12
Faith in the Balance:
Catholic Social Thought and the
Vocation of the Accounting
Profession in an Evolving
Regulatory Framework
LESTER A. MYERS
ethics@mindspring.com
Abstract
HIS PAPER APPLIES the systematic normative approach of Catholic social thought
to reflect on the vocation of the American accounting profession in the context of the evolving
regulatory framework in which it has operated. The argument consists of three sections. First, it
analyzes and assesses the key stages in the historical and systematic evolution of the profession and
this regulatory framework from the late nineteenth century through the Sarbanes-Oxley Act of 2002.
Second, it analyzes the three substantive principles of Catholic social thought-subsidiarity,
socialization and solidarity with a view to their applicability to the regulation of the accounting
profession. Third, it invokes these principles to assess this regulatory framework in the wake of the
Sarbanes-Oxley Act. The conclusion is that this framework largely conforms to the first two
principles, but that it is deficient with regard to the third, principally because of the behavior of the
PART II: THE CALLING OF BUSINESS
modern accounting profession, regulators and other key decision makers. Only with reforms to the
profession and the broader political and regulatory process will it be possible for this framework to
conform to the principle of solidarity.
Introduction
The spectacular business scandals in the United States in the early 2000s involving Enron,
WorldCom, Andersen and other firms shocked and alarmed much of American society, as well as
global financial markets, for the audacious greed, arrogance and narcissism of the miscreants
responsible; the injuries their machinations caused to employees, investors and other stakeholders;
and the ominous implications of these deceptions for the stability and integrity of capital markets,
owing to uncertainty regarding the scale and scope of such behavior.
Several of these debacles involved patterns of misbehavior by members of the American
accounting profession,1 particularly those in public accounting firms who were responsible for
providing “attest”2 services, especially audit services, for their clients. Numerous episodes came to
light in which auditors failed to adhere diligently to the profession’s body of auditing standards.3
According to these standards, when an accounting firm enters into an audit engagement with a
client, it contractually undertakes a formal process for discerning and constructing the basis for
rendering an opinion regarding the fairness of the client’s representations in its financial statements.
In addition to their contractual duties to one another, the auditor and the client undertake duties to
other external stakeholders whom they actually or constructively recognize at the time of their
agreement, e.g., creditors of the client and regulators on behalf of the public. These duties stem from
the legal doctrine of privity of contract, from statutory and regulatory requirements and from a
growing consensus regarding best practices in stakeholder management. As a consequence, when
auditors fail to follow these standards they not only breach contractual and related duties, but they
often violate federal and state civil and criminal provisions for the regulation of securities markets,
and common ethical standards in society relating to fairness, honesty and respect for persons.
In some cases auditors acted negligently, i.e., they failed to exercise due professional care,
particularly when dealing with clients that sought to deceive them and the public through their
financial statements. In other cases auditors’ failures resulted from their appeasement of reckless
clients in an attempt to avoid losing audit fees and, what is more to the point, the consulting and
other fees that came to occupy an increasing portion of accounting firms’ revenues in the final
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decades of the twentieth century. The ethical challenges these and similar trends and behaviors have
posed to the accounting profession, and to all who rely on the diligent practice of accounting,
constitute the topic of this paper.
The scope of analysis for this inquiry encompasses the historical and systematic elements of the
regulatory framework for the American accounting profession, with a special focus on the audit
function.4 In its evolving features of public- and private-sector oversight, this framework has
mirrored the development of accounting from a practice to a profession, most of whose leading
theoreticians and practitioners have discerned and embraced a robust sense of vocation to diligence,
fairness and integrity in serving clients and the public. The recognition of this commitment by those
inside and outside the profession has inspired experiments in regulatory oversight that have drawn
upon the demonstrable and salutary resources the profession has formulated and applied at critical
moments in the development of industrial and post-industrial economies. At other times when
accountants have failed to live up to the high example they have set, painful recognition of this fact
has fueled disappointment inside and outside the profession and has provoked calls for structural
reforms to this regulatory framework, including the reassertion of external oversight.
The most dramatic episode of such reform to the regulatory framework occurred with the
passage of the Sarbanes-Oxley Act of 20025 (SOA), which effectively reclaimed much of the
oversight for setting accounting principles and standards that the Securities and Exchange
Commission (SEC) had delegated to the profession in the 1930s. However, even in the turmoil of
the scandals, this legislative response did not uncritically impose a broad governmental regime, but
instead made primary recourse to a new locus of private-sector oversight. The purpose for this
analysis is to justify normative conclusions about this regulatory framework, particularly in light of
these dramatic changes. The normative approach for responding to this question is an ethical and
public policy tradition that has grown up roughly contemporaneously with the American accounting
profession, viz., the tradition of Catholic social thought.
The argument consists of three parts. First, a historical narrative analytically recounts the
development of the accounting profession in the United States and its public- and private-sector
regulatory framework. This discussion traces the origins of the profession from the contributions of
immigrant English and Scottish accountants in the nineteenth century to the formalization of
practice standards, early initiatives for cooperation between the profession and regulators to
safeguard capital market participants and the largely self-regulatory regime in which the profession
flourished in the decades following the aforementioned federal delegation of oversight in the 1930s.
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Despite growth in the vitality and contributions of the accounting profession for much of the
twentieth century under this arrangement, the framework broke down by the beginning of the
twenty-first century, due principally to three factors. First, as the practices of financial accounting
and auditing became more complex and specialized, accountants, attorneys, clients and other parties
came to rely too heavily and uncritically on one another’s credibility, without diligently seeking a
complementary independent grasp of systematic issues. Second, as accountants began to offer
significant, more lucrative nonaudit services to clients, they overextended their practices in areas
where they had little experience. In occasionally being in the awkward position of auditing systems
that reflected their own contributions, and in their growing dependence on the fees and on the
nonaccountant colleagues who helped provide these alternative services, they surrendered a measure
of their independent professional judgment, particularly as auditors. Third, the profession emerged
as a cohesive special-interest group and potent political force during the twentieth century, with the
power to attenuate and even neutralize external regulatory oversight through political campaign
contributions, endorsements, lobbying, public relations and other activities. Accountants were hardly
unique when it came to such behavior, but these practices posed moral risks to the profession’s
historically admirable commitment to high standards of service to clients and the public, and they
aggravated the corrosive effects of money and power on the quality of democracy and regulatory
oversight in the public interest. A dramatic example of these effects is the story of the profession’s
influence on the promulgation and implementation of the SOA, with which section I of the paper
concludes.
Section II of this paper discusses the meaning and practical relevance of the three substantive
principles that historically and systematically have informed the core of Catholic social thought:
subsidiarity, socialization and solidarity. These principles provide guidelines for responding to social
challenges or problems out of a substantive grounding in the Catholic moral tradition that reflects an
intellectual sophistication commensurate with venerable concepts in philosophical ethics,
economics, public policy and law, and an institutional moral authority that can be conducive to
committed action. These principles are not merely sound guidelines for effective managerial
responses to social challenges or problems, but also credible ethical directives for principled
leadership to protect articulable moral interests of relevant stakeholder communities. Though
logically distinct, these principles are complementary to one another, and their conceptual
intelligibility and practical effectiveness rest on respect for this integrity.
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Section III of this paper applies these principles to the regulatory framework for the accounting
profession in the wake of the reforms of the SOA to assess whether this arrangement conforms to
these guidelines. This section argues that the institutional elements of this framework that Congress,
the SEC, the stock exchanges and the profession have crafted have been largely consistent with the
principles of subsidiarity and socialization, but that the framework has been deficient as regards the
principle of solidarity, viz., in the personal commitment of key decision-making stakeholders to
participate meaningfully in these and other institutions in ways that promote a pervasive and abiding
concern, not just for the public interest, but for the common good. While the SOA itself is facially
meritorious, the morally problematic story of its drafting, promulgation and clumsy implementation
has provided dramatic testimony to the regulatory framework’s persistent deficiencies. The SOA is a
necessary, but not sufficient response to the structural weaknesses in this framework, not only as
they revealed themselves in the aforementioned scandals, but also as regards the deeply troubling
political activities of the accounting profession.
On the basis of the systematic complementarity of these three principles, this paper argues that
conforming policy and practice to them in an integrated fashion is necessary to enable the regulatory
framework for the accounting profession to achieve and sustain the salutary moral and financial
equilibria that over the long run are consistent with the ethical interests these principles seek to
safeguard. In particular it will be necessary for members of the profession, Congress and regulatory
agencies, and other key stakeholders to formulate an articulable, substantive and actionable vision of
social solidarity toward the common good. This will be a difficult process, both because of the need
for continuing clarification regarding the prescriptive claims of the principle of solidarity itself and
because of a pervasive countervailing ethos in and around the profession, the federal regulatory
apparatus and the political process that emphasizes private interests over public ones. However,
working toward such true reform remains a meritorious policy objective, in large measure because it
will help to recover and renew an articulable and positive ethical vocation for the profession as a
contributor to society, and to avoid repetition of such scandals.
The metaphor of vocation is rich and compelling for its contemplative depths; its pervasive
engagement with the whole person; the aspirational hopes it occasions in business, professional life
and other familiar regions of experience and the spiritual consolations and desolations that come
with discerning and responding to the experience of a “calling” as simultaneously a journey and a
journey’s end.6 In these qualities the experience of vocation touches professionals qua professionals,
whether their groups are incipient or whether they have enjoyed social recognition and license for
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centuries. There are numerous descriptive, sociological and prescriptive dimensions of the concept
of a “professional,” including the root meaning of someone who professes faith of some sort,
whether in God or in his or her colleagues. For the purposes of this inquiry, one may understand
“professionals” to be those who listen (and look) (1) inwardly for their vocation; (2) to colleagues for
the measure of their discipline and diligence and (3) to clients and society for the moral license and final
judgment of the efficacy of their practice and service of counseling, guiding and healing others and
rehabilitating and redeeming unjust structures and institutions.
This way of framing what it means to be a professional clearly can and does apply to practices
beyond accounting. However, given the dramatic history and contributions of this discipline to
social and economic development and the astounding lapses in judgment of some of its practitioners
at critical moments, including the early 2000s, this construction provides an eminently appropriate, if
bittersweet, perspective for reflecting on the story and state of this profession. This representation
of professionalism portrays the essential linkage between this history and the perennial normative
issues that arise in the work of accountants. In fifteenth century Venice, Fra Luca Paciolo made
systematic the practice of double-entry bookkeeping, and this provided a powerful tool for the
eventual development of modern capitalism. In discerning in this method a sign of divine
proportionality and balance, though, he elevated it above a mere commercial practice, and he
signaled its own higher calling in such a way as to render accounting unintelligible without this
essential vocational identity and dimension.
This inseparable vocational character of accounting that is the mark of the practice’s systematic
indebtedness to and association with the Catholic intellectual tradition simultaneously provides a
reminder that a vocation, and the responses to it, occur in historical contexts, including the regions
of business and professional life. When it comes to assessing the regulatory framework for the
accounting profession, it thus is impossible to separate the force of the normative analysis from the
evidence in the historical narrative. In order to perform this analysis meaningfully and convincingly,
it is essential to read the “signs of the times” and to engage and analyze the history of the
profession, in its grace and disgrace. It is to this task that the argument now turns.
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I. A Brief History of the Accounting Profession,
Corporate Financial Disclosure and
Auditing Practices in the United States
Accountancy plays a great part . . . in the market career of the security. It is customary for
bankers to rely in making up their statements on accountants’ reports, and the integrity of the
accountant and the soundness of his method are the greatest single safeguard to the public investor
and to the market in general.
ADOLF A. BERLE AND GARDINER C. MEANS
The Modern Corporation and Private Property7
A. Early Adopters: The Leadership of the American Accounting Profession and Stock
Exchanges in Promoting Corporate Financial Disclosure and Audit Review
American audit practice evolved amid institutional influences in Great Britain as well as the
United States, including legislation, judicial rulings and the guidelines of accounting associations;
however, there was less concern in the United States for protecting the public at first.8 For one
thing, the American economy was one generation behind the British in terms of large-scale
industrialization and the concomitant process of building a vast capital market infrastructure; prior
to 1850 most business activity took the form of sole proprietorships and partnerships.9 In addition
American society had not undergone the disruptive trauma of Britain’s South Sea Bubble affair, a
massive eighteenth century financial collapse due in part to fraudulent financial statements and
“stock pumping.”10
On the regulatory front the federal government was decades away from exploring the robust
potential of its Commerce Clause powers that would become so familiar in the New Deal. Even
though the path to corporate status came through state charters, state governments did not
promulgate substantive corporate laws until 1860 since there was so little demand for that form of
organization.11 To this day corporate regulation has remained primarily the prerogative of individual
states.12
From the 1880s until the 1930s, the prime movers for audit review and public disclosure of
corporate operations in the United States were the professional accounting organizations and the
stock exchanges. The ethos surrounding American audit practice emphasized economic efficiency:
corporations paid for only the minimum reviews necessary for exchange registration and public
acceptance.13 The latter concern was a complex matter, reflecting the need to respond to and even to
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preempt the criticism of Thomas W. Phillips, a member of the United States Industrial Commission,
and others regarding the secretiveness of the large trusts that had appeared at the turn of the
century.14
Accountants’ leadership in auditing reflected a direct British influence in one respect, however.
In the 1880s and 1890s, at the invitation of investment bankers in New York, several English and
Scottish accountants came to the United States to review operations of companies that the bankers
partially owned and to assist in reorganizing the railroads.15 These accountants’ professional selfawareness, habitual reliance on legislative support and newly formalized approach to their duties
were novel and even out of place in the United States, where indigenous accountants still focused on
bookkeeping and basic management.16 Nevertheless, their self-confidence, finesse and professional
skill brought them into contact with other prominent professionals, e.g., attorneys, bankers and
industrialists, and they quickly began to influence business practices.17 Beginning with Price
Waterhouse & Co., British and Scottish accountants formed American branches of their firms.18
They then rapidly transferred their developed profession into the relative financial wilderness of the
United States. The result was a growing constituency of professionals19 (and clients) that did not wait
for regulators or courts to promulgate guidelines.
With the first importation of British practice, auditing in the United States began to consist
largely of verification of details in journals and general ledgers; the attest function was paramount
for the British, and the vast majority of audit effort went to checking the arithmetic of columns of
numbers and the correctness of ledger postings.20 On one hand such procedures seemed necessary;
there were many mistakes in accounting records, some lasting years.21 Embezzlement and other sorts
of fraud also were common, leading to widespread bankruptcies of new industrial companies; much
of this had to do with the aforementioned absence of federal regulation.22 There clearly was a need
for attest-driven audits. On the other hand, despite advances in the previous generation, the auditor
of the 1890s remained a glorified clerk, a status that was not helpful in building esteem for the
profession.23
B. From Debt to Equity: The Rise of a National Capital Market and the New Exigencies
for Accountants, Corporate Financial Disclosure and Auditing
Since American industrial companies relied heavily on revolving bank credit for their capital
financing through the late nineteenth century, the country’s capital markets remained largely
regional; this was despite the contribution of the railroad industry to the ascent of the stock
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exchanges in New York.24 At first many banking relationships were quite familiar and extending
credit was not difficult; through long and close associations, bankers knew the risks about as well as
any outsider could know them.25 This began to change as the capital-financing needs of the
companies expanded, however. As borrowers gradually sought funds from more geographically
distant banks, approval terms became stiffer. From the bankers’ perspective, default led to possible
liquidation of the company, perhaps after costly and time-consuming litigation. To bolster their
comfort in extending credit to distant borrowers, bankers began to require a signed balance sheet;
this document was useful for the financial assessment of a loan applicant and, if circumstances later
required it, the parties could submit it to a bankruptcy court.26 Because of this requirement by
bankers, the demand for balance sheet certifications grew sharply; between 1900 and 1914, this
occupied a substantial portion of the time and work of CPAs.27
Reliance on a balance sheet with an increased concern for liquidity meant that reporting of
current assets and liabilities received more attention, and long-term assets and equities, less. This
different use of the balance sheet in turn led to a change in the justification for an audit: a 100
percent verification of arithmetic and postings to the general ledger became unnecessary in the
United States, just as it had been in the United Kingdom.28 The changing interests of borrowers
afforded accountants opportunities to experiment with selective examination techniques, e.g.,
statistical sampling, in part due to the larger number of transactions in current accounts.29 The
companies cooperated, since they never had been enthusiastic about paying for more audit services
than were necessary for certification. In light of these pressures, some American accountants began
to exercise more independence and innovation than their colleagues in the United Kingdom by
advocating review of a company’s system of internal accounting control as the first stage of an audit,
making firm management effectively assist in the review without compromising independence; this
did not become widespread until the 1920s, however.30 In the meantime, the accountant finally had a
good reason and an opportunity to enjoy liberation from the life of a clerk; the days of merely readding columns and cross checking totals from journals to the general ledger were over. For once
the needs of the banks, the companies and the accountants coincided.31
However, a more widespread requirement for auditing balance sheets was insufficient to
guarantee that more formal procedures for effecting this would appear. The growing interregional
character of bank lending made it clear that neither corporate disclosure nor audit procedures were
uniform across the country; the accounting profession, the lenders and the government saw a need
for nationwide standardization of reporting and auditing.32 There was growing evidence that the
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companies also were seeing this exigency: a number of large firms began to issue annual reports in
the first years of the twentieth century, notably United States Steel, International Harvester,
American Telephone & Telegraph and Westinghouse Electric & Manufacturing.33 These reports
were largely experimental from an accounting perspective, since the companies sometimes meant
them for other purposes as well. For example, American Telephone & Telegraph’s publication was
as much a public relations pamphlet as an accounting report. The likely motivation of United States
Steel was to minimize perceived risk among creditors (and its cost of capital), or simply to preempt
popular calls for governmental regulation of such reporting.34 However, that they did this at all set a
precedent. The accounting profession responded to these gestures with a focused analytical
discussion in an influential column in the Journal of Accountancy from October 1906 until September
1907. Thomas Warner Mitchell, an early prominent corporate finance scholar at the University of
Pennsylvania, wrote all but one of the columns.35
C. Early Federal Initiatives on Corporate Financial Disclosure and Audit Practice
In addition to these moves from the companies and the increasingly cohesive accounting
profession, the federal government applied its regulatory force, albeit indirectly. In 1917 the Federal
Trade Commission (FTC) asked the American Institute of Accountants (AIA) to draft a guide of
American audit scope and practice. This came in the wake of progressive income taxation during
World War I, which prompted closer governmental monitoring of corporate income reporting.36 It
is significant that government regulators thought it prudent to go to practicing accountants for the
guidelines. They did not simply descend on the profession and the companies and mandate
disclosure requirements. Rather, they recognized that the experiences of both constituencies enabled
them to contribute something to the regulatory regime, and the result was the beginning of a
cooperative and mutually beneficial partnership.37 Other interested groups would come to benefit
from this collaboration, including the investing public.
