The Good Auditor ? Skeptic or Wealth Accumulator? Ethical Lessons Learned from the Arthur Andersen Debacle

Duska, Ronald

doi:10.1007/s10551-004-3818-1

Cited by 31 publications

(33 citation statements)

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“…The two conditions necessary for a lemons market (Akerlof, 1970) (high and low quality audits and information asymmetry) are demonstrated, at least retrospectively, through Andersen's repeated audit failures, for which they were sued for substandard audit practices (e.g., Sunbeam, Waste Management, Global Crossing, and Enron, among others). The repeated audit failures of Andersen's client in the 1990s provide indirect evidence that Andersen produced ''lemon'' audit reports that failed to serve the public's interests (Duska, 2005). The lemons model applies when there exists information asymmetry between sellers and buyers.…”

Section: Discussionmentioning

confidence: 99%

“…The repeated audit failures of the now defunct accounting firm of Andersen are infamous: Enron, Global Crossing, Sunbeam, Waste Management, HBOCMcKesson, among others (Duska, 2005;Staubus, 2005). In all of these cases, Andersen rendered a ''clean'' audit report when material misstatements existed.…”

Section: Introductionmentioning

confidence: 99%

“…An audit failure occurs when an auditor fails to warn the public that the financial statements are not fairly presented by the management. Although audit failure may be a result of bad luck in statistical audit testing or due to collusion among client personnel, audit failure also may result when the auditor knowingly fails in the exercise of her or his professional responsibilities 1 and, as a result, fails to warn the public that the financial statements are not fairly presented by the management (Duska, 2005). The cost to the public of audit failure is enormous and extends well beyond the monies lost by the shareholders and creditors, as it includes loss of confidence in the audit report and in financial markets (Diamond, 2005).…”

Section: Introductionmentioning

confidence: 99%

“…The cost to the public of audit failure is enormous and extends well beyond the monies lost by the shareholders and creditors, as it includes loss of confidence in the audit report and in financial markets (Diamond, 2005). Previous academic and professional research suggests that, at least to some extent, these audit failures were a matter of choice by Andersen, and therefore, an ethical lapse (Benston and Hartgraves, 2002;Duska, 2005;Revsine, 2002;Toffler and Reingold, 2003).…”

Section: Introductionmentioning

confidence: 99%

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Andersen and the Market for Lemons in Audit Reports

2006

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Previous accounting ethics research berates auditors for ethical lapses that contribute to the failure of Andersen (e.g., Duska, R.: 2005, Journal of Business Ethics 57, 17–29; Staubus, G.: 2005, Journal of Business Ethics 57, 5–15; however, some of the blame must also fall on regulatory and professional bodies that exist to mitigate auditors’ ethical lapses. In this paper, we consider the ethical and economic context that existed and facilitated Andersen’s failure. Our analysis is grounded in Akerlof’s (1970, Quarterly Journal of Economics August, 488–500) Theory of the Market for Lemons and we characterize the market for audit reports as a market for lemons. Consistent with Akerlof’s model, we consider the appropriateness of the countervailing mechanisms that existed at the time of Andersen’s demise that appeared to have effectively failed in counteracting Andersen’s ethical shortcomings. Finally, we assess the appropriateness of the remedies proposed by the Sarbanes–Oxley Act of 2002 (SOA) to ensure that similar ethical lapses will not occur in the future. Our analysis indicates that the SOA regulatory reforms should counteract some of the necessary conditions of the Lemons Model, and thereby mitigate the likelihood of audit failures. However, we contend that the effectiveness of the SOA critically depends upon the focus and attention of theâ\x90£Public Companies Accounting Oversight Board (PCAOB) towards assessing the ethical climates of public accounting firms. Assessments by the PCAOB of public accounting firm’s ethical climate are needed to sufficiently ensure that public accounting firms effectively promote and maintain audit quality in situations where unconscious bias or economic incentives may erode the public accounting firm’s independence. Copyright Springer 2007auditor independence, audit quality, information asymmetry, market for lemons, public interest,

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Andersen and the Market for Lemons in Audit Reports

2006

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“…governance of an organization (Duska, 2005). 'Independence' and 'objectivity' are the most fundamental and vital assets possessed by the auditing profession.…”

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confidence: 99%