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    Reining in auditors: On the dynamics of power surrounding an...
    research summary posted October 27, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 04.0 Independence and Ethics, 04.08 Impact of SEC Rules Changes/SarbOx 
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    Title:
    Reining in auditors: On the dynamics of power surrounding an ‘‘innovation’’ in the regulatory space
    Practical Implications:

    This study shows that in practice the independent regulatory bodies implemented after the scandal of Enron and the collapse of Arthur Anderson are influenced by the accounting profession, despite their claim of independence. The Big Four firms are exerting a great influence on them, while the interest of the public only takes a small place in the discussion. Regulatory regimes thus face the challenge to ensure that the institutions they created fulfill the role they were given.

     

    For more information on this study, please contact Bertrand Malsch. 

    Citation:

    Malsch, B. and Y. Gendron. 2011. Reining in auditors: On the dynamics of power surrounding an “innovation” in the regulatory space. Accounting, Organizations and Society 36 (7): 456-476.

    Keywords:
    Dynamics of power, independent audit regulators, arm’s length regulation, outside monitoring, tradition of self-regulation, Canadian Public Accountability Board
    Purpose of the Study:

    In the past, auditors largely self-regulated and were subject to peer reviews.  In the aftermath of Enron and the collapse of Arthur Andersen, new “independent” institutions have been created to oversee financial auditing. Accounting firms are now accountable to regulatory organizations localized outside the boundaries of the profession’s jurisdictional domain.

     

    First, the authors investigate how the creation of the Canadian Public Accountability Board (CPAB) has affected the dynamics of power among the main players enlisted in Canada’s regulatory field of public accounting. They were especially interested in examining which organizations gained, maintained or lost their position of power in the regulatory space under study, and the extent to which the new regulatory practices were consistent with the independent regulator’s claim of “outside monitoring”. The authors’ analysis is also directed at the exercise of power and influence in the globalized audit regulatory space.

     

    Second, they extend the boundaries of their argument by showing that patterns of resistance against the logic of arm’s length regulation operate in a variety of audit regulatory sites. The analysis provides some insights into the dynamics of power which the creation of independent audit regulators engendered in other spaces, and the collaborative processes taking place across networks of regulators in trying to ensure that their mandates and practices are coherent and consistent.

    Design/Method/ Approach:

    The empirical material relates to a specific time frame, from the establishment of CPAB in 2003 until year 2009.  The following sources of information have been used: public statements issued by a number of independent audit regulators and regulatory agencies, internal documents, documents retracing the public consultation process initiated in June 2003 on regulatory project 52-108 regarding the creation of CPAB, and minutes of all meetings held between 2005 and 2009 by two agencies set up by the European commission. Two rounds of semi-structured interviews were conducted.  The first round of interviews, carried out from 2003 to 2005 mostly in Canada, consists of more than 60 interviews with audit committee members, financial analysts, financial auditors, regulators, etc. Two of these interviews take on special significance retrospectively in the context of the study: one with the first chief executive officer (CEO) of CPAB, and the other with a member of CPAB’s board of directors. The second round involves seven interviews conducted in 2008–2009 in Europe. The second-round interviews involve three high-ranking partners of the Big Four, as well as one board member and three executives from independent audit regulatory organizations.

    Findings:
    • The authors find that the accounting profession is resistant to the establishment of an independent regulatory organization. The logic of self regulation in the profession influences the new regulatory organization significantly, in spite of the efforts of a number of non accounting organizations to constrain the influence of the accounting establishment and its key allies in reshaping regulation in accordance with their interests. 
    • The authors find that the regulator is influenced partially in practice by a private circuit of power. The targets of regulation, especially the Big Four firms, are powerful in the face of audit regulators.
    • The authors find that there is a major regulatory gap where both the international firms and the global standard-setting bodies are not subject to global and strong regulatory oversight.
    • The authors find that the patterns of resistance to the logic of arm’s length regulation are influential across a number of jurisdictions. Of course, the degree of influence varies in time and space.
    • The authors find that the ‘public’ is often a marginal figure in the discourses constructed by the actors studied. 
    Category:
    Independence & Ethics, Standard Setting
    Sub-category:
    Impact of PCAOB, Impact of SEC Rules Changes/SarBox