Gatekeeper Failures: Why Important, What to Do

The United States was hit by a wave of corporate scandals that crested between late 2001 and the end of 2002. Some were traditional scandals involving insiders looting company assets – the most prominent being Tyco, HealthSouth, and Adelphia. But most were what might be called “financial scandals”: attempts by an issuer to maximize the market price of its securities by creating misimpressions as to what its future cash flows were likely to be. Enron and WorldCom were the most spectacular examples of these financial scandals. In scores of additional cases, the companies involved and their executives were sued by the Securities and Exchange Commission (“SEC”), and, in a number, executives were criminall prosecuted (p. 15). Hundreds of issuers were forced to restate their financial statements (p. 15). Why did this rash of financial scandals occur and what lessons for reform can be learned from the explanation? These are the questions addressed by Professor John Coffee in Gatekeepers: The Professions and Corporate Governance.