Category: Accounting

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FAN 111 (First Amendment News) Flying Dog Brewery Launches First Amendment Society

L-R: Jim Caruso, Alan Gora & Ilya Shapiro

L-R: Jim Caruso, Alan Gora & Ilya Shapiro

Free beer was being served as the audience gathered yesterday for a press conference at the National Press Club in Washington, D.C. to hear Jim Caruso (CEO of Flying Dog Brewery), Alan Gura (a DC-based constitutional law litigator), and Erin Weston (senior Director of Communications for Flying Dog). The three were there to discuss their First Amendment victory in Flying Dog Brewery v. Michigan Control Commission (6th Cir., 2015). More importantly, they were there to formally launch a new free-speech initiative. Ms. Weston will oversee the initiative.

The “First Amendment Society” is a non-profit initiative started by Flying Dog. The seed money for the campaign came from the damages award the brewery received from its victory in the Sixth Circuit.

Dean Lucy Dalglish

Dean Lucy Dalglish

One component of the initiative will be a First Amendment scholarship program done in conjunction with the  Philip Merrill College of Journalism at the University of Maryland, of which Lucy Dalglish (former executive director of the Reporters Committee for Freedom of the Press) is dean. Dalglish was present at yesterday’s press conference

Another component of the initiative will involve a a partnership with a public library. Staring next week, the Frederick County Public Library will host a series of lectures focusing on banned books and the First Amendment. The first three of those events will be held at 6:00 p.m. on the following dates:

  1. June 8Garrett Epps will discuss Whitman’s Leaves of Grass
  2. July 13: Michelle Markey Butler  will discuss Harry Potter and the Sorcerer’s Stone
  3. August 10: Ronald Collins, “The Poem that Howled Against Censorship: The Story of the Attempt to Ban a Book of Poems”
L-R: Jim Caruso, Erin Weston & Robert Corn-Revere

L-R: Jim Caruso, Erin Weston & Robert Corn-Revere

Moved to action by the Michigan Liquor Control Commission’s attempt to ban the company’s “Raging Bitch” beer from being sold within the state, Jim Caruso tagged the experience as “an outrageous violation of our First Amendment rights.” It was that experience that prompted him to launch the First Amendment Society. In the course of the press conference, Caruso was emphatic that “this is not a marketing tactic.” Alan Gura, the lawyer who successfully argued the case, echoed that point as he discussed the merits of the case and why it was important to litigate it.

Some of those present at the press conference were Robert Corn-Revere, Walter Olson, Nico PerrinoIlya Shapiro, and Bryan Thomas Hissing, Community Services Coordinator for the Frederick County Public Library

New Book on Child Pornography Law Read More

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B Corps for Bankers

Claire Hill and Richard Painter’s new Better Bankers, Better Banks aims to find a way forward by looking backward – and by casting a few sidelong glances as well. It is valuable for what it has to say about the view in all directions.

Begin from where we are – the point from which Hill and Painter would like to see forward movement. Where we are now is a world in which, even seven years out from the crash of ’08, banking scandal is near boring in its ubiquity. From Libor in 2012 to Euribor, forex, commodity and precious metal cornering thereafter, the story of financial markets of late seems an unending parade of horribles.

How do we get out of this seeming cesspool? Here is where Hill and Painter look backward and sideways.

First let’s look back. Time was when ‘bankers’ – Hill and Painter employ the term broadly to cover all folk who hold ‘other folks’ money’ – invested not only our money, but their money too. By organizing as general partnerships whose partners were jointly and severally liable for losses, they kept, as the current idiom has it, ‘skin in the game.’ This of course aligned their interests with client and institutional interests – to some extent, anyway. (Names like ‘Jay Gould’ should remind us that ‘some extent’ wasn’t the ‘full extent.’) And so there were limits on how much by way of other folks’ money the bankers were likely to fritter away.

Now let’s look sideways. There appears to be growing consensus, in the face of such scandals as those just rehearsed, that our regulatory and law enforcement regimes’ penchant for penalizing banks rather than bankers just isn’t cutting it. Compared to the gains to be had from wrongful behavior unlikely to be caught, even five or twelve billion dollar settlements between banks and their regulators are chump change. Oughtn’t we, then, focus our efforts upon the human agents through whom the banks act? After all, five billion – or five years in jail – are more likely to pinch if you’re human.

