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IBIMA Publishing

Journal of Accounting and Auditing: Research & Practice

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Vol. 2!2 "2!2#$ Article % '2(($ 2 pages

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Copyright © 2012 John R. Kuhn. This is an open access article distributed under the Creative CommonsAttribution icense unported !.0" #hich permits unrestricted use" distribution" and reproduction in anymedium" provided that original #or$ is properly cited. Contact author% John R. Kuhn &'mail% (r$uhn)us*.edu

Public Accounting in the New Millenium:On the Edge of Chaos

John R. Kuhn

College of Business, University of South Florida, Tampa, FL, United States of America

__________________________________________________________________________________________________________________

Abstract

Change is a constant *eature o* organi+ational e,istence. -uccess*ully managing change reuires anunderstanding o* the environment in #hich an organi+ation operates. The comple, andinterconnected #orld in #hich public accounting operates presents many challenges to thetraditional neo'classical vie# o* research and management. A#areness o* the constantly'changing"net#or$ed environment and the dynamics o* agent interactions o**ers distinct competitiveadvantages to the astute. The current paper strives to convey the appropriateness and necessity *orrecogni+ing the public accounting pro*ession as a comple+ adapti,e s-stem /CA- that operates in anever'changing" unpredictable environment impacted by local and global politico'economic entities"pro*essional organi+ations" clientele" internal organi+ational members" higher educationinstitutions" technological advances" and others. ra#ing on comple,ity theory" the paper developsand presents testable propositions to e,amine the public accounting pro*ession as a CA- #ith thee,press purpose o* stimulating more holistic research e**orts in accounting.

Keywords: Comple, adaptive system Comple,ity theory 3ublic accounting pro*ession 4et#or$s.555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555

Introduction

The old adage 6nothing is certain but deathand ta,es7 could reasonably be modi*ied toinclude change. Change is a constant *eatureo* organi+ational e,istence those that canadapt survive" those that cannot #ither a#ay.-uccess*ully managing change *irst reuiresan understanding o* the environment orsystem in #hich an organi+ation operates.This paper argues the necessity *or andappropriateness o* recogni+ing the publicaccounting pro*ession as a comple+ adapti,e

s-stem /CA- that operates in an ever'changing" unpredictable environmentimpacted by local and global politico'economic entities" pro*essionalorgani+ations" clientele" internalorgani+ational members" higher educationinstitutions" technological advances" andothers. 8ie#ing public accounting in such

light #ill hope*ully provide insight intopossible methods to success*ully research thepro*ession in an ever'*lattening" continuouslyevolving #orld *ull o* competing interestsand players #ith unpredictable eventslur$ing around every corner.

9ainstream accounting research andliterature operates under neo'classicaleconomic assumptions utili+ing theories o*rational" utility'ma,imi+ing behavior such asthat ingrained in the e**icient mar$etshypothesis /&9: that states mar$et prices*ully re*lect all publicly available in*ormation/;ama 1<=0. The general reductionistapproach o* this research attempts to reducethe comple, do#n to the simple by creatingregression models o* phenomena to analy+eindividual components. These theories *ail toincorporate or ac$no#ledge di**erences inindividual behavior and the impact o* that

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behavior on capital mar$ets" (udgment and

decision'ma$ing" as #ell as other areas o*accounting and" more broadly" *ail to account*or the interconnectedness o* the system thephenomenon *unctions in.

3ractitioners" regulators" and certain poc$etso* academics appear disenchanted #ith &9:due to observed irrational mar$et behaviorevidenced by under'reaction o* prices tolarge earnings changes" odd ratios o* pricesto *undamentals" and other statistics derived*rom *undamental accounting analyses/?loom*ield 2002. Tim ?ell" a managing

partner #ith K39@" uestions thereductionist research approach%

6n our time" the con*idence" maturity andpromise o* a science should be measured notby its po#er to reduce the comple, to thesimple B but instead by its #illingness tostudy comple,ity #ith advanced methodsunder descriptions that respect the reality o*#hat is being studied.7 /?ell et al." 1<<=" p. 1.

9al$iel /200! concludes stoc$ mar$ets aremore e**icient than some recent academic

studies indicate but are *ar less predictableas #ell #hile Chambers /1<<! challengesthe neo'classical assumption" in general" thatearnings releases dominate stoc$ pricechanges%

6There are scores o* events" or bits o*in*ormation about events" that may in*luencethe price o* a stoc$ at any point o* time BinvestorD response is the outcome o* acomple, evaluative process" o* states andstimuli and needs and pre*erences" at astated time.7

To date" ho#ever" no alternative theoryo**ered to e,plain mar$et ine**iciency hasbeen #idely embraced and there*ore" studiessho#ing mispricing are vie#ed as statistical*lu$es resulting *rom *ishing e,peditions/;ama" 1<<E Kothari" 2001 ?loom*ield"2002. Reality may be more comple, than theneo'classical approach permits. 3erhaps thisnarro#ness accounts *or the inability to *ullye,plain long'standing phenomena such as the

post'announcement earnings dri*t and the

scarcity o* alternate theories *acilitatescontinued acceptance o* imper*ect theories.

:istorically" many non'believers o* the neo'classical approach have been intimidated bythe 6scienti*ic7 blu** and bluster o* academicresearch" especially #hen the researchincludes highly abstract mathematicalnotations /9ouc$ 2000. The -anta ;enstitute /-;" a private researchorgani+ation *ounded in 1<EF" developed analternative vie# o* reality /includingeconomic and social conte,ts grounded in

the natural sciences that *ocuses on anevolutionary model o* continual change"instability" and adaptation appropriatelytermed CA-. The group o* scientists thatcomprise -; hail *rom many disciplines andbac$grounds including physics" biology"mathematics" economics" psychology"decision sciences" etc.

Grgani+ational theorists have embraced theconcepts o* CA- *or nearly 20 years as aviable lens to vie# organi+ational change"leadership" strategic management" and other

organi+ational behavior *rom aholisticHconte,tual perspective earlye,amples include Tushman et al. /1<EI"Cart#right /1<<1" -tacey /1<<2" heatley/1<<2" immerman /1<<!" evy /1<<F" >9int+berg /1<<F. CA- theory vie#sorgani+ations as open" non'linear dynamicalsystems that adapt and evolve in the processo* interacting #ith their environments #hereoutcomes o* their actions are unpredictable"but not random. The $ey to success*ullymanaging a CA- is to $eep the organi+ationoperating Lon the edge o* chaosM% too much

stability results in stagnation and ultimateorgani+ational death #hile too much chaoscan cause an organi+ation to *lounder underthe #eight o* e,cessive change.

