Law and Accounting

• Author: Vern Krishna
• Pages: 357-376

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Chapter 17: Law and Accounting

A. OVERVIEW

Accounting deals with measurement and summarization of nancial

transactions according to generally accepted accounting principles

and concepts. Finance is essentially corporate law that concerns the

creation and valuation of nancial instruments, such as stocks, bonds,

and derivatives. us, both accounting and nance are important

for lawyers when they advise on commercial transactions, family law,

public securities, and litigation, such as in:

• Business contracts;

» Buyout clauses in buy-sell agreements;

» Partnership agreements;

» Purchase-sale of assets;

» Purchase-sale of shares;

» Joint ventures

• Employment Contracts;

• Tort litigation;

• Supply contracts;

• Minutes of settlement in litigation;

• Employment agreements; and

• Marriage contracts.

 Financial Skills for Professionals

B. BUSINESS CONTRACTS

e most common scenario where lawyers encounter accounting and

nance issues is in litigation over agreements where the parties inter-

pret basic concepts and nancial terminology, such as “book value,”

“net prots,” and “income,” dierently. In such cases, lawyers must

either negotiate a settlement of the dispute or have a court adjudicate

if negotiations are unsuccessful.

In some cases, the courts defer to GAAP and rely upon the account-

ing profession’s understanding of these terms. In others, however, the

courts reject GAAP and insert their own interpretation of the words.

As the cases that follow show, interpretation of accounting terminol-

ogy often arises in corporate agreements involving buyout clauses and

in incentive compensation agreements for key employees. Most of the

problems can be resolved at the drafting stage by using conventional

terminology and dening the meaning of terms in the contract.

Even simple words can lead to misunderstanding and litigation.

In Piedmont Publishing Company (A Corporation) et al v Mary Pick-

ford Rogers et al, for example, Mary Pickford Rogers (star of silent

pictures) and Piedmont were rival applicants for a licence from the

Federal Communications Commission (FCC) for a television station

in Winston-Salem, North Carolina, where Piedmont also owned and

published two newspapers and a radio broadcasting station. Piedmont

and Pickford decided to pool their interests and organized a new com-

pany, Triangle Broadcasting Corporation (Triangle) in North Caro-

lina to apply for the licence. e parties knew that the FCC would

grant only one licence, and that a contest for it might take so long

that a television station already licensed in Winston-Salem might cap-

ture the television audience. Triangle was awarded the licence and an

exclusive local contract with National Broadcasting Company (NBC).

e parties signed an agreement in New York on  May 

under which Piedmont subscribed for , shares of Triangle’s stock,

for USD$,. Pickford subscribed for  shares, for which she

 Civ No  Second Dist, Div One June ,  [Piedmont].