Executive Summary

In the aftermath of the downfall of accounting firm Arthur Andersen (AA), many questions were formulated in the press and other arenas regarding the apparent inability of control mechanisms (within AA or beyond) to produce adequate audit work regarding Enron’s accounts. Our paper investigates the construction of controllability boundaries surrounding financial auditing in the aftermath of the collapse of AA, as experienced by people affiliated with the firm. Several reasons justify this object of study. In particular, data gathered from former members of AA regarding controllability can be used as a basis to reflect on questions that are not frequently asked in auditing literature: Is financial auditing controllable? How is financial audit controlled? How should it be controlled? Moreover, although application is not the primary objective of this paper, from a practitioner perspective it is reasonable to assume that the design and improvement of control and regulatory mechanisms ought to be predicated (at least partially) on the views of actors as agents and/or targets of control. In other words, something can hopefully be gained in reforming control and regulation by means of a thorough analysis of actors’ experiences.

Specifically, we approach the controllability of financial auditing from a double standpoint: the ability of public accounting firms to control financial audit work and auditor behavior performed within their confines (i.e., organizational controllability); and the ability of outside regulators to control financial auditing (i.e., regulatory controllability). How accounting firms organize and coordinate financial audit work constitutes a central preoccupation, not only in the eyes of audit practitioners but also from a theoretical viewpoint. Our empirical focus is how members of AA, in light of their firm’s downfall, assess the organizational and regulatory controllability of the financial audit function. To carry out the investigation we interviewed 25 former partners and employees of the firm, mostly in Canada and the United Kingdom. Our unit of analysis consists of the individual actor as a reflective person, which we consider both as a target and an agent of organizational and regulatory control.

Methodologically speaking, our analysis is focused on interviewees’ degree of confidence regarding the capabilities of accounting firm organizations and regulatory bodies to control financial auditing, as indicated through interview narratives surrounding the downfall of AA. For every group of interviewees having relatively similar views about controllability, we analyze how they make sense of the firm’s collapse from the viewpoint of control and how they justify their position regarding controllability. Specifically, we investigate the following question: In light of their firm’s downfall, how do former members of AA assess the abilities of public accounting firms to control financial audits (organizational controllability) and the abilities of nonaccounting bodies to regulate financial auditing (regulatory controllability)?

Interviewees vary over the extent to which the breakdown of AA is seen as a matter of organizational control deficiency. Three main profiles or clusters emerged from comparative analysis: unwavering, restoring, and skeptical members. The unwavering and restoring clusters represent interviewees whose confidence is higher on organizational controllability but lower on regulatory controllability. The main difference between the two is that unwavering interviewees are more uncompromising regarding the effectiveness of AA’s organizational controls, because their interpretations of the collapse do not cast significant doubt on the ability of audit firms to control effectively auditor independence and financial audit work. Unwavering members are also more likely to attribute the collapse of the firm to uncontrollable parties, such as unreliable journalists and politicians. Restoring interviewees attribute (at least partially) the firm’s collapse to the AA organization’s not having been in control of auditor independence and financial auditing; however, through certain lines of thought, they ultimately express a relatively high degree of confidence in organizational control effectiveness. Both unwavering and restoring individuals are critical of outside regulation, preferring self-regulation or market mechanisms to govern the profession. The third cluster consists of skeptical members, who tend to interpret the firm’s debacle in terms of organizational control deficiencies, which cannot be easily fixed. In comparison with unwavering and restoring individuals, skeptical members are more favorably disposed to the involvement of outside regulators in governing the profession — although they recognize that this mode of regulation has some limitations.

Our analysis indicates that unwavering interviewees (which consist of eight interviewees) provide narratives of the firm’s collapse that do not interpret the event as an organizational control failure. They generally believe that the downfall of AA results from factors that are beyond an accounting firm’s quality control. Restoring members (eight interviewees) consider that AA, failed through its internal control structure, to keep auditor independence in check; however, their narratives imply that auditor independence can be properly managed if appropriate control mechanisms are established and enforced. Skeptical members (four interviewees) view the collapse of AA in terms of a failure to control behavior in the context of an organization’s climate increasingly permeated with mercantilism, while remaining doubtful about the extent to which accounting firms’ quality control can be effectively strengthened in order to rein in the spread of commercialism. Outside regulation is seen by skeptics as a lifeline in ensuring the continuity of financial auditing. Finally, several interviewees are inconclusive or contradictory regarding the issue of controllability — as if they had (more or less temporarily) reached a conceptual impasse in trying to understand the firm’s downfall.

