Professor
Larry Cunningham identifies compelling reasons for this
chapter:
A familiar pass-the-buck pas de deus in deal meetings
occurs when the accountant says, after an impasse,
"that's a legal problem" while the lawyer
says "that's an accounting problem." The
truth is, both are right; the trouble is, as Enron
shows, prevailing professional cultures create a crack
between law and accounting that resolute fraud artists
exploit, not cultures that emphasize the intersection
of law and accounting that should foil would-be fraudsters.
As policymakers rush to respond to Enron, this perspective
on law and accounting should be appreciated, as should
Enron's place in soecity's parade of corporate debacles.
At Enron's core are accounting chicanery related
to off-balance sheet financing and related party transactions,
but in its penumbra are also colossal examples of
governance, audit, and regulatory failure. Even in
its accounting aspects, Enron is both an isolated
example of fraud and epitome of systemic failure in
the financial reporting and disclosure regime. It
is another accounting scandal added to the sum of
accounting scandals that evidences a broader dysfunction.
While not in the league of the LBO, BCCI, or S&L
debacles, Enron as an accounting scandal is the straw
that broke the accounting camel's back.
Among possible regulatory responses are wresting
the standard setting function from the profession
of accounting and rendering accounting rules and standards
matters of law, as is done in many countries. While
such a bold move would surely constitute a huge power
shift from accountants to lawyers, the effect on the
competent business lawyer's practice would be more
modest. Competent business lawyers already treat accounting
principles as an important tool in their professional
toolbox, even if by virtue of the manner and source
of their present promulgation they are better understood
as facts rather than law.
Despite the increasing role accounting plays in business
law practice since the mid-1970s, accounting teaching
in law schools has declined. First taught in 1950,
professors at top schools rapidly published impressive
books and the number teaching the subject gradually
increased through 1975, its peak, and has decreased
as steadily since. In 1975, 150 full-time law professors
taught accounting while today only 96 do, a drop of
36% during a period when the number of law schools
increased by 19% and the number of full-time law professors
increased by 35%.
So beginning when accounting rose in practical importance
to lawyers, the academy began to demote its significance
in the law school curriculum. Reasons for the decline
include the rising intellectual influence of modern
finance theory. This theory's efficient market hypothesis
discounts the relevance of accounting data in a world
where financial analysts pierce the form of accounting
reports to discover fundamental values wholly apart
from accounting choices. In law schools, modern finance
theory became the centerpiece of a rival course, corporate
finance.
The string of accounting debacles culminating in
Enron show the folly and fantasy of ECMH and modern
finance theory. When coupled with the practice of
business lawyers, questions beyond pedagogy arise,
particularly the professional ethics of business lawyers.
It suggests that the ethical duty of competence should
require knowing some accounting. The professional
literature concerning legal ethics offers a more equivocal
answer. Yet all lawyers know that just because something
is legal doesn't mean it is right. In the area of
legal ethics, just because a duty can be technically
discharged in a painless way, doesn't mean client
interests are served.
Chapter 2 - Risk and Return
