CONFLICTS OF INTEREST AND THE CASE OF AUDITOR INDEPENDENCE: MORAL SEDUCTION … · 2019-12-12 · model: the failure of the U.S. auditing system to deliver true independence. We offer

CONFLICTS OF INTEREST AND THE CASE OFAUDITOR INDEPENDENCE: MORAL

SEDUCTION AND STRATEGIC ISSUE CYCLING

DON A. MOORECarnegie Mellon University

PHILIP E. TETLOCKUniversity of California, Berkeley

LLOYD TANLUMAX H. BAZERMANHarvard University

A series of financial scandals revealed a key weakness in the American businessmodel: the failure of the U.S. auditing system to deliver true independence. We offera two-tiered analysis of what went wrong. At the more micro tier, we advance moralseduction theory, explaining why professionals are often unaware of how morallycompromised they have become by conflicts of interest. At the more macro tier, weoffer issue-cycle theory, explaining why conflicts of interest of the sort that compro-mise major accounting firms are so pervasive.

People rely extensively on the advice of ex-perts. Often, these experts face conflicts of inter-est between their own self-interest and theirprofessional obligation to provide good advice.Conflicts of interest played a central role in thecorporate scandals that shook America at theturn of the twenty-first century. Many companieshave joined Enron and WorldCom in issuingearnings restatements as a result of inaccura-cies in published financial reports. Adelphia,Bristol-Myers Squibb, FastTrack Savings &Loan, Rocky Mountain Electric, Mirant, GlobalCrossing, Halliburton, Qwest, AOL TimeWarner, Tyco, and Xerox are some of the firmsthat have come under scrutiny for potentiallycorrupt management and a clear lack of inde-pendent financial monitoring. At the root of boththis mismanagement and the failure of monitor-ing systems lie conflicts of interest. For exam-ple, stock options give upper management in-centives to boost short-term stock prices at theexpense of a company’s long-term viability. Andauditors charged with independently reviewinga firm’s financial reports have often been found

to be complicit with firm management in thiseffort (Levitt & Dwyer, 2002). Accounting firmshave incentives to avoid providing negative au-dit opinions to the managers who hire them andpay their auditing fees.

At large investment banks, research depart-ments have become intertwined with sales de-partments; stock analysts seeking new businesshave recommended the stocks of current or po-tential clients to others. Happy clients boost theinvestment bank’s business, but members of thepublic who heed the analysts’ recommendationsmay not be served as well. The public receiveslots of “strong buy” recommendations from an-alysts, a trend that increases short-term stockvalue at the expense of long-term investmentsafety (Cowen, Groysberg, & Healy, 2003). Ac-cording to Laura Unger (2001), member of theSecurities and Exchange Commission (SEC), inthe year 2000, a period during which the stockmarket was in broad decline (the Dow JonesIndustrial Average dropped 6 percent, the Stan-dard & Poor’s 500 index dropped 10 percent, andthe NASDAQ dropped 41 percent), 99 percent ofbrokerage analysts’ recommendations to theirclients remained “strong buy,” “buy,” or “hold.”

Physicians are charged with looking out forthe best interest of their patients, a goal com-promised by the common practice of giving re-

This article has benefited from the feedback of Art Brief,George Loewenstein, and three anonymous reviewers. Itwas supported by a grant from the American AccountingAssociation.

� Academy of Management Review2006, Vol. 31, No. 1, 10–29.

10

ferrals to clinics and pharmacies in which theyhave ownership. In addition, biomedical andpharmaceutical manufacturers court physicianswith free product samples, free meals, and freetravel, in an attempt to influence which drugsthey prescribe. Doctors are typically loath to ad-mit that such conflicts of interest affect theirjudgment. Yet their very livelihood depend onanother conflict of interest: prescribing servicesthat they themselves will perform. We argueboth that doctors’ advice is biased by these con-flicts of interest and that they typically believetheir biased advice is unbiased.

