Evaluation and Response to Risk: Co-Operation between Lawyers, Accountants, and Auditors

By Kirchner, Christian | Journal of Corporation Law, Winter 2004 | Go to article overview

Evaluation and Response to Risk: Co-Operation between Lawyers, Accountants, and Auditors


Kirchner, Christian, Journal of Corporation Law


I. INTRODUCTORY REMARKS

Evaluation and response to risks by lawyers, accountants, and auditors turns out to be a crucial issue not only for the three professions but for the functioning of capital markets as well. Whether and how lawyers, accountants, and auditors evaluate and respond to risk is a matter of how they are professionally trained to do so. It is also a matter of ethical standards of these professions, and last but not least it is a matter of regulation of these professions. The regulation may be, and regularly is, different for the three professions. Whereas auditors have a monitoring function and thus should be obliged to evaluate and respond to risk, lawyers consult on legal matters and thus enjoy a position vis-a-vis their clients characterized by mutual trust, which might be endangered if they have the obligation to evaluate and respond to risk. Traditional wisdom thus tells us that when it comes to risk evaluation and response to risk there should be a division of labor between lawyers, accountants and auditors. But, on the other hand, lawyers might consult with their clients in a way that certain risks can be disguised or are difficult to discover. This is true, for instance, when it comes to "creative" methods of accounting. Then it has to be determined whether regulation of lawyers should cover evaluation and response to risk. This might be one factor for the effective functioning of capital markets. It is this relationship between lawyers' ability and obligation to evaluate and respond to risk and the effective functioning of capital markets which will be discussed in this Article.

As far as the term 'risk' is concerned, this Article is not dealing with all sorts of risks but with one certain type of risk: the risk of investors making wrong decisions about investing in a company, due to false information from the company's financial statement. Such false information might be the result of manipulating the books of the company, manipulating financial statements, or of just making use of the wide discretion given to management by accounting rules and standards.

In the principal-agent relationship between investors (shareholders) and management, modern corporate and capital market law has built in several devices for the protection of the principals' interests, i.e. that of shareholders. One of those devices is the auditing of financial statements by independent auditors. Auditors are acting as agents for shareholders in order to monitor transactions of management. Management is responsible for accounting and financial reporting under the supervision of auditors. However, this control mechanism does not function when auditors are not fully independent and especially if it comes to collusion between management and auditors. Regulation of auditors has thus become one of the major topics in the wake of such cases as Enron and WorldCom, where investors have lost billions of dollars due to false information provided by financial statements.

Other professions may play a role in such cases as well, especially lawyers consulting management on legal devices which are utilized to enable manipulation of financial statements. This has been the case when lawyers design special purpose entities used to reduce the amount of liabilities in consolidated financial statements, placing them into the financial statements of such special purpose entities which have not been consolidated. The question then arises whether new control mechanisms-besides those of regulating auditors-should be put into action covering not only auditors but lawyers as well.

Today regulation of auditors and lawyers in many countries differs considerably. But both professions may be engaged in transactions which might directly or indirectly turn out to be harmful for investors. This Article shall not discuss proposals of regulating lawyers for the purpose of improving the functioning of capital markets. Rather, it shall deal with the question of how lawyers can be enabled to detect, evaluate, and respond to risk. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Evaluation and Response to Risk: Co-Operation between Lawyers, Accountants, and Auditors
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.