A Perspective on the Future of Auditing Regulation

It is a real pleasure to be here at the New York State Society of CPAs again this year. I very much appreciate that the Society has invited PCAOB members and staff each of the years since the PCAOB’s inception in 2003 to talk about our work.

The New York State Society deserves special recognition as a professional body dedicated to the public interest. The Society was an outspoken advocate of reform in the auditing profession long before the Enron and Worldcom scandals dealt their blows to the investing public’s confidence in the reliability and integrity of our financial reporting system. Therefore, it was fitting that Bill McDonough chose this conference as the venue for his first public appearance as chairman of the PCAOB four years ago, almost to the day, to deliver his momentous “tough love” speech. That speech described his vision for implementing the historic shift from self-regulation of the auditing profession to regulation by an independent oversight body, as required by the Sarbanes-Oxley Act. The principles in that speech still guide the work of the PCAOB today.

In its essence, Bill’s speech offered the profession a choice: embrace the reforms as a path to redemption of the public’s confidence, or resist them and test the new regulatory arsenal. Coming from Bill, it probably didn’t sound like a choice, though! Fortunately, most auditors appear to have accepted oversight. And while we continue to find busted audits, the more audits we review, the more likely latent problems will be identified and addressed before they erupt in uncontainable disasters. It’s as simple as that, and with sustained effort, it’s our best chance to break the cycle of audit failures we have allowed to occur every decade or so until now.

With the passage of time, Bill’s vision for the oversight of auditors of public companies – and the Sarbanes-Oxley reforms in general – have become part of the fabric of our financial reporting system.  Time has also blunted the sense of urgency to the reforms for some, though, and that has left them vulnerable to fearmongering about unintended – and unfounded – consequences.  I’d like to spend my time with you today exploring and dispeling some of those fears, to make the case that they should not change the course of the reforms.

It is important to note, though, that the ideas I express today are solely my own personal views. They should not be attibuted to the PCAOB as a whole or any other members or staff of the PCAOB.

I. Debunking the Fears.

Perhaps the most widely cited fear is that the intensity of the regulatory structure we use to protect our financial reporting system has crimped the competitiveness of our capital markets.  The claims, as expressed in three high-profile reports issued last winter, are that the burdens of Sarbanes-Oxley, and other aspects of the regulatory model that applies to U.S. capital markets, are making U.S. markets less competitive.  The reports claim that Sarbanes-Oxley’s reforms have increased managers’ and auditors’ fears of being second-guessed, so that even the smallest of problems are being treated as material.    They also claim this fear increases the time and effort required to focus on compliance with applicable regulations and standards, which themselves are a complex trap for the unwary.  Litigation over what should be judgment calls is purportedly out of control, and a myriad of uncoordinated regulators exacerbates uncertainty.  Ultimately, the reports express the fear that companies will flee U.S. markets, and they point to the facts that the U.S. share of worldwide IPOs has declined, and that many companies are going private, as signs that the claims are real.

When I first heard these claims, I was surprised and concerned too. The reports paint a very grim picture. So I started looking into the issues myself. What I found is that the facts don’t support such doom and gloom. It couldn’t be further from the reality, which is that the reforms are working, as intended, to improve the quality of financial reporting, reduce the risk of investor losses due to fraud, and give companies that seek capital in U.S. markets a competitive edge.

When companies have decided they need public investment to fund growth opportunities, they often seek such investment in U.S. markets. Research has shown that non-U.S. companies that cross-list in the United States enjoy a significantly lower cost of equity capital, indeed the lowest in the world. Specifically, the cost-of-capital reduction from using U.S. public equity markets ranges from at least six percent (for Japanese companies that list in the United States) to 25 percent (for Egyptian companies) and averages 13 percent.

A. Sarbanes-Oxley Has Not Diminished U.S. Markets’ Appeal.

Let me start with the IPO trend. The truth is that the U.S. share of world IPOs hit bottom in 2001 – from 60 percent of all IPOs in 1996 to less than 10 percent in 2001 – even with the surge in U.S. technology IPOs in that period. After 2001, the U.S. share of IPOs has on average increased somewhat (to about 14 percent in 2006 and 14.5 percent in 2007 as of last Friday) (See Figure 1.)[1] These statistics don’t support the claims that Sarbanes-Oxley has harmed the competitiveness of U.S. capital markets. More importantly, though, I caution against even looking to them as a measure of the success of our markets.

