Photo by Erica Freudenstein.
Michael R. Young has spent his entire career at New York’s Willkie Farr & Gallagher, where he represents individuals, companies, investment banks and accounting firms in litigation, investigations and regulatory proceedings related to financial reporting. He also handles securities class actions, and serves as co-chair of Willkie Farr’s litigation department and its securities litigation and enforcement practice group.
During our reporting for the 2010 Lawdragon 500, Young’s name was the most frequently mentioned as a practice leader focused on accounting irregularities. Young has authored two seminal books in the field – The Financial Reporting Handbook and Accounting Irregularities and Financial Fraud – and he has assisted in the development of standards and legislation related to financial reporting.
Lawdragon: How would you describe your practice?
Michael Young: My area is financial reporting, and by that I mean the ways in which companies report their performance. If, for example, a board of directors is suspicious of financial fraud they may bring me in to investigate, or I may help audit committees in putting in place things to help prevent financial fraud. I defend public companies, accounting firms and investment banks where fraudulent financial reporting has been alleged. I also represent individuals who are mixed up in allegations of improper financial reporting.
LD: What has your practice been focusing on recently?
MY: Ironically, current events are sort of dragging me into several new directions. One direction is the accounting at the core of the subprime crisis –fair value accounting – which has led to numerous allegations of impropriety. Another area coming out of the subprime crisis is the burgeoning topic of risk management. Just as accounting fraud was the topic of the last decade, it looks like risk management may be the topic of the coming decade. Some people are of the view that risk management should be the responsibility of audit committees, so I’m getting dragged into this area along with them.
The problem with risk management right now is that everyone is wondering about the best approach. To everyone’s credit, we have just been through a horrific financial crisis, and so we should be wondering about the best practices. The problem is that the best practices have yet to be written. Almost everything is up for grabs, including the risks that boards should be trying to focus on, who should manage those risks and who within the board structure should oversee the entire process.
LD: What approach should boards take to risk management?
MY: The best approach to board-level oversight of risk will depend on a company’s particular needs, its culture and history. That having been said, we can see a couple of trends. One trend is in the direction of a special risk management committee of the board. I don’t mean to suggest that such a view is by any means unanimous; at some companies, the costs will outweigh the benefits. On the other hand, in the absence of a risk management committee, an audit committee may have to pick up responsibility, and many audit committee members are not happy about that. But there is no one-size-fits-all approach; it will be different based on the company.
LD: What are some of the challenges of practicing in this field?
MY: One of the main difficulties is that expectations placed upon boards of directors and board committees can change so quickly. That is, for example, exactly what we saw about 10 years ago with Enron and Worldcom. One day we woke up and suddenly there was Sarbanes-Oxley, which largely federalized the law of financial reporting and corporate governance. Today we’re seeing dramatically increased expectations in the area of risk management. It is a real challenge to upgrade corporate governance mechanisms when things can change so suddenly.
LD: What are your thoughts on the new Wall St. reform and consumer protection package?
MY: My main thought is that the prevailing law will likely be the law of unintended consequences. We should probably assume that few things are going to work exactly as planned; the real question is that, when all is said and done looking back five years from now, will the benefits have exceeded the costs? It’s too early to tell.
Keep in mind that, to the man with a hammer, everything looks like a nail. It is the normal inclination of a lawyer and lawmakers to think in terms of legal solutions. That’s what they do, that’s what their mindset is. It’s going to be interesting to see how these new laws play out.
LD: How about securities litigation – are you seeing any trends there?
MY: We’re seeing a couple of trends. One is that securities class actions based on fraudulent financial reporting and restatements are down – probably because, as a business matter, fraudulent reporting and restatements are down. And so we’ve had less litigation based on that. That’s good news. The bad news is that it’s being replaced by a different type of securities litigation arising out of the subprime crisis. That is in the process of working its way through the courts.
It makes one wonder what’s coming down the road next. As we come out of the recession, and as companies step back onto growth curves and analysts’ expectations start to matter again, one cannot help but wonder if we will return to the past with another bout of the kinds of pressures thay can lead to fraudulent financial reporting.
LD: How did you get into this area of law?
MY: My firm, Willkie Farr & Gallagher, has historically represented defendants in accounting matters in general, and financial reporting professionals in particular. As a young associate, I came to realize the usefulness of getting behind the numbers and understanding the underlying accounting issues. From there I developed an expertise, and more and more business followed. As part of that I was asked to play increasing roles in the formulation of financial reporting standards, corporate governance, audit committee investigations, and ultimately financial reporting legislation.
LD: Given that you’re busy with your practice, what made you want to get into book writing?
MY: It started when I was approached by the publishing company Harcourt. An editor there heard me give a speech and came up to me and said that they’d like me to write a book. I immediately dismissed it out of hand, thinking I was too busy. But I thought some more about it and came to a realization that I had seen and learned a lot about financial reporting problems, and that there was not a real good textbook on the subject. So I decided to give it a try. A number of partners at the firm contributed various chapters and we pulled it together. As it turned out, the timing was right as this was a couple of years before Enron.
LD: What do like about practicing in this area of law?
MY: One of the most intellectually intriguing things about accounting problems is that they often have very little to do with accounting. Rather, they can be a consequence of business pressures and the impact of business pressures on the psychology of human organizations. One course I did not take in college was psychology, and I know now that was a big mistake.
LD: What are some of the psychological insights you’ve picked up over the years?
MY: One of the interesting things about accounting problems in general, and financial fraud in particular, is that these problems tend to develop in the same ways over and over again, regardless of the business or the industry or the individuals involved. Fraudulent behavior rarely starts with dishonesty. Instead, financial misreporting tends to start with pressure for performance that creates an almost irresistible temptation by honest individuals to rationalize to the point where they find themselves doing dishonest things. That is the pattern I have seen over and over again for 30 years.