Hill and Painter like what they see in both directions. They find limitations, however, in how effective the enforcement of finance-regulatory provisions can be. These, they believe, are just too easy to game – a fact that might partly account for regulators’ going after the banks rather than the bankers in the first place. Why not, then, take yet another sidelong glance in another direction – that of contemporary moves to simulate better regulation through private ordering? Are there not means, for example, of appealing to socially responsible investors by committing to operate as a socially responsible business – e.g., as a ‘B Corp’ or ‘Benefit Corp’?

Indeed there are, and though they do not discuss these new business forms, Hill and Painter valuably adapt, in effect, the idea behind them to financial firms. Herewith the authors’ novel suggestion to introduce a practice of what they call ‘Covenant Banking.’ The idea is for financial firms whose owners or managers are comfortable with the idea to undertake ‘skin in the game’ commitments on the part of their managers. Managers would voluntarily assume some liability for losses, thereby partly replicating the ancien regime of pre-corporate partnership banking. Investors could then choose between what kinds of institutions through which they invest – the more risk-averse perhaps working through covenant banks, the more risk-cavalier working through today’s more familiar casinoish firms.

It would be hard not to like this proposal. What’s not to like? Like recent proposals for Wall Street voluntarily to maintain ‘naughty lists‘ of bankers who have gotten themselves into trouble, it imposes nothing, yet offers something – the prospect of ‘better bankers,’ hence ‘better banks,’ for at least some investors. It simply expands the field of choice, and who in these times doesn’t like choice?

If I have any reservations about Hill and Painter’s proposal or their brief in its favor, they have to do with the prospect of some people’s possibly taking the authors to claim or to promise more than they actually intend.

To begin with, we should note that wrongs such as those alleged in connection with Libor, Euribor, forex, and commodity and precious metal cornering are not wrongs of excessive risk-taking. They are wrongs of sheer fraud and manipulation. It isn’t the case that ‘skin in the game’ on the part of the relevant fraudsters in these cases ‘would’ have helped; the ‘skin’ seems to have been at the core of the ‘game’ from the start, and was indeed part of the problem – the fraudsters profited precisely by illicitly betting their own money on what they controlled. Hill and Painter, then, should not be taken to be targeting this form of market abuse through their proposal.

A distinct but related point has to do with the lead-up, not to 2012 and after, but to 2008. It is still common to hear that year’s cataclysm blamed upon venal behavior or ‘excessive risk-taking’ by ‘bankers.’ And such behavior clearly occurred – it always does. But a very strong case can be made – I think I and others have made it – that the principal causes of 2008 were more radical than mere vice or recklessness on the part of some bankers. They are endemic to capitalism itself absent serious and sustained effort on the part of the polity to distribute capital’s returns – or capital itself – far more equitably than we’d managed before 1929 or between 1970 and 2008. ‘Better bankers’ would certainly be better than worse bankers; better still would be better distributions of that with which bankers bank.

Finally, there is a danger in underselling what proper law enforcement, adequately funded and staffed, can do where finance-regulation is concerned. When Wall Street contributes more to political campaigns than most other industries, when DOJ officials openly admit to having feared to prosecute bankers for fear of rattling markets, and when regulators like the CFTC and the SEC are chronically understaffed and underfunded, we should be skeptical of suggestions that ‘gameability’ of the rules is the sole – or even principal – reason for old fashioned law enforcement’s not having eradicated rulebreaking by financiers. Indeed, as Hill and Painter themselves note, a rule change at the NYSE in 1970 played a critical role in the move from partnership to incorporated form among Wall Street investment banks. If that is so, could a legal re-imposition of some variant of the old rule not itself make for ‘better bankers’?

None of these caveats should be taken as more than what they are – mere caveats. There is much, much to be learned from a reading of Hill and Painter, and much is quite plausibly promised by their Covenant Banking. And since, as before noted, their proposal is made in effect to the banks rather than the polity, it seems to be all upside, no down. Let, then, those bankers intrigued by the Hill/Painter proposal give it a go. One might even imagine some funds offering their services in A and B flavors, so to speak – in Covenant and Noncovenant forms. In such case consistently better performance by one kind over the other might in future foment a stampede to the winning kind, and with it a privately worked transformation.

