Differentiating Gatekeepers

Abstract

The emphasis on gatekeepers to control corporate misconduct has depended on a rational actor model. A gatekeeper prevents wrongdoing because expected liability or reputational harm from failing to prevent misconduct exceeds the gain in fees. This model, however, fails to distinguish among gatekeepers or account for how gatekeepers with different incentives respond to legal controls. This Article distinguishes between gatekeepers that are supposed to be independent, such as auditors and analysts, from those that are supposed to be dependent, such as lawyers and underwriters. The Article then addresses why gatekeepers have not been more effective monitors and points out failures of conventional analysis. Advances in behavioral and social psychology suggest that dependent gatekeepers perform their responsibilities under the yoke of unconscious bias. Independent agents, therefore, are better gatekeepers than dependent ones. Concern about bias is exacerbated by indeterminacy in corporate and securities law, which facilitates self-serving interpretations of the law and gives wide berth to insist the principal's conduct is appropriate. Differences among gatekeepers, viewed through a social psychology prism, help explain recent reforms and suggest the potential need for additional reforms. One such proposal is to marry the suggestion for lawyer certifications of financial statements with the "reporting up" requirement of Sarbanes-Oxley and require, instead, that a lawyer certify annually that the lawyer is not aware of evidence of a material violation, or has made the required report under the SEC's lawyer rules. The prospect of making a false filing would likely have deterrent effects that are absent under current rules. The hope is that the Article raises for further consideration whether insights from behavioral psychology, married with a deeper understanding of the structure of gatekeeper relationships, can help tailor reform.

Keywords: gatekeepers, lawyers, accountants, research analysts, social psychology, behavioral psychology, Sarbanes-Oxley Act

JEL Classification: K22, K42