The Acquiescent Gatekeeper: Reputational Intermediaries, Auditor Independence and the Governance of Accounting

62 Pages Posted: 25 May 2001  

John C. Coffee Jr.

Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences

Date Written: May 2001

Abstract

The role of "gatekeepers" as reputational intermediaries who can be more easily deterred than the principals they serve has been developed in theory, but less often examined in practice. Initially, this article seeks to define the conditions under which gatekeeper liability is likely to work - and, correspondingly, the conditions under which it is more likely to fail. Then, after reviewing the recent empirical literature on earnings management, it concludes that the independent auditor does not today satisfy the conditions under which gatekeeper liability should produce high law compliance. A variety of explanations - poor observability, implicit collusion, and high agency costs within the gatekeeper - provide overlapping explanations for gatekeeper failure. What remedy should work best to minimize such failures? As a more appropriate and supplementary remedy to reliance on class action litigation, this article recommends fundamental reform of the governance of the accounting profession. In particular, it contrasts the structure of self-regulation within the broker-dealer industry with the absence of similar self-discipline in the accounting profession. While such reform may be unlikely, its absence strongly implies that earnings management is likely to remain a pervasive phenomenon.

JEL Classification: M41, M43, M49, K22

Suggested Citation

Coffee, John C., The Acquiescent Gatekeeper: Reputational Intermediaries, Auditor Independence and the Governance of Accounting (May 2001). Columbia Law and Economics Working Paper No. 191. Available at SSRN: https://ssrn.com/abstract=270944 or http://dx.doi.org/10.2139/ssrn.270944

John C. Coffee Jr. (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-2833 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

American Academy of Arts & Sciences

136 Irving Street
Cambridge, MA 02138
United States

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