A better measure is to examine how well our markets serve those seeking capital and those providing capital. That is, how much are investors willing to pay for a company’s shares? Will they pay more or less depending on the market? Or, looked at from the perspective of companies, where can a company get the lowest cost of capital?

The research shows that, going back to 1990, public investors have offered companies that list on U.S. exchanges a valuation premium over what they would get in other markets. A team of researchers at Ohio State have found that. "Not only is this premium significantly positive every year, but there is no convincing evidence . . . that it has fallen in recent years."[2] This premium translates into the lowest cost of equity capital in the world.[3] On average, non-U.S. companies that cross-list on U.S. exchanges enjoy an average reduction in the cost of capital between 70 and 120 basis points.[4] That’s an enormous advantage that far outweighs the cost of listing in the U.S.

U.S. markets are often compared to U.K. markets, where the regulatory system is advertised as less burdensome to corporate managers, more principles-based and less focused on using law enforcement processes. Interestingly, the research shows that there is no premium for listing in U.K. markets, before or after Sarbanes-Oxley.[5]

In addition, there is no evidence that companies are seeking less capital on U.S. exchanges than they would have without Sarbanes-Oxley. On the contrary, more companies have listed in the U.S. since Sarbanes-Oxley than were expected to before it. Recently, two groups of researchers – those from Ohio State as well as a separate group from the University of Chicago – have independently come to this conclusion, finding that U.S. markets have raised more new capital since Sarbanes-Oxley than they have lost to U.K. markets.[6]

With investors offering premiums for U.S.-listed companies, it’s easy to understand why companies seeking capital are attracted to U.S. markets. But why don’t all companies list here? And why are investors in U.S. markets willing to pay such a premium anyway? Investors in U.S. markets don’t pay any more than they have to, but they pay more in the United States because they get more.

What they get is a bundle of rights, also known as governance benefits. Those benefits reflect the value of the U.S. regulatory environment to investors.[7] This environment includes –

  • corporate and securities laws and regulations,
  • regulatory oversight and enforcement by the Securities and Exchange Commission and other public institutions,
  • private enforcement of legal rights, and
  • monitoring by gatekeepers such as auditors, analysts, and institutional investors, among others.

Companies that are not yet public engage in a cost-benefit analysis, whether they know it or not. The U.S. regulatory environment – our laws and standards, backed up by monitoring and enforcement – restricts owners’ and managers’ ability to run their companies to benefit themselves (or, in the case of state-owned companies, to benefit social policies) at the expense of minority shareholders.[8] The true cost in the calculation is not the cost of compliance. Rather, it’s the inherent cost of the restriction on controlling owners and managers. Make no mistake: this is a strong disincentive to go public in U.S. markets, but in fact it enhances the value of U.S. markets

This same analysis applies to private funding models, such as venture capital and private equity funds, which can demand as much and more information and control than public market regulation does. Pointing to a rise in private equity funding and so-called going private transactions since Sarbanes-Oxley, as one of the reports did, is thus not persuasive evidence that the reforms demand too much. There has been an increase in private equity transactions since 2005. But this is a worldwide trend attributable to the broad availability of cheap debt funding. It is not disproportionately related to the U.S. (See Figure 2.)[9] And as we’ve seen very recently, as credit markets dry up, private equity deals shrink too. Neither part of this cycle can be attributed to Sarbanes-Oxley.

B. Rising Litigation Settlement Values in Recent Years Relate to Pre-Sarbanes-Oxley Conduct, and New Filings After Sarbanes-Oxley are Dramatically Down.