Politicians elected to represent the interests oftheir constituents have been accused of beingswayed by private interests, such as personalties, soft money donations to political cam-paigns, and other factors. Special interestgroups preselect and even fund “independent”research to be made public at political gather-ings and public conferences. Lobbyists seekingfavorable legislation bend politicians’ ears, andcorporations fill their campaign coffers.1

One could take the optimistic position thatthese conflicts of interest in the American corpo-rate, medical, and political realm are for themost part innocuous, or that they often work tothe clients’ benefit. After all, those most likely tohave vested interests are also those most likelyto possess the most relevant expertise in a givenfield (Stark, 2005). For example, many both in-side and outside the accounting industry haveargued that an auditing firm is better equippedto handle a client’s complex accounting taskswhen the auditor also has deep consulting tiesto that client. Similarly, a stock analyst mightargue, “I would not recommend buying a stockthat I myself did not own,” and proponents ofstock options might assert that giving managersstock options in their company ensures thatthese employees are financially tied to the fateof their firms. In addition, some experts believethat conflicts of interest are innocuous because,

on the whole, professionals who face them (inmedicine, law, real estate, accounting, and soon) maintain high ethical standards. Accordingto this argument, aside from the occasional “badapple,” we can expect the great majority of doc-tors, politicians, CEOs, accountants, and Su-preme Court Justices to successfully navigatetheir conflicts of interest in an honest, unbiased,and noncorrupt way. However, both recentevents and recent research have given us rea-son to question these assumptions.

Our own position can be stated simply. On theone hand, we recognize that conflicts of interestare pervasive features of life within all complexsocieties and that it would be prohibitivelycostly to try to reduce such conflicts to zero. Onthe other hand, we do not adopt a laissez-fairestance toward conflicts of interest. We believethat many conflicts of interest are far from in-nocuous and, indeed, that abundant evidenceshows that many of them have become trulyegregious.

We offer two principal arguments, each ofwhich presents a set of novel and testable the-oretical propositions. The first argument is thatthe internal dynamics of “moral seduction”within professions encourage complacencyamong practitioners, as illustrated by the com-mon assertion, “We aren’t doing anythingwrong.” We focus on the accounting industryand offer a detailed analysis of the cognitive,organizational, and political forces that have soseverely eroded auditor independence. Al-though it is tempting to be cynical about moti-vation and to assume that professionals alwaysrealize when they are succumbing to conflicts ofinterest, we suggest this judgment is too harsh.Putting the most Machiavellian fringes of pro-fessional communities aside, we suggest thatthe majority of professionals are unaware of thegradual accumulation of pressures on them toslant their conclusions—a process we character-ize as moral seduction. Most professionals feelthat their professional decisions are justifiedand that concerns about conflicts of interest areoverblown by ignorant or demagogic outsiderswho malign them unfairly. Given what we nowknow generally about motivated reasoning andself-serving biases in human cognition (Kunda,1990), and specifically about the incentive andaccountability matrix within which auditorswork (Bazerman, Morgan, & Loewenstein, 1997),

1 Of course, conflicts of interest are not unique to theUnited States. The success of the U.S. free market system,particularly in the late 1990s, inspired many nations to fol-low its policy lead. Leuz, Nanda, and Wysocki (2003) reportthat misleading accounting practices, such as “earningsmanagement,” are at least as common abroad as they are inthe United States. Across the globe, different practices makeconflicts of interest and their disclosure a particularly thornyissue for multinational corporations.

2006 11Moore, Tetlock, Tanlu, and Bazerman

we should view personal testimonials of auditorindependence with skepticism.

Our second argument has a more macro the-oretical agenda: we seek to understand why so-ciety permits so many conflicts of interest topersist, despite their corrosive effects on profes-sional advice, decision making, and the alloca-tion of societal resources. Specifically, we arguethat the external dynamics of issue cycles in thepolitical world can deflect many regulatory andlegal demands for accountability that couldcheck conflicts of interest before they spiral outof control. We argue that organization theorycould benefit from an infusion of insights fromthe political science literature on interest grouplobbying (supplemented by insights from thepsychological literature on biases and errors injudgment and decision making). Organizationtheorists, we believe, have placed too much em-phasis on how organizations adapt to the di-verse accountability demands impinging onthem from the external environment (e.g., regu-lators, customers, courts, shareholders, and themedia).

A more balanced assessment would recognizethat many organizations can be politically pro-active as well as reactive—norm creators aswell as norm followers. We therefore propose apolitical psychological framework, “issue-cycletheory,” that describes a cycle through whichpolitical issues move: (1) many organizationsaggressively and successfully promote legisla-tive and regulatory changes that work to theiradvantage; (2) these changes are often madepolitically palatable by public justifications thatdo not draw attention to the rent-seeking inter-ests of their beneficiaries, and thus avoid draw-ing the attention of potentially countervailinginterest groups; (3) some of these organizationsoverreach in their efforts and end up inflictingtangible losses (not just opportunity costs) onwell-defined, influential constituencies, thus be-coming the targets of political backlash; and (4)organizations often recover after outrage fadesand reconcentrate their efforts at political influ-ence.