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Roundup: Law and Humanities 10.20.15

A quick view of the Law and Humanities landscape, mid-October 2015.

Conferences

First, we are looking forward to a couple of notable conferences next year. The Association for the Study of Law, Culture, and the Humanities (ASLCH) 19th Annual Conference will take place at the University of Connecticut Law School April 1-2, 2016. This year’s conference theme is Reading Race, Writing Race, and Living Race. The deadline for submitting paper and panel proposals is extended until October 22nd. More information here at the conference website.

Another notable conference is the Law and Society Association Conference. This year LSA will hold its meeting in New Orleans from June 2-5, 2016. This year’s theme is At the Delta: Belonging, Place and Visions of Law and Social Change. The submission deadline for papers and panels has been extended to October 25. More information here at the LSA website.

In addition, AALS will have several interesting law and humanities-themed sessions.  The AALS Law and Film Committee presents as its feature film selection this year, Wednesday, January 6 at 7:30 p.m., Reversal of Fortune. This movie, based on the nonfiction account of the case by Alan Dershowitz of Harvard Law School, who represented Claus von Bulow, convicted of attempted murder of his wife Sunny, in his attempt to obtain a new trial. The film stars Jeremy Irons as von Bulow and Ron Silver as Dershowitz. On Friday, January 8, also at 7:30, the Committee presents the documentary film The Hunting Ground. This 2015 film, made by Kirby Dick and Amy Ziering, investigates the explosion of campus rape and the repeated failure of many university officials to address the problem.

The Law and Humanities Section presents its panel at 10:30, January 9. This year’s presentation is on Law and Images. The Law and Interpretation Section presents its panel on January 9 at 4:30. Its theme is the Empirics of Legal Interpretation.  The Legal History Section presents its panel at 1:30 January 9. Its theme is 800 Years of Comparative Constitutionalism: The Unique Legacy of Magna Carta.

 

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In Praise of Love’s Promises

I just returned from an AALS Workshop on “Shifting Foundations in Family Law,” where Martha Ertman read from and presented the ideas in Love’s Promises: How Formal and Informal Contracts Shape All Kinds of Families.  The reception was enthusiastic and admiring — exactly my reaction to her wonderful new book.  Martha seamlessly blends memoir, case stories and legal analysis to create a compelling and provocative narrative that beautifully illustrates her central point — that love and contracts are not opposites, but  complementary, and that exchanges — both big and small, formal and informal —  create and sustain families, both the conventional type that she calls Plan A and the less common (but equally valuable) varities that she dubs Plan B.

One of the book’s most impressive features is its combination of personal memoir and legal analysis.  Often seen as incompatible, particularly in the academic world, these two genres reinforce and enrich each other in Martha’s book.  While Martha has described the snippets of memoir at the beginning of each chapter as the “sweet coating that makes the legal medicine easier to swallow,” the juxtaposition does much more than that.  Although Martha may not have intended this, her decision to combine memoir with serious legal analysis is another example of how things sometimes thought of as incompatible not only co-exist, but enhance each other’s power.  Small wonder that, after reading the first 30 pages of the book,  my husband exclaimed that “This ought to be a movie!”

Martha’s legal analysis covers an immense amount of ground — touching on almost every area of family law.  Given that breadth, and the fact that she is writing for both a lay and a legal audience, she does an impressive job of describing and explaining the law.  Still, there are a few things that I wish the book had done more thoroughly or more convincingly.  One is to delineate more clearly which type of family agreements she thinks the law should enforce as “contracts” and which types she thinks should remain mere “deals” — important  to the parties who enter into them, but not giving rise to legally enforceable rights or remedies.  For family law scholars, who largely already agree with Martha’s basic insight about the compatibility of love and contracts, this is the $64,000 question and Martha does not provide much help in answering it.  For example, in some contexts (such as post-adoption contact agreements (PACA’s), she seems to suggest that the degree of formality should matter, while in others,  (such as cohabitation contracts), she bemoans the law’s insistence on a writing as a prerequisite to enforceability.  To be fair, family law academics probably are not Martha’s target audience, and she is justifiably more concerned with convincing a skeptical public that love and contracts are not opposites and that exchange plays an important role in creating and sustaining families.  But for those who agree with her basic insight, Martha provides few markers to answer what she describes as the “big whoop” in contract law — drawing a line between the kinds of (family) promises that courts enforce and the ones they won’t. Read More