Recently" other business disciplines startedto espouse the virtues o* comple,ity scienceand underta$e research activities *rom a CA-perspective. ;or instance" Jacucci et al./200I establishes the need *or the use o*comple,ity theory in a special issue o*

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%nformation echnolog- & People dedicated to

comple,ity theory and in*ormation systemsresearch. An e,haustive literature revie#leading to this study revealed scant CA-'related research in accounting" regardless o**ield specialty. A *e# management accountingarticles /GM?rien et al." 1<<I Ahrens et al."200F and a study o* changes in accounting/?urns" 2000 touch on aspects o* comple,itybut only in passing. 9ouc$ /1<<E 2000truly introduces CA- to the accountingliterature by e,ploring -; studies and theirimplications *or capital investment andbudgeting theories and overall capital

investment strategy that directly challengesneo'classical assumptions *or capitalmar$ets. -utton et al. /200I presentscomple,ity theory as an e,planation *or theimpact o* enterprise resource planning /&R3systems on organi+ations contending that&R3 systems represent the antithesis o* themodel *or a best per*orming organi+ation bysti*ling innovation through a highly orderedstructure that struggles to respond tocompetitive pressures.

Continuing the ground#or$ laid by 9ouc$

/1<<E 2000 and -utton et al. /200I thispaper proposes CA- as a necessary andviable theoretical approach to studyaccounting in the ne# millennium. The papere,amines the public accounting pro*ession inthe conte,t o* the CA- *rame#or$constructed by Choi et al. /2001 andcontinues as *ollo#s% *irst" an overvie# o* theCA- theoretical *oundation and the Choi et al./2001 *rame#or$ second" application o*CA- concepts and principles to the publicaccounting pro*ession and development o*testable propositions and lastly" discussion

o* implications theory building and research.

An Oeriew of Com!le" Ada!tie

#ystems

The theory o* CA- arose *rom the comple,itytheories spa#ned in the natural sciences todevelop mathematical models o* systems innature. 9any variations o* the de*inition and$ey premises o* CA- e,ist. A uote *rom John:. :olland" one o* the original researchers in

the area" best depicts the general principles

underlying CA-%

6A Comple, Adaptive -ystem /CA- is adynamic net#or$ o* many agents /#hich mayrepresent cells" species" individuals" *irms"nations acting in parallel" constantly actingand reacting to #hat the other agents aredoing. The control o* a CA- tends to be highlydispersed and decentrali+ed. * there is to beany coherent behavior in the system" it has toarise *rom competition and cooperationamong the agents themselves. The overallbehavior o* the system is the result o* a huge

number o* decisions made every moment bymany individual agents7 /aldrop" 1<<2.

Although seemingly random" the chaoticnature o* the dynamic interactions amongCA- agents actually contains a hidden orderin #hich patterns o* behavior occur inirregular but similar *orms and can bemodeled to simpli*y the comple, CA-e,amples include economies" social systems"ecologies" cultures" politics" technologies"tra**ic" #eather" etc. /ooley" 1<<=. Toe,amine a CA-" Choi et al. /2001 develop a

comprehensive *rame#or$ comprised o*three interacting and intert#ined *oci% 1internal mechanisms" 2 an environment" and! co'evolution. The remainder o* thissection revie#s these *oundational conceptsand principles in more depth.

Internal Mechanisms

Agents and Schema

Agents represent the building bloc$s o* a CA-and are semi'autonomous units #hich see$

to ma,imi+e some measure o* goodness" or*itness" by evolving over time #here *itnesscorresponds to the general #ell'being o* thesystem /ooley" 1<<=. @iddens /1<EFde*ines agency as the ability to intervenemeaning*ully in the course o* events.There*ore" by de*inition" a system mustinclude agents that can impact the state o*the system by their actions in order to beconsidered a CA-. &,amples o* agents in asocial CA- include individuals inside *irms"

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*irms comprising a pro*ession" or even a

pro*ession operating in a global mar$etplace.The latter t#o illustrate a net#or$ o*multiple CA-s *unctioning in concert.e*ining agents and CA-s thus dependsentirely upon the perspective o* theonloo$er.

CA- agents interact #ith other agents" both#ithin their o#n CA- as #ell as #ith theenvironment #hich may include other CA-sand their respective agents" commonlyre*erred to as meta'agents /?enbya >9cKelvey" 200I. The e,change o*

in*ormation and resources bet#een agents*acilitate the generation o* schema that-chein /1<<= de*ines as the norms" values"belie*s" and assumptions shared among thecollective that dictate the manner in #hichagents interpret in*ormation and per*ormactions. Grgani+ational leaders o*ten declare*ormali+ed mission statements" create codeso* conduct" ethic statements" etc. thatrepresent core values and guide the behavioro* agents" in particular" the interactionbet#een agents and other sta$eholders /e.g.employees" customers" vendors" and other

related parties.

ithin the bounds o* these 6rules o*behavior7 and shared values" agents strive toincrease the *itness o* their system" bothlocally and globally /Choi et al." 2001. Theactions o* agents can result in non'linearimpacts to the local system and net#or$ o*systems depending upon theinterconnectedness o* the system/s a moreconnected system #ill generally e,periencelarger ripple e**ects throughout as agentsinteract in a dynamic *ashion. Comple,

system behavior" there*ore" can occur #henmultiple non'linear processes interact /Choiet al." 2001.

Self-Organization and Emergence

-el*'organi+ation re*ers to the emergence o* apattern o* order *rom a simple set o* rules inan interconnected net#or$ #ithout theintervention o* a central controller/Anderson" 1<<< uoma" 200I 9ason"

200=. The sel*'organi+ation process occurs

*rom the bottom up through the interactionsand inter'relationships o* agents creatingne# structures or behaviors unintentionally.These emergent phenomena seem to have ali*e o* their o#n #ith their o#n rules" la#s"and possibilities /@oldstein" 1<<Fimmerman et al." 1<<E Choi et al." 2001.

Choi et al. /2001 present the phenomenon o**loc$ing birds as an illustration *rom natureo* the sel*'organi+ation process. The *loc$ingpattern /i.e. the ne# structure neitheroccurs because o* a predetermined plan or

unilateral control by the lead bird. Thepattern emerges *rom the actions o*individual birds acting upon simple rulesbased on local in*ormation. &ach birddetermines the speed and direction by *lyingto#ard the center o* the *loc$" mimic$ing thevelocity o* the neighboring birds" and stayinga sa*e distance a#ay.

