Lawyers and Accountants: A SEMIOTIC
Competition
Bernhard Grossfeld
Professor of Law, Law School
of Muenster, Germany.
excerpted from - 36 Wake Forest Law Review
167 (2001).
1. Basic Error
Lawyers belong to a time-honoured profession
from Babylonian and Roman times on. Their "bibles" are the Codex
Hamurabbi and Justinian’s Corpus Iuris. Common opinion has it that
accountants are of a much younger breed, their bible being Luca
Paciolo’s Venetian book from 1494. However, these stories do not
reflect reality. In reality, accountants came first: They took care of
the temple economy and they invented numerals from which our alphabet
was an afterthought. The original power lies with the powers of numbers
and, therefore, with accountants.
2. Upside Down
Since the times of Moses the written law had a
touch of holiness ("The tablets were the work of God: the writing was
the writing of God, engraved on the tablets."). The written law had
the flavour of fighting for freedom (from Egyptian slavery), where
economy came close to the "golden calf" as a symbol for return to
Egyptian slavery. Thereafter, the higher reputation went with the
lawyers ("profession") while the accountants ("business") stayed close
to Mammon. This turned the real world upside down.
3. Winds of Change
The shrinking of space and time brought about a
new space-time and shattered the position of the old lawgivers from
above: the national sovereignties. Instead, markets took over in first
shaping customs and then creating rules. The International Accounting
Standards are a prime example of this proposition. Small wonder that
accountants are the major beneficiaries. In addition, they take
advantage of the common belief that numbers have a worldwide meaning
and that specialists in numbers are, therefore, global economic
engineers. Compared with this gorgeous view, lawyers look like clerks
restricted to their local bureaucracies.
4. Corporate Governance
This dramatic change in outlook received
support from the changing concepts of corporate governance under the
rubric of "shareholder value." For many years it has been known
that the only long-term, efficient mechanism to control a publicly
traded corporation (these artificial "mortmains") is stock markets.
They define the capital costs of the firm, and they present management
with the risk of losing its position through a takeover.
5. Accounting
Global accounting is the king or the queen of
global financial markets. Accounting has long been belittled as number
crunching, but now it has lost its microeconomic image and has reappeared
as a macroeconomic instrument of formidable proportions. It triggers
the power of interests and compound interests, which Rockefeller
believed to be the "eighth wonder of the world" and which Einstein
regarded as more powerful than the H-bomb.
6. Accountants vs. Lawyers
What counts, however, is the changing positions
of lawyers and accountants along with this landslide in space, time,
and normative aspects. The change in corporate governance and corporate
control benefits accountants as the masters of global accounting, and
might restore the very original pecking order. Lawyers beware!
Corporate lawyers, for a long time, have
looked with disdain on these number-bureaucrats. They saw themselves on
the side of management against anything that could hurt management’s
position. The lawyer’s traditional role was to be loyal to inside
senior management and to maintain their confidences. The corporate
entity as such, as well as the voice and loyalty of other
shareholders, were often regarded as not being their business. The
American Bar Association’s Model Rules have done little to change this
unilateral view of legal ethics.
That opened wide opportunities for
accountants, whose reputations increased with the rise of global
financial markets. They presented themselves as trustees for
shareholders, pension funds, and analysts. Accordingly, accountants
stepped in where lawyers did not dare to walk. Today, accounting firms
have grown enormously in size and international reach, leaving lawyers
far behind. They provide corporate clients with all sorts of legal
services, calling themselves "multidisciplinary practices." Attorneys
are now a significant component of their staffs (unfortunately not the
partners).
The charm for financial markets lies in the
fact that these accountants—though no bloodhounds—have a "watchdog"
duty under the Securities Exchange Act, which requires them to notify
the Securities and Exchange Commission of suspected frauds. It is
unsettled whether this duty to disclose includes information that
attorneys working for them have learned, but it could be so. Lawyers
worry that this will foster conflicts between the obligation to report
irregularities and the duty to maintain client confidence. The public
has voted against these concerns.