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JOBS Act, Sarbanes-Oxley and US Stock Market Competitiveness

Steve Bainbridge posts that we now have evidence that the facilitations that the JOBS Act provided to emerging growth companies for going public are ineffective. Steve also points out that since the early 2000s we have seen the US stock markets appearing less competitive than foreign markets. Let me add that we also have evidence that the Sarbanes-Oxley Act of 2002 (SOX) lengthened the time to going public and increased the probability of a private sale instead of an IPO. (SSRN has tons of papers on the mostly negative consequences of SOX but also a couple of papers suggesting indeterminate answers.) This means that SOX moved returns away from entrepreneurs and public investors to private equity funds. Although the costs of compliance have dropped and perhaps we cannot definitively say that SOX was a mistake, we cannot say it was a success either and the JOBS Act did not cure the inefficiencies that SOX produced. So, it is time to accept that the way to restore competitiveness is to repeal the dubious SOX provisions. Read More

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Brian Tamanaha’s Straw Men (Part 2): Who’s Cherry Picking?

(Reposted from Brian Leiter’s Law School Reports)

BT Claim 2:  Using more years of data would reduce the earnings premium

BT Quote: There is no doubt that including 1992 to 1995 in their study would measurabley reduce the ‘earnings premium.'” 

Response:  Using more years of historical data is as likely to increase the earnings premium as to reduce it

We have doubts about the effect of more data, even if Professor Tamanaha does not.

Without seeing data that would enable us to calculate earnings premiums, we can’t know for sure if introducing more years of comparable data would increase our estimates of the earnings premium or reduce it.

The issue is not simply the state of the legal market or entry level legal hiring—we must also consider how our control group of bachelor’s degree holders (who appear to be similar to the law degree holders but for the law degree) were doing.   To measure the value of a law degree, we must measure earnings premiums, not absolute earnings levels.

As a commenter on Tamanaha’s blog helpfully points out:

“I think you make far too much of the exclusion of the period from 1992-1995. Entry-level employment was similar to 1995-98 (as indicated by table 2 on page 9).

But this does not necessarily mean that the earnings premium was the same or lower. One cannot form conclusions about all JD holders based solely on entry-level employment numbers. As S&M’s data suggests, the earnings premium tends to be larger during recessions and their immediate aftermath and the U.S. economy only began an economic recovery in late 1992.

Lastly, even if you are right about the earnings premium from 1992-1995, what about 1987-91 when the legal economy appeared to be quite strong (as illustrated by the same chart referenced above)? Your suggestion to look at a twenty year period excludes this time frame even though it might offset the diminution in the earnings premium that would allegedly occur if S&M considered 1992-95.”

There is nothing magical about 1992.  If good quality data were available, why not go back to the 1980s or beyond?   Stephen Diamond and others make this point.

The 1980s are generally believed to be a boom time in the legal market.  Assuming for the sake of the argument that law degree earnings premiums are pro-cyclical (we are not sure if they are), inclusion of more historical data going back past 1992 is just as likely to increase our earnings premium as to reduce it.  Older data might suggest an upward trend in education earnings premiums, which could mean that our assumption of flat earnigns premiums may be too conservative. Leaving aside the data quality and continuity issues we discussed before (which led us to pick 1996 as our start year), there is no objective reason to stop in the early 1990s instead of going back further to the 1980s.

Our sample from 1996 to 2011 includes both good times and bad for law graduates and for the overall economy, and in every part of the cycle, law graduates appear to earn substantially more than similar individuals with only bachelor’s degrees.

 

Cycles

 

This might be as good a place as any to affirm that we certainly did not pick 1996 for any nefarious purpose.  Having worked with the SIPP before and being aware of the change in design, we chose 1996 purely because of the benefits we described here.  Once again, should Professor Tamanaha or any other group wish to use the publicly available SIPP data to extend the series farther back, we’ll be interested to see the results.