The AIA responded to the FTC’s request by preparing the guide, and after the institute’s council
and the commission reviewed it, the Federal Reserve Board (FRB) distributed it as Uniform Accounting
in the April 1917 Federal Reserve Bulletin. One year later, the same parties jointly published a revision
as Approved Methods for the Preparation of Balance-Sheet Statements, and they distributed a copy to each
member of the institute.38 This publication contained recommended formats for a balance sheet and
a comparative income statement and detailed directions for examining specific accounts in each.
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Although this document remained a recommendation, it was a major step toward the profession’s
effective self-regulation and its partnership with public and private regulatory authorities, including
the stock exchanges. It aligned American audit practice more closely with the British, and it was a
helpful precedent for the more complex corporate regulation to come in the 1930s.39
Despite the methodological convergence of British and American practices, differences
remained: British audits through the 1920s continued to report on the accuracy of bookkeeping,
while American audits began to address the need to render an opinion on the fairness of the
financial statements in disclosing the overall condition of the business.40 Until American accountants
became explicit about this distinction, there was danger of misinterpreting their use of British
expressions in audits, e.g., that financial statements gave a “clear and correct view.” The British used
these terms for legal purposes. Until American auditors clarified this, they left themselves legally
liable for “overcertification.”41
In the 1920s, as corporations made greater use of national stock exchanges for capital financing,
a new constituency arose for the use of financial statements: individual investors, a source of capital
qualitatively distinct from the institutional players such as banks, investment houses and the newly
ascendant class of superwealthy patrons whom they served; the typical members of this group had
much smaller pools of economic resources, proportionately less potential to affect markets and only
limited understanding of accounting.42 The members of this group clearly approached the market
from a more vulnerable bargaining position than the larger participants.
With this new presence there was renewed scrutiny of corporate disclosure practices: J. M. B.
Hoxsey of the New York Stock Exchange (NYSE) accused corporations of not publishing their
sales results, failing to take depreciation, recording nonoperating income inconsistently, failing to
segregate retained earnings from additional paid-in capital and failing to disclose arbitrary increases
in assets.43 He felt that reporting practices appropriate to businesses’ previous reliance on short-term
bank borrowing, e.g., overconservatism, were out of place in stock markets. Ripley, a Harvard
economist, performed a systematic analysis of annual reports in this decade and arrived at
substantially the same conclusion: Corporations still were keeping vital information from the
investing public, and some information they were releasing was deceptive. He appealed to the FTC to
flex its muscle once more.44
Pressure was building for a regulatory response. A member of the premier stock market and a
prominent scholar were agitating for change; the existing regulatory framework between the
government, the accounting profession, the exchanges and the companies was increasingly
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inadequate. The FRB and the AIA revised and republished their 1917 document early in 1929, only
months before the most perilous epoch for the world’s stock markets; it was entitled Verification of
Financial Statements.45 It still recommended auditing balance sheets of firms desiring short-term bank
financing; however, acknowledging the new prominence of regional and national capital markets, it
focused on income statements along with reporting procedures.46 It also formally endorsed the
increasing practice of evaluating a firm’s system of internal accounting control, and, in an important
step toward redefining the nature and purpose of an audit, it amended the model audit opinion to
focus on the fairness of the financial statements.47
At about the same tim,e key judicial rulings further influenced development of audit practice,
particularly in enumerating those to whom auditors were responsible. In Craig v. Anyon48 a New York
appellate court seemingly followed British precedent and limited liability to clients, as long as the
auditor demonstrated “reasonable care.”49 This narrow interpretation did not last long, however.
A landmark verdict appeared in 1931, also in New York, in Ultramares Corp. v. Touche, Niven &
Co.50 Prior to this case auditors acknowledged no formal liability to parties other than the client,
including creditors who relied on audited financial statements to make loans (which sometimes
subsequently became uncollectible).51 Judge Cardozo, writing for the New York Court of Appeals,
ruled that a third party that suffered such damage could hold an auditor liable, but only for fraud.52
However, a court could infer fraud from a grossly negligent audit, and this could open the auditor to
liability to any party who suffered injury from reliance upon the audited financial statements; this
liability would arise whether or not the accountant previously was aware of the injured party’s reliance
on the audit opinion.53 In short, auditor liability to the public had become almost as binding as to the
client. The profession responded quickly by revising the standard audit report, dropping the assertion
that accountants were “certifying” the financial statements in favor of merely rendering an opinion.54
For their parts, the NYSE and the AIA continued their dialogue on disclosure in the years after
the stock market crash in 1929. George O. May, the chair of the institute’s Committee on
Cooperation with Stock Exchanges (and a Briton), took leadership in this. He supported equipping
American auditors with the powers and responsibilities that the British Companies Acts had
conferred.55 The exchange itself already was regulating companies in at least a small way; for ten
years it had been requiring financial statements from listed companies, though its aspirational
standard for independently audited results did not become a requirement until 1933.56 In October of
that year, it implemented May’s suggestion that corporations be allowed to select their accounting
methods from among “accepted accounting principles,” with proper disclosure of their decisions
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and consistent application thereafter.57
The import of this development for the history of accounting well exceeded the practice of
auditing. A consensus was emerging in the profession on the repertory of (generally) accepted
accounting principles, and these became the centerpiece of the criteria for evaluating the fairness of
financial statements. The standard audit opinion eventually changed to reflect this and to emphasize
that financial statements themselves were representations of management. The institute began to
recommend that all accountants use this standard format of the audit opinion. Its hope was that
such general usage would cause exceptions to alert readers immediately.58 This philosophy has
continued to the present, even as the wording of the model audit opinion has undergone
refinements in the meantime to delineate further the roles and responsibilities of (1) management as
the author of the financial statements and (2) the auditor as the evaluator of the fairness of the financial
representations therein. The savings and loan and insider trading scandals of the 1980s in particular
prompted such changes (though principally as preemptive moves by the accounting profession to
avoid litigation and loss of regulatory control).
D. Nothing But Blue Skies (and Blue Markets): State Initiatives, Scandals and the
Precursors of the Federal Securities Acts
Great corporations exist only because they are created and safeguarded by our
institutions; and it is therefore our right and our duty to see that they work in
harmony with these institutions. . . . The first requisite is knowledge, full and complete;
knowledge which may be made public to the world.
THEODORE ROOSEVELT59
It may help to appreciate the ethos regarding shareholder relations that reigned during the
nineteenth century to consider the one-sentence response of the treasurer of the Delaware,
Lackawanna & Western Railroad Company to the 1866 request from the NYSE for financial
reports: “The Delaware, Lackawanna & Western R.R. Co. make [sic] no reports and publish no
statements and have done nothing of the sort for the last five years.”60 Prior to 1900. this was typical
as corporate managers volunteered precious little information about their firms’ operations.61
Corporate disclosure, whether to a stock exchange or even to the shareholders, was purely at the
whim of these managers:
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During the 1870’s and 80’s [sic] the New York Central rendered no annual report to its shareholders. Some
carriers were more condescending. Early reports of the Chicago and North Western contained the names and
addresses of the shareholders, doubtless so each could see the excellent company he was keeping. The
Westinghouse Company seems to have held no annual meeting for almost ten years between 1897 and 1905;
the United States Express Company held no stockholders’ meetings in this era, nor submitted any financial
reports to its stockholders. It is not surprising, then, that a government report on the subject in 1900 states:
“one of the chief evils of large corporations is the lack of responsibility of the directors to the stockholders. In
many cases the directors hold their positions for a series of years, and practically never make reports that are
calculated to give to the individual stockholders much light on the actual methods of management.”62
Despite courteous and diligent efforts, the NYSE had had limited results in convincing corporations
to disclose more information. Corporate secrecy was customary for at least four reasons:
(1) there was no tradition of publicity;
(2) management did not believe the public (often even shareholders) had a right to the
information;
(3) managers feared that they would aid competitors by releasing the information; and
(4) the doctrine of caveat emptor still reigned in American economic life.63
There were incremental improvements as companies began to issue periodic reports, but by modern
standards information was fragmentary and not amenable to easy comparison between companies;
investors still evaluated purchases by considering the reliability and reputation of the investment
bankers rather than by analyzing the financial merits of the investments themselves.64
Those investors who sought comfort in the press often met with sore disappointment as
reporters at the New York Times, the Wall Street Journal and other publications took bribes from—and
then joined— “stock pools” of corporate executives and publicity agents; the sole purpose for these
arrangements was to manipulate coverage of corporate operations and results to benefit the
members of these pools.65
In response to the Final Report of the United States Industrial Commission, which criticized
“secrecy in promotion” of stocks of trusts and other business combinations,66 Congress created the
Bureau of Corporations in 1903.67 The first report of James R. Garfield, Commissioner of
Corporations, the following year pointed to secrecy and dishonesty in promoting stocks and
corporate administration and “misleading or dishonest financial statements” as the “principal evils
[of] present industrial conditions.”68 He recommended a regime of federal licensing for corporations
to deal with issues that state laws could not regulate effectively and to restore the principle of
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“individual responsibility” in corporate law by requiring disclosure; however, despite a second
recommendation from him two years later, this did not happen.69 Nevertheless, as a result of his
findings, between 1905 and 1914, members of Congress introduced twenty bills providing for
federal incorporation statutes or licensing of corporations, many of which relied on publicity “as a
deterrent to overcapitalization.”70
As early as 1901, President Theodore Roosevelt began proposing legislation to require full
publicity of corporate accounts for firms transacting interstate business,71 intending this principally
to govern the railroads, and assigning regulatory responsibility to the Interstate Commerce
Commission (ICC) because of its oversight of this industry.72 A similar provision appeared as a
plank in the Republican platform of 1908. President William Howard Taft likewise recommended a
statute to provide for federal incorporation in 1910 and 1911, though he reversed his position on
this in 1912. Despite these numerous federal licensing and incorporation initiatives from the
executive and legislative branches, there was insufficient political support to bring them to fruition.73
The Investment Bankers Association (IBA) also had proposed corporate fraud laws and a
federal incorporation statute (even though its leadership knew the latter had no chance of passage).74
The association had drafted a Model Securities Act between 1913 and 1915 and had tried to
influence states as they drafted their own securities statutes.75 The content of the model provisions
dealt largely with fraud and granted investigatory, injunctive and prosecutorial powers to state
officers, but the association scorned further proposals for registration of securities and licensing laws
as “crude paternalistic measures.”76 Nevertheless, beginning with Kansas in 1911 and proceeding
until the eve of the federal securities legislation in 1933, the territory of Hawaii and every state
except Nevada enacted some form of regulatory security statute, with many of these laws calling for
substantive merit regulation of the risk and fairness of securities and their issuers in addition to
financial disclosure.77 Early on people came to know these statutes as blue sky laws.78
While the states were making legislative progress toward enhancing corporate openness, the
efforts of the NYSE to increase disclosure continued apace. Its agreements with the General Motors
Corporation in 1916 and the American Smelting and Refining Company in 1918 to publish extensive
financial data on a regular basis were major breakthroughs in their campaign for more disclosure.79
However, despite these advances it still had to negotiate with corporate managers to elicit most of
the disclosure that did occur through the early 1930s.80 If a corporation did not want to comply with
the exchange’s exacting disclosure standards,81 it easily could opt for trading its securities as
“unlisted” on the New York Curb Exchange (which later became the American Stock Exchange) or
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on one of the other seventeen regional exchanges that allowed such a trading status.82 Meanwhile
even for those companies whose managers elected to continue trading on the NYSE while
committing fraudulent or suspicious acts, the threat of discovery became progressively less likely
because the exchange’s staff became thoroughly inadequate to enforce the exchange’s disclosure
regime as the number of new stock applicants increased.83
The blue sky laws likewise proved ineffective in the fraud waves of 1917 through 1920 and in
the late 1920s, principally because (1) enforcement could not proceed beyond state lines and (2)
even within their home jurisdictions, regulators in some states remained susceptible to pressure from
local corporate interests for lenient treatment.84 Moreover, the disclosure provisions in these laws
were not especially robust; they did not succeed in providing market participants with the amount of
information they needed to appraise the merits and risks of new issues.85 These laws more closely
resembled a regime of mandatory inspection whereby the companies filed the information with state
agencies but for the most part did not release it to the public. The principle underlying the laws was
that such corporate information was “private,” of interest only to existing shareholders and not the
general public.86 For these reasons and because of the distraction from the buoyant economy of the
1920s, many states lost interest in the blue sky laws.87 Indeed, the ostensibly prosperous economy
and the IBA’s partial success at influencing the course of state legislation led it to place “complete
faith in its own ability to discipline the securities industry.”88 By the time of the stock market crash in
1929, the efforts of federal and state governments, the NYSE and professional associations such as
the IBA and professional accounting organizations to elicit greater openness from corporations had
met with mixed success. When the crash finally came, some critics accused the entire nominal,
incipient regulatory apparatus of complicity:
[T]he market crash did not occur from greed alone or only because predatory individuals exploited ignorant
investors. The crash occurred, in part, because institutions, including the Investment Bankers Association and
the New York Stock Exchange, lacked the will, the ability and the administrative apparatus necessary to
regulate greedy and predatory individuals.89
Yet, as the effects of this financial catastrophe spread throughout society,90 public clamor grew for
decisive and wholesale regulatory action.91 The first investigations revealed how widespread the
fraud had been.92 For at least 30 years preceding the passage of the Securities Acts of 1933 and 1934,
there were waves of widespread fraudulent activity in financial markets.93 One index of the extent of
these problems comes from the large number of injunctions and other enforcement actions that the
various state securities regulators initiated under the blue sky laws.94
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During Word War I Congress authorized the Capital Issues Committee to manage a voluntary
federal system of securities regulation to ensure that the country’s financial resources would go to
national defense. In its final report of 1919, the committee conservatively estimated that annual sales
of fraudulent or worthless stocks totaled $500 million; it also recommended that Congress pass a
federal securities law.95 Despite the support of President Woodrow Wilson, Secretary of the Treasury
Glass, the FTC, many members of Congress and frustrated state officials responsible for enforcing
blue sky laws, several bills in support of this failed to pass.96 It took another wave of financial
scandals involving deceptive marketing and trading of foreign government bonds to garner sufficient
popular support for decisive federal action. 97
As hearings of the Senate Finance Committee beginning in December 1931 would show, many
of these debacles were due to inadequate disclosure, and even outright fraud.98 Most of the
documents that bond promoters had provided to investors—one hesitates to call them
“prospectuses”—highlighted positive promotional aspects of the bonds (real or imagined) rather
than investment risks; the documents were “extremely brief, many occupying less than a page in the
printed [transcripts of the Senate] hearings.”99 These machinations, in addition to the Pecora
hearings’ revelations in 1933 regarding widespread accounting fraud and manipulation of stock
warrants, and the absence of corroborating prospectuses and meaningful informed consent in proxy
solicitations provided overwhelming evidence to policy makers and the public that a dramatic,
unprecedented and immediate federal response was necessary.100
E. The Securities Acts of 1933 and 1934
In defining moments in the history of corporate regulation, Congress101 passed the Securities Act
of 1933102 and the Securities Exchange Act of 1934.103 The first act required companies to register
issues of securities with the FTC prior to selling them across state boundaries.104 It also mandated
that companies provide independently audited financial statements to the FTC and the public.105
This legislation required a party alleging injury from reliance on audited financial statements merely
to show the reliance; the accountant had the burden of proof in defending the integrity of the
audit.106
The 1934 act required registration of stock issues before they could trade on national exchanges;
it also required companies trading on public capital markets to publish and submit audited financial
statements to the newly created SEC, which also became responsible for administering the 1933
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act.107 The second act was more even-handed from the accountant’s perspective, since it placed the
burden of proof for injury on the investor (who indeed had to show injury from reliance on the
audited statements, not just reliance).108 The two pieces of legislation were distinct in that the 1933
act conferred upon the FTC the power to carry out particular, well-defined tasks regarding the
registration of public securities offerings, while the 1934 act enumerated a series of problems “for
which Congress articulated neither the means nor the end objective,” instead delegating these tasks
to the SEC for specific applications.109
For many interested constituencies and observers, the most explosive aspect of the 1934 act was
that Congress and the President gave the SEC wide latitude in setting accounting standards. The
disclosure requirements of these laws were more detailed than any piece of company legislation to
that time (in any country). They specified the methods of bookkeeping that registered corporations were
to use, as well as the format of the financial statements themselves.110
Yet in practice the SEC did not wield these powers heavy-handedly. It continued to defer to the
AIA for many of the practical aspects of the evolution of accounting principles and reporting
procedures. Much of this had to do with the limitations in its enforcement capacities, but the
commission also recognized the institute’s expertise in these matters.111 In fact, between 1936 and
1938, it handed back to the private sector—principally to the accounting profession—many of its
most imposing regulatory powers, including the power to develop corporate financial reporting
standards.112
The SEC retained a very important role, though. It provided a level of oversight to keep the
profession vigilant in complying with its own principles and standards of practice. Just as it had done
with the FTC, the institute maintained ongoing discussions with the SEC on corporate disclosure
issues. This meant that the new commission exercised a profound influence on the development of
accounting and auditing standards, though it did so largely at the level of theoretical formulation. By
participating in this fashion, it also helped to solidify the trends and decisions of the institute, e.g.,
the fairness examination, the new prominence of the income statement, expansion of the balance
sheet audit and more emphasis on large corporations that solicited stock markets rather than on
small ones that patronized banks. This focused regulation of commission-registered companies had
spillover effects as well; these disclosure standards quickly began to be the popular measure of all
companies.113
In 1936, the AIA again revised its original 1917 publication, entitled Examination of Financial
Statements by Independent Public Accountants; this version reflected communication between the AIA, the
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SEC and the NYSE.114 It accorded the income statement and balance sheet equal importance in
assessing the overall condition of a company, and it identified creditors and shareholders as regular users
of these statements. Finally, it formally appropriated concepts that previously had belonged solely to
accounting theory, e.g., going-concern, consistency and historical cost.115
Two things this document did not address were the growing audit practices of the physical
inventory and the direct confirmation of accounts receivable.116 These often were significant
accounts on a balance sheet, and they provided ample opportunities for inept or even fraudulent
accounting. For example, in 1938, the commission uncovered a scandal at the McKesson & Robbins
drug company, in which there was a systematic and elaborate defalcation scheme involving the
fabrication of all sorts of accounting documents to support nonexistent transactions.117 In response
to this, the institute quickly amended its recommended auditing procedures to include physical
inventories and the direct confirmation of receivables. The McKesson & Robbins debacle also led
the commission to promulgate a rule requiring the audit opinion to state whether the auditor had
performed the investigation “in accordance with generally accepted auditing standards applicable in
the circumstances.”118 Finally, the commission rule specified that accountants should assume
responsibility for the procedures they took, or did not take, in light of these standards and the
particular audit situation.119
Although there were numerous subsequent refinements in disclosure and audit practices,
including amendments to the securities acts, by the middle of the twentieth century, the primary
apparatus for regulating corporate financial disclosure in the United States was in place and
functioning tolerably well from the perspective of those whom its designers intended to benefit,
including investors, corporate managers, stock exchange managers, government regulators and the
public.120
As the SEC formally began to delegate its regulatory authority in the mid-1930s, the accounting
profession responded by institutionalizing its process for formulating and promulgating authoritative
pronouncements for accounting and auditing standards. The first attempt to do this came in the
form of an agency of the AICPA, the Committee on Accounting Procedure, which operated from
1936 through 1959. Its successor, the Accounting Principles Board (APB), came into existence in
1959, but it issued few opinions, garnered little prestige and eventually went out of existence in 1973.