Nor can the large litigation claims against companies, board directors, auditors and others that arose from pre-Sarbanes-Oxley conduct but are still winding their way through the court system be blamed on Sarbanes-Oxley. More telling, since the Sarbanes-Oxley reforms, we’ve seen a sharp decline in new litigation filed alleging fraudulent financial reporting. As documented in a report earlier this year by Stanford Law School and Cornerstone Research, the number of securities fraud class actions filed in 2006 was the lowest ever recorded in a calendar year since the adoption of the Private Securities Litigation Reform Act of 1995[10].The study attributes the change to the strengthened enforcement environment. To put a finer point on it, as Joe Grundfest of Stanford Law School says, securities litigation is "shrinking because corporations are engaging in less activity that gives plaintiffs an excuse to file a complaint alleging fraud."[11]

C. A Policy of Strong Enforcement is a Critical Factor Contributing to the Valuation Premium in U.S. Markets.

Another suggestion raised in the three reports on competitiveness is that the United States should reconsider its enforcement model, possibly in favor of the U.K. model. Based on the facts I’ve just explained, I think we need to be cautious about changing our approach to enforcement. Enforcement is an important component of the value of our regulatory system, without which the benefits from the laws on our books would likely lose their value.

There is a marked variation in the intensity of enforcement efforts by securities regulators in various countries, and this difference has an effect on the cost of capital available in different countries. Research has found that "active enforcement appears to lower a country’s cost of equity capital," which "attract[s] some foreign issuers, even while it deters others from cross-listing."[12]

Other countries have noted the importance of enforcement to the strength of our markets, and some are emulating it by investing in public enforcement institutions. It may surprise you to learn that Australia, Canada, the U.K. and Singapore all spend more on enforcement per billion dollars of stock market capitalization.[13] When one looks at enforcement output, however, the United States clearly stands out from the pack. Thus, as John Coffee of Columbia Law School has assessed, "Arguably, the enforcement disparity explains, at least in part, why cross-lising premiums are observed only for the New York Stock Exchange and not the London Stock Exchange."[14]

Economists agree. For example, University of Chicago economist Christian Leuz reports that "a key reason" why non-U.S. companies list "on U.S. exchanges is because they want to show that they are willing and committed to play by very tough rules. They are seeking [an] environment with strict enforcement and market monitoring."[15] This is because “the markets reward this commitment on the part of the companies, and it helps their ability to raise finance, . . . lowers their cost of capital and helps their equity valuations."[16]

The irony of the public debate about U.S. enforcement policy is that while some in this country admire the freedom from the risk of intervention that foreign market participants enjoy, other countries are enhancing and establishing new legal rights for shareholders. This is a natural reaction given the increase in retail investment around the world, which many governments are encouraging as a way to move away from defined benefit pension plans.

In markets where the principal investors are financial institutions, there is little demand for securities regulation, which could also be applied to the institutions themselves. Rather, institutions in such markets tend to resolve disputes through engagement and persuasion. The U.K. has some of the characteristics of such a market. Although it has dispersed ownership, it’s still dominated by institutions who can use their consolidated buying power to enhance shareowner value and protect against management fraud by persuading managements to adopt changes in strategy or, when necessary, replacing management. The U.K. is beginning to see more retail investment, but retail investors still have to count on an active institution to pursue an engagement strategy for protection of their interests.

As ordinary citizens become convinced to invest their savings more broadly in equity securities, though, those citizens demand legal protections against fraud and fiduciary abuse. Non-U.S. investor groups are increasingly active in securities litigation in the U.S.[17] Moreover, following the U.S. lead, several countries have adopted laws providing for securities class actions to recoup investor losses, including Canada, Australia, Israel, Germany and South Korea. Indeed, just last spring, Royal Dutch Shell submitted to an Amsterdam court a proposed $352 million settlement of claims lodged by non-U.S. investors related to its 2004 restatement of reserves.[18]

As more and more individuals participate in equity ownership in those countries, increased emphasis on protecting shareholder rights becomes inevitable. Thus, as Professor Coffee has predicted, "the disparity in enforcement levels between the U.S. and Europe may decrease as retail participation in the stock market continues to grow across Europe."[19] No doubt there is room to improve the effectiveness of the U.S. securities litigation system at deterring fraud and compensating investors for losses due to fraud. But based on the evidence, I fear that if we acted on the suggestion that a policy of lighter enforcement might attract more companies to our capital markets, we would put in jeopardy the very foundation of our markets’ success, and the considerable benefits the reforms have brought both investors and companies.

D. Recent Trends in Restatements Show the Reforms are Working, as Intended, to Identify and Address Errors Before They Result in Catastrophic Loss.

