Shareholder Value, Financial Conservatism, and Auditor Independence

38 Pages Posted: 10 Oct 2003

See all articles by William W. Bratton

William W. Bratton

University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)


The principal-agent characterization resonates especially well in both corporate law and economics because it cabins the problem of auditor responsibility within these fields' paradigms for describing and regulating duties within the firm.

This article questions the practice of framing the problem of auditors' professional responsibility inside the principal-agent paradigm, even as it accepts the story of the dirty deal. The questions about the agency framework 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, which tends to assume a unitary model of the shareholder. Under this article's analysis, multiple and unstable shareholder demands displace the unitary shareholder interest. This fragmented and volatile model of the shareholder does not provide a basis for articulating a coherent set of instructions respecting aggressive accounting and earnings management.

This article endorses traditional notions of auditor independence even as it rejects the fiduciary-beneficiary framework. One cannot "stand separate and apart" from the client's business and at the same time be an agent beholden to the shareholder interest. If we want auditors to be independent, we cannot enmesh them in an agency relationship with the shareholders, where by definition they become subject to the principal's control and cannot act independently. Nor, for the same reason, should auditors' duties be articulated in the framework of corporate law fiduciary duty. More generally, auditor responsibility should not be conceived relationally at all.

This 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, to the texts, to the system that auditors apply.

JEL Classification: M41, M44, M49, L22, G18

Suggested Citation

Bratton, William Wilson, Shareholder Value, Financial Conservatism, and Auditor Independence. Duke Law Journal, Vol. 53, No. 2. Available at SSRN: or

William Wilson Bratton (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )



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