Published in: Seton Hall Law Review, vol. 35, no. 3 (2005).
As we move on from the financial scandals of the early 2000s, the question of how to prevent the next Enron continues to be a pressing one. This Article focuses on the law’s deeply conflicted treatment of auditors of public corporations. Though the audit firm is charged with serving as the public’s watchdog in insuring good financial disclosure, the auditor’s actual client is the audited corporation itself, whose interests concerning disclosure are not necessarily aligned with those of investors. Because the Sarbanes-Oxley Act of 2002 left this structure in place, further reform is needed. One promising suggestion is to give public corporations the option of buying Financial Statement Insurance (FSI) to insure against liability to investors harmed by misrepresentations in financial information disclosed to the public. Instead of working for the audited corporation, under FSI, auditors work for the insurer, whose financial interest in a candid audit is in line with the investing public’s need for good information. Who Pays The Auditor Calls The Tune? contributes to the FSI literature by making the case for reform and suggesting modifications in current FSI proposals. It reviews the development of the auditor’s role through history, the changing incentives of auditors and clients and the characteristics of other successful disclosure-based regulatory regimes compared to FSI and rival suggestions. It concludes that FSI is viable not just as a supplement to current auditor regulation, but as a substitute, with corporations required to have at least a minimum level of FSI coverage.
Date of Authorship for this Version
Shapiro, Amy, "Who Pays the Auditor Calls the Tune?: Auditing Regulations and Clients' Incentives" (2005). Cornell Law Faculty Publications. Paper 9.