;rom an organi+ational perspective"individual managers cannot predict or planlong'term outcomes /il$inson > Noung"1<<E ;rederic$" 1<<E Kelly" 1<<< 9ason"

200=" but can adapt the simple rules tomanage movement o* the aggregate /i.e. theCA- bet#een stability and chaos /e#in"1<<! 9ason" 200=. The a*orementionede,amples o* mission statements" codes o*conduct" and ethic statements embody theunderlying principles o* simple rules thatguide agent behavior" rather than directlycontrolling the eventual outcome o* dynamicagent interaction. &,amples o* sel*'organi+ation and emergence in the businesssetting include development o* ne#strategies /Conner" 1<<E" development o*

mar$eting tactics /;orrest > 9i+ers$i" 1<<I"sel*'directed teams /@ault > Jaccaci" 1<<I"and gro#th o* strategic alliances /il$inson> Noung" 1<<E.

Connectivity

A $ey premise o* CA- revolves around theconcept o* connectivity% the lin$ages o*agents inside the system #ith each other andto neighboring systems. i**erent elements

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/agents" meta'agents" other CA-s

continuously interact producing intert#inedreactions nearly impossible to anticipate ortrace a*ter#ards /uoma" 200I. As thenumber o* agents increase" the volume andlayers o* relationships" both direct andindirect" gro# e,ponentially to such acomple, state that di**erentiating bet#eencause and e**ect becomes too onerous.

The theory o* reductionism asserts thatcomple, data and phenomena can bee,plained by a process o* reducing to simplerterms and analy+ing the components

independently to gain insight into the #hole.?ettis > 3rahalad /1<<O and ent /1<<<argue the reductionist approach *ails toe**ectively provide $no#ledge o* the #hole#hen studying organi+ations due to theircomple, nature. 8ie#ing organi+ations as aCA- reuires a holistic *ocus on the system inaggregate" not individual agents or poc$ets o*agents. The per*ormance o* the #hole cannotbe enhanced by optimi+ing the per*ormanceo* each individual agent nor should theproblem #ith one agent be e,amined inisolation *rom the system /uoma" 200I. A

#ider conte,t must al#ays be at the*ore*ront promoting e,amination o* the unitin the broader perspective o* agentrelationships" dependencies" anddo#nstream e**ects. Analysis o* theseinterconnected relationships in a CA- o**ers adistinct opportunity to ma$e the most o* theagent diversity inherent in the system*acilitating richer interpretations o* theenvironment and *ostering creative solutions.

imensionality

ooley > 8an de 8en /1<<< de*ine thedimensionality o* a CA- as the degrees o**reedom that individual agents #ithin thesystem have to enact behavior in a some#hatautonomous *ashion. Controls such as rulesand regulations" budgets" limits o* authority"etc. constrain agent behavior and thus reducedimensionality and change the comple,ity o*the systemMs aggregate behavior /-tacey"1<<O Thietart > ;orgues" 1<<O @lass" 1<<IChoi et al." 2001. The CA- becomes

predictable" stable" and less *le,ible. CA-

researchers re*er to these constraints asnegative *eedbac$ in the sense the system#or$s to maintain some stable condition#here deviations lead to corrective action.hen agents are allo#ed more autonomy toma$e decisions locally" outcomes then havethe ability to emerge and cascade throughoutthe system possibly leading to the generationo* more creative solutions and competitiveadvantage. This emergence re*lects theconcept o* positive *eedbac$ #here thesystem #or$s to rein*orce the phenomenaincreasing the overall e**ect. As an e,ample"

t#o scientists #or$ing together potentiallycan advance more rapidly than i* in isolationdue to the opportunity to leverage the uniueperspectives" bac$ground" and $no#ledgeeach individual o**ers. ncreaseddimensionality thrives on positive *eedbac$.

Environment

The environment in relation to a CA-depends entirely upon the scale o* analysischosen. ;or a CA- de*ined as the supply chain*unction o* a manu*acturing company"

internal agents may consist o* the employeesin the production planning" inventorymanagement" and #arehouse departmentsthat interact #ith other potential internalCA-s such as the purchasing and accountingdepartments and even e,ecutivemanagement. &,ternally" meta'agents mayinclude customers" suppliers" andtransportation vendors. An e,panded scalemight consider the manu*acturing company"in aggregate" as the CA- #hich interacts #ithnumerous other meta'agents in addition tothe ones that inter*ace #ith the supply

*unction such as regulatory agencies"corporate shareholders" ta,ing authorities"etc. Regardless o* scale chosen" Choi et al./2001 characteri+e environments asdynamic and rugged.

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ynamism

The 9erriam'ebster Gnline ictionaryde*ines dynamism as 6a theory that allphenomena can be e,plained asmani*estations o* *orce7 /9erriam'ebster"200=. CA-s e,perience many sources o**orce" internally and e,ternally. hile a CA-attempts to emerge through agentinteraction and proactively in*luence otherneighboring CA-s" the e,ternal environmentsimultaneously e,erts pressure on the CA-causing a reaction that" in turn" a**ects theenvironment. Comple,ity theory posits that a

CA- both reacts to and creates itsenvironment through e,periences o* positiveand negative *eedbac$ /Choi et al." 2001.

The constantly changing relationships amongagents" bet#een CA-s" and #ith theenvironment result in changes to the schemaorgani+ations incorporate into their day'to'day interpretations o* reality and behavior.The emergence o* the nternet o**ers ane,cellent e,ample o* a dynamic change in theenvironment. The nternet delivered broad'based changes to the organi+ation o*

economic activity so pro*ound to #arrant thetitle o* a revolution the declining cost o*in*ormation led to increased business tra**ic"greater in*ormation access" personalautonomy in local decisions" and ultimately"greater dispersion o* economic activity/;eldman" 2002. A number o* simultaneousdevelopments resulted in positive *eedbac$that rein*orced and strengthened thenternet movement% e,panding personalcomputer use" technological advances inhard#are and so*t#are" increased a#arenessby users" improvements in

telecommunications" *alling technologyprices" etc. /uoma" 200I.

As the nternet *ever began to ta$e hold" ne#competitors emerged *or traditional bric$and mortar companies. ?arnes and 4obleoperates the largest chain o* boo$stores inthe P.-. n 1<<=" the company surpassed theQ2 billion revenue mar$ yet encountered ane# competitive threat in Ama+on.com" at#o'year old online boo$seller #ith 1<<=

revenues o* Q1FE million" an increase o*

EF0 over the previous year" and #hichsubseuently reported 1<<E revenues o*QI10 million. ?arnes and 4oble sa# the#riting on the #all% the nternet #ouldupend the traditional boo$selling businessmodel. n response to the changingenvironment" ?arnes and 4oble launched anonline plat*orm to sell boo$s and eventuallydeveloped an in'stoc$ inventory o* over=O0"000 titles ready *or immediate deliveryand eight million ne#" out'o*'print" and rareboo$sS both o* #hich the company claimed#ere the largest in the industry

/Ans#ers.com" 200=. The e,periences o*?arnes and 4oble and many others duringthe early years o* the nternet demonstratethe interaction o* numerous CA-s and thebroader e**ects o* agent actions in a dynamicenvironment.