Its successor since that time, the FASB, is a subsidiary of the Financial Accounting Foundation
(FAF), an independent exempt organization, and it has taken a more active role as an independent
forum and authority for promulgating standards for financial accounting and reporting, guidelines
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which of course were (and are) essential for performing an audit engagement properly.121 The
pronouncements of the previous bodies remain in force except where the FASB has amended or
superseded them, e.g., with Statements of Financial Accounting Standards.122 At the inception of the
FASB, the SEC affirmed its reliance on the private-sector body for leadership in establishing and
improving financial accounting standards.123
As the structure of the economy evolved from an industrial to a post-industrial, service-oriented
model, and the practice of accounting underwent commensurate changes, this public-private
regulatory framework for the profession cumulatively became more vulnerable to dysfunction, with
serious risks for vast stakeholder constituencies. Although there were occasional indications of
weaknesses in the framework over many years, it was in the wake of the scandals surrounding
Global Crossing, Enron, WorldCom, Andersen and other major firms that the catastrophic moral
and organizational failure of the system became apparent. The next subsection discusses the
responses to these scandals in the United States—principally the SOA—and how they have altered
this framework.
F. Scandal and Response: The Sarbanes-Oxley Act of 2002 and the New Regulatory
Framework for the American Accounting Profession
The late twentieth century saw numerous scandals and other morally problematic behaviors
involving financial markets, including the savings and loan crisis, conflicts of interest and social
dislocations stemming from leveraged buyouts, insider trading and flouting of professional
prohibitions against auditor ownership of client stocks. However, as the next century began, the
misconduct of corporate executives in cases of fraudulent corporate financial reporting and the
complicity of the accounting profession in these scandals rekindled the fire of outrage on a new
scale in the minds of the public and regulators. Part of this anger came from the fact that public- and
private-sector regulatory responses to previous scandals had not been effective. The unsympathetic
personalities and extravagant lifestyles of some of the malefactors doubtless contributed to this
response as well, particularly since reports of these fraudulent activities and the bankruptcies that
their personal enrichment engendered came against a backdrop of a declining economy with losses
of jobs and retirement savings for huge numbers of people. With the public’s greater direct and
indirect participation in capital markets in the 1980s and 1990s and the wildly successful returns of
the second half of the latter decade, there was growing confidence that the economy could offer
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opportunity to vast segments of the population. However, the combination of an economic
downturn and scandal124 disillusioned many, and left them feeling as though capitalism and its
significant players—including corporate leaders and CPAs—had let them down.
In the 1990s, SEC Chair Arthur Levitt, Jr. tried to rein in the practice of accounting firms
providing consulting services for their audit clients, but he faced continuing opposition from
Congress and President Bill Clinton. After revelations of accounting irregularities at Enron and
other corporations, many in Congress, including some who had accepted contributions from firms
and who had blocked Levitt, expressed outrage in no fewer than eleven congressional investigations.
One previous critic, Senator Robert Torricelli (D-New Jersey), offered a rare admission that he had
been wrong to block Levitt’s efforts.125
The profession tried to influence public perceptions regarding the scandals and its members’
culpability, but the frequency, size and name recognition of the firms, along with stories of unbridled
executive hubris and greed, created a momentum that limited the profession’s efforts to attenuate
condemnation from the public, commentators and Congress. As the U.S. Department of Justice
moved toward a successful obstruction-of-justice prosecution of Andersen,126 the once-venerable
global professional services firm whose audit practice had been at the center of much of the
controversy at Enron and other companies, the other major accounting firms eventually cut their
losses and abandoned their lobbying alliance with and support for the firm as they worked to
influence the shape of the reform measures.127 After its conviction Andersen followed through on
the humiliating necessity to confirm that its audit practice was ending permanently by resigning from
the SEC Practice Section of the AICPA.128
Scandals at WorldCom and elsewhere kept public outrage alive and led to condemnation of
corporate misconduct by President George W. Bush and, despite his reticence for a dramatic
response,129 passage of the landmark SOA in 2002. It is expansive legislation that encompasses a
broad array of issues, including regulation of the accounting profession, corporate governance,
financial reporting and investment analysis. The first two sections—Title I, Public Company
Accounting Oversight Board (PCAOB), and Title II, Auditor Independence—constitute almost
one-half of the act. These titles are particularly relevant to the regulatory framework for the
profession, and, in reasserting federal regulation of the profession’s audit function through the
agency of the PCAOB, they signal a marked change from the policies that prevailed for the
preceding 64 years.
Title I of the SOA sets out the responsibilities of the PCAOB, an entity that many members of
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the accounting profession had spent decades trying to prevent:
to oversee the audit of public companies that are subject to the securities laws, and related matters, in orer to
protect the interests of investors and further the public interest in the preparation of informative, accurate, and
independent audit reports for companies the securities of which are sold to, and held by and for, public
investors. The Board shall be a body corporate, operate as a nonprofit corporation and have succession until
dissolved by an Act of Congress.130
Despite the PCAOB’s federal charter, Congress fashioned it as a private entity and provided
expressly that board service would not constitute appointment as a federal officer.131 The board’s
expansive duties include registering public accounting firms (“firms”) that audit issuers of securities
in public capital markets (“issuers”); setting standards for auditing, quality control, ethics,
independence and other matters; inspecting, investigating and sanctioning firms and their members;
and enforcing the SOA, PCAOB rules, professional standards and securities laws regarding audits.132
Firms must submit activity reports to the PCAOB at least annually; these reports, and the original
registrations, are available for public inspection, except for proprietary information.133 To finance its
work, the PCAOB assesses registration and annual fees on firms that practice before it.134
With regard to standards for auditing, quality control and independence, the SOA provides for a
discretionary zone of continuing cooperation between the PCAOB and private-sector advisory bodies,
including authority to adopt professional standards from such groups.135 However, subsequent
provisions signal significant reemergence of direct oversight of the accounting profession by laying
out stiff minimal requirements for firms regarding auditing standards and quality control standards
for audit reports.136 Although the PCAOB may solicit recommendations from private-sector “expert
advisory groups” within the profession and from others,137 it retains “full authority to modify,
supplement, revise or subsequently amend, modify or repeal” the resulting standards.138 In other
words, what for decades had been the SEC’s largely rule-based deferential delegation to the privatesector standard-setting process had become in the SOA a potentially more case-based, even issuebased, exercise of regulatory oversight.
This statutory oversight authority had remained with the SEC since its creation in 1934 (and
under the SOA, it continues to do so).139 However, with this legislation the proximate exercise of this
authority shifted perceptibly and the federal government reclaimed much of what it delegated,
though ostensibly through an alternative private entity. Yet, in the future the PCAOB’s private status
may turn out to be a distinction without a difference, since the scope of the SEC’s “oversight and
enforcement authority”140 over it remains quite broad.141
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To clarify the continuing relevance of the FASB, the SEC on April 25, 2003 affirmed its
confidence in and reliance upon the body as a “designated private-sector standard setter.”142
Nevertheless, the SEC has proffered reminders of a long-standing judicial precedent that formal
compliance with GAAP does not constitute a safe harbor for compliance with securities laws.143
The SOA applies as well to foreign firms that prepare or provide audit reports for issuers in the
United States, and it subjects them to the rules of the PCAOB and the SEC as though they were
American firms, with the exception that registration by itself will not subject them to the jurisdiction
of federal or state courts, other than for controversies between the firms and the PCAOB.144 Even
for foreign firms that do not issue audit reports, the act empowers the PCAOB to use its rulemaking authority to assert jurisdiction when it determines that “it is necessary or appropriate” to do
so, in light of the purposes of the SOA and in the public interest or for the protection of
investors.145
Title II of the SOA changes legal guidelines to promote formal, arm’s length relationships
between firms and issuers. Among other things, these provisions affirm the fiduciary duty of the
issuer’s audit committee to preapprove audit engagements146 and the obligation of auditors to make
timely reports of the issuer’s critical accounting policies and practices, alternative presentations of
financial information and other material written communications between the parties.147 In addition,
to help keep the relationship at arm’s length, the SOA requires the audit partner for each
engagement to rotate at least once each five years,148 and it prohibits a firm from performing an
audit for an issuer whose chief executive officer or senior financial officer had worked for the firm
and “participated in any capacity” in the audit of the company during the year preceding the
beginning of the audit.149
Other provisions in this title enumerate an expansive list of services firms may not offer to audit
clients, including bookkeeping, financial information systems, appraisal, internal audit, human
resources, investment and legal services.150 As section III.B discusses, the proliferation of these
parallel services, while ostensibly and in good faith complementary to effective and efficient audits,
became excessive, distracted CPAs from this original core responsibility and in some cases
compromised their independent professional judgment, e.g., when audits came to involve review of
their own work. However, the SOA empowers the PCAOB to grant exemptions from these
restrictions on a case-by-case basis,151 e.g., for firms to calculate compensation packages for chief
executive officers of issuers.
In assessing the scope of the SOA, it is essential to keep in mind what it does not do, viz.,
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promulgate standards for the vast majority of firms that provide auditing and non-auditing services
for clients that do not meet the statutory definition of “issuer.”152 The regulation of most of these
firms falls outside the scope of federal securities statutes and regulations, and yet the size of this
practice area abundantly confirms the necessity for multilevel, integrated and institutionally
pluralistic oversight. In practical terms this means a continuing prominent role for the state boards
of accountancy that license firms and, of course, for private entities such as the AICPA and parallel
state CPA societies, e.g., through promulgating and enforcing substantive codes of conduct and
performing regular peer review. Moreover, in light of eventual federal experience, some state
governments may enact provisions similar to the SOA that could extend the scope of its de facto
influence, if not its de jure jurisdiction.
The SOA assigns the SEC, in consultation with the Chair of the FRB and the Secretary of the
Treasury, authority to appoint five board members to the PCAOB, consisting of
prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of
investors and the public, and an understanding of the responsibilities for and nature of . . . financial disclosures
. . . and the obligations of accountants with respect to . . . audit reports. . . .153
These are full-time, exclusive positions with five-year terms, except for the first group, whose terms
end on a staggered basis on each anniversary of the first appointment; the chair serves for five
years.154 Two must be, or must have been, CPAs, while the others cannot have been CPAs.155
Members can serve only two terms, consecutively or nonconsecutively, and are subject to removal
for good cause.156
Though this statutory path to rehabilitating corporate America and the accounting profession
seemed straightforward on paper, the moral frailties of those who forged it in 2002 quickly tested its
credibility. Doubts among observers about the competence157 and the independence of then-SEC
Chair Harvey L. Pitt only deepened with the perception that his tepid response to the scandals and
financial crisis was due to his persistent sympathies for the profession as a result of his previous
representation of CPA firms. He compounded this image with his furtive and clumsy attempts to
install retired federal Judge William H. Webster, the former Director of Central Intelligence and
Director of the Federal Bureau of Investigation, as the PCAOB chair, instead of John H. Biggs, the
former chair of TIAA-CREF, who likely would have been firmer with the profession. The
controversy intensified with the revelation that Webster had chaired the audit committee of U.S.
Technologies, which had faced accusations of fraud. Pitt had withheld this information from the
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other commissioners prior to their vote.158 The resulting uncertainty generated global concern about
the integrity of American capital markets, and helped to devalue the dollar. Eventually Pitt159 and
Webster resigned,160 and former NYSE Chair William H. Donaldson161 and William J. McDonough,
President of the Federal Reserve Bank of New York,162 assumed these respective positions.
The United States long has had a robust and formidable apparatus for regulating its capital
markets, the accounting profession and corporate governance practices, with many of the elements
of this framework originating in the rigorous intellectual discourse and principled leadership of the
accounting profession, i.e., prior to and apart from state and federal legislation. However, the
scandals of the early 2000s revealed that this cumulative regime of public and private elements was
insufficient to prevent and detect widespread and massive fraud in corporate reporting and related
activities in the wake of decades of dramatic changes in the profession and the nature of the
economy. It became clear that some modifications to this regime would be necessary, but the form
these would take would have to reflect mindfulness of the beneficial precedents of the profession, as
well as its latter-day missteps.
As the narrative above demonstrates, the SOA represented a twenty-first century attunement to
a twentieth century regulatory framework that presumed nineteenth century standards of proficiency,
professionalism and restraint on the part of accountants. Its comprehensive provisions
proportionately responded to the most notorious practices in and around accounting firms,
including financial statement irregularities; compromises of auditor independence; bias in securities
analysis in investment banking firms and breaches in fiduciary duty, corporate accountability and
principled governance. The SOA clearly was a necessary corrective. However, to determine whether
it has been sufficient, this paper will assess the strengths and limitations of the regulatory framework
that it heralded according to the normative approach of Catholic social thought. The second section
of this argument lays out the substantive principles of this approach to set the stage for this detailed
assessment in section III.
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II. A Contemporary Framework for Ethics and Public Policy:
Substantive Principles of Catholic Social Thought
As the previous section demonstrates, one abiding characteristic of the regulatory framework for
the accounting profession has been the multilevel, integrated and institutionally pluralistic nature of
the oversight it deploys. When this regulatory framework has been most effective, it has been due to
this rich depth of institutional interdependence and “balance of powers.” Such an approach is
thoroughly in accord with the principles of Catholic social thought as they prescribe a diversity of
institutional responses that organically complement one another’s strengths and limitations when it
comes to experience, wisdom, motivational force and practical effectiveness.163
The three substantive principles of Catholic social thought that help frame such public policy
approaches are the principles of subsidiarity, socialization and solidarity. These principles represent
an integrated and complementary model of social order that recognizes proportionate roles and
responsibilities for individuals and public- and private-sector institutions at all levels, including
globally. As practical principles, they communicate a prescriptive character, with normative
dimensions of assent and action, i.e., respective commitments to (1) a distinctive assessment of facts and
circumstances and (2) a response in the form of action that is socially meaningful, effective and
efficient. As the U.S. Catholic bishops put it, “the challenge . . . is not merely to think differently, but
also to act differently. . . . We cannot separate what we believe from how we act in the marketplace
and the broader community, for this is where we make our primary contribution to the pursuit of
economic justice.”164
Because of the global scale of the urgent social, political, economic, environmental and security
questions facing humanity, and the systematic interrelationship of these spheres of human activity, it
is essential to assess and apply these principles as an ensemble. If one construes them as guidelines
for the practice of virtuous public policy, the analogy would be to the interdependence of the
classical canon of cardinal virtues: justice, temperance, fortitude and, especially, practical wisdom.
Just as a truly virtuous person must practice each of these excellences to live a life of order and
discipline, so must a public philosophy—and the public policy that effects it—reflect order, balance,
restraint, courage and prudence in conscientious discernment and application.
An authentic invocation of Catholic social thought must avoid dogmatism, and yet must speak
out of a distinctive pattern of historical conversations, even as it takes its cue from the “signs of the
times.” The failure to preserve such discipline and balance risks unjustifiably skewing responses to
social questions, e.g., toward an uncritical embrace of either private- or public-sector solutions. In
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particular, isolating these principles from the Catholic religious and intellectual traditions that have
inspired them and guided their development, and construing them ideologically according to secular
political and economic interests, agendas and categories is a constant danger in a pluralistic world.165
Yet, it is in the real world of limitations in time and other resources; conflicts among persons,
societies and ideas; and diversity in religious, political and economic views that one must seek to
apply and find meaning in Catholic social thought because this is where one finds the human
persons who are the center of its concern.166 Catholic social thought, as a discursive, aspirational
conversation that occurs in history, must reflect the vocation and context of the people who carry it
on and so be in the world, but not of the world.
This section discusses the elements of these principles of Catholic social thought and relates
them to the regulatory framework for the accounting profession, particularly as regards duties of
CPAs to audit clients and other relevant stakeholder constituencies. The conclusion is that the
regulatory framework admirably conforms to the principles of subsidiarity and socialization. With
regard to the principle of solidarity, the argument briefly notes systematic questions concerning the
meaning and practicability of this guideline. However, taking this principle facially, and on the basis
of its current development in Catholic social thought, the paper concludes that an affirmative
judgment regarding the regulatory framework will require further evidence of committed action on
behalf of the common good by key decision makers, including government regulators, stock
exchanges, issuers, investors and especially members of the accounting profession themselves. Only
if these constituencies commit to an unprecedented effort to animate this regulatory framework in
dedication to the common good and to integrate all three principles in practice will there be hope
for recovering and renewing a substantive contributory vision for the vocation of the profession in
the twenty-first century.
A. The Principle of Subsidiarity
The principle of subsidiarity prescribes responding to social needs or challenges at a level of
authority that is proportionate to (1) the scale, scope and complexity of the needs or challenges; and
(2) the autonomy, competencies and resources of the prospective responders, with a presumption of
recourse to the responder most proximate to the circumstances of the need or challenge. The issue
routinely arises in the context of social needs or challenges to which alternative levels of publicand/or private-sector authority could respond, and a common way of expressing the prescriptive
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guidance of this principle is that no “higher” level of authority should act when a lower level is
willing and able to do so. In the tradition of Catholic social thought, there is a strong association of
this principle with Pope Pius XI who, in the 1931 encyclical Quadragesimo Anno, writes:
Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and
industry and give it to the community, so also it is an injustice and at the same time a grave evil and disturbance
of right order to assign to a greater and higher association what lesser and subordinate organizations can do.
For every social activity ought of its very nature to furnish help to the members of the body social, and never
destroy and absorb them.167
As Pius XI indicates in introducing this principle, the concept is not original to this document. In
addition to appearing implicitly 40 years earlier in the first modern social encyclical, Rerum novarum,168
the concept figures in other diverse traditions. For example, the political dynamics for applying the
principle clearly were on the minds of ancient rulers and thinkers.169 In the liberal tradition this
principle has been an important means for organizing political institutions while (1) respecting the
autonomous liberty interests of those closest to facts and circumstances that implicate social
questions, (2) avoiding the multiple costs of bureaucracy and (3) allowing for preemption by higher
authority when the scope of the matter extends beyond the competency or resources of lower
authorities.170 The framers of the United States Constitution made this an essential structural feature
of the federal government,171 and European Union leaders continue to invoke the principle as a key
philosophical guideline for the evolving structure of that international organization.172
The prescriptive dimension of assent in this principle arises in the call to assess modern society
as consisting of multiple levels of institutions that work to accomplish a variety of socially salutary
objectives, i.e., to promote human flourishing. These “mediating institutions” can assume multiple
forms in the public and private sectors, and an essential first step is recognizing the scale, scope and
complexity of articulable social needs and challenges, and the respective competencies and resources
that mediating institutions variously can bring to bear in response. The prescriptive dimension of
action comes in the resolve to respond to the social need or challenge, or, in conformity with the
substance of the principle, sometimes to refrain from responding, so that a more proximate (“lowerlevel”), yet fully competent, level of authority can do so.