Another benefit of the reforms that has been questioned by some is the fact that, since Sarbanes-Oxley, more companies than ever have identified and corrected misstatements in their financial reporting. Specifically, the number of restatements by public companies reached record levels in 2005 and 2006. Approximately 1 in 12 public companies restated their financial statements in 2005 to correct material errors in current or prior periods.[20] Restatements reached another high in 2006.[21]

Some say this surge shows that the materiality standard for determining when a restatement is necessary has run awry, by operation of Sarbanes-Oxley or the SEC’s policy on restatements that predated Sarbanes-Oxley, or both. Whichever the culprit, they say, managers fearful of being second-guessed are restating to correct immaterial errors. It’s important to take a closer look at the drivers of the trend, though, to understand what’s really happening.

The Sarbanes-Oxley reforms did not include any provision on materiality, or direct that any related rules or other guidance be established. Rather, the most recent regulatory statement on materiality remains the SEC’s Staff Accounting Bulletin No. 99, issued in August of 1999 and subsequently endorsed by the Second Circuit Court of Appeals.[22] But the 2005 and 2006 surge six years later can hardly be attributed to it.

Rather, a much more likely catalyst was a wide-scale re-evaluation by companies and auditors of their tolerance for risk, in light of the financial reporting scandals. And shortly thereafter, Sarbanes-Oxley’s requirement that companies obtain audits of their internal control went into effect. These audits are designed to detect material weaknesses in internal control over financial reporting and, in the course of doing so, may detect material misstatements that have resulted from those weaknesses. The first such audits were performed on the largest companies’ financial periods ending in or after November 2004, and not surprising, many of those first-year internal control audits unearthed errors that resulted in restatements in 2005.

Importantly, although the overall rate of restatements rose in 2006, restatements by companies with market capitalizations greater than $75 million (i.e., accelerated filers) peaked in 2005 and declined in 2006. Restatements by microcap companies, on the other hand, significantly increased in 2006, making 2006 overall a record year for restatements[23]. What I draw from this is that, while small companies may continue to experience a high restatement rate as they begin to undergo internal control audits, the large company component of this surge is past. And, once small companies have implemented Sarbanes-Oxley’s internal control requirements, their restatements may too drop, just as the rate for small-cap accelerated filers has already.

Of course, whether we’re looking at large companies or small, the size of investor losses associated with financial reporting errors has decreased substantially since Sarbanes-Oxley. To my mind, this is because the amounts being restated today tend to be smaller. Errors caught today are being corrected and not left to accumulate (or at least they shouldn’t be). This is a good thing for both investors and our markets.

Nevertheless, some have questioned whether some of the restatements in this surge were, in retrospect, immaterial to investors, at least based on stock market reactions. Restatement analysis is not limited to evaluating whether correction of an error will likely move the company’s stock price, though. Market price movements in connection with corrections of misstatements can be very useful to courts determining the amount of, and liability for, investor losses. But they have not been and shouldn’t be dispositive in evaluating whether to correct known errors in financial statements currently being used by investors.

E. The Debate over the Relative Benefits of the U.S. Accounting System and the European Accounting System Misses the True Challenges Both Systems Face.

That leads me to the last concern I’d like to address – that U.S. accounting is too rules-based and thus is inferior to other models that are more principles-based, such as those based on the standards of the International Accounting Standards Board. In my view, the terms "rules-based" and "principles-based" have become charged with significance that neither term merits. And this debate has unfortunately distracted us from the true challenges we face as we try to develop a reliable accounting framework that can be used uniformly by companies and investors in many countries.

There are plenty of rules in the IASB’s standards. It’s true the IASB’s standards allow management considerable flexibility to choose among multiple approaches to recording and reporting financial information. This makes accounting under the international model more variable, not more principled. The variability may, in part, reflect the range of uses for accounting in different countries, including calculating taxes and gathering statistics for government analysis, in addition to communicating financial information to investors[24]. As the IASB sorts out these different goals, I hope it will introduce more comparability of information reported for investment purposes. That would make international standards more useful to investors, not less principles-based. They would also then be more rigorous, although some might call them more rules-based.