!ugged "andsca#e

?y nature" the eventual outcomes o* agentinteraction in CA-s are un$no#n andunpredictable. CA- researchers represent thepotential states that a CA- can attain in a

dynamic environment as a rugged landscape#ith many hills and valleys /Kau**man" 1<<OChoi et al." 2001. The highest point in thelandscape symboli+es the optimal state o* thesystem. :o#ever" many system components/agents operate in a tightly" coupled mannereach contributing to the overall direction o*the system. The optimal state becomesdi**icult to locate as many local optima e,ist*or the individual components. ;urthere,asperating the comple,ity o* a CA-"environmental pressures *orce the landscapeto change eliciting system members to

e,ploit e,isting $no#ledge and e,plore ne#$no#ledge /9arch" 1<<F necessary toovercome the uncertainty imposed by theenvironment and ensure survivability /Choiet al." 2001.

Choi et al. /2001 discuss the inter'dependencies o* agents and the overall stateo* a CA- in the conte,t o* a supply chainnet#or$. The authors e,plain thatincorporating modular design in the

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automotive supply chain process reduced the

number o* pea$s in the rugged landscapecreating a condition more conducive tooverall system optimi+ation. As opposed tothe manu*acture o* individual parts" theautomotive industry reorgani+ed the entiresupply chain process to a point #here *irst'tier suppliers produce entire modules orsubsystems /e.g. complete engines" steeringsystems" etc. minimi+ing the cost o*coordination across the entire supplynet#or$.

Co-Evolution

Co'evolution directly relates to the concept o*connectivity in that multiple systems andHorsub'systems emerge together because 6thereis *eedbac$ among the systems in terms o*competition or co'operation and utili+ationo* the same limited resources7 /@oldstein" inimmerman et al." 1<<E" p. 2I!. -ymbioticrelationships e,ist as di**erent parties/agents and neighboring CA-s depend uponand interact #ith each other. Theenvironment imposes changes on itsmembers #ho react thus changing

themselves and conseuently changing theenvironment. There*ore" co'evolution occurs#hen system members are *orced to adaptcontinually to the changing conte,t #roughtby othersM strategies in order to remainrelatively *it /van 8alen" 1<=! Kim > Kaplan"200I.

n a business conte,t" the increasingprevalence o* partnerships and alliances in atraditionally competitive environmentindicates a general shi*t o* practice andstrategy to#ards co'evolution /uoma"

200I. 9any organi+ations see$ to e,pandoperations into *oreign mar$ets not throughacuisitions and mergers but through mutualagreements in order to leverage the$no#ledge and resources o* each party.@rant > ?aden';uller /200F present atheory o* strategic alliances that *ocuses onalliances as a strategic tool to access$no#ledge resources o* other *irms ratherthan acuire. Alliances contribute to thee**iciency in the application o* $no#ledge by

improving the integration o* $no#ledge into

the production o* comple, goods andservices and increasing the e**iciency o*$no#ledge utili+ation. The e**iciencyadvantages o* alliances are enhanced #henuncertainty e,ists in the environment.

$uasi-E%uilibrium and State Change

Pnli$e chaos theory that *ocuses on thediscovery o* unpredictable behavior"comple,ity science strives to e,plain ho#order emerges *rom sel*'organi+ing agentinteraction /Kau**man" 1<<! :olland" 1<<O.

ithin the apparent randomness o* a CA-"order can be unmas$ed to predict broadbehavior" not at the individual agent level butin the aggregate. 9ain+er /1<<F > 9cKelvey/200F re*er to comple,ity as an order'creation science.

-ystems under comple,ity science can e,istor vacillate bet#een any o* three statesSstable" chaotic" and one in bet#een /e#in"1<<2. 9any comple,ity researchers labelthe middle state as the 6edge o* chaos7/e#in" 1<<2 Kau**man" 1<<O. A CA-

maintains this uasi'euilibrium state"balancing bet#een complete order andincomplete disorder /@oldstein" 1<<F.:ighly ordered systems e,hibit too muchrigidity to e**ectively respond toenvironmental changes #hile highly chaoticsystems cannot maintain any semblance o*consistency and eventually collapse *rome,cessive disruption. The 6poised7 systemsthat lie in the middle 6may have specialrelevance to evolution because they seem tohave the optimal capacity *or evolving7/Kau**man" 1<<1" p. E2. These systems

adhere to the principle o* ma,imum entropyproduction #here the system moves to#ardsthe brin$ o* complete disorder /entropy butnever uite *alls over the edge as ne# energy*lo#s into the system *orcing redirectionbac$ to a uasi'euilibrium state the orderlies not at the individual level" but in theaggregate /uoma" 200I.

The uoma /200I discussion o* comple,ityand management development asserts

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diseuilibrium and disorder should not be

seen as negative organi+ational attributes.Attempts to entirely eliminate disordersuppress the systemMs ability to sel*'organi+e/-tump*" 1<<O. uoma /200I recommendsthat management e,ert some control butsupports the approach o* allo#ing anorgani+ation to e,ploit the innate ability tospontaneously develop behavior that moste**ectively moves the #hole in a givendirection. eic$ /1<=< notes managers tendto get in the #ay o* activities that have theiro#n sel*'regulation" *orm" and sel*'correctingtendencies.

&on-"inear Changes

The level o* sensitive dependence on initialconditions delineates a CA- *rom a stablesystem /?riggs > 3eat" 1<<< 3hillips > Kim"1<<I. @enerally" small changes in a stablesystem result in small e**ects #hile largechanges produce large e**ects. Changes in aCA- generate unpredictable e**ects smallchanges can gro# e,ponentially #ith eachinteraction through the system and largechanges may languish or disintegrate

altogether through agent inattention. @ibson/1<<I > heatley /1<<I advocatemanagement application o* small 6nudges7 toguide an event or process rather thandramatic actions intended to control. As inmany instances in business" timing iseverything. The right $ind o* nudge at thecorrect time can lead" through positive*eedbac$" to ma(or change /4ilson" 1<<O.

9ason /200= presents the *irst'moveradvantage as an illustration o* non'linearchange in a business conte,t. -ensitive

dependence on initial conditions and positive*eedbac$ create a 6*ly#heel a**ect7 thatrein*orces early success" providing asigni*icant advantage over the long term. Anumber o* studies discount *irst'moveradvantage as a myth /-uare+ > an+olla"200O 3*e**er > -utton" 200I yet otherscontend the opposite%

6To gain advantage" *irst movers mustcapitali+e on the opportunities that come

#ith being a pioneer #hile at the same time

manage the threats that arise. The bottomline% ?eing *irst in a mar$et is only anadvantage #hen you do something #ith it7/;in$elstein" 200=" p. !.