Before presenting our two core arguments indetail, we develop our case by examining therole and history of auditing in the United States.We then build our two primary arguments re-garding moral seduction and issue cycling. To-gether, our arguments suggest a pessimisticprognosis for would-be reformers. However, the

situation is not hopeless. We conclude on anoptimistic note, offering remedial recommenda-tions specific to auditing and building on thiscase to offer advice on the broader topic of con-flict of interest.

THE ROLE AND HISTORY OF AUDITING INTHE UNITED STATES

The Role of Auditing

The efficiency of capital markets depends onthe availability of reliable information about thecondition of the firms whose stock is publiclytraded. Therefore, U.S. law requires that all pub-licly traded firms submit to audits of their finan-cial reports, performed by independent outsideauditors hired at the firm’s expense. Indepen-dence requires that these audits be carried outwithout bias. Auditors are charged with eitherconfirming that their clients’ public financial re-ports have been prepared in accordance withgenerally accepted accounting principles(GAAP) or issuing an opinion stating otherwise.According to the American Institute of CertifiedPublic Accountants (AICPA) Council, “Indepen-dence, both historically and philosophically, isthe foundation of the public accounting profes-sion and upon its maintenance depends the pro-fession’s strength and its stature” (Carey, 1970:182). Simply stated, auditors are required to beindependent from and unbiased by their clients’interests. As former Chief Justice Warren Burgerwrote on behalf of a unanimous U.S. SupremeCourt:

By certifying the public reports that collectivelydepict a corporation’s financial status, the inde-pendent auditor assumes a public responsibilitytranscending any employment relationship withthe client. The independent public accountantperforming this special function owes ultimateallegiance to the corporation’s creditors andstockholders, as well as to the investing public.This “public watchdog” function demands thatthe accountant maintain total independence fromthe client at all times and requires complete fi-delity to the public trust (Burger, 1984).2

Despite this tradition, auditor independencehas remained an elusive promise in the UnitedStates. While public officials and academics de-

2 See Arens, Elder, and Beasley (2003) for a discussion ofthe legal issues involved in applying this definition to casesinvolving charges of audit fraud.

12 JanuaryAcademy of Management Review

voted some attention to failures of auditor inde-pendence prior to Enron’s bankruptcy, the pub-lic’s trust in financial institutions was shakenonly after the fall of Enron and its auditor, ArthurAndersen. Andersen’s audit of Enron may havebeen the most notable failure of auditor inde-pendence, but it was by no means the first, thelargest, or the last. The earnings restatementthat precipitated Enron’s fall revised the compa-ny’s profits downward by $650 million. Yet priorto the Enron scandal, Waste Management over-stated earnings by $1.43 billion over a five-yearperiod, and U.S. regulators found that the com-pany’s auditor, Arthur Andersen, conspired tohide accurate accounting data from the public.Since Enron’s fall, WorldCom, another Andersenclient, revised its profit reports downward by ashocking $9 billion.

Cases of audit fraud were not limited toArthur Andersen. PricewaterhouseCoopers wasforced to settle charges of fraud in connectionwith its audit of Tyco, a firm that has suffered along string of accounting scandals. These casesare only the most vivid of the multitude of casesin which the major auditing firms3 paid to settlelawsuits or lost cases in the courts, partially asa result of failures of auditor independence (Ba-zerman, Loewenstein, & Moore, 2002; Bazermanet al., 1997).

There is no shortage of speculation about theroot cause of the many well-publicized account-ing scandals. Some theories attribute them tochanges in institutional arrangements, such asthe increased use of stock options to compen-sate top managers, which created new incen-tives for showing ever-growing company earn-ings. Others point to a shift in corporate ethics,from a focus on what is morally right to a focuson what is technically legal (Moore & Loewen-stein, 2004). While corporate managers mayhave attempted to manipulate earnings or re-ports to make them look as good as possible, theconsequences would have been minor had thesecompanies’ books been subjected to the kind ofcareful independent scrutiny the U.S. auditingsystem is supposed to provide.

