Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:


Lingering lessons of Enron fiasco: Auditors' concern for reputation can backfire

New research shows that concern about preserving their good reputation can lead auditors to conceal the kind of irregularities that brought down not only Enron but the auditing firm Arthur Anderson, according to the Management Insights feature in the current issue of Management Science, a flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®).

“The Auditor’s Slippery Slope: An Analysis of Reputational Incentives” is by Carlos Corona of the University of Texas and Ramandeep S. Randhaw of the University of Southern California.

Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal.

The authors consider whether the auditor-client contract should be subject to term limits.

The WorldCom and Enron debacles at the turn of the last century were a black eye for Arthur Andersen and the auditing community and led to the auditing restrictions included in the Sarbanes-Oxley Act of 2002, which requires auditors to remain more autonomous.

Auditors’ concerns about their reputation are commonly perceived as having a positive effect on execution of their monitoring and attesting functions. The authors demonstrate that this concern can actually have the opposite effect.

Using game theory to analyze manager and auditor relationships, they illustrate how reputational concerns can actually induce an auditing firm to misreport.

Early undetected or unreported slight misconduct by a manager places the auditor in a bad position in future periods, when admission of prior transgressions tarnishes the auditor’s reputation. They find that a strategic manager can lead the auditors down a slippery slope, with managerial fraud increasing as the length of the audit firm’s contract progresses. In this scenario, as company fraud increases, the probability that the auditor will report it decreases. Ironically, the stronger the auditor’s current reputation, the stronger is the incentive to misreport after the reporting omission of initial malfeasance.

The authors’ lesson for management is that long-term relationships between auditing firms and clients can lead to inaccurate reporting despite – or perhaps because of – the auditing firm’s good reputation.

The current issue of Management Insights is available here. The full papers associated with the Insights are available to Management Science subscribers. Individual papers can be purchased at Additional issues of Management Insights can be accessed here.

The other Insights in the current issue are:

Impossible Frontiers by Thomas J. Brennan, Andrew W. Lo
Effects of Litigation Risk on Board Oversight and CEO Incentive Pay by Volker Laux
Positioning and Pricing in a Variety Seeking Market by S. Sajeesh, Jagmohan S. Raju
Quick Response and Retailer Effort by Harish Krishnan, Roman Kapuscinski, David A. Butz
Quality Management and Job Quality: How the ISO 9001 Standard for Quality Management Systems Affects Employees and Employers by David I. Levine, Michael W. Toffel
Assessing Joint Distributions with Isoprobability Contours by Ali E. Abbas, David V. Budescu, Yuhong (Rola) Gu
Contingent Effects of Quality Signaling: Evidence from the Indian Offshore IT Services Industry by Guodong (Gordon) Gao, Anandasivam Gopal, Ritu Agarwal
Operational Flexibility and Financial Hedging: Complements or Substitutes? by Jiri Chod, Nils Rudi, Jan A. Van Mieghem

INFORMS journals are strongly cited in Journal Citation Reports, an industry source. In the JCR subject category “operations research and management science,” Management Science ranks in the top 10.

The special MBA issue published by BusinessWeek includes Management Science and three other INFORMS journals in its list of 20 top academic journals that are used to evaluate business school programs. Financial Times includes Management Science and four other INFORMS journals in its list of academic journals used to evaluate MBA programs.

The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications.

Barry List | EurekAlert!
Further information:

More articles from Studies and Analyses:

nachricht Diagnoses: When Are Several Opinions Better Than One?
19.07.2016 | Max-Planck-Institut für Bildungsforschung

nachricht High in calories and low in nutrients when adolescents share pictures of food online
07.04.2016 | University of Gothenburg

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Novel light sources made of 2D materials

Physicists from the University of Würzburg have designed a light source that emits photon pairs. Two-photon sources are particularly well suited for tap-proof data encryption. The experiment's key ingredients: a semiconductor crystal and some sticky tape.

So-called monolayers are at the heart of the research activities. These "super materials" (as the prestigious science magazine "Nature" puts it) have been...

Im Focus: Etching Microstructures with Lasers

Ultrafast lasers have introduced new possibilities in engraving ultrafine structures, and scientists are now also investigating how to use them to etch microstructures into thin glass. There are possible applications in analytics (lab on a chip) and especially in electronics and the consumer sector, where great interest has been shown.

This new method was born of a surprising phenomenon: irradiating glass in a particular way with an ultrafast laser has the effect of making the glass up to a...

Im Focus: Light-driven atomic rotations excite magnetic waves

Terahertz excitation of selected crystal vibrations leads to an effective magnetic field that drives coherent spin motion

Controlling functional properties by light is one of the grand goals in modern condensed matter physics and materials science. A new study now demonstrates how...

Im Focus: New 3-D wiring technique brings scalable quantum computers closer to reality

Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.

"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...

Im Focus: Scientists develop a semiconductor nanocomposite material that moves in response to light

In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.

A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...

All Focus news of the innovation-report >>>



Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

Agricultural Trade Developments and Potentials in Central Asia and the South Caucasus

14.10.2016 | Event News

World Health Summit – Day Three: A Call to Action

12.10.2016 | Event News

Latest News

Prototype device for measuring graphene-based electromagnetic radiation created

28.10.2016 | Power and Electrical Engineering

Gamma ray camera offers new view on ultra-high energy electrons in plasma

28.10.2016 | Physics and Astronomy

When fat cells change their colour

28.10.2016 | Life Sciences

More VideoLinks >>>