The di**ering opinions on the validity o* *irst'mover advantage epitomi+e core concepts o*CA- theory. ;irst'mover advantage occurs asa result o* non'linear relationships andpositive *eedbac$ yet the interaction bet#eenagents /pioneers" competitors" and theenvironment results in unpredictableoutcomes" i.e. #hether or not a pioneer can

maintain the advantage through proactiveand reactive action. Traditional *orecastingand prediction models ine,orably *ail toadeuately account *or the dynamic nature o*CA-s due to the e,ponential gro#th o*speci*ication errors as the *uture un*olds/3eitgen et al." 1<<2.

&on-!andom 'uture

Although the nature o* CA-s prevents e,actprediction o* *uture actions and outcomes"distinct patterns o* behavior e,ist

underneath apparent randomness allo#inge,amination and general predictive ability.-mall changes may lead to drasticallydi**erent *uture paths ho#ever" the samecharacteristic pattern o* behavior emergesdespite the change /Choi et al." 2001.

Recent #or$ in *inancial economicshighlights patterns o* non'random behaviorthat result in varied outcomes. ?a$er et al./2002 attempt to solve the 6dividendpu++le7 by e,amining ho# managersdetermine dividend policy. Calling upon

earlier #or$ on habitual behavior /aller"1<E< ;ran$*urter > ane" 1<EF" the authorsconclude that various mar$et imper*ectionsand *rictions a**ect *irms di**erentlythere*ore" dividend policy di**ers *irm to *irmand models should consider competing*rictions on a *irm'speci*ic basis. Pnderlyingthis #or$" aller /1<E< suggests theconcept o* habit /nonre*lective behaviormay be a use*ul tool *or institutional policyanalysis and can 6be a *atal blo# to #or$ that

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< Journal o* Accounting and Auditing% Research > 3ractice

is based on rational behavior7 /?a$er et al."

2002. :abits re*lect cultural and societalnorms and standards that may contradictrational economic behavior. ;urther";ran$*urter > ane /1<EF assert habitualbehavior causes problems *or modelsattempting to e,plain dividend policyassuming rational behavior and claimsocioeconomic conseuences o* moderncorporate evolution best e,plain dividendbehavior. This stream o* research" althoughnot e,plicitly stated" e,hibits core CA-principles.

This section presented the elements o* theCA- theoretical *oundation developed byChoi et al. /2001 and provided e,amples*rom academic research" the businessenvironment" and natural systems in order toe,plain the *undamentals underlyingcomple,ity science and to demonstrateapplication outside the realm o* accounting.The subseuent section e,amines the publicaccounting pro*ession as a CA- and developstestable propositions *or *utureconsideration.

$iewing Public Accounting as a Com!le" Ada!tie #ystem

;or the purpose o* this discussion" the termLpublic accounting pro*essionM relates to *irmsthat provide accounting and auditing" ta,"and consulting services to publicly'heldentities #ith an emphasis on auditing. Theremainder o* this section e,plores severalaspects o* the pro*ession under the Choi et al./2001 CA- *rame#or$ to establish analternative #ay o* vie#ing and researchingthe pro*ession that o**ers a more holistic"

richer perspective than the traditional neo'classical approach allo#s.

Internal Mechanisms

Agents and Schema

Agents" by de*inition" represent the core o* aCA- and must possess the ability to in*luencethe direction o* the system in order *or thesystem to be classi*ied as a CA-. At the lo#est

level o* the public accounting CA-" auditors

constitute the agents. Auditors employed bya public accounting *irm per*orm *inancialstatement attestation" #or$ing in locali+edaudit teams #ith a de*ined hierarchicalstructure. -ta** auditors #or$ under thedirect supervision o* managers that report toan engagement partner #ho simultaneouslyreports to the local o**ice managing partner/G93 and a uality assurance audit partner"typically located in a di**erent o**ice *orincreased ob(ectivity. The G93 leads andcoordinates all activity o* a particular o**iceand is accountable to a regional partner that

*unctions under the overall direction o* anational o**ice. The various national o**iceslocated around the #orld each represent amember *irm o* a global group o* *irms. ;ore,ample" &rnst and Noung @lobal imited/&N@" a PK private company limited byguarantee" is the principal governance entityo* the global &N organi+ation comprised o*legally separate member *irms that have noliability *or the actions o* each other /&rnst >Noung" 200=a. As such" the individual &Nauditors e,ecuting *ield#or$ embody acorporeal organi+ation comprised o* agents"

meta'agents" and interconnected CA-s thatcollectively *orm the &N@ public accounting*irm.

Arguably" accounting can be traced bac$ tothe da#n o* intelligence among humanbeings #here primitive man began theprocess o* numbering /?ro#n" 1<0O. Gvertime" numeration evolved *rom ancient *ormso* accounting *or transactions to the double'entry boo$$eeping *ormat o* today. idelyre*erred to as 6the language o* business7/avidson et al." 1<E= accounting consists o*

speciali+ed phrases and terminology thatcollectively create a common body o*socially'constructed schema to interpret thepractice o* accounting.

ithin the pro*ession" individual *irmse,tend the general accounting schema bydeveloping *irm'speci*ic policies andprocedures that guide the behavior o*internal agents. &ach o* the ?ig ;our publicaccounting *irms created and published

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in*ormation about the core values o* the *irm

and related codes o* conduct on their global#ebsite. eloitte and Touche established the*ollo#ing set o* *irm'#ide core values%

6The shared values o* TT and its member*irms bind the people o* TTMs member *irmstogether and promote trust among partnersand pro*essionals B These values (ointogether all employees across di**erentcultures" customs and languages and are the*oundation *or collective successes. Care*ullyidenti*ied through a global consultationprocess" these values are all'encompassing

and embrace the cultures in #hich TTMsmember *irms operate. This thoroughprocess resulted in universal shared valuesthat *orm a basis *or a consistent approach toservice delivery #orld#ide. The sharedvalues are% ntegrity" Gutstanding value tomar$ets and clients" Commitment to eachother" -trength *rom cultural diversity7/eloitte > Touche" 200=a.

The &rnst and Noung #ebsite includes the*ollo#ing statement about their *irmMs codeo* conduct%

6The &rnst and Noung @lobal Code o* Conductsets out a comprehensive ethical andbehavioral *rame#or$ that guides thedecisions #e ma$e every day. The @lobalCode re*lects our commitment to deliveringuality in &verything e o" underscored bythe strength o* our 8alues -tatement. The@lobal Code o* Conduct provides a series o*guiding principles grouped into *ivecategories that cover the breadth o* ouractivities. They are% 1 or$ing #ith GneAnother 2 or$ing #ith Clients and Gthers

! Acting #ith 3ro*essional ntegrity F9aintaining our Gb(ectivity andndependence O Respecting ntellectualCapital7 /&rnst > Noung" 200=b.

