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Financial Gatekeepers

Financial Gatekeepers: Can They Protect Investors?

Copyright Date: 2006
Pages: 201
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  • Book Info
    Financial Gatekeepers
    Book Description:

    Developed country capital markets have devised a set of institutions and actors to help provide investors with timely and accurate information they need to make informed investment decisions. These actors have become known as "financial gatekeepers" and include auditors, financial analysts, and credit rating agencies.

    Corporate financial reporting scandals in the United States and elsewhere in recent years, however, have called into question the sufficiency of the legal framework governing these gatekeepers. Policymakers have since responded by imposing a series of new obligations, restrictions, and punishments -all with the purpose of strengthening investor confidence in these important actors. Financial Gatekeepersprovides an in-depth look at these new frameworks, especially in the United States and Japan. How have they worked? Are further refinements appropriate? These are among the questions addressed in this timely and important volume. Contributors include Leslie Boni (University of New Mexico), Barry Bosworth (Brookings Institution), Tomoo Inoue (Seikei University), Zoe-Vonna Palmrose (University of Southern California), Frank Partnoy (University of San Diego School of Law), George Perry (Brookings Institution), Justin Pettit (UBS), Paul Stevens (Investment Company Institute), Peter Wallison (American Enterprise Institute)

    eISBN: 978-0-8157-2982-2
    Subjects: Finance, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-x)
  4. 1 Introduction
    (pp. 1-12)

    The successive bankruptcies of Enron and WorldCom—once two of the leading U.S. high-technology companies—in the early part of this decade shook the economic and political establishment, in the United States and elsewhere around the world. Officials, investors, and ordinary citizens had simple questions. How could it have happened? Why wasn’t the public alerted earlier to problems in those firms and in other large companies that also failed?

    In the United States, reaction was swift—almost remarkably so. Within a year of Enron’s failure, Congress had passed and President George W. Bush had signed what probably was the most...

  5. 2 Financial Gatekeepers in Japan
    (pp. 13-58)

    Accountants, analysts, and credit rating agencies function as gatekeepers to financial markets by providing information on investment products to investors. When these financial gatekeepers face conflicts of interest or engage in inappropriate behavior, investors’ decisionmaking process is distorted and their interests are put in jeopardy.

    Despite a mandate to protect investors, securities regulators have not clearly defined the role of financial gatekeepers and they rarely regulate gatekeepers’ activities in the same way that they regulate those of broker-dealers and investment advisers to avoid securities fraud. The collapse of Enron and a series of other corporate scandals have called into question...

  6. 3 How and Why Credit Rating Agencies Are Not Like Other Gatekeepers
    (pp. 59-102)

    In september 2005, the Brookings–Tokyo Club Seminar addressed perhaps the most important policy question related to the recent wave of corporate scandals in the United States and Japan: What should be the role of private financial market gatekeepers?¹ In this chapter I assess potential answers to this question with respect to the least-understood gatekeeper: the credit rating agency.

    Credit rating agencies clearly belong within the broad classification of financial market gatekeepers.² They play a verification function in the fixed-income markets by designating alphabetical ratings of debt. They have a substantial stock of resources to pledge as reputational capital in...

  7. 4 Maintaining the Value and Viability of Auditors as Gatekeepers under SOX: An Auditing Master Proposal
    (pp. 103-138)

    It is both timely and necessary to consider the future role of auditors as financial gatekeepers in the United States. There have been many reforms over the last few years, of which the most radical for auditors was the shift from self-regulation to government regulation, when the Sarbanes-Oxley Act of 2002 (SOX) established the Public Company Accounting Oversight Board (PCAOB) to oversee auditors of companies registered with the U.S. Securities and Exchange Commission (SEC). Still, the scrutiny and criticism of auditors continues, and recent events have renewed the public debate over both the value of external audits and the viability...

  8. 5 Analyzing the Analysts after the Global Settlement
    (pp. 139-176)

    On april 28, 2003, U.S. securities market regulators held a press conference to announce the completion of the Global Settlement Agreement with ten of the largest investment banking firms. The agreement settled enforcement actions that alleged that those firms “engaged in acts and practices that created or maintained inappropriate influence by investment banking over research analysts, thereby imposing conflicts of interest on research analysts.” The firms agreed to make organizational changes, to increase disclosure, and to make payments totaling $1.39 billion for penalties, independent research, and investor education. New York attorney general Eliot Spitzer stated at the press conference that...

  9. 6 Conclusion
    (pp. 177-190)

    To analyze the role of gatekeepers intelligently, one must begin by defining what the termgatekeepermeans. Two definitions are often used in the literature. The first and broader definition simply describes anyone who must give a necessary consent for a transaction or activity, literally or metaphorically, as a gatekeeper. Thus, a gatekeeper is one who possesses blocking or veto authority—that is, one who can close the gate. This broad definition encompasses a wide range of people and institutions. For example, under this definition, a board of directors is a gatekeeper.

    A second and narrower definition ofgatekeeperfocuses...

  10. Contributors
    (pp. 191-192)
  11. Index
    (pp. 193-202)
  12. Back Matter
    (pp. 203-205)