There’s variability in accounting in the U.S. as well. Take, for example, the waste industry, which I had a fair amount of experience with in private practice. It’s a simple business, involving trucks and holes in the ground. There are a handful of big players. But each one reports on the value and productivity of its trucks and dumps in a different way. This doesn’t make the U.S. system more rules-based, but it does make it less useful to investors than it could be.

The appeal of principles-based standards to some is that they leave the determination of whether the principles in the standards are fairly implemented to the judgment of public companies and their auditors, at least in the first instance. But in order for a system articulated only by a set of general principles to work, the judgment used to apply those principles cannot be based on whatever company management says is fair, but rather on what informed financial statement users will believe is fair. Indeed, I believe this is what financial statement users have in mind when they promote the use of principles over rules. To the extent rules are designed merely to provide excuses not to adhere to a principle, some investors see pure principles, without exceptions, as better.

In this regard, some claim that the U.S. system has abandoned its principles by bowing to the interest of managers, who quite naturally want to be perceived as successful and often have the means to lobby for exceptions that will help them appear so. U.S. GAAP is replete with such exceptions. But compliance with the letter of the standards and not the principles underlying them ultimately provides no safe harbor here. Time and time again, U.S. courts have upheld the principle that managers and auditors are liable for misleading investors, even when the company purportedly relied on GAAP to do so.[25]

This basic principle is in the federal securities laws, and thus it applies regardless of what accounting framework a company uses. Indeed, to the extent that international standards permit managers even more discretion to choose how to present a company’s financial position, the temptation to present a favorable story to investors may increase. It follows then that we may see more cases brought against managers and their auditors for succumbing to that temptation and misleading investors.

Thus, to my mind, those who point to the international standards as an improvement over U.S. GAAP based on the theory that international standards are more principles-based are in fact ignoring the most difficult challenge we face – the behavioral aspect of financial reporting. As long as the personal benefits to management of painting a rosy picture outweigh the downsides, there’s not a system in the world that will truly meet investors’ needs.

Make no mistake: International uniformity in the presentation of financial information for investment purposes would be a good thing for the investing public and the capital markets. I am concerned, though, that some are rushing to claim that all it will take to achieve such uniformity is switching to the IASB’s standards. But if we make that switch without resolving the behavioral problems I’ve cited, we’ll have achieved little.

Successful development and use of uniform standards for international application will take two things. First, the standards-setter must be able to establish standards for the benefit of the investing public, without the interference of corporate lobbyists or other political interests. Unfortunately, to date the IASB has proven not to be any more insulated from political pressures than the FASB is, though. If this feature of standards-setting is not reigned in, then the IASB’s standards will no doubt become as riddled with exceptions as the FASB’s are.

Second, we must provide for robust enforcement of the IASB’s standards. As Professor Leuz from Chicago said at the SEC’s roundtable on international reporting standards, there is very little evidence that markets “reward one standard over another.” Rather, he said, “what we have evidence that what the markets do reward . . . is a firm's commitment to transparency,” as demonstrated by submitting to rigorous enforcement mechanisms, such as the accounting and disclosure comment process managed by the SEC’s Division of Corporation Finance, the U.S. litigation system, robust auditing, and even a transparent reconciliation of one accounting framework to another, at least until the reconciliation produces insignificantly small differences.[26] With strong enforcement, in my view international standards would gradually start looking a lot more rigorous, and at that point they might be appropriate for broader use.

II. Concluding Thoughts.

I’ve said a lot today about what I think are not the main challenges we face to maintaining the most effective financial reporting system. IPO trends are not evidence that U.S. markets have lost their appeal; litigation and restatement trends do not show reforms have gone wild; enforcement is not driving the right companies away (although it is appropriately driving the wrong companies away); and the U.S. accounting model has not abandoned its principles. I’ve also touched on what I think are our challenges, including most importantly the behavioral aspect of financial reporting.

Management incentives to present a rosier picture than is real have existed as long as financial reporting has been required. Counteracting them requires counter-incentives, including robust, independent auditing and other forms of enforcement. To the extent that the expression of fears about the competitiveness of U.S. markets are intended to advocate returning to a more permissive attitude toward management incentives, we will only repeat past failures. As a nation, I hope we’ll have the courage to resist that. And as leaders in the accounting profession, I hope you will join in that effort.

I want to thank you for the opportunity to speak to you today. I would be happy to discuss any of these issues further, today or at any time.