McCann has argued convincingly on behalf of a Trinitarian foundation for the principle of
subsidiarity that reveals itself not just in the elemental application to the state that Pius XI seems to
have envisioned, but also in the diverse socioeconomic institutions that incrementally have come to
be essential for the flourishing of the community, including corporations.173 Such a holistic
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interpretation of the foundations for this principle likewise would support construing it to apply to
professions such as the accounting profession. Indeed, the ostensible aspirations of such professions
to ethical regard for the interests of clients, the public and colleagues corroborate the applicability of
the principle in this context.
B. The Principle of Socialization
The principle of socialization modifies and extends the principle of subsidiarity when it comes to
reading concrete social conditions and justifying the dedication of proportionate institutional
resources to social needs or challenges. The prescriptive dimension of assent is clear in the repeated
calls in encyclicals to note the process of socialization as a contemporary and qualitatively distinct
extension of the massive social change that occurred in the nineteenth century, when the modern
Catholic social thought tradition began in the wake of the Industrial Revolution. This process only
has accelerated since the Second Vatican Council, particularly because of public- and private-sector
initiatives to lower barriers to global movement of capital, goods, people and information. The
effects of socialization in the post-industrial world include large-scale migration and the proliferation
of both intimate and expansive institutional contexts for human relationships, particularly in
economically and technologically advanced societies.174 Yet, this process obviously did not originate
in the nineteenth century, and it encompasses much more than political and economic associations.
It has a long history and a theoretical grounding in the theological anthropology of Catholic social
thought. Both waves of change—the industrial and the post-industrial, or “informational”175—have
arisen out of traditional experiences of social roles and institutions over millennia, and originate
from the inherent social dimension of the human person:
Among those social ties which man needs for his development, some, like the family and political
community, relate with greater immediacy to his innermost nature; others originate rather from his free
decision. In our era, for various reasons, reciprocal ties and mutual dependencies increase day by day and give
rise to a variety of associations and organizations, both public and private. This development, which is called
socialization, while certainly not without its dangers, brings with it many advantages with respect to
consolidating and increasing the qualities of the human person, and safeguarding his rights.176
This assessment of the human condition as intrinsically social is hardly unique to Catholic social
thought. Aristotle and other thinkers expressly assume it in their philosophical anthropologies.
However, this anthropological interpretation for the progressive scale of socialization of people
around the world is itself of limited usefulness because it remains an intuitive proposition. To
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supplement this assessment, the principle of socialization has developed so as to distinguish between
the qualities of traditional, small-scale, preindustrial groups and the larger scale and scope of social
affiliations in industrial and post-industrial societies, particularly the special role of the latter type of
group in making possible larger construction projects and larger processes of production and
distribution. However, the analytical perspective of the principle extends beyond this and takes
account not just of the distinctive functional aspects of large-scale contemporary groups, but also of
the respective levels of effectiveness of such groups in attending to various social needs and
challenges.177
If the principle of subsidiarity carries a rebuttable presumption in favor of “lower-level” or
proximate sources of authority out of deference to the autonomy, competencies and resources of
these decision makers, the principle of socialization prescribes accounting for such exceptions and
operationally acts as a countervailing, or equilibrating, requirement. Just as the principle of
subsidiarity, the principle of socialization prescribes taking due account of the scale, scope and
complexity of social needs and challenges and, when necessary, intervening to respond to them. As a
prescriptive principle, socialization provides a systematic means for taking the principle of
subsidiarity seriously, viz., by justifying appeals to higher-level institutional authorities on the grounds
that they authentically represent the most proximate means of responding to such social needs and
challenges effectively. A more or less articulable guideline for identifying the relevant point of
demarcation along the continuum of subsidiarity and socialization as regards one significant actor—
government—is the following:
[G]overnment . . . should intervene in the economy when basic justice requires greater social coordination and
regulation of economic actors and institutions.178
In other words, to marshal lesser forces in situations so exigent as to endanger “basic justice” (a
likely reference to “basic rights”) would be to risk allowing the principle of subsidiarity to degenerate
into some sort of shallow dogmatic rejection of any credible vocation for higher-order institutions.
The roots of the principle of socialization are apparent in Mater et magistra, when John XXIII
discusses limits on the natural, financial and other resources of even the wealthiest countries for
responding to “scientific, technical, economic, social, political and cultural problems”; because of the
scale, scope and complexity of such problems, he argues for multilateral and even global
responses.179 He is more explicit two years later in Pacem in terris, where he draws a parallel between
the domestic and international contexts for applying the principle of subsidiarity, with the latter
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requiring openness on the part of nations to recourse to higher authorities in the form of multilateral
and global institutions such as the United Nations to promote the common good of humanity.180 At
the same time, he wisely discerns the need to head off temptations to rationalize his comments, lest
others use them to render global concerns and global authority abstract (and ineffective). He clearly
believes that fragmentation of political authority in the form of competing self-interested nationstates is institutionally incapable of promoting the common good of humanity.181 Nevertheless, he
acknowledges that the primary organs for enforcing international law remain individual national
governments.182
The distinctive contribution here of Catholic social thought is the theological context for
discerning and assessing the broader significance of the historical process of socialization toward
unification of the human community and, indeed, of all creation.183 As section II.A indicates above,
McCann locates the original model for subsidiarity in the Trinity, and it is not surprising that a
similar invocation on behalf of its companion principle of socialization arises out of the Second
Vatican Council:
The Church recognizes that worthy elements are found in today’s social movements, especially an evolution
toward unity, a process of wholesome socialization and of association in civic and economic realms. The
promotion of unity belongs to the innermost nature of the Church, for she is, “thanks to her relationship with
Christ, a sacramental sign and an instrument of intimate union with God, and of the unity of the whole human
race.” Thus she shows the world that an authentic union, social and external, results from a union of minds and
hearts, namely from that faith and charity by which her own unity is unbreakably rooted in the Holy Spirit. For
the force which the Church can inject into the modern society of man consists in that faith and charity put into
vital practice, not in any external dominion exercised by merely human means.184
It is instructive, inadvertently perhaps, that Gaudium et spes invokes the example of the Church to
portray the process of socialization toward such unity, for the Church has shown itself to be a
typically human institution, with aspirations to mission-oriented service, principle and ennoblement
of the persons to whom it ministers—and repeated reminders of its organizational dysfunctions and
deficiencies in meeting these standards, particularly when it comes to openness, accountability and
readiness to implement for itself the principles it applies to other institutions. Yet, this realization
can be genuinely helpful in discerning our expectations about what other institutions, large and
small, are and what they can be, and it thus can form a bridge to the principle of socialization’s
complementary prescriptive dimension of action, which contemplates the repertory of justifiable
responses to the complex new situations people face in post-industrial society.
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Regardless of the level of response to the relevant social need or challenge, the call of the
principles of subsidiarity and socialization is to come to such determinations as part of a prudential
process of good-faith decision making regarding:
(1) the scale, scope and complexity of the social need or challenge;
(2) the seriousness of the threats and costs the need or challenge poses, apart from the
prospective response(s);
(3) the moral claims stemming from autonomy interests of prospective decision makers and the
moral costs of preempting them in favor of higher authority and
(4) the scale and scope of the resources of candidate institutional responders and the
prospective efficiency and effectiveness of their respective contributions.
Although there is an inherent macropolitical and macroeconomic perspective in the principle of
socialization, its integral and complementary relationship with subsidiarity means that questions of
more proximate institutions, e.g., businesses and professional associations, are never far from view.
The ready applicability of subsidiarity to the business and professional context, and the breadth of
examples in the prescriptive dimension of assent in socialization, including economic institutions
and technological advances, support applying the latter principle as well to the regulatory framework
for the accounting profession.
C. The Principle of Solidarity
The principle of solidarity is the third substantive principle of Catholic social thought, and it
provides a comprehensive view that informs the distinctive contribution of the tradition vis-à-vis
socialist—particularly Marxian—thought and liberalism. This principle prescribes committed action
out of respect for an intimate bond of social connectedness among people in institutional contexts
at all levels, and construes all authentic forms of community, i.e., those with a credible ethical claim
to promoting the flourishing of human life, as meaningful participative stages toward an
overarching, theologically centered model of unity among humanity and all of creation. There is a
strong identification of the principle of solidarity with the thinking of Pope John Paul II, and he
traces the roots of the concept to the beginning of modern Catholic social thought:
[W]hat we nowadays call the principle of solidarity, the validity of which both in the internal order of each
nation and in the international order I have discussed in the Encyclical Sollicitudo rei socialis, is clearly seen to be
one of the fundamental principles of the Christian view of social and political organization. This principle is
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frequently stated by Pope Leo XIII, who uses the term “friendship,” a concept already found in Greek
philosophy. Pope Pius XI refers to it with the equally meaningful term “social charity.” Pope Paul VI,
expanding the concept to cover the many modern aspects of the social question, speaks of a “civilization of
love.”185
In its dimension of assent, the principle of solidarity entails commitment to recognizing a
normative hierarchy of basic human needs and human capacities for reason, affectivity, work,
contemplation and prayer. John Paul II distinguishes it from the mere fact of interdependence and
construes it as an avowedly formal prescriptive principle:
[I]n a world divided and beset by every type of conflict, the conviction is growing of a radical interdependence
and consequently of the need for a solidarity which will take up interdependence and transfer it to the moral
plane. Today perhaps more than in the past, people are realizing that they are linked together by a common
destiny, which is to be constructed together, if catastrophe for all is to be avoided.186
[I]nterdependence [is] sensed as a system determining relationships in the contemporary world in its economic,
cultural, political and religious elements and [is] accepted as a moral category. When interdependence becomes
recognized in this way, the correlative response as a moral and social attitude, as a “virtue,” is solidarity. This
then is not a feeling of vague compassion or shallow distress at the misfortunes of so many people, both near
and far. On the contrary, it is a firm and persevering determination to commit oneself to the common good;
that is to say to the good of all and of each individual, because we are all really responsible for all.187
The distinction between the principle of socialization and the principle of solidarity when it comes
to the assent to spheres of bonded relationship is that in the latter there is a progression beyond the
discrete institutional apparatus and “levels” of relatedness to a thematic rendering of an underlying
matrix of relationship that underwrites the representative examples that John XXIII observes in
Mater et magistra and Pacem in terris. In particular, the principle of solidarity expands the scope of
analysis beyond engagement with institutions whose idiomatic assumptions otherwise might
prejudice moral judgments and public policy. For example, granting a role for markets and
corporations means discerning a legitimate, if instrumental, role for them and conditioned moral
acceptance of their own technical prerequisites, such as producer-profit maximization, consumerpreference maximization, the free flow of information, limitations on barriers to entry and exit and,
especially, atomistic action and consumer sovereignty. By deploying the principle of solidarity, with
its moral foundation rooted in a resolutely social and theological anthropology, John Paul II seeks to
avoid this systematic risk:
Solidarity, in short, is an achievement not to be taken for granted. It is the fullness of community to be realized
ultimately in the love “brought to perfection in the Kingdom of God.” The principle of subsidiarity is a
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signpost along the path toward that fullness. It helps us to distinguish which strategies for organizational
development are likely to advance the cause of solidarity, and which are likely to generate obstacles to
solidarity.188
He articulates a vision of society that is not beholden to the polemical premises of either socialism
or liberalism, with their respective categories of (1) public welfare and oversight and (2) correlative
rule-utilitarian rights and duties, especially as they relate to property.189 His predecessors’
developmental contributions to discerning institutional equilibria through the principles of
subsidiarity and socialization have been extremely valuable, and his contribution of the principle of
solidarity expands the analytical scope of Catholic social thought, advances its objectives and helps
the tradition reclaim a distinctive critical posture and prophetic voice on matters of public policy.
Solidarity’s complementary prescriptive dimension of action entails a moral duty to respond to
this assessment by designing and participating in institutions in ways that contribute to the
satisfaction of basic human needs and the development of the aforementioned diversity of human
capacities:
Solidarity helps us to see the “other”—whether a person, people or nation—not just as some kind of
instrument, with a work capacity and physical strength to be exploited at low cost and then discarded when no
longer useful, but as our “neighbor,” a “helper” (cf. Gen 2:18-20), to be made a sharer, on a par with ourselves,
in the banquet of life to which all are equally invited by God. Hence the importance of reawakening the
religious awareness of individuals and peoples.190
John Paul II’s development of the principle of solidarity bespeaks an affinity with an almost
medieval organic representation of society, in which there is a more or less common set of
assumptions about the origin, vocation and destiny of the human person. Solidarity functions as a
sort of “cement” to fill in the gaps and institutionally recognize and reinforce the substantive moral
relationships for which subsidiarity and socialization (and humanistic conceptions of group
dynamics) by themselves are unable to account. It is a supernatural virtue, a veritable “partner” to
the theological virtue of charity:
Solidarity is undoubtedly a Christian virtue. In what has been said so far it has been possible to identify many
points of contact between solidarity and charity, which is the distinguishing mark of Christ's disciples (cf. Jn
13:35). In the light of faith, solidarity seeks to go beyond itself, to take on the specifically Christian dimension
of total gratuity, forgiveness and reconciliation. . . .
Beyond human and natural bonds, already so close and strong, there is discerned in the light of faith a new
model of the unity of the human race, which must ultimately inspire our solidarity. This supreme model of
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unity, which is a reflection of the intimate life of God, one God in three Persons, is what we Christians mean
by the word “communion.” This specifically Christian communion, jealously preserved, extended and enriched
with the Lord’s help, is the soul of the Church’s vocation to be a “sacrament,” in the sense already indicated.
Solidarity therefore must play its part in the realization of this divine plan, both on the level of individuals and
on the level of national and international society.191
Despite John Paul II’s statements about the close relationship between Christian faith, charity and
solidarity, room clearly remains for cognizing the principle in secular terms, as some communitarians
have done. He seems well aware of this, since the principle would have to be accessible to those
from other religious and humanistic traditions with whom he contemplates building coalitions.
However, the principle remains problematic, given that it draws its authority from a systematic
and even historical progression from the principle of subsidiarity, with its predisposition to
decentralize authority, to the unifying movement of the principle of socialization, which builds upon
and integrates traditional spheres of human relationships. The principle of solidarity’s theme of unity
emphasizes the setting aside of differences within and between organizations, and this can make it
appear as though it does not have a sufficient grasp of the inherent—and often salutary—role of
conflict in such contexts. This unitary perspective furnishes a philosophical underpinning that is
quite consistent with the centralizing tendencies of the leadership style of John Paul II and his
apparent vision for the institutional Church. However, in light of the dialectical movements that
come before it—subsidiarity and socialization—when it comes to a basis for justifying social
structures and institutional responses to needs and challenges, the principle of solidarity represents
some wishful thinking. Concrete human societies rarely resemble the confluent vision he articulates,
particularly when they reach an appreciable scale. This does not mean that his vision is defective,
normatively or otherwise. However, he might be several centuries too late—or too early—in
banking so heavily on the unitary social representations concomitant with this principle.
In addition to this descriptive critique, there are systematic grounds for seeking clarification
about this normative framework. The most serious issue has to do with the principle’s apparent
conflation of duties of justice and duties of virtue, or what Kant refers to as duties of perfect and
imperfect obligation, respectively. When John Paul II says that subsidiarity “is not a feeling of vague
compassion or shallow distress at the misfortunes of so many people,” and that “it is a firm and
persevering determination to commit oneself to the . . . good of all and of each individual, because
we are all really responsible for all,”192 he seems to be staking out a quite expansive zone of moral
duty, and construing this under the rubric of justice. He reinforces this impression by drawing direct
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comparisons between the special ethical intimacy of the family and other “intermediate
communities”:
Apart from the family, other intermediate communities exercise primary functions and give life to specific
networks of solidarity. These develop as real communities of persons and strengthen the social fabric,
preventing society from becoming an anonymous and impersonal mass, as unfortunately often happens today.
It is in interrelationships on many levels that a person lives, and that society becomes more “personalized.”193
One of the consequences of mounting such a facially expansive field of duty is that it asks too much
of virtue and, if virtue were to rise to the occasion, it would leave no distinctive role for justice. It is
important to remember that not all duties are duties of justice. In fact, the majority of duties
arguably are prudential duties of virtue, charity or, to use Kant’s expression again, imperfect
obligation. To construe “intermediate communities” as “exercising primary functions,” and “giving
life to specific networks of solidarity” analogously to the family risks conflating regions of duty that
legitimately remain qualitatively distinct in the depths of their respective moral claims. The
alternative is to risk an open-ended universalism that facially construes duty to “all,” but that
operationally is incapable of honoring existing articulable duties to individuals in the context of
special relationships that enjoy social approbation, e.g., the parent-child relationship. There are
justifiable anthropological and normative reasons why some people should remain effectively
“anonymous” to others, particularly the moral costs of forsaking the aforementioned special
relationships. This does not mean that one should not bear moral reverence for the dignity of those
more distant from himself or herself, but only that the quality of the regard, and the practical
expectations that attach to it, should be proportionate to the nature of the relationship, the needs
and capacities of the parties and especially existing pledges and commitments. An aspirational
commitment to “all” remains in constant danger of dissipating into vacuous and self-deceptive
indifference to any.
Hume considers this question of the applicable scope of the models of family and friendship,
and the resulting problematic scenario leads him to different conclusions:
Again; suppose, that, though the necessities of [the] human race continue the same as at present, yet the
mind is so enlarged, and so replete with friendship and generosity, that every man has the utmost tenderness
for every man, and feels no more concern for his own interest than for that of his fellows; it seems evident that
the use of justice would, in this case, be suspended by such an extensive benevolence, nor would the divisions
and barriers of property and obligation have ever been thought of. . . . Every man, upon this supposition, being
a second self to another, would trust all his interests to the discretion of every man; without jealousy, without
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partition, without distinction. And the whole human race would form only one family; where all would lie in
common, and be used freely, without regard to property; but cautiously too, with as entire regard to the
necessities of each individual, as if our own interests were most intimately concerned.
In the present disposition of the human heart, it would, perhaps, be difficult to find complete instances of
such enlarged affections; but still we may observe, that the case of families approaches towards it; and the
stronger the mutual benevolence is among the individuals, the nearer it approaches; till all distinction of
property be, in a great measure, lost and confounded among them. Between married persons, the cement of
friendship is by the laws supposed so strong as to abolish all division of possessions; and has often, in reality,
the force ascribed to it. And it is observable, that, during the ardour of new enthusiasms, when every principle
is inflamed into extravagance, the community of goods has frequently been attempted; and nothing but
experience of its inconveniencies, from the returning or disguised selfishness of men, could make the
imprudent fanatics adopt anew the ideas of justice and of separate property.194
Now even Hume’s cynical hypothesizing admits that “returning or disguised selfishness” could be
the undoing of such an expansive plane of virtue, so one interpretation is that his speculation merely
proves John Paul II’s point, viz., that people must overcome their own tendencies to self-interested
behavior and that such sporadic disciplinary failures do not handicap the principle of solidarity more
than any other normative approach. Although the scenario that Hume envisions, in which
substantive uncertainty remains about the practical and theoretical boundaries of justice and virtue,
is strange, his point is sufficient for one to counsel caution in applying this principle. It might be the
case that, over the long run, solidarity will be the most salutary organizing principle for society.