At the time of data collection, the vast majority of interviewees considered commercialism as a destabilizing force in the profession and were not favorably disposed toward market-based controls. The dominant view is that the negative aspects of commercialism can be reined in through a network of bureaucratic and clan controls within accounting firms. Indeed, a majority of interviewees provide interpretations of the scandal that either praise AA’s quality control (unwavering members) or are characterized by faith in the effectiveness of proposed technical changes in the way in which control is exerted in surviving accounting firms (restoring members). The claim that a network of bureaucratic and clan mechanisms can be effective enough in constraining the appeal of commercialism is very much alive in the community of professional accountants, sustained through various advocates and institutional stories and anecdotes. Importantly, advocates comprise the seven interviewees who were still active, at the time of their interview, in public accounting. In contrast, members having mixed feelings on the issue of organizational controllability, or who are skeptical about it, were not involved (at the time of their interview) in public accounting. Although more research clearly is needed on the matter, the discrepancy may be the result of filtering and/or socialization mechanisms within public accounting firms.

It is perhaps not surprising that a clear majority of our interviewees have low confidence in regulatory controllability. Professionalism and the free-market discourses, which are often viewed as exerting key influence over professions, are both intolerant of outside regulation. Although professionalism and free-market discourses differ prescriptively regarding the acceptability of commercialism in professional fields, they nonetheless converge on their antiregulatory stance — the former because of the presumption that peers are more qualified than outsiders to assess professional work; the latter because of the view that unconstrained markets benefit any area of social life, including professions. The discursive convergence between the two lines of reasoning may heighten professionals’ resistance to outside regulation.

Also, a hierarchical pattern differentiates unwavering/restoring members from the skeptical ones. In contrast to the skeptical cluster, members of the unwavering and restoring clusters are mostly individuals who reached the partner level in the firm. It appears that partners, in the aftermath of a destabilizing event, are more likely to manifest confidence in organizational controllability and intolerance regarding outside regulation than individuals at lower hierarchical levels.

Most interviewees appear not to recognize any significant role for the professional institutes in bringing financial auditing under control and/or in helping to restore the profession’s external legitimacy. Nineteen interviewees are basically silent or negative on the matter, criticizing the institutes’ laisser-faire attitude regarding the collapse of AA or the unbridled spread of commercialism throughout the profession. The overshadowing of the professional institutes clashes with the traditional role they have played in defining and securing jurisdictional boundaries of professional work.

Furthermore, a number of interviewees emphasize the extent of bureaucratic control exerted on partners before the collapse of Enron — compulsory approvals, tight inspections, and some penalizing mechanisms imposed on deviant partners were then institutionalized in AA and also in other large accounting firms. Audit partners are, post-Enron, subjected to the gaze of an even tighter bureaucracy. Consequences ensuing from such a mode of governance may be far-reaching as surveillance systems, through the constitution of individualized knowledge bases, exert complex and significant influences over individuals. It would therefore seem that one of the key features of professional life — the use of one’s judgment — is threatened by the tightening of bureaucratic control within large accounting firms. Motivational consequences ensuing from such a shift are palpable in our interviews because no partner still involved in public accounting showed enthusiasm about his or her career — although a number of them mentioned that, in spite of an alienating organizational climate, they find solace in concentrating on accounting and auditing work. Drawing on the above, it can be argued that audit partners in large accounting firms are increasingly considered as controllable cogs and disposable bodies (although obviously we do not deny various exceptions and countertrends).

In conclusion, the collapse of Arthur Andersen generated in the media and elsewhere a series of questions regarding the extent to which the financial audit function is controllable, how it should be controlled, and by whom. This paper is about the construction of controllability boundaries surrounding the financial audit function, focusing on the experiences of professionals employed in what was one of the largest accounting firms in the world. Controllability boundaries vary over time and space; investigating their construction by means of narratives of actors who try to comprehend important events in the flow of their professional lives is central in developing an understanding of one of the most prominent mechanisms that generates order in contemporary society — namely, institutional control. The paper also provides several lines of interpretation regarding what may have gone wrong within AA regarding problematic audit engagements, especially that of Enron. Perhaps one of the most surprising features emerging from our analysis is the fading role of professional associations in restoring controllability in times of crisis. Recall that in the vast majority of interviews, the professional association is either invisible or severely criticized for not having been able to constrain the influence of commercialism. Consequences ensuing from the fading role of the professional associations may be very significant. At the very least, the accounting profession does not convey the imagery of being tightly united and organized. In spite of short-term measures of “success” ensuing from the passage of post-Enron legislation (e.g., rise in audit fees), the accounting profession appears to be confronted with serious governance issues.