[1] Source: Dealogic.

[2] Doidge, C., Karolyi, G.A., Stulz, R., Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time, Ohio State Dice Center working paper 2007-09 (July 2007), at 8, available at http://www.cob.ohio-state.edu/fin/dice/papers/2007/2007-9.pdf  see also Coffee, J., Law and the Market: the Impact of Enforcement, Columbia Law and Economics working paper (April 2007) ("Coffee on Enforcement"), at 17, available at http://isites.harvard.edu/fs/docs/icb.topic74765.files/ Item_11_Coffee_041707.pdf  ("The Paulson Report notes that the valuation premia incident to a U.S. listing have recently declined and suggests that it is a response to Sarbanes-Oxley. The data, however, show that this decline preceded Sarbanes-Oxley, and listing premia are again increasing."

[3] See Hail, L. and Leuz, C., International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulations Matter?, 44 J. Accounting Res. 485 (June 2006) (finding that when non-U.S. companies cross-list on a U.S. exchange, they enjoy a reduction in cost of capital that averages 13 percent and ranges as high as 25 percent).

[4] See Hail, L. and Leuz, C., Cost of Capital Effects and Changes in Growth Expectations around U.S. Cross-Listings, University of Chicago Initiative on Global Financial Markets, Working Paper No. 2 (October 2006), at 3.

[5] Doidge, Karolyi and Stulz, supra n. 2, at 8 (“In fact, we show that there is no listing premium in London over the 1990 to 2005 period.”).

[6] Id. at 27.

Strikingly, the actual listing percents are higher than expected for the U.S. exchange listings, while those for the U.K. listings are lower than expected. For example, in 2002 on the major U.S. exchanges, there were 343 listings, of 7.24% of 4,738 eligible firms in the Worldscope database (nonfinancial firms with over $100 million in assets and available data, from non-U.K., non-tax-haven countries) while the logit models would have predicted 3.81% U.S. exchange listings. The economic magnitude of this difference is large: in terms of total firms counts, there are about 163 fewer expected listings than actual listings. The differences between actual and expected listing propensities for U.K. listings are smaller than those for U.S. listings; for example, there were 78 ordinary listings on the Main Market in 2005, 1.63% of the 4,708 eligible firms, but 3.11% were expected to do so based on the propensity to list during the 1990-2001 period.

See also Piotroski, J. and Srinivasan, S., The Sarbanes-Oxley Act and the Flow of International Listings, University of Chicago working paper (April 2007), available at http://ssrn.com/abstract=956987. The researchers from Chicago put a dollar figure on the scorecard. They found that, since Sarbanes-Oxley, U.S. markets have gained a net $14 billion in new foreign listings that were expected to list in London but instead listed in the U.S. These new U.S. listings tended to be by large companies from emerging economies with weaker investor protections and weaker markets. Based on this evidence, they concluded that Sarbanes-Oxley appears to have improved the signal of quality associated with listing on a U.S. exchange, “making it more beneficial for these firms to seek a U.S. listing following the Act.” Id. at 7.

[7] See Doidge, Karolyi and Stulz, supra n. 2, at 2-3.

[8] See id. As John Coffee of Columbia Law School has put it,

The firm’s interest in increasing its share value can be overriden, for example, by the interest of its controlling shareholders in maintaining unfettered access to the private benefits of control or of its managers in avoiding enforcement penalities. Simple as this answer sounds, its implication is that the U.S. might be the listing venue for higher quality issuers that wish to pursue strategic plans that require them to obtain low-cost equity financing or to bond with their shareholders, while London (and other markets) provide instead a comfortable refuge for firms with a control group intent on enjoying the private benefits of control (or a management pursuing other self-interested aims). The result is a separating equilibrium, as some foreign firms list in the U.S. to bond and more migrate to London to enjoy "business as usual."

Coffee, J., supra n. 2, at 7.

[9] See Leuz, C., Was the Sarbanes-Oxley Act of 2002 Really This Costly? A Discussion of Evidence from Event Returns and Going-Private Decisions, University of Chicago Initiative on Global Financial Markets, Working Paper No. 8 (May 2007), at 5-6 and Figure 1.