Outside auditors are hired to provide an inde-pendent, external opinion that can certify the

truthfulness of a firm’s own financial reports.Independence is the only justification for theexistence of accounting firms that provide out-side audits; if it were not for the claim of inde-pendence, there would be no reason for outsideauditors to exist, since their function would beredundant with that of a firm’s inside auditors.The assurance of independence is crucial to allof those who rely on audited financial state-ments for reliable information regarding a firm’sfinancial health, including investors, lenders,employees, and strategic partners. Although acorporation’s managers often have powerful in-centives to make their performance appear bet-ter than it is by improving reported earnings,outside auditors are supposed to help immunizethe company’s financial reports from the threatsposed by such incentives. Shareholders count onauditors to provide these independent reviews.Yet, for true independence to exist, auditors’ re-ports must not be affected by any goal otherthan accuracy.

A Brief History of Audit Regulation

Prior to the stock market crash of 1929, therewas relatively little regulation of the securitiesmarkets in the United States. The crash and thedepression that followed caused public confi-dence in financial markets to falter. To restorefaith in capital markets, Congress passed theSecurities Act of 1933 and the Securities Ex-change Act of 1934. These laws established whatwe now recognize as the SEC, required publiclytraded firms to file financial reports with theSEC, and required that these reports be re-viewed by independent outside auditors. De-spite the SEC’s mandate to set accounting stan-dards, it has generally relied on the accountingindustry to set such standards.

Over the decades, the definition of auditorindependence has evolved along with the ac-counting profession itself. In the 1920s and 1930sthe concept of independence was considered ofgreat importance, and the focus was on elimi-nating conflicts of interest that arose from finan-cial relationships between auditors and theirclients. Over the following decades, the appear-ance of auditor independence became more im-portant. Indeed, many in the accounting commu-nity argue that the primary value of hiringindependent auditors is to reassure current andpotential investors regarding a company’s fi-

3 The “Final Four” major remaining accounting firms areKPMG, Deloitte & Touche, PricewaterhouseCoopers, andErnst & Young.


nancial well-being (Antle, 1984; Dopuch, King, &Schwartz, 2004). As early as 1932, the AICPACouncil noted the need to ensure that the ap-pearance of objectivity exists, apart from actualindependence in fact (POB Panel on Audit Effec-tiveness Reports and Recommendations, 2002).More recently, the SEC released an appearance-based standard governing auditor indepen-dence, stating that “an auditor is not indepen-dent if a reasonable investor, with knowledge ofall relevant facts and circumstances, would con-clude that the auditor is not capable of exercis-ing objective and impartial judgment” (SEC,2000).

Given this history, it may not be surprisingthat the profession’s response to manyaccounting- and audit-related crises has fo-cused on cosmetic changes that improve the ap-pearance of independence. Independence in ap-pearance but not in fact has tended to increasethe so-called expectations gap between (1) theexpectation that companies with upbeat finan-cial reports and “clean” audit opinions are freeof the risk of short-term business failure and (2)the reality of sudden collapse among firmswhose reports make them look healthy.4

Fogarty, Heian, and Owen (1991), Baker (1993),and Lee (1995) have noted that the U.S. account-ing profession in the 1980s responded by settingup new committees to review the problem andby intensifying peer review.5 However, solutionsthat could have improved independence in fact,such as the setting of more tangible standards,the threat of disciplinary action, and the devel-

opment of new audit procedures, were not pur-sued (Fogarty et al., 1991; Reiter & Williams,2000).

In June 2000 the SEC drafted a strong proposaldesigned to improve auditor independence infact. The SEC proposal explicitly spelled outlimitations on financial and personal relation-ships between the employees of auditing firmsand their audit clients, and it enumerated a listof banned nonaudit services, including finan-cial system design and implementation and in-ternal audit outsourcing. The major accountingfirms lobbied hard against the proposed limita-tions on their consulting work and dramaticallyincreased their political contributions to the ma-jor political parties (Mayer, 2002). Shortly there-after, members of Congress pressured the SECand its chairman, Arthur Levitt, to implementmuch weaker reforms than those initially sought(Levitt & Dwyer, 2002). The resulting compromiseallowed auditors to continue offering consultingservices but required firms to disclose howmuch they paid their auditors for both audit andnonaudit services.

This new rule did not prevent the financialscandals at Enron and WorldCom, which cre-ated enough public outrage that Congresspassed the Sarbanes-Oxley Act of 2002. The actintroduces several reforms, such as the formal-ization of the accountability of the CEO andCFO for the company’s financial statements, in-creased civil and criminal sanctions against di-rectors or managers accused of fraud, and morestringent and comprehensive disclosure and in-ternal control requirements.6 Companies are re-quired to ensure that their audit committees arestaffed with independent (external) directorsand have at least have one financial expert.