7. Stonewalling
It goes without saying that lawyers hurry to
stonewall these intrusions onto their turf. As lawyers are trained to
do, they argue along normative and traditional lines. Lawyers also
indulge in the confidence that these newcomers lack the experience of
the long-established "old boys." But they probably need to wake up:
apparently the public again regards the accountants’ experience as
sufficient.
8. New Facts
New facts are, indeed, the name of the game.
The most important fact is the change in the point of view from which
we see corporations. Rules of accounting are corporation law in the
truest sense—building a cornerstone of corporate governance which is no
longer the lawyers’exclusive domain.
The most important factor seems to be that
accounting creates currency. Shares are used to buy up other firms, and
today they often constitute the most important acquisition currency.
But whoever has the power to define the purchasing power of currency
sits on top, almost like a private Federal Bank—like a private Alan
Greenspan in disguise. Is there any law firm that reaches this summit
of social power outside the public eye and largely outside legal
scrutiny?
9. Deficiencies
a. Proper Accounting
A closer analysis thus shows the reasons for
the lawyers’ predicaments: They lost sight of the changing
concepts of trusteeship. By compartmentalizing social dynamics
according to their letter-addicted concepts, they lost touch with new
social realities. Global markets care very little for priests of
national holy grails, but make facts, facts, facts reign supreme again.
Take for example the question of how
Amazon.com treated the large stock payments from other Internet
companies that are promoted by Amazon. The stock options are shown as
revenue. But what happens when the value of the securities falls? Does
Amazon go back and restate its revenue? No, "[i]nstead, it records the
losses in other less-scrutinized areas of its financial statements,
including lines devoted to investment gain and losses" (noncash loss).
Amazon’s bookkeeping is a wonderful example of how creative accounting
creates acquisition currency.
Accountants and finance professors are
regarded to be the authorities in this field. As the Wall Street
Journal states: "Treating the stock payment as revenue, which
accounting experts say is legal, raises questions." Is it not the
lawyer’s job to give an opinion on what is legal? Is there any lawyer
prepared to do so? Is he accepted as an authority in this field? Is he
the creator of currency? Is creating currency a matter of law? Yes,
certainly.
b. Proper Valuations
The power of creating currency is closely
connected with the power to turn stocks into cash without market
interference. This is the most important art when squeezing out
minority shareholders (appraisal rights). How to evaluate the payment
of cash? Here accountants reigned supreme for a very long time as
lawyers regarded this "art" as a kind of arcane mathematics to be left
to more highly qualified mathematical minds.
The history of this story of things is
demonstrated by Weinberger v. UOP, Inc., which decided how shares would
be valued in a corporate squeezeout of minority shareholders:
We believe that a more liberal
approach must include proof of value by any techniques or methods which
are generally considered acceptable in the financial community and
otherwise admissible in court . . . .
Note that the answer is left to the "financial
community" where—probably—accountants have the upper hand.
c. Transnational Corporations
Here the main instruments of global control are
worldwide consolidated statements. They alone are the instruments that
pierce the multitude of corporate members to arrive at the accumulated
economic and cultural power of the group. Such accounts are therefore
the center of gravity in any serious approach to come to grips with
these powerful global "payers." However, in his book Transnational
Business Problems, [law professor] Detlev Vagts deals with financial
statements under the heading "Notes on the Accountant’s View of the
Multinational Enterprise." If lawyers give away the prime "ocular" to
find out about facts, how do they expect to handle the normative
aspects? An old Latin adage tell us Da mihi facta, dabo tibi ius (give
me the facts, I will give you the law). Fact finding is the vital basis
of any legal discussion, as "facts are sacred, opinions are free."
17. Conclusion
Law students should get the chance to go deeper
into the field of accountancy. This is vital in keeping a balance
between "The Tyranny of Numbers" in a digital world and a balance
between the cultural values and experiences that are the core of our
legal systems, with lawyers as trustees.