The guidance developed by these t#o *irmsillustrates schema created to generateconsistent agent behavior across the *irmthat lays the *oundation *or overall *irmculture and image thus increasing the6*itness7 o* the *irm. The AuditAnal-tics

database lists IF= public accounting *irms

that issued an audit opinion in 200O *or a-ecurities and &,change Commission /-&Cregistrant. The number o* *irms invariablyleads to a variety o* business approaches"organi+ational in*rastructures" managementstyles" values" cultures" and agent behavioroperating in the pro*ession simultaneously.

Pro!osition %& he greater the le,el of shared

schema within a public accounting firm$ the

higher the le,el of fitness achie,ed "e.g.

performance$ sur,i,abilit-#.

Self-Organization and Emergence

The activities o* the public accountingpro*ession prior to the passage o* the-arbanes'G,ley Act o* 2002 /-GUdemonstrate e,amples o* sel*'organi+ationand emergent behavior. ith the advent o*technological advances and the nternet?oom in the latter part o* the 20 th century"the accounting pro*ession *elt compelled toalter the structure and perception o* thepro*ession to $eep pace #ith changes inbusiness. The American nstitute o* Certi*ied

3ublic Accountants /AC3A 8ision 3ro(ect"Canadian nstitute o* Chartered Accountants/CCA 8ision -tatement" and nstitute o*Chartered Accountants in &ngland and ales20H20 8ision 3ro(ect initiatives representattempts by the accounting pro*essionalbodies to rede*ine themselves and theirpractices under the rubric o* 6vision7/;ogarty et al." 200I. The AC3A sought tobroaden the services o* the traditionalaccounting and audit'oriented *ocus to apoint #here accountants could be vie#ed astrusted business advisors. The AC3A

heralded the vision statement as 6the basis*or e,panding the value o* the C3A totomorro#Ms mar$etplace7 /AC3A" 2000 andstated the pro*essionMs core purpose as6ma$ing sense o* a changing and comple,#orld7. Te,t *rom the vision statement o**ersevidence o* the desired shi*t%

6C3As are the trusted pro*essionals #hoenable people and organi+ations to shapetheir *uture. Combining insight #ith integrity"

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11 Journal o* Accounting and Auditing% Research > 3ractice

C3As deliver value by% Communicating the

total picture" Translating comple,in*ormation into critical $no#ledge"Anticipating and creating opportunities" andesigning path#ays that trans*orm visioninto reality7 /AC3A" 2000.

The *irms uic$ly latched on to thismovement to e,pand the array o* servicesdelivered. hen the AC3A championed aglobal consulting credential" many in theaccounting pro*ession voci*erously ob(ected.Kliegman /2001" p. F< complained that6hundreds o* thousands o* people #ho lac$

the rules" regulations and ethics o* C3AsV#illW be admitted to compete #ith thepro*essional C3A as consultants.7 ?G-eidman (oined the debate as$ing%

6hy #ould the pro*ession #ant to dilute itsinvaluable 6trusted advisor7 reputation bysharing it #ith others #ho are not similarlygrounded in ethics and ob(ectivityX7 /Klein"2001" p. F.

The pro*essional accounting bodies led thecharge to adapt to the changing business

environment and public accountants"particularly the larger *irms" sel*'organi+edand embraced the emergence *rom the roleas merely a provider o* accounting and auditservices to one o* a valued businessconsultant.

Pro!osition '& Public accounting firms that

adjust ,ision$ strateg-$ and infrastructure

uic0l- in response to en,ironmental changes

"e.g. legal$ mar0etplace# will perform better

and sur,i,e longer.

Connectivity

-avage /1<<F asserts that pro*essions areneither occupations nor *irms" but insteadrepresent an e,ample o* the net#or$ *orm o*organi+ation that has evolved and continuesto survive because they representcomparatively e**icient and adaptablesolutions to certain $inds o* dynamicproduction problems. Collectively" the publicaccounting pro*ession consists o* many

entities ranging *rom sole practitioners to the

?ig ;our international *irms and variousnational and international pro*essionalbodies. The pro*ession interacts e,ternally#ith regulatory agencies" governments"higher education institutions" *inancialmar$ets" e,isting and potential clients" and*uture employees. The communicationbet#een these parties creates a myriad o*intert#ining" dynamic relationshipsS eachparty #ith their o#n goals and agendas.

The structure and international *ocus o* thelarger public accounting *irms re*lect the

global connectivity o* the pro*ession.3riceaterhouseCoopers /3C and itsinternational member *irms" *or instance"conduct business in 1F< countries #ith morethan 1F0"000 employees and state on thecorporate #ebsite%

63eople B across our net#or$ share theirthin$ing" e,perience and solutions to develop*resh perspectives and practical advice. nthis @lobal Annual Revie# #e describe ourper*ormance B in helping clients address thechallenges o* the global mar$etplace7

/3riceaterhouseCoopers" 200=.

The interplay o* the international publicaccounting *irms #ith internationalregulatory bodies o**ers another e,ample o*the global connectivity o* the pro*ession. Theorld Trade Grgani+ation /TG developsthe ground'rules *or international commerceand mediates trade disputes. Arnold /200Oe,amines ho# transnational accounting*irms in &urope and the P.-. use internationaltrade agreements such as the 1eneral

Agreement on rade in er,ices and

isciplines on omestic Regulation in the Accountanc- ector developed and en*orcedby the TG to create a global mar$et *oraccounting and auditing services byeliminating domestic regulation vie#ed asbarriers to trade and investment. Caramanis/2002 e,plores the interconnectedness o*national politics #ith global *orces and therami*ication o* this interaction *or accountingregulation and the relationship bet#een thestate and the pro*ession. A*ter analy+ing

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historical documents o* the liberali+ation o*

the @ree$ auditing pro*ession in the 1<<0Msand the pressure e,erted on the @ree$government by intergovernmental politico'economic organi+ations at the behest o* thepublic accounting pro*ession" Caramanis/2002 asserts%

6The politics o* international accountingpro*essionalism in the Lglobali+ationM era arebecoming more polycentric #ith /lessernation'states as merely one level /o*diminishing importance in a comple, systemo* superimposed" overlapping and o*ten

competing national and internationalagencies o* governance.7

The author concludes by stating" 6The paperhas sho#n ho# intert#ined accountancy andthe broader socio'economic and politicaldomain are" not only at the local" but also atthe international level.7 The accountingpro*ession clearly *unctions in aninterconnected" ever'evolving #orldcomprised o* many distinct agents and CA-s#hose actions a**ect others in the system.

