then who?
So, the Supreme Court says 10(b) and 10b-5 can not, in most cases, protect investors from the auditors when they do not do their job. And the GAO says that since they do not know how to solve the problem of concentration in the provision of audit services, they will not make any recommendations or acknowledge the real impact of concentration in any detail. The PCAOB is taking only small bites out of the firms, as they lack the teeth to be a true watchdog.
Who is competent, objective, independent, and non-self-serving enough, with sufficient credibility and stature to drive the dialogue?
Curse me, spit on me and condemn me.
The securities litigation plaintiffs’ bar is the only group that doesn’t give a flying tomato what anyone thinks and, so, is the only one right now that can put pressure on the auditors to live up to their duty to investors, (their true client,) or get the hell out of Dodge.
9 replies
  1. Independent Accountant
    Independent Accountant says:

    Francine:
    I have been calling the plaintiffs’ bar a necessary evil for about 30 years. I’ve got some posts about it at my blog. I have one coming about Stoneridge. Don’t miss it.

  2. Anonymous
    Anonymous says:

    As long as he emphasizes the term evil, independent accountant may have a point.

    The long-term solution probably lies in another direction, though. Something will eventually have to be done about the way large corporations function in the US today. Perhaps some institutional revisions are the cure.

  3. Independent Accountant
    Independent Accountant says:

    No insitutional revision will work. We’ve had 31 years of CPA firm “reforms” with no substantial changes.

  4. Anonymous
    Anonymous says:

    Independent accountant-

    I wasn’t talking about reform related to CPA firms. Perhaps the corporation, as currently constructed, is the problem. If you go back 100-150 years, there was much discussion of this very problem.

    Corporate personhood in some ways tends to work against the notion of personal responsibility. Same goes for the distance it creates between between ownership and management.

    What to do about it? I have no idea. But what we have now is not working.

    Now there’s a worthwhile project for a lawyer!

  5. Independent Accountant
    Independent Accountant says:

    I agree with anonymous about corporations. Thomas Jefferson opposed their existence, feeling they led to abuses. What can be done? Reduction of limited liability. How? By becoming an officer of a publicly-held company, you assume liability for some of the corporation’s debts, like a general partner in a partnership. I have no formula that might make sense and no idea of what to do about “pre-existing” debts.
    Adolph A. Berle, a Columbia Law Professor and FDR “Brain Truster” wrote about the problem of the separation of ownership and control in the 1930s. This is a long-standing problem as you are aware.

  6. Oversight for the Better
    Oversight for the Better says:

    If there’s enough of an activist in you, here are some groups working to reduce or eliminate the dominance large corporations have over every aspect of our existence:

    The Alliance for Democracy – “Progressive populist movement to end the domination of the economy, government, culture, media, and the environment by large corporations.”

    POCLAD (Program on Corporations, Law and Democracy) – “a group of persons instigating democratic conversations and actions that contest the authority of corporations to define our cultures…”

  7. Oversight for the Better
    Oversight for the Better says:

    If there’s enough of an activist in you, here are some groups working to reduce or eliminate the dominance large corporations have over every aspect of our existence:

    The Alliance for Democracy – “Progressive populist movement to end the domination of the economy, government, culture, media, and the environment by large corporations.”

    POCLAD (Program on Corporations, Law and Democracy) – “a group of persons instigating democratic conversations and actions that contest the authority of corporations to define our cultures…”

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  1. […] my hopes, is some variation of the Specter bill to repeal a 2007 Supreme Court decision known as Stoneridge that makes it considerably more difficult to hold third-parties like accounting firms legally […]

  2. […] Gorman lays out the opposing views of the Supreme Court on the original Stoneridge decision in a way that highlights the pro-business versus pro-investor bias inherent in the decision.  In […]

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