[10] See Cornerstone Research, Securities Class Action Case Filings, 2006: A Year in Review, available at http://securities.cornerstone.com/pdfs/YIR2006.pdf . The study reports securities fraud class actions decreased by 38 percent in 2006, plunging from 178 filings in 2005 to just 110 in 2006, making 2006 numbers nearly 43 percent lower than the ten-year historical average of 193.

[11] Press Release, Securities Fraud Class Actions Tumbled to an All-Time Low in 2006, Finds New Study by Stanford Law School and Cornerstone Research (Jan. 2, 2007), available at http://securities.cornerstone.com/pdfs/CsR%202006%20YIR%20Release.pdf . To be sure, seven of the ten largest securities class action settlements ever occurred in 2005 and 2006. See Foster, T., Miller, R., Plancich, S., Recent Trends in Shareholder Class Action Litigation: Filings Plummet, Settlements Soar (NERA January 2007), at 5, available at http://www.nera.com/ image/BRO_Recent_Trends_SEC1288_FINAL_0307.pdf . But importantly, all of those actions resulted from pre-Sarbanes-Oxley conduct.

[12] Coffee, J., supra n. 2, at 1.

[13] Harvard law professor Howell Jackson has estimated the costs of public securities regulation based on data published by the U.K. Financial Services Agency. He found that, when when adjusted for market capitalization were $83,943 per billion dollars of stock market capitalization for the United States, compared to $279,587 for Australia, $220,515 for Canada, $138,159 for the U.K., $73, 317 for Hong Kong, and $95, 406 for Singapore. See Jackson, Howell E., Variation in the Intensity of Financial Regulation: Preliminary Evidence and Potential Implications, John M. Olin Center for Law, Economics and Business, discussion paper No. 521 (August 2005), available at http://www.law.harvard.edu/programs/olin_center/ papers/pdf/Jackson_521.pdf .

[14] See Coffee, J., supra n. 2, at 47; see also id. at 34.

[15] Transcript of International Financial Reporting Standards Roadmap Roundtable, available at http://www.sec.gov/spotlight/ifrsroadmap/ifrsroadmap-transcript.txt.

[16] Id.

[17] See Accountability Goes Global: International Investors and U.S. Securities Class Actions, ISS White Paper (May 2007), available at http://www.issproxy.com/pdf/ AccountabilityGoesGlobal.pdf .

[18] Form 6-K dated April 11, 2007 filed by Royal Dutch Shell, available at http://www.sec.gov/Archives/edgar/data/1306965/000130901407000222/htm_2141.htm.

[19] Coffee, J., supra n. 2, at 65-66.

[20] See Glass Lewis & Co., Getting it Wrong the First Time, March 2, 2006, at 1.

[21] See Glass Lewis & Co., The Errors of Their Ways, February 27, 2007, at 1.

[22] See Ganino v. Citizens Utilities Co., 228 F. 3d 154, 163 (2d Cir. 2000) ("SAB No. 99 is thoroughly reasoned and consistent with existing law – its non-exhaustive list of factors is simply an application of the well-established Basic analysis to misrepresentations of financial results – [and thus] we find it persuasive guidance for evaluating the materiality of an alleged misrepresentation.").

[23] See Glass Lewis & Co., The Errors of Their Ways, supra n. 22, at 8.

[24] See Hughes, J. "Blueprint of change fosters revolution," Financial Times (Sept. 10, 2007).

[25] See, e.g., United States v. Rigas, 2007 U.S. App. LEXIS 12096 (2d Cir. 2007) ("Even if Defendants complied with GAAP, a jury could have found, as the jury did here, that Defendants intentionally misled investors."); United States v. Ebbers, 458 F.3d 110, 125 (2d Cir. 2006) ("If the government proves that a defendant was responsible for financial reports that intentionally and materially misled investors, the [securities fraud] statute is satisfied. The government is not required in addition to prevail in a battle of expert witnesses over the application of individual GAAP rules."); United States v. Simon, 425 F.2d 796, 805–06 (2d Cir.1969) (upholding district court’s refusal to grant auditors’ request for jury instruction that they could not be found guilty of securities fraud if the financial statements in question were in compliance with GAAP).

[26] See Transcript of International Financial Reporting Standards Roadmap Roundtable, supra n. 16.

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