However, a precipitous shift to such an approach likely would be very destabilizing for the economy
and probably other institutions, and this would work to everyone’s disadvantage, including the
materially poor around the world who are a special concern for John Paul II.
A more thorough investigation of these questions is outside the scope of this paper, and these
comments are by way of acknowledging the evolutionary nature of this doctrine and the need for
continuing clarification regarding its prescriptive claims. For the sake of this analysis, the argument
brackets this question and draws on the facial contours of the principle of solidarity in the literature
of Catholic social thought, along with the principles of subsidiarity and socialization, to assess the
regulatory framework for the accounting profession. There is much more to know about solidarity
(and the other principles), but with what already is apparent, there are sufficient grounds for coming
to preliminary conclusions about the sufficiency of this framework. This is the topic of the final
section.
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III. Two Out of Three: Catholic Social Thought and
Unfinished Business for the Accounting Profession
This section analyzes the regulatory framework for the accounting profession in the wake of the
SOA with a view to assessing its conformity to the principles of Catholic social thought in two
subsections. First, there is a brief discussion of the public goods approach for framing responses to
social questions, a policy matrix to which Catholic social thought is able to contribute rich and
intellectually substantive responses out of its own robust institutional account. Second, there is an
analysis of the three key elements that contributed to the systemic failure of the regulatory
framework in the early 2000s: (1) the complexity of the practice environment and agency costs, (2)
practice diversification and the erosion of accountants’ independent professional judgment, and (3)
the increasingly cohesive political power of the accounting profession and its influence on the
regulatory process. This subsection also discusses whether the reforms in and around the SOA have
addressed these weaknesses adequately when it comes to the legislation’s avowed policy objective of
protecting the public interest and, what is of even greater importance, promoting the common good
in a manner compatible with these three principles.
The conclusion of this section is that the regulatory framework is consistent with the principles
of subsidiarity and socialization, but that it remains deficient with regard to the principle of
solidarity. Only through broader reforms, including public- and private-sector initiatives to limit the
influence of special-interest groups such as the accounting profession on the regulatory process, will
the regulatory framework have a reasonable chance of meeting these standards. Such reforms in turn
only will be possible with a transformation of the political ethos in the United States.
A. The Public Goods Problem and Catholic Social Thought
One way of analyzing and assessing responses to ethical questions in the competitive contexts of
business and professional life is through the economic concept of a public good, a category that can
include a desirable social practice or set of practices (though this is by no means equivalent to the
concept of the “common good”195 in Catholic social thought). In light of the elements of a public
good—joint provision and nonexcludibility196—it often is difficult for decision-making stakeholder
constituencies to resolve to pool their resources to provide such goods (even though it would be to
their collective benefit). Sometimes it is because of difficulties in creating group cohesion that go to
foundational questions of the logic of collective action, e.g., group size, barriers to communication
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or inertial apathy stemming from perceptions about the direct costs or benefits of participation.197
Other times it is because of legal constraints such as anti-trust laws. However, a prominent
impediment for decision makers in business and the professions when it comes to socially
responsible behavior is aversion to the risk that they will devote precious resources to such activities,
while their competitors will decline to do so (a form of opportunity cost).198
As Kenneth Arrow argues, for organizations to be successful in providing this public good—or
at a minimum to avoid injuries to market participants from market failures such as externalities or
information asymmetries—they must overcome this risk aversion, and the most effective way to do
this is for all relevant participants to be subject to some sort of consistent external inducement or
incentive.199 There can be many levels for such inducements or incentives, from individual
conscientious action, e.g., whistle-blowing, to mediating institutions and systems such as market
forces, organizational ethics and compliance programs, professional codes of conduct, civil
litigation, legislative regulation and international conventions.200 In most cases questions in business
and the professions with ethical dimensions will find meaningful responses in combinations of such
institutions and systems that fashion just the sort of multilevel, integrated and institutionally
pluralistic account that Catholic social thought prescribes.201 At the same time, this is not a license to
conflate these ethical issues with the apparatus for social responses. Ethics is not economics or law,
but it can provide the justification for concepts and practices in both, and the resulting social
institutions in turn can support and reinforce ethical principles in the form of public policy.
The distinctive contribution of Catholic social thought to such an analysis is a systematic and
normatively substantive apparatus for assigning roles to these various levels of social response. The
principle of subsidiarity is an ethical and organizational guideline that prescribes solutions that
appeal to and make fruitful use of the familiar knowledge and autonomous decision making of
lower-level institutions. The principle of socialization enables recognition of the fact that the scale,
scope and complexity of some social questions call for responses from “higher-order” institutions
on grounds of competence and resources. Finally, the principle of solidarity prescribes a distinctive
foundational model of social order and relationship that envisions responsibilities among market
participants according to roles more normatively substantive and socially comprehensive than the
market itself. In other words, it presumes the market is an important—though instrumental—
institution in a broader social fabric of relationship and obligation. The final step in this analysis is to
apply these principles to the regulatory framework for the accounting profession in the wake of the
SOA.
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B. Principles, Politics and the Common Good: The Limits of Reforms to the
Regulatory Framework
As section I indicates, there has been a robust conversation in the United States since at least the
last quarter of the nineteenth century about the proper context for regulating the standards for and
the practice of accountants’ professional contributions to clients and the public, particularly audit
services. The dynamic nature of this discussion has paralleled the evolving features of capital
markets, particularly their scale, the types of securities participants have favored and prevailing
assessments of various forms of risk. For much of this period, the regulatory framework for the
accounting profession has resembled the sort of recommendations one would expect from the
principle of subsidiarity, both out of the deference of stock exchanges, government officials and
investors to the ostensible practical wisdom and professionalism of accountants, and because of the
costs of external oversight. The presence of a vibrant and responsive accounting profession in the
United States and Europe meant that there was an existing institutional reservoir of talent,
experience and dedication on which to draw, and there was a ready compatibility between this
developmental process and the principle of subsidiarity:
The principle of subsidiarity serves a different role in Catholic social thought than others such as solidarity.
Subsidiarity is a functional principle—a principle that is related to process. It provides guidance on how the
other principles are brought to fruition in society. As reflected in papal encyclicals, there are two dimensions to
the principle. The first is the natural right to associate and organize. The second, as Michael E. Allsapp notes,
involves efficiency.202
These two dimensions to which Tavis refers of course complement one another in society’s
prudential provision for agency costs (principally the costs other institutional responders would have
to incur to oversee the work of accountants, which would include some duplication of accountants’
information gathering and expertise). An important corollary to the right to associate and organize is
the right to participate, particularly for those whose proximity to the practical circumstances makes
special demands on their capacity for autonomous decision making203 according to standards of
independent professional judgment.204 In the case of the accounting profession, there is a long
tradition in the United States of recognizing accountants’ interests205 in participating in setting
accounting standards and regulatory procedures, especially in the aforementioned relationships with
stock exchanges, and federal and state regulators. In the face of the secretiveness and intransigence
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of many large corporations in the early twentieth century, the profession and the exchanges,
particularly the NYSE, demonstrated leadership that brought incremental progress for the
stakeholder constituencies whose interests they were trying to protect. These early initiatives among
mostly private-sector actors were consistent with the principle of subsidiarity as John XXIII
affirmed it in Mater et magistra:
[I]n the economic order first place must be given to the personal initiative of private citizens working either as
individuals or in association with each other in various ways for the furtherance of common interests.206
However, the devastating effects of the stock market crash in 1929, and the outrage that followed
the revelations in the Pecora hearings of widespread errors, irregularities and outright fraud in
financial reporting, provided overwhelming evidence that this arrangement had failed to render such
protection adequately. Assessment of these facts led Congress and the White House to a position
similar to the later insight of John XXIII regarding the incipient regulatory profile of the principle of
socialization:
[T]he civil power must also have a hand in the economy. It has to promote production in a way best calculated
to achieve social progress and the well-being of all citizens.207
A portion of the “civil power’s” response to this disaster in the form of the Securities Acts of 1933
and 1934 represented a dramatic initiative within the Roosevelt administration’s broad program to
resuscitate liberal institutions such as capital markets and corporations that had faltered in the largest
market failure in history.208 The securities acts created an institutional apparatus to promulgate and
enforce guidelines for accounting standards and disclosure. However, this initiative did not abandon
the private sector as irredeemably untrustworthy. As section I recounts, within two years the SEC
delegated some of its authority to the accounting profession and this measured response to the
upheaval of the Great Depression represented restraint in keeping with John XXIII’s interpretation
of subsidiarity:
Private enterprise, too, must contribute to an economic and social balance in the different areas of the same
political community. Indeed, in accordance with “the principle of subsidiary function,” public authority must
encourage and assist private enterprise, entrusting to it, wherever possible, the continuation of economic
development.209
If the economy was to recover, i.e., if there was to be plausible “continuation of economic
development,” the process had to arise from “cooperation and consensus-building among the
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diverse economic agents,”210 with a proportionate division of labor between the public and private
sectors. The securities acts added a robust federal role to monitor, preserve and build upon the
accomplishments of the accounting profession, the stock exchanges and state regulators. The
profession in turn established a succession of private regulatory entities to aid this process, most
recently the FASB.
However, in providing for oversight and delegation, this arrangement also institutionalized
agency costs. While these interdependent relationships formed an effective regulatory framework for
the profession for much of the twentieth century, the chronic presence of these costs ironically
proved to be a major element in the spectacular failure of this arrangement at the dawn of the
twenty-first century due to three factors:
(1) the uncritical reliance of clients, CPAs, public- and private-sector regulators, attorneys and
others on mutual assurances regarding increasingly complex accounting practices;
(2) the proliferation of nontraditional practice areas by CPA firms, which strained the
plausibility of CPAs’ independent professional judgment by creating conflicts of interest in
audit services and by overextending their resources and leaving them financially vulnerable
to clients;
(3) the growing political influence of the accounting profession, especially on the content and
process for crafting the regulatory framework.
In each case, the very elements John XXIII identifies as part of the evolutionary process of
socialization—scale, scope and complexity of the subject matter—affected the resulting disastrously
pliant and permissive attitude of some CPAs (and, in the case of the third factor, regulators and the
public).
First, the cumulative increase in complexity of accounting practice and theory as well as the
general business environment over many years made the independent professional judgment and
counsel of numerous professional advisors a necessity for effective management. Because few
understood all aspects of the relevant processes to remain sufficiently vigilant, the arrangement
became vulnerable to opportunistic exploitation. In particular, in dealing with arcane topics such as
special-purpose entities, off-balance sheet liabilities and “deconsolidations,” corporate leaders and
professional experts came to rely greatly on one another’s authoritative representations regarding the
intelligibility and propriety of these practices. Agency costs escalated, and the perceived benefits
from attempting to manage these often were meager. Rather than replicate the expertise that client
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management, CPAs, legal counsel and others thought they were receiving from one another, they
settled for the dangerous path of relying inordinately on the credibility of one another’s authority. As
headlines later would reveal, the tenuousness of this groupthink arrangement in terms of conceptual
clarity, due diligence, legal compliance and ethical responsibility proved a weak barrier to the
narcissistic opportunism of executives at Enron, WorldCom and other companies. Likewise, the
ostensible oversight of the regulatory framework was insufficient to constrain individual CPAs and
firms such as Andersen that pandered to these clients.
Second, accountants incrementally diversified their repertory over the years to include nonaudit
services, and this compromised their capacity for independent professional judgment. For one thing,
such diversification sometimes put them in the awkward position of assessing systems and practices
that reflected their own contributions. Moreover, in embarking on this strategy of diversification,
accountants were “spreading themselves thin” when it came to their putative areas of competent
practice, and this left them vulnerable to manipulation by the clients they were trying to serve; in
some cases, this was a willing vulnerability.
The accounting profession had assumed a central role in helping to compensate for the effects
of the separation of ownership from control that Berle and Means had identified in 1932. Drawing
on more than one century of distinguished service in the United States, the United Kingdom and
other nations, it rose to the challenge of developing a system of accountability so that providers of
capital would be able to assess the performance of users of capital. Although the profession did an
admirable job of regulating itself in the first decades of this experiment, structural changes in the
economy eventually overwhelmed it as society moved from an industrial model that focused on
amassing vast quantities of anonymous and distant capital for equally vast production and
distribution, to a post-industrial model of specialized services in which information became the chief
commodity and store of value. To demonstrate enduring added value to clients and to avoid slipping
into a routine background role as “checker” of the financial statements, accountants took the
initiative to develop a broader professional profile and to apply their independent professional
judgment in fields beyond auditing, including a diversity of management advisory services.
In fairness there were and remain good-faith reasons for such a diversification strategy, not the
least of which are the efficiencies that come from the ability to provide comprehensive assessments
of the condition, operations and needs of an organization. In theory at least, a firm that performs
compilation services and management advisory services in taxation, human resources, strategy and
information systems for a client will be in a better position to perform its audit work more efficiently
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and effectively. If nothing else, it knows the client well enough to investigate possible weaknesses in
its system of internal accounting control in the course of such an examination (provided it has not
caused or exacerbated them). In addition, the profession did make some efforts to modify its own
structure and to expand its repertory of expertise so that it could deliver on its service objectives,
e.g., by implementing the 150-hour education requirement for entering the profession, by revising
the form and content of the CPA exam and through evolving continuing education requirements.
When the requisite expertise was not available in-house, accounting firms recruited externally,
including among many nonaccountants.
However, the proliferation in managerial specializations over the last decades of the twentieth
century led to greater complexity in the practice of public accounting as well, and in the mission
scope and structure of its larger firms. One ostensible advantage of practicing in such firms was that
they could be virtually “all things to all clients.” The downside was that the financial requirements to
sustain the commensurate infrastructure even to attempt such a strategy were so great that the
resulting precious reputational and intellectual capital of the firms became as susceptible to loss from
impairment of independent professional judgment as from obsolescence. With so much at stake,
practice development assumed an even more central role, but in degenerating into a portfolio model
of profit centers, this strategy took on a life of its own that was bereft of logic and principle. Such
“full-service” firms scarcely could afford to lose clients, and this vulnerability imposed acutely
difficult decisions when client demands resulted in thinner margins and increased pressure to
acquiesce to risky practices, in audits and otherwise.211 (This dramatizes the fact that accountants
were not solely responsible for this degenerative process; clients clearly bore responsibility, too,
along with regulators and investors.) As Andersen painfully learned, the consequences of the
reputational damage from succumbing to such pressures could be swift—and terminal.212
In light of these failures in the regulatory framework, and in the wake of the most explosive
outrage among the public and government officials since the Pecora hearings, Congress in 2002
again took up the task of refining this system, with the principal results being the SOA and the
PCAOB. These changes reflected the sorts of debates about institutional dynamics of power, trust
and accountability that fall within the purview of Catholic social thought, complete with hopes for
the public regard for and diligence of “higher order” institutions, particularly government regulatory
agencies, and the objective of avoiding a plunge into disproportionately costly bureaucracy. These
debates in the press, academe, the accounting profession and Congress continued beyond passage of
the SOA, particularly due to the controversial actions of the SEC and the PCAOB in implementing
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it and the related role of the profession as a growing political force in influencing the process. This
last factor was the third major element of the systemic failure of the regulatory framework, and,
because of the continuing lack of attention to this structural weakness, this remains a source of great
concern with regard to the long-term prospects for these reforms.
The SOA represents a policy consistent with a judicious application of the principles of
subsidiarity and socialization. As federal legislation, it wields the highest statutory authority in the
United States, and it extends jurisdiction over foreign entities operating in the country or with
American companies. Given the broad “social concerns” it encompasses, and the failure of the
previous regulatory framework, a legislative response was appropriate. Yet, as section I.F indicates,
in deploying a private organization to effect its salient purposes, with oversight by a federal
commission, this response narrowly tailors regulation of the accounting profession in a way that
subtly reflects a prudential balance between the public and private sectors. Facially, it is in accord
with the scheme of inducements and incentives that Arrow identifies and with the institutional
vision of Catholic social thought.213
The counsel that John XXIII offers for “economic enterprises” of the state or “agencies of
public law” is fitting as well for the PCAOB in its oversight role, which
must be entrusted to men of good reputation who have the necessary experience and ability and a keen sense
of responsibility towards their country. Furthermore, a strict check should constantly be kept upon their
activity, so as to avoid any possibility of the concentration of undue economic power in the hands of a few
State officials, to the detriment of the best interests of the community.214
The SOA’s list of qualifications to serve on the PCAOB and its provisions for standard setting and
oversight by the SEC and other authorities ostensibly conform to these standards of
trustworthiness, diligence and objectivity for the “best interests of the community.” However,
agency costs remain for those overseeing the PCAOB, and this regulatory framework will succeed
only with the active partnership of the accounting profession, the stock exchanges, investors and
other key stakeholders.215 The PCAOB is institutionally capable of promoting the public interest, but
only the combination of good-faith efforts by these constituencies will be able to serve the common
good, i.e., those who appoint members to serve on the PCAOB and the board members themselves.
At a minimum, continuing vigilance will be necessary from all parties to avoid a repeat of uncritically
imputing credibility on the basis of authority. Yet, this is not a license for persistent skepticism and
suspicion of public or private officials (even when they seem to deserve it). The situation calls for
neither blind trust nor blind mistrust, but an ex ante template for substantive and procedural
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transparency that reflects and reinforces a well-placed trust.
When it comes to the principle of solidarity, there is no lack of attention to those in professional
life, especially from John Paul II, and the hopes he shared in a 1991 speech to business leaders in
Rome one easily can imagine him directing to the accounting profession (and to other constituencies
in the regulatory framework):
You must seek to act with the best professional skill in order to develop the best relations among all the
personnel of your businesses, with those who use your products or services, with the various social agents or
authorities responsible for the common good, all of this without ever losing sight of the primary objective,
which is the construction of a just society in which the whole ensemble of people can achieve true social
balance.216
Aside from the aforementioned questions regarding the descriptive “fit” of the principle of solidarity
in the broad context of social institutions around the world, and the uncertainty surrounding the
extent of the respective spheres of justice and virtue, the issue remains whether the letter or the
spirit of the regulatory framework for the accounting profession that the SOA represents really
conveys a commitment to the common good that reflects the general contours of this principle. On
the basis of (1) the context and process for promulgating the SOA, (2) the content of the legislation
and (3) its initial implementation, there are grounds for concluding that the new regulatory
framework remains deficient according to the standard of the principle of solidarity.