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Brian Tamanaha’s Straw Men (Part 1): Why we used SIPP data from 1996 to 2011

(Reposted from Brian Leiter’s Law School Reports)

 

BT Claim:  We could have used more historical data without introducing continuity and other methodological problems

BT quote:  “Although SIPP was redesigned in 1996, there are surveys for 1993 and 1992, which allow continuity . . .”

Response:  Using more historical data from SIPP would likely have introduced continuity and other methodological problems

SIPP does indeed go back farther than 1996.  We chose that date because it was the beginning of an updated and revitalized SIPP that continues to this day.  SIPP was substantially redesigned in 1996 to increase sample size and improve data quality.  Combining different versions of SIPP could have introduced methodological problems.  That doesn’t mean one could not do it in the future, but it might raise as many questions as it would answer.

Had we used earlier data, it could be difficult to know to what extent changes to our earnings premiums estimates were caused by changes in the real world, and to what extent they were artifacts caused by changes to the SIPP methodology.

Because SIPP has developed and improved over time, the more recent data is more reliable than older historical data.  All else being equal, a larger sample size and more years of data are preferable.  However, data quality issues suggest focusing on more recent data.

If older data were included, it probably would have been appropriate to weight more recent and higher quality data more heavily than older and lower quality data.  We would likely also have had to make adjustments for differences that might have been caused by changes in survey methodology.  Such adjustments would inevitably have been controversial.

Because the sample size increased dramatically after 1996, including a few years of pre 1996 data would not provide as much new data or have the potential to change our estimates by nearly as much as Professor Tamanaha believes.  There are also gaps in SIPP data from the 1980s because of insufficient funding.

These issues and the 1996 changes are explained at length in the Survey of Income and Program Participation User’s Guide.

Changes to the new 1996 version of SIPP include:

Roughly doubling the sample size

This improves the precision of estimates and shrinks standard errors

Lengthening the panels from 3 years to 4 years

This reduces the severity of the regression to the median problem

Introducing computer assisted interviewing to improve data collection and reduce errors or the need to impute for missing data

Introducing oversampling of low income neighborhoods
This mitigates response bias issues we previously discussed, which are most likely to affect the bottom of the distribution
New income topcoding procedures were instituted with the 1996 Panel
This will affect both means and various points in the distribution
Topcoding is done on a monthly or quarterly basis, and can therefore undercount end of year bonuses, even for those who are not extremely high income year-round

Most government surveys topcode income data—that is, there is a maximum income that they will report.  This is done to protect the privacy of high-income individuals who could more easily be identified from ostensibly confidential survey data if their incomes were revealed.

Because law graduates tend to have higher incomes than bachelor’s, topcoding introduces downward bias to earnings premiums estimates. Midstream changes to topcoding procedures can change this bias and create problems with respect to consistency and continuity.

Without going into more detail, the topcoding procedure that began in 1996 appears to be an improvement over the earlier topcoding procedure.

These are only a subset of the problems extending the SIPP data back past 1996 would have introduced.  For us, the costs of backfilling data appear to outweigh the benefits.  If other parties wish to pursue that course, we’ll be interested in what they find, just as we hope others were interested in our findings.

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Call for Papers: National Business Law Scholars Conference

I am delighted to pass along the following notice from the organizers of the National Business Law Scholars Conference.  I’m also honored to report that they have asked me to deliver the keynote at this year’s conference, and I look forward to doing so.  

Deadline Extended to May 31

We have received an enthusiastic response to the Call for Papers for the National Business Law Scholars Conference, scheduled for June 12-13, at The Ohio State University School of Law.  We will have additional openings for anyone who would like to make a presentation but has not yet responded.  Thus, we have extended the deadline to MAY 31st.  See the Call for Papers, re-posted below with the extended deadline date, for details on how to submit:

National Business Law Scholars Conference: Call-for-Papers

The National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by MAY 31, 2013.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in late May.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

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Publicity and Illegality in Organizations

“Corporations do not commit crimes, people do,” would be a good thing for everyone to remember but those who like to vilify the corporation too readily forget.  A valuable new research paper canvasses much of the literature about wrongdoing by people in corporations. Rosa Abrantes-Metz and Danny Sokol focus on cartels that violate antitrust laws, shifting the lens from the firm level to those within a corporation and offering a broader review of screens useful to combat illegality.  It’s a great contribution to and synthesis of the literature.  

