11 Colum. J. Eur. L. 665 (2005)

José João Montes Ferreira- Gomnes. Ph.D. candidate at the Universidade Católica Portuguesa and associate of Uría Menéndez (Lisbon).

Tyco – and Europe – with Royal Ahold, Skandia Insurance of Sweden and finally Parmalat – have awoken the world to the need for reform of company and financial The financial scandals that swept the United States – such as Enron, WorldCom and law. Studies suggest that the main causes of the debacle in the United States were the increasing incentives for managers to commit fraud and ‘gatekeepers’ to be lenient, together with the evolution of the GAAP towards a rule based financial reporting system. In Europe the causes of the scandals have not yet been fully determined, but one question was also heard above the rest: where were the gatekeepers? As for the reporting system, it has been said that the European principles based systems are less likely to allow fraud on such a grand scale, but Parmalat proved that much has to be done in Europe as well.

In midst of the crisis, one overwhelmingly simple conclusion strikes me: no matter how greedy corporate officers may have been (or in the European case, even controlling shareholders), none of these frauds would have been possible without the acquiescence of ‘gatekeepers’. The incentives of entrepreneurs to commit fraud are always strong, but gatekeepers’ incentives to withhold their support to wrongdoers are meant to be equally strong. ‘gatekeepers’ are supposed to protect their reputation, to protect investors who rely on their word and to say “no” to their fraudulent clients.

We have fully entrusted these ‘gatekeepers’ with our safety and rested on our laurels. We may now conclude that this was not a wise decision. As Donald Langevoort states, “the ‘expectations gap’ is real: securities regulation is far from any assurance of corporate transparency, delivering neither as much protection as many investors assume nor as much as is optimal.” It is true that ‘gatekeepers’ may not fully guarantee corporate transparency, but they should do so to a certain degree. An interesting question is whether maintaining a goodreputation is a sufficient incentive to protect investors. Just as this was once a generally accepted premise, nowadays it tends to be rejected.

The United States reacted to the scandals by enacting the Sarbanes Oxley Act (Public Company Accounting Reform and Investor Protection Act of 20023), described by President Bush as incorporating “the most far-reaching reforms of American business practices since the time of Franklyn Delano Roosevelt.” Meanwhile, the European Union was already involved in a profound reform of corporate law in Europe – seeking the harmonization of the different Member States’ systems – and the creation of a single capital market, but the outbreak of US scandals and the fear of similar European scandals created a new incentive to boost the reforms outlined in the action plans for Financial Services and Company Law. While the US response (with the enactment of the Sarbanes Oxley Act) was considered precipitated, many fear that EU’s response will be too slow. The causes of these scandals have been analyzed in Europe by the High Level Group of Company Law Experts and are reflected in the implementation of the various steps of the aforementioned action plans. The hope for a timely reaction now rests with the implementation of the Lamfalussy Process.

In this Note I seek to assess the role of auditors as ‘gatekeepers’; what has been done to improve this role on both sides of the Atlantic and what is still to be done; and how the measures adopted and discussed in the United States with and following the Sarbanes Oxley Act have and will influence parallel reactions by the European Union. In particular, I shall address the issues that in my opinion have the most significant impact on the role of auditors as gatekeepers: auditor independence and liability to investors.

Moreover, although the discussion in Europe embraces the role of auditors in the protection of the company as an ongoing enterprise – considering the interests of all those who rely on the company such as shareholders, employees and creditors – my analysis is limited to the role of auditors as ‘gatekeepers’, i.e. in the protection of investors.