Abstract
This Article questions the practice of framing problems concerning auditors’ professional responsibility inside a principal-agent paradigm. If professional independence is to be achieved, auditors cannot be enmeshed in agency relationships with the shareholders of their audit clients. As agents, the auditors by definition become subject to the principal’s control and cannot act independently. For the same reason, auditors’ duties should be neither articulated in the framework of corporate law fiduciary duty, nor conceived relationally at all. These assertions follow from an inquiry into the operative notion of the shareholder-beneficiary. The Article unpacks the notion of the shareholder and tells a particularized story about the shareholder interest. The exercise complicates the agency description, highlighting multiple and unstable shareholder demands that displace the unitary model of the shareholder usually brought to bear. This fragmented and volatile model of the shareholder provides neither a basis for articulating a coherent set of instructions respecting aggressive accounting nor for imposing conservative accounting. The Article concludes that legal positivism provides a more appropriate conceptual framework. Auditor duties should be conceived in formal rather than relational terms, with fidelity going to the rules and the system that auditors apply rather than to a client interest. Copyright © 2003 by William W. Bratton. † Professor of Law, Georgetown University Law Center. For comments on earlier drafts, my thanks to Kim Krawiec, Larry Mitchell, Elliott Weiss, and participants at the Duke Law Journal Symposium and at workshops at the Cornell and Georgetown law schools, Harvard Business School, and the law faculty of Tilburg University. BRATTON.DOC 06/21/04 3:58 PM 440 DUKE LAW JOURNAL [Vol. 53:439 Introduction 440 I. Finance as Politics 446 A. The Elusive Value of a Share 448 B. Modeling the Shareholder 452 1. Speculation versus Investment 455 2. Noise Trading versus Fundamental Value Investment 455 3. Dumb Money versus Smart Money 458 4. Short Term versus Long Term 460 C. Summary 463 II. Managed Earnings and the Shareholder Interest 463 A. Exaggerated Reserves 465 B. Revenues, Costs, Aggressive Accounting, and the Incentives of Shareholders and Auditors 468 C. Summary 472 III. The Shareholder Beneficiary and the Choice of Treatment ....473 A. Modeling the Auditor’s Shareholder Beneficiary 474 1. Irrelevance: The Smart Money as Beneficiary 475 2. The Real World Shareholder as Beneficiary 476 3. All Constituents as Beneficiary 477 4. The Fundamental Value Investor as Beneficiary ........479 B. Market Correction versus Regulation 481 IV. Conclusion 485