First, with regard to the context and process for promulgating the SOA, one must remember
that in early 2002, momentum for legislative reform in the wake of the Global Crossing, Enron and
Andersen scandals had diminished. It was only after the explosive news about WorldCom and other
companies that there was renewed interest in legislation to reform accounting standards and
practices and general corporate governance. The vacillating attentions of legislators did not convey a
constancy of interest in and commitment to the common good befitting the principle of solidarity.
Moreover, the atmosphere of crisis at the time among accountants, regulators and investors, in
combination with intense lobbying by accountants and other special-interest groups,217 lent a
conspicuous expediency to the process that bespoke a tenuous context for passing substantive law
on behalf of the common good, or even the derivative policy objective of the public interest.
Although it was admirable that Congress ultimately took action, the quality of the process fell far
short of the standard that the Second Vatican Council outlined:
[Christians] must recognize the legitimacy of different opinions with regard to temporal solutions, and respect
citizens, who, even as a group, defend their points of view by honest methods. Political parties, for their part,
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must promote those things which in their judgement are required for the common good; it is never allowable
to give their interests priority over the common good.218
Second, with regard to the content of the SOA, the provisions reflect many voices, interests and
hands, but a vision for the common good remains largely absent. Despite the aspirations of the
SOA’s supporters to mount a comprehensive response to the ills that faced American business and
the accounting profession in 2002, the legislation itself predictably dwells in traditional, mundane
categories of statutory construction, including the mechanics of layers of oversight to prevent and
detect violations, with referrals to various enforcement channels for regulatory sanction, civil
litigation or criminal prosecution. As section I.F indicates above, there is language in the statute that
admirably appeals to a standard of the “public interest.” In fact, the phrase appears almost 30 times.
However, the SOA does not reflect or convey a comprehensive moral vision that credibly supplies
articulable content for this interest, instead leaving this to the default inference of the reader that,
whatever the public interest is, it at least does not mean some private interest (of powerful,
menacing constituencies such as CPAs, attorneys, or corporate insiders).
In light of the fractious state of the political process in the United States, including the
prominent role of well-organized and well-financed special-interest groups that regularly lobby
Congress and the White House on regulatory issues (particularly controversial legislation such as the
SOA),219 the social conditions that the principle of solidarity prescribes are far from fulfillment:
Despite its [legislative] victor[ies], the accounting industry was hit hard by the fallout from the savings and loan
scandal. The Big Six were forced to pay more than $1 billion in damages to the government from 1992 to 1994
for their role in advising corrupt and mismanaged savings associations.
But the small accounting lobbying group grew in size, sophistication and influence and completely overcame
the industry’s tarnished image. By 1993, according to records at the Federal Election Commission, the
industry’s main political action committee was helping to finance more than 300 races in Congress. Each of the
Big Six also contributed more than $2 million to finance lobbying for more limits on lawsuits.
Its lobbying sophistication is evident from internal records that show the group kept comprehensive reports on
most lawmakers, including everything from the mundane to the significant. The reports described the
lawmakers’ key aides and outside advisers, influential constituents and local news organizations, donations from
rival political groups, and political vulnerabilities and pressure points. To assist in the lobbying effort, the group
also turned occasionally to the lawmakers’ personal accountants to pitch for greater restrictions on investor
lawsuits.
By 1995, the group had teamed up with interests from Silicon Valley, which as it grew richer was growing more
influential. The group’s agenda fit easily into the Gingrich revolution’s mission of attacking lawyers and the
legal system.220
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In a political ethos that tolerates such behavior, it is difficult to hope that in the short term a
supervening and abiding concern for the common good will guide the actions of those who
promulgate and comply with such laws. This does not mean that there is no merit in the SOA, or
that its potential is not worthwhile. It also does not mean that CPAs, attorneys, regulators, stock
exchange managers and corporate executives—and lobbyists and members of Congress, for that
matter—are inherently unethical. However, the disappointing—and relatively recent—history of
legislative maneuvers that predisposed the regulatory framework to these scandals is a reminder of
broader dysfunctions in the American legislative process having to do with money, politics and the
power of collective action by cohesive special-interest groups.
One response to this critique would be to note that the free expression of this diversity of
interests and opinions is really a source of strength when it comes to the ongoing process of
mapping out a regulatory framework for such a central activity in the economy as accounting, and
that seeking a univocal social response in accord with a putative principle of solidarity in the long
run would result in policies and laws that reflect less subtlety, crafting and refinement. Such a result
could have the inverse effect of harming the common good by neglecting the virtuous practices of
participation, consultation and deliberation. This eventually could diminish society’s institutional
apparatus for effective capital formation, and it could deplete and neutralize the capacity of private
associations of CPAs and other professionals to contribute to the public discourse the distinct
perspectives of their experiences and competencies in serving their clients and broader stakeholder
constituencies. If CPAs, their stakeholders and others do not feel ownership in the process of
fashioning the regulatory framework, this could lead to alienation, and it could create greater
cynicism about regulations generally and inspire more efforts to evade them. Regulation, especially
governmental regulation, can be a blunt instrument, and authors of regulation serve the public best
when they observe a decorous humility in the policy objectives they set for such initiatives.
Diversity in fashioning a justifiable regulatory framework is essential, and the practical
experience of CPAs and others should contribute to this process. Accountants should not be mere
spectators, particularly when this would disadvantage them vis-à-vis other organized constituencies.
However, participation does not mean a license for unbridled opportunism and manipulation of the
political process for selfish ends. Accountants safeguard their clients’ interests as a matter of
fiduciary and ethical duty, and as professionals they remain under a similar duty to demonstrate
leadership in safeguarding the common good. The fact that interest groups might not have agreed in
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the past does not logically mean that they have no interests in common or that they might not agree
in the future in advocating measures for this regulatory framework. The question is whether they are
making good-faith attempts to build such consensus, and the record does not support an affirmative
judgment, particularly with regard to accountants’ aggressive political tactics. Moreover, given the
profiles and objectives of those who arrayed themselves against regulation of the profession in the
1990s, it is questionable at best whether this regulatory system truly promotes a “diversity” of
interests and views. It is disingenuous to claim that the regulatory framework in the wake of the
SOA has rectified the problems that a minority of members of the accounting profession caused,
when this framework simultaneously bears the fingerprints of the profession’s lobbying. The SOA is
expansive in its scope, but it is silent when it comes to the growing menace the accounting
profession poses to the common good by seeking to manipulate the regulatory process through its
political activities.221
Finally, the inauguration of the PCAOB reflected poor judgment, an obliviousness to the
common good (and the public interest) and a conspicuous lack of political tact and decorum. ThenSEC Chair Pitt’s ill-conceived nomination of Judge Webster to chair the board demonstrated an
extraordinary lack of ethical regard for the other commissioners and the public, particularly since the
information he withheld concerned a matter acutely deleterious to the mission and credibility of the
PCAOB and the SEC. This process was supposed to signal a new regulatory response to a
devastating pattern of unethical behavior, but Pitt spectacularly failed to meet the policy objective of
restoring trust and confidence in markets.
The PCAOB convened its first formal meeting on January 9, 2003 without a permanent chair,
senior staff or final budget. Members voted on matters that mixed irony and awkwardness, e.g., the
lease of headquarters in Washington offices that Andersen had vacated; the rejection of a member’s
proposal to subject the PCAOB to the same rule on auditor rotation that it was to enforce for
issuers and approval of salaries for themselves of $452,000 (with $560,000 for the chair).222 While
none of these actions was an articulable violation of the principle of solidarity or other ethical
principles, the second and third issues influenced perceptions within Congress and among the
public, and put the PCAOB on the defensive.223
The more substantive concerns about the PCAOB from the perspective of solidarity arose later
that January, when the SEC took up formal rule making to implement the SOA. What had been
mere awkwardness for the PCAOB erupted into public controversy with reports that the SEC had
stepped back from the posture of the previous year, and had promulgated weaker rules than it
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originally had planned. In fairness, the SEC substantively complied with its duties under the SOA,
and in fact unanimously voted to extend from five to seven the number of years that auditors would
have to retain their audit work papers.224 Moreover, even though the SEC ultimately adopted an
auditor-rotation rule weaker than it first proposed, the provision nevertheless was more stringent
than the SOA required.225 However, the SEC also voted to allow firms to continue to provide tax
advisory services to their audit clients,226 and this elicited significant criticism from legislators and
others because in theory it would allow a firm to review its own tax advice.227 The SEC’s position
was that the issuer audit committee’s requirement under the SOA228 to review and approve all nonaudit work would provide sufficient safeguards against this risk to independence.229
The unfortunate effects of this bickering over SEC action have been deleterious to aspirations
for a social vision of solidarity and a concomitant commitment to the common good by those who
regulate markets, those who lobby regulators, those who comply with regulations and the investors
who are supposed to benefit. The SEC’s founding aroused controversy, but it has enjoyed a largely
favorable reputation for most of its existence, as an important contributor to global confidence in
the stability and fairness of American capital markets. It has built this reputation through decades of
diligence, efficiency and professionalism, and through forming domestic and international coalitions
to promote effective and fair regulation.
The SEC began a challenging period in 1994, when a wave of deregulatory fervor made
Congress more responsive to lobbying by corporate and professional interests.230 As a result, during
the term of Chair Levitt in the 1990s, the SEC lost regulatory and political leverage, and the fiscal
attention of Congress for maintaining its resources, especially staffing and technology, waned.
Because of this, the SEC was unable to discharge its mission effectively for almost one decade, and
this contributed to the scandals. These dysfunctions increased during the tenure of Pitt,231 when
there were credible perceptions inside and outside the SEC that it did not act in a consistent or
trustworthy pattern in service to the common good—or even the public interest. The fact that the
SEC remained defensive about its rule making and other actions prior to Pitt’s departure many
weeks after he announced his resignation demonstrated the corrosive effects of this lack of public
confidence.232
It rests with the current leadership of the SEC and the PCAOB to demonstrate resolve in
leading their respective organizations in ways that will serve the common good. Already, SEC Chair
Donaldson has taken measures to improve the management functions of the commission, as it
absorbs dramatic increases in its budget.233 In a show of support for his efforts, Congress has moved
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to authorize new powers for the SEC to streamline its ability to impose civil penalties for violations
of securities laws and for other purposes, without the administrative assistance of a federal court,
and to issue confidential subpoenas for financial records; the legislation also would increase the
levels of these penalties significantly.234
Through the example of their leadership, Donaldson and McDonough have the potential to help
overcome some of the historical structural weaknesses of the regulatory framework for the
accounting profession and the credibility problems surrounding the SOA. They already have made
significant progress. However, the broader project of rehabilitating this framework toward an
authentic regard for the common good and conformity with the principles of subsidiarity,
socialization and solidarity is not something that they and their staffs will be able to accomplish on
their own. Consistent with the integrated, multilevel institutional pluralism that Catholic social
thought recognizes as essential, this process will require the concerted effort of all the key decisionmaking constituencies in the public and private sectors—as well as time—to be successful in
restoring trust.
Conclusion
This paper has addressed urgent questions regarding the vocation of the American accounting
profession as it has unfolded since the last quarter of the nineteenth century. This process has
occurred against a backdrop of an evolving regulatory framework, with standards for accounting
practice and auditor independence undergoing dramatic changes that have reflected tumultuous
events in the life of the country, particularly the Great Depression, the savings-and-loan crisis and
the massive accounting scandals of the early 2000s. The paper has analyzed the evolution of the
profession and the various roles that accountants have played in developing and refining this
regulatory framework in cooperation with stock exchanges, government regulators and others. The
responses of accountants to this vocation to professional service have included chapters of
principled leadership in the theoretical and practical development of the discipline, but they also
have revealed episodes in which members of the profession have been less than courageous in the
face of temptations to power, prestige and financial rewards.
The focus of this discussion has been on refinements to this regulatory framework in the wake
of the aforementioned scandals, with particular attention to the SOA. The policy objective for this
act is to safeguard the public interest and to help avoid a repeat of the shocking scandals that
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precipitated it and the associated erosion of public confidence in markets and other institutions,
which can be deleterious for the capital-formation process.
Most of the notorious behaviors in the scandals of the early 2000s were illegal before the SOA,
and some of these violations were more basic than questions of securities law, e.g., the breach of
fiduciary duty by corporate officers and directors and the criminal obstruction of justice that
Andersen had elevated to an art form. Yet, the premise of the SOA was not to create a new regime
out of whole cloth. Rather, the act expanded the existing regulatory framework that traced its roots
to before the securities acts. In naming, restricting, and even prohibiting specific practices that had
been routine, and in deploying a new private entity to oversee the accounting profession, the SOA
made recourse to a familiar approach to public policy and yet signaled a new moment in the
regulatory framework when it came to regulatory scope.
The systematic normative contribution of this argument has been to discuss and apply the three
substantive principles of Catholic social thought—subsidiarity, socialization and solidarity—to
support the judgment that this regulatory framework is formally consistent with the first two
principles, but that it remains deficient in terms of its commitment to the evolving contours of the
third, specifically the pervasive social regard that should animate such a regulatory apparatus.
Instead, a politically charged and contentious atmosphere has engulfed the regulatory framework.
The most recent evidence of this includes the circumstances surrounding the promulgation of the
SOA, the SEC rule making to implement it and the inauguration of the PCAOB. It is ironic and
disappointing that the dysfunctions in the regulatory framework emerged as saliently in the attempt
at reform that the SOA represented as in the scandals that precipitated it.
The dramatic reversals the accounting profession suffered in the public eye and in its regulatory
framework in the early 2000s provide abundant and sad testimony to how egregiously some CPAs
had broken faith with the moral concern and professional discipline that had characterized the
vocation of the profession for decades. The willingness of CPAs to risk their independent
professional judgment and reputations for the allure of professional status and fees for services that
put them in dangerous conflicts of interest was particularly disappointing. When an ostensibly
independent CPA allows him- or herself to become effectively beholden to a client, then he or she
must be ready to accept moral, managerial and legal responsibility for the negative effects that arise
from such illegitimate affiliations. The same holds true in cases of appalling abuses of the
professional sanctity of the CPA-client relationship by accountants who apply political pressure to
clients who happen to be members of Congress. On the basis of fiduciary duty, professional
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standards, self-respect and simple decency, it is unacceptable for a CPA to approach his or her client
with anything other than a dedicated regard for the client’s best interests. There is no place in the
profession for those who opportunistically would pervert such access for self-interested purposes. It
is intellectually dishonest for CPAs to act out of conspicuous private interests in these ways, and
then to claim a public regard.
Despite such disappointing behavior, it is important to remember that this is a story that remains
in progress, and that it is reasonable to continue to hope for the rehabilitation and redemption of the
accounting profession. It took many years for it to reach its current ethically lamentable state, and it
likely will take a similar span of time for it to renew itself and to recover. Moreover, it is important
to maintain a realistic set of expectations for the efficacy of any regulatory framework for the
profession. In particular, it is best to avoid a “restorationist” perspective that is neither historically
accurate nor ultimately helpful in crafting a regulatory framework that will be competent and
practicable for the dynamic global capital markets of the twenty-first century. There was no “golden
age” in which the regulatory framework was ideal, or in which the profession fully succeeded in
balancing and honoring stakeholder interests. In practice, the profession throughout its existence in
the United States has remained responsive primarily to those who have owned or controlled the
capital. Despite accountants’ long-standing and admirable aspirations to a broader sphere of social
responsibility, whether out of ethical principle or as part of a concession for self-regulation, the
evidence for such abiding commitment, particularly to the common good, has grown increasingly
elusive, particularly since the last quarter of the twentieth century. It is unfortunate that this egoistic
trend in the profession has increased even as the scope of its stakeholder community has expanded,
due to the aging of the population and concomitant broader participation in capital markets through
direct and indirect investments—particularly mutual funds, retirement plans and other institutional
arrangements.
Rather than trying to recapture a mythical past, the most constructive response for participants
in the regulatory framework and the public is to focus on the present reality of global capital markets
and to set expectations that concretely will promote the objectives of an ethical public policy
regarding this framework, at a minimum including compliance with securities laws and regulations
and best practices in the accounting profession and capital markets. The SOA is a law every bit as
imperfect as the process that created and implemented it. Nevertheless, as a threshold moment in
the life of the accounting profession in the United States, the history of securities regulation and the
practice of corporate governance, the SOA represents a new beginning and an opportunity to reduce
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the ethical and financial costs of uncertainty. It is not sufficient to repair the profession’s selfinflicted wounds—much less to secure the common good—but it is necessary, and it is a start.
If money has been the lingua franca of industrial and now post-industrial society, then financial
statements have assumed a role between newspaper and temple oracle. Financial statements make
public and even mundane what previously was mysterious for being out of sight. They help to
elucidate a corporate strategy, appraise an organization according to its progress on this path or
simply justify a loan. Above all, financial statements are a form of communication, however indirect
and idiomatic. They communicate information from those who manage capital to those who own it,
with the warrant of credibility from the accounting profession, which prescribes standards for
presenting the information and for adjudging the fairness of these presentations. Yet financial
statements never speak for themselves. Because they conceal, even as they reveal, they require
interpretation, and they remain only one element in a broader repertory of channels for
communication and accountability between corporations and their stakeholders.
Accounting is an interpretive discipline that only incidentally is about numbers; its core purpose
is to recognize and represent certain benefits, obligations and processes of entities in a systematic,
fair, reliable and credible manner. Accounting is both a social science and a profession, and so it
remains firmly reliant upon theoretical and practical standards that guide its practitioners so that they
can convey relevantly uniform patterns of meaning to their clients and other stakeholders from case
to case. Given the significant moral interests that accounting implicates, the role for independent
professional judgment remains essential. Historically and systematically, what elevates such judgment
above mere discretion is an abiding social concern that recognizes these moral interests on behalf of
all who rely on accountants’ experience and interpretive skill. As a matter of history and
contemporary profession, accounting is a form of stewardship and it bespeaks a public as well as
private trust.
Finally, it is worthwhile to recollect and elaborate upon the introduction’s comments regarding
the significant historical and systematic convergence between the contributions of the accounting
profession and Catholic social thought. Since the fifteenth century, in the Venetian study of the
Franciscan mathematician, Fra Luca Paciolo, the respective precursors to these traditions have
grown up together, and, beginning in the last quarter of the nineteenth century, they both entered a
period marking their modern intellectual maturity. The theory and practice of both will continue to
evolve in a new millennium that will see ongoing integration in the world economy, with
commensurate increases in the frequency of the intercultural exchanges and interreligious dialogues
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PART II: THE CALLING OF BUSINESS
that contribute to the process of socialization. The American accounting profession and the
economic system that it represents, just as Catholic social thought and the religious and intellectual
traditions that it represents, have exerted profound and, in some cases, provocative influences
around the world.
Yet, these traditions share systematic elements as well as historical contemporaneity. While
Paciolo did not invent the double-entry bookkeeping system, he did formalize it and in his major
work on the topic in 1494, he discerned in the method a reflection of divine proportionality and
order. He recognized a higher purpose, not just in this way of thinking, but also in this method of
practice. It was the vocation of this method that would transform those who practiced it, and make
them worthy of becoming professionals. The proximate economic benefits of this system emerged
as a process for rationalizing and enabling the incipient system of capitalism. Double-entry
bookkeeping helped to make capitalism plausible and practicable over the long term by extending a
measure of this order to the rapid and often chaotic development of capital markets and by
providing a disciplined means for owners and managers of capital to understand the significance of
the uses to which they were putting these resources, e.g., in the precursors to the corporate form in
commercial shipping ventures that circumnavigated the globe.