Pro!osition (& Public accounting firms awareof the interconnectedness of the agents$ meta3

agents$ and 4As the- interact with directl-

and indirectl- will be more effecti,e at

e+panding operations$ achie,ing objecti,es$

and managing resources.

imensionality

Although the bread and butter line level#or$ o* auditing public companies occurs ina small team'based environment" theseindividual silos need certain controls to

uphold a high level o* pro*essional ualityacross the *irm and reduce liability. Asevidenced by the &nron scandal" actual orperceived *ailure in only a single audit candevastate a *irm. n order to maintain aconsistent level o* per*ormance andminimi+e ris$" public accounting *irmsimplement a #ide variety o* institutional

controls that reduce the dimensionality o*

agents and sub'CA-s. &,amples includestructured training *or each pro*essionallevel" client acceptance procedures" internaluality revie#s" *irm guidance /i.e. auditingstandardsS e.g. materiality (udgments"uality assurance partners" national technicalpartners" mentoring" *ormali+edcompensation and evaluation structure" etc.

-everal academic studies e,amined variousaspects o* public accounting institutionalcontrol mechanisms. irsmith et al. /200Odeconstructed the structure o* international

public accounting *irms identi*ying t#ogeneral modes o* governance rhetoric" theob(ective bureaucracy managed byadministrative partners and the sub(ectivee,pertise o* practice partners that e,ercisepro*essional (udgment in the *ield. Theauthors conclude the distinction bet#eenob(ectivity and sub(ectivity compete yetsupplement the shortcomings o* the othercreating an intert#ined relationship. Theadministrative controls reduce thedimensionality o* the practitionerspreventing the collective *irm *rom entering a

state o* complete chaos. Covales$i et al./1<<E e,amine the mentoring structure inpublic accounting *irms and determine thatthe mentoring process shapes the identitieso* organi+ational participants but thediscourse o* pro*essional autonomy" incontrast" generates resistance to totalcon*ormity. 9entoring accomplishes thegoals o* both creating and ingraining sharedschema throughout the organi+ation #hilesimultaneously reducing the dimensionalityo* agents.

Pro!osition )& %mplementation ofinstitutional control mechanisms in public

accounting firms leads to consistent

performance ualit- but ma-$ in turn$ reduce

the professional autonom- of practitioners

leading to less organi5ational commitment$

job satisfaction$ inno,ati,eness$ and ultimatel-

performance.

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1! Journal o* Accounting and Auditing% Research > 3ractice

Environment

ynamism

As a direct result o* -GU legislationreuirements in the P.-." particularly -ectionF0F that reuires assessment o* internalcontrols over *inancial reporting" publicaccounting *irms are hiring more accountantsthan ever be*ore in an environment alreadyshort o* supply. According to the managingpartner o* the eloitte and Touche3ittsburgh o**ice" 6All our young people#anted to be dot.commers" investment

ban$ers and consultants"7 /?oselovic" 200F.n 200F alone" the &rnst and Noung3ittsburgh o**ice increased sta**ing by over2O /?oselovic" 200F. n discussing thehiring outloo$ *or 200= 9onster.com" one o*the largest online employment #ebsites"e,pects continued e**ects o* -GU on theaccounting pro*ession%

6-arbanes'G,ley #ill have a pro*ound e**ect*or years to come. There #asnYt the talent tobac$*ill slots emptied by accounts pulledonto -GU compliance pro(ects. ThereYs a huge

demand *or auditors" C3As and people ininternal controls. The ?ig ;our accountingand consulting *irms continue to hireaggressively as they *ace competition *romsmaller competitors and corporateemployers. 6eYve seen a *airly robustincrease in business across all three o* ourpractices% audit" ta, and advisory"Z says9anny ;ernande+" national managingpartner *or campus recruiting at K39@. Z4o#that #eYve stabili+ed the turnover in the#a$e o* -arbanes'G,ley" #eYre trying to comebac$ to a sense o* balance in terms o*

peopleYs #or$loads7 /Rossheim" 200=.

n the *ace o* a sta**ing strain propagated bythe e,isting shortage o* accountants and themost signi*icant legislation since the -&C Actso* 1<!! and 1<!F driving ever more demand"public accounting *irms reacted aggressivelyby implementing creative approaches tohiring and retention practices. n 200F" &Nestablished an internal net#or$ calledb&Nond *or gay and lesbians employees to

interact and *eel connected to the *irm. The

company #ebsite provides the *ollo#ingin*ormation about b&Nond%

6&rnst and Noung is committed to providing a#or$ environment that is" and *eels" inclusive*or all our people. Through 3eople Resource4et#or$s /3R4s" various a**inity groups#ithin our *irm can net#or$ and e,changein*ormation as #ell as advise seniorleadership about inclusiveness issues.

b&Nond" a net#or$ *or lesbian" gay" bise,ual"and transgender people and their allies

/@?TA" #as the *irst 3R4 established bythe *irm" and it #or$ed to add the inclusiono* 6gender identityHe,pression7 as a coveredcategory #ithin the *irmMs antidiscriminationpolicy7 /&rnst > Noung" 200=c.

&N reportedly needs more than O"O00 collegerecruits *or internships and entry'level (obsin 4orth America in 200= /hite" 200=. nan attempt to reach this demographic in theirnatural habitat /the nternet" &N became thevery *irst employer to create a #ebpage on;aceboo$" a social net#or$ing #ebsite that

caters to college and university students"dedicated solely to recruiting /Rothberg"200=. The &N ;aceboo$ page containsin*ormation and discussion boards targetedspeci*ically at the internet'savvy audience.The b&Nond 3R4 and ;aceboo$ recruitinge**orts e,empli*y the concept o* dynamismthe dynamic e,ternal environment e,ertedpressure on the *irm resulting in a sta**ingcrisis and the *irm uic$ly and ingeniouslyadapted to address the threat.

Pro!osition *& Public accounting firms that

respond uic0l- to threats from a d-namice+ternal en,ironment will gain competiti,e

ad,antage o,er those that either fail to

respond or react slower.

!ugged landsca#e

&ach public accounting *irm may consist o*many groups internally that collectivelycomprise the *irm. These groups can bedelineated by *unction /e.g. audit" ta,"

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Journal o* Accounting and Auditing% Research > 3ractice 1F

consulting" etc. or nationality" each striving

to#ards an optimal level o* *itness locally yete,periencing inter'dependencies that mayover#helm the local contribution to thedirection o* the collective. -imilar to themodular design o* the automobile industry inChoi et al. /2001" the architecture o* publicaccounting *irms can be optimi+edindependently to allo# the emergence o*high dimensionality reducing coordinationcosts across the entire *irm.

