Accounting Scandals Of The United States

2009 Words Apr 16th, 2015 9 Pages
In the last two decades, accounting scandals have become a truly global phenomenon. These scandals include the 2001 Enron scandal in the United States (Chaney and Philipich, 2002), the 2002 ComROAD scandal in Germany (Weber et al., 2008), the 2005 Kanebo issue in Japan (Skinner and Srinivasan, 2012), and the 2009 Satyam downfall in India (Bandyopadhyay et al., 2014). Moreover, these and other scandals involved the world’s most highly reputable audit firms, such as Arthur Anderson, PwC, and KPMG. Although auditors can be sued for negligence in the United States, such suits are rare or effectively absent in Japan, Germany, and India. With the biggest, most reputable audit firms failing in both high-litigation and low or no-litigation countries, it is appropriate to revisit the “reputation rationale” (DeAngelo, 1981) for audit quality and investigate to what extent reputation concern provides incentives for auditors (especially the large reputable ones), using a formal model of reputation formation.

High-quality auditing is a central component of corporate governance. Yet the factors that promote such auditing remain an open question. The two forms of incentives that induce quality in audits are litigation/insurance and reputation. Litigation incentives work in a straightforward way by making the auditor liable for the opinion issued. Reputation, on the other hand, is an indirect mechanism and begs the question of whether it is sufficiently powerful to motivate high-quality…
Open Document