In a parallel way, Catholic social thought recollects and reintegrates these concerns by construing
a qualitatively distinct but related moral order for markets and by cognizing their essentially
instrumental character as means for promoting human dignity.235 Whatever the virtues of markets as
dynamic engines for creating and enlarging wealth, they remain fallible because they are human
institutions. There is abundant testimony to the many ways markets can fail, in their allocative
efficacy as well as their moral vocation. Consequently, from the perspectives of both economics and
ethics, it is essential to avoid a false equivalency between markets and justice.236 Catholic social
thought helps to provide a balanced assessment of the virtues and limitations of markets and a
robust normative foundation for guiding the path of their development in ways that sustain their
vibrancy so that they will be capable of increasing the social product, promoting the common good
and enhancing the dignity of the human person. As the accounting profession continues a difficult
process of therapeutic discernment and self-assessment, contrition (one hopes) and acclimation to
an evolving regulatory framework, there will be continuing opportunities to benefit from the
analytical perspectives of Catholic social thought.237
Moreover, as the American accounting profession238 and Catholic social thought239 continue to
exert influence on a global scale in the new century, there is an intensifying urgency for them to
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PART II: THE CALLING OF BUSINESS
explain themselves to a world that is understandably skeptical of the intentions of capitalists and
Christians, particularly when much of the rest of the world remains committed to other humanistic,
religious and economic traditions that historically have been in tension with capitalism and/or
Christianity. The American accounting profession—and American management and professional
practices generally—and Catholic social thought thus will continue to have tremendous relevance
and influence far beyond their respective geographies, and normative analysis and dialogue between
and among these traditions on urgent social questions of human development only will enhance
their capacity to make credible and successful contributions on the world stage.
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PART II: THE CALLING OF BUSINESS
1 The principal professional membership organization for certified public accountants (CPAs) is the American Institute of Certified
Public Accountants (AICPA). The membership of the AICPA stands at approximately 328,000, or about three-fourths of all holders
of the American CPA credential. AICPA, “Frequently Asked Questions About the AICPA,”
http://www.aicpa.org/dues/CPA_count.htm (accessed May 20, 2003).
2 An “attest” engagement requires one of the distinctive qualifications of a certified financial accountant (CPA), viz., the exercise of
independent professional judgment according to AICPA Professional Standards. See AICPA Code of Professional Conduct § 92.01 (2001)
(“Attest engagement”), http://www.aicpa.org/about/code/et_92.html (accessed May 20, 2003) [hereinafter AICPA Code].
3 The senior technical committee of the AICPA that promulgates auditing standards and guidelines for member CPAs is the Auditing
Standards Board (ASB). AICPA, “Audit and Attest Standards,” http://www.aicpa.org/members/div/auditstd/index.htm (accessed
May 20, 2003). Compliance with ASB pronouncements is mandatory. AICPA Code § 202.01 (“Compliance with standards”),
http://www.aicpa.org/about/code/et_202.html (accessed May 20, 2003).
4 Except for discussion of some legislative prohibitions on non-audit services by auditors in section III.B below, analysis of the
regulation of the broader, related repertory of services that CPAs historically have provided, including tax advisory and preparation
services, information technology, human resources and general management advisory services, is beyond the scope of this article.
Likewise, discussion of the accounting profession’s attest function necessarily implicates significant questions of corporate
governance, but these are not the main focus of this article.
5 Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002)
(codified as amended in various sections of 11 U.S.C., 15 U.S.C., 18 U.S.C., 28 U.S.C., and 29 U.S.C. (2003)).
6 For a thoughtful rendering of this notion of vocation in terms of “receivement” of an invitation both to a free and complete identity
and to the grace to make this process possible, see John C. Haughey, “The Primacy of Receivement.”
7 Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property, rev. ed. (1968; repr., New Brunswick: Transaction
Publishers, 1991), 271.
8 Michael Chatfield, A History of Accounting Thought, rev. ed. (Huntington, New York: Robert E. Krieger Publishing Co., 1977), 125.
9 N. Loyall McLaren, Annual Reports To Stockholders (New York: The Ronald Press Co., 1947), 3.
10 Chatfield, 80-81. The circumstances, scale, and effects of this financial disaster eerily prefigured the twenty-first century’s Enron and
WorldCom scandals.
11 McLaren, 3.
12 Indeed, as regards the judiciary, the Delaware Court of Chancery has become the de facto supreme court for the nation when it
comes to corporate law because of its highly developed case law and expertise in corporate matters, an advantage stemming from the
state’s long-term strategy of providing a friendly, low-cost and procedurally efficient environment that has attracted a huge number of
corporations to incorporate there.
13 Chatfield, 125-26.
14 Joel Seligman, “The Historical Need For A Mandatory Corporate Disclosure System,” Journal of Corporation Law 9 (Fall 1983): 19
(citing 19 Industrial Commission, Final Report, H.R. Doc. No. 380, 57th Cong., 1st Sess. 619 [1902]); and William Z. Ripley, Main
Street and Wall Street (New York: Little, Brown, and Co., 1927), 220. In the commission’s Final Report, Phillips recommended detailed
corporate disclosure and a system of public auditing. See Corporate Financial Reporting and Analysis in the Early 1900s, ed. Richard P. Brief
(New York: Garland Publishing, 1986), 1-2.
15 Chatfield, 125, 150-51; and Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge,
Massachusetts: Belknap Press, 1977), 464.
16 Chatfield, 151.
17 One early effect of their encouragement was the establishment in 1887 of the American Association of Public Accountants, the
forerunner of the current AICPA. See John L. Carey, The Rise of the Accounting Profession: From Technician to Professional 1896-1936 (New
York: American Institute of Certified Public Accountants, 1969-1970), 1:6.
18 Chatfield, 125-26, 151; and Chandler, 464.
19 After some false starts, New York State passed the first law authorizing the conferral of the professional designation “Certified
Public Accountant” on April 17, 1896. See James Don Edwards, History Of Public Accounting in The United States, MSU Business Studies
(East Lansing, Michigan: Bureau of Business and Economic Research, 1960), 68-70.
20 Chatfield, 126.
21 Ibid.
22 Ibid.
23 Ibid.
24 Ibid., 126-27; Chandler, 90-92; Berle and Means, 13; and Gary John Previts and Barbara Dubis Merino, A History of Accounting in
America: An Historical Interpretation of the Cultural Significance of Accounting (New York: John Wiley & Sons, Inc., 1979), 44-46.
25 Chatfield, 126-27.
26 Ibid.
27 Ibid., 127.
28 Ibid.
29 Ibid.
30 Ibid., 127-28.
31 Ibid.
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PART II: THE CALLING OF BUSINESS
Ibid., 128.
Brief, passim.
34 Ibid., introduction (unnumbered), 2.
35 Ibid., 178-234. Five of these columns appear in this volume, along with a subsequent report Mitchell published in the Journal of
Accountancy in February 1909 on the New England Railroads.
36 Chatfield, 128.
37 See Mary Ann Glendon, “Rights in Twentieth-Century Constitutions,” University of Chicago Law Review 59 (Winter 1992): 534-36
(discussing the long-standing American practice of recourse to public and private “mediating structures” to respond to social
challenges).
38 Chatfield, 128-29; McLaren, 18-19.
39 Chatfield, 128-29.
40 Ibid., 129.
41 Ibid.
42 Ibid.
43 Ibid., 129-30.
44 Ripley, 156-207.
45 Chatfield, 130; McLaren, 23.
46 Chatfield, 130; McLaren, 23-27.
47 Chatfield, 130. Despite the new emphasis on fairness, the text continued to say that auditors “certify that the [financial statements], in
our opinion, set forth the financial condition of the company . . .” (emphasis added).
48 212 App. Div. 55 (1925), aff’d, 152 N.E. 431 (1926).
49 Chatfield, 130-31.
50 174 N.E. 441 (1931).
51 Chatfield, 131.
52 Ibid.
53 Ibid., 131-32.
54 Ibid.
55 Ibid., 132.
56 Ibid.
57 Ibid.
58 Ibid., 133.
59 Quoted in Russell B. Stevenson, Jr., Corporations and Information: Secrecy, Access, and Disclosure (Baltimore: The Johns Hopkins
University Press, 1980), vii.
60 McLaren, 4-5.
61 Burton M. Leiser, “Ethics and Equity in the Securities Markets,” in Ethics and the Investment Industry, ed. Oliver F. Williams, Frank K.
Reilly, and John W. Houck (Rowman & Littlefield Publishers, 1989), 149, 152.
62 McLaren, 5. See also David F. Hawkins, “The Development of Modern Financial Reporting Practices Among American
Manufacturing Corporations,” Business History Review 37 (August 1963): 135: “The little information actually revealed was ‘invariably
colored by the point of view of the corporation, and frequently unreliable because of “sins of omission”’.”
63 Hawkins, 137, 140-41.
64 Ibid., 143-44.
65 Leiser, 153; Seligman, 28-29. While such machinations certainly played a part in the financial instability that led to the crash of 1929,
research in 1996 suggested that the 1932-1934 hearings of the Senate Committee on Banking and Currency (the Pecora hearings)
overstated their effect, possibly for political purposes. James D. Cox, Robert W. Hillman and Donald C. Langevoort, Securities
Regulation: Cases and Materials, 2d ed. (New York: Aspen Law & Business, 1997), 6. However, testimony regarding stock pools—and
indeed the Pecora hearings themselves—provided only a portion of the voluminous evidence of widespread financial frauds in the
decades preceding the crash.
66 See note 14 above for the citation for this report.
67 Seligman, 19.
68 Ibid. (citing Report of the Commissioner of Corporations, H.R. Doc. No. 165, 58th Cong., 3d Sess. 30 [1904]).
69 Ripley, 221-22.
70 Seligman, 20.
71 Ibid.
72 Carey, 57; Berle and Means, 280.
73 Seligman, 20; Ripley, 222.
74 Michael E. Parrish, Securities Regulation and the New Deal (New Haven: Yale University Press, 1970), 8.
75 Ibid., 10.
76 Ibid.
77 Seligman, 18, 20; Cox, Hillman, and Langevoort, 16, 17-18. Since that time, all states and the District of Columbia have enacted
statutes for regulating financial securities, following at least in part the Uniform Securities Act that the National Conference of
Commissioners on Uniform State Laws promulgated in 1956 and amended in 1985; however, the states vary greatly in their versions
of these laws and in the resources they commit to enforcement. Although the Securities Act of 1933 originally prohibited preempting
32
33
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PART II: THE CALLING OF BUSINESS
these laws, a 1996 amendment exempted from state registration procedures many types of securities, including those bound for
registration on national exchanges. The result has been that states normally can require registration of only small offerings to
nonsophisticated investors. Ibid., 16-17.
78 This name derived from the original purpose of these laws to control promoters who went to almost any length to sell securities,
even those with no more reality than “so many feet of blue sky.” Hall v. Geiger-Jones Co., 242 U.S. 539, 550 (1917).
79 McLaren, 5-6.
80 Ibid., 6.
81 Berle and Means, 275, 280.
82 Seligman, 54; Ripley, 213-14; Berle and Means, 258, 280. In March 1998, the American Stock Exchange and the NASDAQ
announced their merger plans.
83 “[A]pplicants increased to 300 in 1926, 571 in 1928 and 759 in the first nine months of 1929, [while] responsibility for enforcing the
requirements remained with the eight Exchange members who composed the Listing Committee and a small investigative staff.”
Seligman, 54.
84 Ibid., 18, 21, 53-54, 56; Ripley, 217-18. The resulting lack of national uniformity and the perceived arbitrariness of the official
substantive evaluations themselves drew criticism from the subjects of these laws and others. Cox, Hillman and Langevoort, 18.
85 Berle and Means, 280.
86 Ibid., 279.
87 Parrish, 9-11.
88 Ibid., 21.
89 Ibid., 39.
90 After reaching a precrash high of $89 billion in 1929, the value of all the securities listed on the NYSE dropped to only $15 billion
by 1932. Cox, Hillman and Langevoort, 5.
91 McLaren, 6-7.
92 The popular grasp of the extent of financial fraud—often a result of painful experience—led to almost unanimous agreement
among policy makers about the need for federal securities laws. However, the congressional testimony and findings did not
incorporate the full extent and duration of these market machinations, and revisionist commentators of later decades would point to
this paucity in the record to justify reverting to voluntary corporate disclosure. See George J. Benston, “An Appraisal of the Costs and
Benefits of Government-Required Disclosure: SEC and FTC Requirements,” Law and Contemporary Problems 41 (Summer 1977): 30-62;
idem, “Required Disclosure and the Stock Market: Rejoinder,” American Economic Review 65 (June 1975): 473-77; idem, “Unaccountable
Accounting,” Journal of Accounting Research 12 (Autumn 1974): 352-54; idem, “Required Disclosure and the Stock Market: An
Evaluation of the Securities Exchange Act of 1934,” American Economic Review 63 (March 1973): 132-55; idem, “The Value of the SEC’s
Accounting Disclosure Requirements,” Accounting Review 44 (July 1969): 515-32; Henry G. Manne, Insider Trading and the Stock Market
(New York: Free Press, 1966); idem and Ezra Solomon, Wall Street In Transition (New York: New York University Press, 1974);
George J. Stigler, “Public Regulation of the Securities Markets,” Journal of Business 37 (April 1964): 117-42; and idem, “The Economics
of Information,” Journal of Political Economy 69 (June 1961): 213-25.
93 Seligman, 18.
94 Ibid., 20-21.
95 Ibid., 21-22.
96 Ibid., 22-23.
97 Ibid., 24.
98 Ibid., 26-27.
99 Ibid., 25.
100 Ibid., 27-30. The fact that in the decades after passage of the Securities Acts of 1933 and 1934 promoters and managers of those
corporations with statutory exemptions from disclosure requirements, e.g., due to capitalization thresholds or number of shareholders,
continued to perpetrate widespread fraud on market participants effectively ratified the policy decision to promulgate these laws at the
federal level. For an enumeration of the most prominent of these continuing and wide-ranging machinations, see ibid., 33-45. Of
course, the scandals involving Global Crossing, Tyco, Enron, WorldCom, Andersen and other firms set new thresholds of injury and
moral outrage for the narcissistic hubris of their perpetrators, but their behaviors violated existing securities and criminal laws,
including prohibitions against obstruction of justice.
101 Congress followed President Franklin Roosevelt in eschewing the states’ approach of merit regulation, i.e., governmental
evaluation and approval of individual securities, settling instead on a disclosure regime. For protecting market participants, the federal
acts were arguably “far more comprehensive and detailed” than any other laws. Stevenson, 80.
102 Securities Act of 1933 (Fletcher-Rayburn Securities Act of 1933) (Truth in Securities Act), May 27, 1933, ch. 38, Title I, § 1, 48 Stat.
74 (codified as amended at 15 U.S.C. §§ 77a et seq. (2003)).
103 Securities Exchange Act of 1934, June 6, 1934, ch. 404, Title I, § 1, 48 Stat. 881 (codified as amended at 15 U.S.C. §§ 78a et seq.
(2003)).
104 15 U.S.C. §§ 77e-f.
105 Id. §§ 77g, 77aa; Chatfield, 133.
106 Chatfield, 133.
107 Ibid.; see 15 U.S.C. §§ 78d-78d-1.
108 Chatfield, 133.
109 Cox, Hillman and Langevoort, 7, 20. As with many provisions of the 1934 act, the sections creating and delegating responsibility to
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the SEC resulted from compromises with representatives of the securities industry. Ibid., 7.
110 Chatfield, 133-34.
111 Ibid., 134. For a summary of significant areas of public- and private-sector collaboration in developing accounting procedures at
the time, see Percival F. Brundage, “Influence of Government Regulation on Development of Today’s Accounting Practices,” Journal
of Accountancy 90 (November 1950): 384-91.
112 Robert Chatov, Corporate Financial Reporting: Public or Private Control? (New York: The Free Press, 1975), 1.
113 An amendment to the securities acts extended disclosure requirements to registrants in the over-the-counter market (now the
NASDAQ) with at least $1 million in assets and at least five hundred shareholders. Securities Acts Amendments of 1964, Pub. L. 88467, 78 Stat. 565 (as subsequently amended). See also Chatfield, 134, 278-79. One of the areas of friction between the AIA and the
SEC involved auditor independence. The AIA always had presumed it. The SEC wanted it to be clear always in appearance as well as in
fact. It pressured the AIA into promulgating rules prohibiting auditors from substantial financial interests in a client (1941) and
eventually from any such interest (1961).
114 Chatfield, 134-35.
115 Ibid.
116 Ibid., 135.
117 Ibid., 135-36; McLaren, 40-41.
118 Chatfield, 138. It was only in 1947 that the institute specified what those standards were.
119 Ibid. The institute revised the audit opinion in 1949 to acknowledge the profession's adoption of specific auditing standards; the
resulting opinion remained substantially intact until the 1980s.
120 Some companies were more cooperative than others in complying with evolving legal duties. For example, it was not until 1947
that the notoriously secretive R. J. Reynolds Tobacco Company finally published an annual report that included “a standard form
income statement, a management review of the previous year, and the outlook for the coming year.” Douglas A. Hayes, “Ethical
Standards in Financial Reporting: A Critical Review,” in Corporate Financial Reporting: Ethical and Other Problems, John C. Burton ed.
(New York: American Institute of Certified Public Accountants, 1972), 75.
121 For information regarding the companion Auditing Standards Board, see note 3 above.
122 Financial Accounting Standards Board, “FASB Facts: An Independent Structure,”
http://www.fasb.org/facts/index.shtml#structure (accessed May 1, 2003).
123 Securities and Exchange Commission, Accounting Series Release No. 150 (December 20, 1973). See also Securities and Exchange
Commission, Accounting Series Release No. 280 (September 2, 1980) (commenting on the FASB’s role in establishing and improving
accounting principles). The SEC made a similar pronouncement upon the establishment of the accounting profession’s Independence
Standards Board, the mission of which has been to promulgate standards to ensure auditor independence. See Securities and
Exchange Commission, Policy Statement: The Establishment and Improvement of Standards Related to Auditor Independence, 17
C.F.R. §§ 210, 211 (2003), Release No. 33-7507; 34-39676; IC-23029; FR-50, February 18, 1998,
http://www.sec.gov/rules/policy/33-7507.htm#foot9 (accessed May 10, 2003).
124 The financial revelations about Enron came in the wake of its exploitive role in the 2001 energy crisis in California.
125 “Addressing . . . Levitt . . . who had pushed for the rule . . . Torricelli said: ‘We were wrong. You were right’.” Don Van Natta, Jr.,
“Enron’s Collapse: The Impact; Bipartisan Outrage but Few Mea Culpas in Capital,” New York Times, January 25, 2002.