Arthur Andersen #as the last true globally'organi+ed public accounting *irm. The P.-.'

led audit team on the &nron engagementessentially brought do#n the entire *irm.Today" the larger *irms operate autonomousgroups as separate legal entities" bothnationally and *unctionally. eloitte andTouche Tohmatsu /TT" similar to &N@" actsas an alliance o* legally'separate member*irms. ithin the P.-." the national member*irm o* TT *urther decomposes into legalsubsidiaries on a *unctional basis #ithsubsidiaries *or audit and assurance"consulting" *inancial advisory" and ta,services /eloitte > Touche" 200=b

providing some level o* legal protection inthe event an incident occurs reminiscent o*the ta, shelter *raud e,posed in 200! #hichnearly ruined the K39@ P.-. member *irm.

Pro!osition +& 6odulari5ation of structure

"nationall- and functionall-# will decrease

o,erall inter3dependencies within a public

accounting firm allowing greater efficienc- of

operations while simultaneousl- mitigating

ris0.

Co-Evolution

$uasi-E%uilibrium and State Change

Changes and actions by the public accountingpro*ession during the mid'1<<0Ms to todayembody the uasi'euilibrium and statechange elements o* the CA- *rame#or$. nthe period prior to the passage o* -GU thepro*ession attempted to broaden the servicesprovided by C3As /evidenced by the actionso* the AC3A during the 8ision 3ro(ect to

e,pand the (urisdictional domain o* the

pro*ession. 9ost *irms bolstered and gre#their consulting service lines to 6grab abigger piece o* the pie7 until the rash o**inancial reporting scandals /&nron"orldCom" and :ealth-outh" etc. roc$ed the*inancial mar$ets resulting in a loss o*con*idence in the auditing *irms andcompelling P.-. legislators to intervene. &N"3C" and K39@ each either sold or spun'o**their larger consulting groups in order to re'*ocus on the core competency and traditiono* ob(ective" independent *inancial statementattestation. uring this era" the pro*ession

crept eerily close to the Ledge o* chaosM.Concern *or the lac$ o* independence in thepro*ession led to structural changes /e.g. peerrevie# discontinued in lieu o* 3CAG?oversight bringing the pro*ession bac$ into auasi'euilibrium state.

Pro!osition ,& tructural changes in line

with traditional ,alues of objecti,it- and

independence will sur,i,e longer and be more

successful than those in conflict.

&on-"inear Changes

As 9ason /200= and ;in$elstein /200=note" positive *eedbac$ rein*orces earlysuccess creating a long'term advantage *or*irst'movers as long as the organi+ation doessomething #ith the advantage. The ?ig ;ourpublic accounting *irms can arguably bevie#ed as having secured a *irst'moveradvantage in the audits o* P.-. publiccompanies. The roots o* each *irm can betraced bac$ #ell over a 100 years and someo* the auditor'client relationships span manyyears avis et al. /2000 *ind that OEO /I<

o* their sample companies retained the sameauditor over the entire 1E year period o*1<E1'1<<E.

Canada et al. /200= re*er to the *ormulationo* -GU as the 6per*ect storm7 #here the set o*events leading to the legislation individually#ould have *ar less impact than thesynergistic e**ect *rom combination /i.e. non'linear impact. The Act continues to changethe landscape o* the public accounting

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1O Journal o* Accounting and Auditing% Research > 3ractice

pro*ession *ive years a*ter passage. The cost

o* compliance *or -GU -ection F0F resulted inand continues to o**er opportunities *orsmaller *irms to obtain an increasing numbero* public company audits. The ?ig ;ourresigned *rom many audits due to theinability to sta** all the e,isting engagementsand opted to $eep only the most pro*itableand least ris$y clients and on the reverseside" clients dismissed ?ig ;our *irms due toincreased audit *ees /?oselovic" 200F. The AuditAnal-tics database sho#s that the ?ig;our issued I= o* the 200! opinions on*inancial statements o* -&C registrants"

dropping to I2 in 200F and O< in 200O.ata thus suggests collective changes in adynamic" interconnected environment mayhave resulted in an unpredictable outcomeSthe ?ig ;our losing their stranglehold on theaudits o* public companies. The slippagepossibly could have been uic$er and evenmore severe i* smaller accounting *irms hadplaced themselves in proper position toleverage the structural change in thelandscape.

Pro!osition -& Public accounting firms

cogni5ant of non3linear effects and positi,ereinforcement are more li0el- to be prepared

for$ less li0el- to be affected b-$ and more

prepared to ta0e ad,antage of unforeseen

changes in the en,ironment.

&on-!andom 'uture

The audit *ailures early in this century"subseuent legislation" and impact on thepublic accounting pro*ession reasonablycould not have been predicted #ith anyprecision due to the many participants

involved and the Lbuilding upM e**ect o* theiractions that culminated in a drastic structuralchange to the manner in #hich P.-.companies conduct business and are audited.:o#ever" general agent and CA- behaviorcan be recogni+ed to reduce the surprise and*acilitate proactive behavior. ;or instance"client management that e,hibits habitual

earnings management behavior" even to a

small degree" may be inclined to commit*raudulent behavior #hen conditions orevents occur (eopardi+ing their position o*po#er. &ven though -cott -ullivan" the e,'C;G o* orldCom" probably reali+ed treatingoperating e,penses as capital e,penditures#as not a Lhealthy businessM that could besustained inde*initely /eventually a #rite'do#n #ould need to occur he e,hibitedirrational behavior by continuing toauthori+e reclassi*ication entries period a*terperiod *or over three years /harton -chool"2002.

Pro!osition .& Auditors aware of past agent

and 4A beha,ior ha,e a higher li0elihood of

predicting the general direction a 4A ma-

proceed "gi,en similar circumstances# than

those anticipating consistent rational

beha,ior.

/iscussion and Conclusion

3ractitioners" regulators" and academicsincreasingly vie# the traditional neo'classical vie# as too myopic and simplistic

*or the increasing comple,ity andinterconnectedness o* todayMs business#orld. Academic disciplines outside and#ithin the business area have recentlyembraced comple,ity theory and CA-s as amanner to conduct research. This papere,tends the #or$ o* 9ouc$ /1<<E" 2000 and-utton et al. /200I in the accountingliterature by introducing the CA- *rame#or$developed by Choi et al. /200= as analternative lens to e,amine the publicaccounting pro*ession. The paper presents aset o* research propositions associated #ith

each concept and principle contained in the*rame#or$ based upon e,tant literature and$no#ledge o* practice. The ultimate goal o*this paper is to broaden the perspective o*accounting academicians to consider thecomple, nature o* the #orld #e live in andconduct research re*lective o* that reality.

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Journal o* Accounting and Auditing% Research > 3ractice 1I

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