Lawyers Keep Out: Why Attorneys Should Not Participate in Negotiating Critical Financial Numbers Reported by Public Company Clients

Abstract

In response to the financial scandals at the turn of the century, Sarbanes-Oxley and related reforms radically changed the relationship between accountants and the companies they audit. As a result, auditors exert greater power in the negotiations with management that produce critical numbers in company financial statements. That power provides auditors with newfound ability to resist pressure to certify financial statements that are overly favorable to company stock prices.

With the best of intentions, some now urge that company attorneys should expand their efforts to police clients’ financial statements. But the introduction of lawyers into the bargaining between management and an auditor would likely reverse the benefits of the recent reforms. Attorneys today suffer from the very biases in favor of management that plagued auditors before the reforms. Lawyers’ client-focused ethos reinforces that bias. Their necessarily meager accounting knowledge, and the absence of any systematic review of lawyers’ input to such negotiations, mean that attorney bias will have free rein. Adding lawyers to the mix will therefore more likely hinder financial reporting than help.

JEL Classification: K22, M41