126 Kurt Eichenwald, “Miscues, Missteps and the Fall of Andersen,” New York Times, May 8, 2002.
127 Jackie Spinner, “Sullied Accounting Firms Regaining Political Clout,” Washington Post, May 12, 2002.
128 Press Release, American Institute of Certified Public Accountants, American Institute of CPAs (AICPA) Accepts Andersen
Resignation From SEC Practice Section; Active Monitoring of Andersen Quality Control Procedures In Place for Audits in Progress
(June 17, 2002), http://www.aicpa.org/news/2002/p061702.htm (accessed September 1, 2002).
129 Floyd Norris, “Bush, on Wall Street, Offers Tough Talk and Softer Plans,” New York Times, July 10, 2002; David E. Sanger, “Bush
Takes Tough Stance on Corporate Wrongdoing,” New York Times, July 10, 2002.
130 Sarbanes Oxley Act of 2002 § 101(a) (codified as amended at 15 U.S.C. § 7211(a) (2003)).
131 15 U.S.C. § 7211(b).
132 Id. § 7211(c).
133 Id. §§ 7212(d)-(e).
134 Id. § 7212(f).
135 Id. § 7213(a)(1).
136 Id. §§ 7213(a)(2)(A)-(B).
137 Id. § 7213(a)(4).
138 Id. § 7213(a)(3)(A)(ii). Likewise, the SOA contemplates situations in which it would be prudent for the PCAOB to cooperate in
return by listening to such groups’ concerns regarding standard setting and responding in a timely fashion, i.e., communicating with
them. Id. § 7213(c). However, as above, the PCAOB retains “full authority” to set standards.
139 Id. § 7218(c).
140 Id. § 7217(a). Under this provision, the SEC is to treat the PCAOB as though it were a “registered securities association” under the
Securities Exchange Act of 1934.
141 Id. §§ 7213(d), 7217(b)-(d).
142 Securities and Exchange Commission, Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector
Standard Setter, Release Nos. 33-8221; 34-47743; IC-26028; FR-70, http://www.sec.gov/rules/policy/33-8221.htm (accessed April
27, 2003). See 15 U.S.C. § 77s(b).
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Floyd Norris, “An Old Case Is Returning to Haunt Auditors,” New York Times, March 1, 2002; and Kurt Eichenwald, “Pushing
Accounting Rules to the Edge of the Envelope,” New York Times, December 31, 2002.
144 15 U.S.C. § 7216(a)(1).
145 Id. § 7216(a)(2).
146 Id. § 78j-1(i). This provision also assigns responsibility to the audit committee to preapprove limited non-audit services, with a de
minimis exemption for some services. Regardless of the scale, scope and timing of approval for the non-audit services, the SOA
requires the issuer to disclose such terms to investors in periodic filings with the SEC.
147 Id. § 78j-1(k).
148 Id. § 78j-1(j). See section III.B below regarding the modification of this provision in SEC rule making to distinguish between lead
and subordinate partners on audit engagements.
149 15 U.S.C. § 78j-1(l).
150 Id. § 78j-1(g). Beyond these specific prohibitions this provision of the SOA forbids auditors from providing any other non-audit
services for a client unless they have received express approval ahead of time from the client’s audit committee.
151 Id. § 7231. According to this provision, such exemptions must be “necessary or appropriate in the public interest and . . . consistent
with the protection of investors, and subject to review by the Commission in the same manner as for rules of the Board under section
107 [15 U.S.C. § 7217].” As section III.B indicates below, the SEC’s decision in January 2003 to allow for a more lenient position on
tax services provoked significant controversy.
152 Id. § 7234.
153 15 U.S.C. § 7211(e)(1).
154 Id. §§ 7211(e)(3)-(5).
155 Id. § 7211(e)(2).
156 Id. §§ 7211(e)(5)(B)-(6).
157 Stephen Labaton, “Government Report Details a Chaotic S.E.C. Under Pitt,” New York Times, December 20, 2002.
158 David Stout, “Webster Ends His Brief Stint on S.E.C. Oversight Board,” New York Times, November 12, 2002.
159 Stephen Labaton, “S.E.C.’s Embattled Chief Resigns in Wake of Latest Political Storm,” New York Times, November 6, 2002.
160 Stout, 157.
161 Associated Press, “Senate Confirms Donaldson as S.E.C. Chief,” New York Times, February 14, 2003.
162 Press Release, Securities and Exchange Commission, SEC Unanimously Approves William J. McDonough as Chairman of Public
Company Accounting Oversight Board, Press Release 2003-63 (May 21, 2003), http://www.sec.gov/news/press/2003-63.htm
(accessed May 25, 2003).
163 National Conference of Catholic Bishops, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy (1986),
in Catholic Social Thought: The Documentary Heritage, David J. O’Brien and Thomas A. Shannon, eds. (Maryknoll, New York: Orbis
Books, 1992), §§ 100, 235.
164 Id., Pastoral Message § 25.
165 John XXIII, Mater et magistra (May 15, 1961), in O’Brien and Shannon, § 38; Second Vatican Ecumenical Council, Gaudium et spes
(December 7, 1965), in O’Brien and Shannon, § 42; National Conference of Catholic Bishops §§ 125, 128-30.
166 John XXIII, Mater et magistra, § 255.
167 Pius XI, Quadragesimo anno (May 15, 1931), in O’Brien and Shannon, § 79.
168 See, e.g., Leo XIII, Rerum novarum (May 15, 1891), in O’Brien and Shannon, §§ 9-12.
169 See, e.g., Thucydides, The History of the Peloponnesian War, Richard Crawley trans., R. Feethan, rev., in Great Books of the Western World,
Robert Maynard Hutchins, ed. (Encyclopædia Britannica, 1952), § II.vi.15, p. 6:391.
170 See, e.g., John Stuart Mill, On Liberty, chap. V (“Applications”) (1860), http://etext.library.
adelaide.edu.au/m/m645o/chapter5.html (accessed May 25, 2003) (discussing the dangers of “bureaucracy”).
171 U.S. CONST. art. VI; amend. X.
172 European Parliament, European Parliament Fact Sheets § 1.2.2 (“Subsidiarity”) (January 22, 2001),
http://www.europarl.eu.int/factsheets/1_2_2_en.htm (accessed April 20, 2003).
173 Dennis P. McCann, “Business Corporations and the Principle of Subsidiarity,” in Rethinking the Purpose of Business: Interdisciplinary
Essays from the Catholic Social Tradition, S. A. Cortright and Michael J. Naughton eds. (Notre Dame: University of Notre Dame Press,
2002), 172-84.
174 John XXIII, Mater et magistra § 59; Second Vatican Ecumenical Council § 6.
175 John Paul II, Centesimus annus (May 1, 1991), in O’Brien and Shannon, § 32.
176 Second Vatican Ecumenical Council § 25. See also John XXIII, Mater et magistra § 60.
177 Through this principle, Catholic social thought thus contributes an intellectually sophisticated account of the development and
operations of successful groups. For a discussion of these distinctions, see Mancur Olson, The Logic of Collective Action: Public Goods and the
Theory of Groups, Harvard Economic Studies, vol. 124 (Cambridge: Harvard University Press, 1965 and 1971), 17-52.
178 National Conference of Catholic Bishops § 323.
179 John XXIII, Mater et magistra §§ 201-202.
180 Idem, Pacem in terris (April 11, 1963), in O’Brien and Shannon, §§ 132-35, 137, 140-41.
181 Ibid. §§ 132-37, 140. See also National Conference of Catholic Bishops §§ 323-25.
182 John XXIII, Pacem in terris § 141.
183 This context is important for avoiding confusion between “socialization” and “socialism.” An alternative translation of the former
concept is the somewhat less elegant “multiplication of social relationships.” See Joseph Gremillion, The Gospel of Peace and Justice:
143
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Catholic Social Teaching Since Pope John (Maryknoll, New York: Orbis Books, 1976), 24-26.
184 Second Vatican Ecumenical Council § 42.
185 John Paul II, Centesimus annus § 10.
186 Idem, Sollicitudo rei socialis (December 30, 1987), in O’Brien and Shannon, § 26.
187 Ibid. § 38.
188 McCann, 179-80.
189 See, e.g., his criticism of “a self-love which leads to an unbridled affirmation of self-interest and which refuses to be limited by any
demand of justice” (John Paul II, Centesimus annus § 17).
190 John Paul II, Sollicitudo rei socialis § 39.
191 Ibid. § 40.
192 Ibid. § 38.
193 Idem, Centesimus annus § 49.
194 David Hume, An Enquiry Concerning the Principles of Morals, 3d ed., P. H. Nidditch, rev. (1777; Oxford: Clarendon Press, 1975), §
III.1.146, pp. 184-86.
195 Second Vatican Ecumenical Council § 26.
196 John G. Head, Public Goods and Public Welfare (Durham: Duke University Press, 1974), 77-83, 164-73.
197 Olson, 1-52.
198 This is the business version of the dysfunctional power dynamic that John XXIII identifies in the competition among nations, e.g.,
in John XXIII, Mater et magistra § 203.
199 Kenneth J. Arrow, “Social Responsibility and Economic Efficiency,” Public Policy 21 (Summer 1973): 306-17. See also Olson, 1-52.
200 Arrow, 309-16.
201 National Conference of Catholic Bishops § 100.
202 Lee A. Tavis, “Modern Contract Theory and the Purpose of the Firm, in Cortright and Naughton, 229.
203 National Conference of Catholic Bishops § 308.
204 Tavis, 232.
205 The initiative that accountants took in this process, and the professional discipline that they demonstrated in doing so, were
sufficient to confer “interests” in associating and participating, but it would be overstating the matter to count these as “rights.” The
later concession approach to regulation of the profession beginning in the 1930s, by which accountants retained a measure of selfregulation in exchange for their commitment to promulgate standards and perform services that benefited the public interest, affirms
this construction of the moral claims of accountants by virtue of their leadership and expertise. There is a defensible moral right to
participate in economic life, but not in a particular profession or in a particular job. One continuously must earn the privilege of such
specific forms of service.
206 John XXIII, Mater et Magistra § 51.
207 Ibid. § 52.
208 This is why these, and eventually many, federal initiatives came to have the label, “liberal programs.” See Overton H. Taylor, “Free
Enterprise and Democracy,” in Economics and Liberalism: Collected Papers, Harvard Economic Studies, vol. 96, (Cambridge: Harvard
University Press, 1955), 163-77. Roosevelt’s liberal reforms coincidentally came shortly after Pius XI’s articulation of the principle of
subsidiarity in response to political and economic conditions in Europe, particularly in Italy.
209 John XXIII, Mater et magistra § 152.
210 National Conference of Catholic Bishops § 124.
211 Sometimes the service portfolio included executive compensation consulting services, i.e., advice from firms that helped set the
compensation packages for some of those who decided which firm to use. In addition, some firms served their clients’ officers
directly, e.g., through tax advisory and preparation services. Such practices aggravated the conflicts of interest facing firms because
they entailed further financial pressure capable of impeaching a CPA’s independent professional judgment. For example, Sprint’s
auditor, Ernst & Young, sold tax-avoidance advice to two (now former) top executives for fees that exceeded the audit fees for the
company itself. As a result, an extraordinary 38 percent of institutional and individual investors voted to switch auditors. Although
this minority result was nonbinding, the company’s new leadership took note of it. See Patrick McGeehan, “Market Place; Sprint’s
Holders Rumbling Over Conflicts by Auditor,” The Markets, New York Times, May 14, 2003.
212 As clients that continue to exert such pressures stand to learn, such behavior now is illegal. See 15 U.S.C. § 7242(a).
213 Such integration of public and private elements into a regulatory framework has been effective elsewhere in promoting salutary
policy objectives in the context of articulable social needs and constitutional and fiscal constraints. For example, the “V-Chip”
legislation of the Telecommunications Act of 1996 requires standard technical specifications for most televisions to allow selective
deactivation of reception according to programming codes that broadcasters embed in transmission signals, with the programming
standards being the product of a private-sector advisory committee consisting of politically balanced constituencies including parents,
broadcasters, television producers and others. In this way, government provides an external inducement in the form of technical
specifications, and facilitates the formation of the advisory committee, but leaves to this body the responsibility for formulating the
content of the applicable programming standards. This locates the judgment about what programming is available, especially to
children, in the most “subsidiary” social institution, the family. See Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat. 56
(1996), § 551, as amended.
214 John XXIII, Mater et magistra § 118. Compare to 15 U.S.C. § 7211(e)(1) in section I.F.
215 One initiative that provides an example of such a partnership in keeping with the principles of subsidiarity and socialization is the
XBRL International consortium, which the AICPA founded in 1999, and which now consists of approximately 250 financial,
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accounting, technology and regulatory organizations in the public and private sectors operating in active or developing chapters in
leading economies around the world. The mission of this consortium is to develop technology to aid the process of creating more
stable and ethical capital markets through the experimental deployment of extensible business reporting language (XBRL), a freely
available Internet language format that can enable consistent, comparable and transparent global financial reporting. According to the
consortium, “[t]he introduction of XBRL tags enables automated processing of business information by computer software, cutting
out laborious and costly processes of manual re-entry and comparison. Computers can treat XBRL data ‘intelligently’: they can
recognise the information in a[n] XBRL document, select it, analyse it, store it, exchange it with other computers and present it
automatically in a variety of ways for users. XBRL greatly increases the speed of handling of financial data, reduces the chance of error
and permits automatic checking of information.” See XBRL International, “What is XBRL,” http://www.xbrl.org/WhatIsXBRL/
(accessed January 11, 2005).
216 John Paul II, Address to International Christian Union of Business Directors, Rome, March 9, 1991, quoted in Jean-Yves Calvez
and Michael J. Naughton, Catholic Social Teaching and the Purpose of the Business Organization: A Developing Tradition, in Cortright and
Naughton, 18n.
217 Spinner.
218 Second Vatican Ecumenical Council § 75.
219 Stephen Labaton, “S.E.C. Facing Deeper Trouble,” New York Times, sec. 1, December 1, 2002.
220 Idem, “Now Who, Exactly, Got Us Into This?” New York Times, sec. 3, February 3, 2002.
221 National and state CPA societies have appealed to their members for years to fund political action committees. Some of these
groups endorse political candidates, including the Ohio Society of CPAs, which endorses candidates for federal and state offices,
including the Ohio Supreme Court. See, e.g., “Capitol Access-Election 2004: The Ohio Society of CPAs 2004 Endorsement Slate,”
Catalyst, September-October 2004, 46-48.
222 Stephen Labaton, “Six Months Later, New Audit Board Holds First Talk,” New York Times, January 10, 2003.
223 The SOA provides at 15 U.S.C. § 7211(f)(4) that the compensation for the employees of the PCAOB shall be “at a level that is
comparable to private sector self-regulatory, accounting, technical, supervisory or other staff or management positions.”
224 Securities and Exchange Commission, Final Rule: Retention of Records Relevant to Audits and Reviews, 17 C.F.R. § 210 (2003),
Release Nos. 33-8180; 34-47241; IC-25911; FR-66; File No. S7-46-02; RIN 3235-AI74, January 24, 2003,
http://www.sec.gov/rules/final/33-8180.htm (accessed February 10, 2003).
225 Idem, Final Rule: Strengthening the Commission's Requirements Regarding Auditor Independence, 17 C.F.R. §§ 210, 240, 249, and
274 (2003), Release No. 33-8183; 34-47265; 35-27642; IC-25915; IA-2103, FR-68, File No. S7-49-02; RIN 3235-AI73, January 28,
2003, http:// www.sec.gov/rules/final/33-8183.htm (accessed February 10, 2003). Under this rule, lead audit partners have to rotate
after five years, while partners with subordinate roles have seven years.
226 Ibid.
227 Jonathan D. Glater, “S.E.C. Backs Rules for Auditors, Revised From Original Plan,” New York Times, January 23, 2003.
228 See notes 146 and 150 for statutory citations.
229 17 C.F.R. §§ 210, 240, 249, and 274.
230 The Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 (1995) (codified as amended at 15 U.S.C. §§ 77,
78 (1994 & Supp. 1998)), limited corporate executives’ liability for making dubious financial projections (“forward-looking
statements”). Andersen, other accounting firms and Silicon Valley firms lobbied hard for passage of this act. Pitt, who was in private
practice in the 1990s (and who represented major accounting firms), helped lay the groundwork for this law when he testified before
Congress four years earlier. He spoke as an independent attorney, but with the credibility of having served as General Counsel of the
SEC in the 1970s. After President Bill Clinton vetoed the legislation in late 1995, Congress voted to override-for the first time. See
Labaton, “Now Who, Exactly, Got Us Into This?”
231 Labaton, “S.E.C. Facing Deeper Trouble.”
232 Senior officials inside the SEC apparently shared these perceptions, though they would not say so on the record at the time: “One .
. . said that some agency employees treat the chairman as if he were Richard M. Nixon in his last days as president, and joked that staff
members are keeping the nuclear codes out of his hands because they worry about what he might do” (Stephen Labaton, [compiled
by Mark A. Stein], “S.E.C.’s Critics Come to a Boil [Again],” New York Times, sec. 3, January 26, 2003).
233 Bloomberg News, “Ex-Banker and 2 Others to Advise S.E.C.,” New York Times, April 23, 2003; Stephen Labaton, “S.E.C. Chief
Says Fixing the Agency Will Take Time,” New York Times, March 14, 2003.
234 Senators Carl Levin (D-Michigan), and Bill Nelson (D-Florida) authored S. 183 (“SEC Civil Enforcement Act”), which passed the
Senate on April 9, 2003. See Richard A. Oppel, Jr., “Senate Votes to Strengthen S.E.C.’s Hand,” New York Times, April 10, 2003.
235 National Conference of Catholic Bishops § 1.
236 Ibid. § 115.
237 Of course, the intelligibility of such analysis will rest in part on the credibility of Catholic social thought in the twenty-first century,
and this will require the Church itself to continue to participate in a public process of self-assessment, as it accepts constructive
criticism and offers contrition for its morally problematic responses to questions of organizational governance and accountability and
substantive and procedural justice in resolving disputes. See, e.g., David Gonzalez, “Employment by Dogma? Lay Teachers Are
Testing the Roman Catholic Church,” New York Times, September 12, 2004.
238 For example, the American accounting profession has taken an active role in helping to shape the dialogue regarding international
accounting standards in bodies such as the International Accounting Standards Board (the successor to the International Accounting
Standards Committee). See http://www.iasb.org/about/history.asp (accessed January 11, 2005); and the International Federation of
Accountants, http://ifac.org/About/ (accessed May 22, 2003).
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239 See, e.g., T. Howland Sanks, S.J., “Globalization and the Church’s Mission,” Theological Studies 60 (1999): 625-51, esp. 642-51, which
affirms the contemporary global context for the inherent social mission of the Church and analyzes the ramifications of this under
several headings, including nation-states; the international system of societies; global capitalism, labor and military alliances; and
culture.
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