I will draw on its lessons as I revise the current edition of my accounting textbook written for use in law schools, as well as to reflect on the corporate governance aspects of this problem, addressed in several important passages of my collection of Warren Buffett’s letters to constituents of Berkshire Hathaway.

Buffett’s writings address the tone at the top and promoting a culture of compliance. As CEO, he sends a biannual letter to his managers emphasizing that the most important job of every one of Berkshire Hathaway’s 300,000 employees is preserving Berkshire’s reputation.  For 25 years, that memo has included some version of this sentence:  “We can afford to lose money, even a lot of money, but we can’t afford to lose reputation, even a shred of reputation.”

Another point he repeats will be of special interest to lawyers among our readership.  He says it is not enough to comply with the law or letter of law. Berkshire must apply a stricter test, called the New York Times test: we would be happy to have all our activities written up on the front page of a national newspaper in an article written by an unfriendly reporter.  It is a much more poignant test than whether you comply with a particular antitrust law or accounting principle.

I call the toughest battle to fight concerning compliance the disease of the crowd. A common defense of sketchy behavior is that everyone else is doing it.  In that letter, Buffett explains that such a  response is usually an excuse rather than a reason. If so, the action probably should be avoided.  To implement such a policy, Buffett offers  senior managers a hotline to him directly if they detect even a whiff of dubious behavior. Those managers pass that message down the ranks and establish parallel hotlines from their troops to them.

Above all, once wrongdoing is detected, swift and public action is required. The worst thing managers can do when they discover illegalities by their employees is try to hide it.  In America, people are very forgiving of substantive errors or even wrongs. They are relentlessly unforgiving of attempts at evasion, duplicity, or hiding things.  (“It’s the cover up, stupid.”) Although Jonathan Macey has recently released an interesting book lamenting the decline of reputation as the constraint portrayed in economic models, it remains a powerful force.  Read More

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Auditing’s Snafu: Foreign Secrecy and Impaired Audits

Many US companies maintain substantial global operations, with increasing volumes of business done in China; many foreign companies are listed on US securities exchanges.  This cross-border expansion makes the reliability of financial reports created in foreign locales increasingly important.  Yet, in tandem with this cross-border expansion, there have been increasing assertions abroad, including in China, that local secrecy laws restrict access to the work papers of auditors, frustrating the ability of US federal authorities to enforce US securities laws designed to promote financial reporting integrity.

The snafu was joined this week in a case where the SEC is seeking access to audit work papers of a Deloitte affiliate in Shagnhai but the firm refuses.  The firm’s lawyers cite Morrison v. National Australia Bank, the 2010 SCOTUS ruling that, absent explicit language, federal statutes are seen as intended to apply within the US, not be extraterritorial.  It said that the federal securities laws lacked such explication.   

Furthermore, for Deloitte to comply with the SEC’s requests, the lawyers said, would risk committing a serious crime under Chinese law, one punishable by imprisonment. Deloitte’s lawyers say that the combination of Morrison and Chinese secrecy laws puts the records beyond the SEC’s reach.

Lawyers for the SEC object that these points cannot possibly be seen to limit the SEC’s administrative subpoena power under which it has demanded the Deloitte documents. But, during oral argument, the SEC’s lawyers did not acquit themselves well, according to one report, as they could not readily cite the precise legal authority supporting their position. 

Deloitte says there isn’t one and that the appropriate procedure to handle such cross-border securities matters is by diplomacy not enforcement. In this view, the SEC is wrong to proceed against Deloitte in court but must dispatch appropriate US officials to broker a resolution with Chinese regulatory counterparts.

The stakes are high for both sides in the case, of course, and for investors and students of auditing. After all,  audits endow financial statements with credibility. Shareholders are willing to pay for audits in exchange for that credence value.  But if an auditor’s work papers are top secret, inaccessible even to a regulatory overseer, how much of an audit’s credence value is lost? Is it still rational for shareholders to condone paying the auditor’s fee?

When the credibility of financial statements are in doubt, investors should shun their issuer and sell the stock.  A critical mass of shareholders of companies affected by this snafu might do well to follow that old-fashioned Wall Street Rule. If they did, then, along with such companies, the need to resort to either a diplomatic or enforcement solution would disappear. Read More