What Went Wrong? The Downfall of Arthur Andersen and the Construction of Controllability Boundaries Surrounding Financial Auditing

This paper aims to improve understanding of the construction of controllability boundaries surrounding the financial audit function, through a set of interviews with former members of Arthur Andersen reflecting upon the collapse of their firm. We focus on how members, in light of their firm’s downfall, assess the abilities of public accounting firms to control financial audit work and auditor behaviour (i.e., organizational controllability), and the abilities of outside, nonaccounting bodies to regulate financial auditing (i.e., regulatory controllability). The investigation is predicated on interviews with 25 former partners and employees of Arthur Andersen — mostly in Canada and the United Kingdom. Our qualitative analysis indicates that a majority of interviewees adhere to the view that financial auditing can best be controlled through a network of bureaucratic and clan controls established within accounting firm organizations, without any direct involvement by regulators. A number of interviewees, though, consider that a reinforcement of outside regulation is necessary to discipline financial auditors. In spite of these differences, the vast majority of interviewees consider that financial auditing is controllable (through organizational or regulatory control), which is of interest, given their spatial and emotional proximity from the controversial collapse of their firm. Also, most participants do not see the professional association as a useful or relevant party in helping the professional accounting community maneuver in times of turmoil. The paper concludes with a discussion of important governance issues ensuing from our analysis.