In addition, the act has attempted to addressauditor issues in two broad ways. First, it hasfederalized regulation and governance of audit-ing firms through the creation of the PublicCompany Accounting Oversight Board (PCAOB),

4 An auditor’s opinion can be classified into one of fourtypes: (1) a standard unqualified opinion (in other words, a“clean” opinion that states that the auditor agrees the finan-cial statements are presented fairly—which refers to a lackof misinformation—and in accordance with GAAP); (2) anunqualified opinion with an explanatory paragraph or mod-ified wording (which means that the audit was satisfactorybut that the auditor believes the firm should provide addi-tional information); (3) a qualified opinion (in which theauditor states that the financial statements are fairly pre-sented, but the scope of the audit was materially limited orstatements were not prepared in compliance with GAAP);and (4) an adverse opinion (in which the auditor is unable toform an opinion as to whether the financial statements arefairly presented) or a disclaimer (which means that the au-ditor is not independent; Arens, Gordon, Narayanamoorthy,& Zhou, 2003).

5 The recent requirement that major accounting firms sub-mit to quality audits by the Public Companies AccountingOversight Board is consistent with this approach.

6 Among the more controversial features of the act is Sec-tion 404, which requires managers and auditors to providepersonal assurance as to the effectiveness of internal con-trols over financial reporting. Corporations are expected tospend approximately $5.8 billion in 2005 (Kawamoto, 2004) inorder to successfully comply with Section 404. It is unclear,however, how the expected benefits (i.e., increased credibil-ity, or at least the appearance thereof) compare with thesemassive costs.


the purpose of which is to establish and promul-gate audit standards to which accounting firmsmust abide, as well as to inspect, investigate,and, whenever appropriate, sanction public ac-counting firms for failure to comply with thesestandards. Second, the act includes a number ofstipulations designed to increase auditor inde-pendence, but these changes concern appear-ance more than fact. For example, many haveendorsed the act’s stipulation that auditors ro-tate assignments every five years. Yet the act infact only requires the rotation of the lead auditpartner, not the audit firm itself. Press reportsalso have highlighted the act’s ban on the pro-vision of nonaudit services but typically ignoredtwo facts: (1) the ban omits important services,such as tax services, and (2) Provision 201b of theact allows the new PCAOB to “exempt any per-son, issuer, public accounting firm, or transac-tion from the prohibitions on the provision ofservices. . .” on a case-by-case basis.

Furthermore, while the act prohibits employ-ees of audited firms from being hired by theirauditors, this prohibition applies only to thosewho have served as CEO, CFO, controller, orchief accounting officer at the client firm, and itonly limits them from auditing their former em-ployers for one year. The act does nothing tolimit the hiring of auditors by client firms, whichis far more common than the reverse. In otherwords, while the act appears to address impor-tant issues surrounding auditor independence,it is insufficient to create true auditor indepen-dence. In legislation, the proverbial devil lurksin the details—details that special interests canoften successfully influence as long as politi-cians project the image of decisive action to thebroader public.

THE MORAL SEDUCTION OF THEACCOUNTING PROFESSION

The United States, like many nations, has in-stitutionalized a set of regulations governingauditing that create an environment in whichauditor independence is virtually impossible.While financial markets would benefit from areduction in the conflicts of interest that perme-ate auditors’ work, there are a number of obsta-cles to such changes. First, we discuss structuralfeatures of the auditor-client relationship thatcreate conflicts of interest. Second, we detail thecognitive processes by which these structures

exert their effects on auditors’ professional judg-ment.

Structural Features of the Auditing Profession

The current auditing system institutionalizesat least three potential threats to independence:managers hiring and firing auditors, auditorstaking positions with clients, and auditors pro-viding nonaudit services.

Managers hiring and firing auditors. Clients,who have the freedom to choose their auditors,have many reasons to select an auditing firmbased on the likelihood the auditor will deliveran affirmative audit opinion. The fact that theprobability a client will switch auditors in-creases following a critical audit report is likelyto reduce the auditor’s desire to file such a re-port (Levinthal & Fichman, 1988; Seabright,Levinthal, & Fichman, 1992). One practice thatauditors might use to signal their willingness toaccommodate the client’s wishes is known as“low-balling”: offering a discounted price for au-dit services in order to build a relationship thatcould become profitable later, either by increas-ing audit fees or by cross-selling services. Thereis some evidence that low-balling increases au-ditors’ willingness to acquiesce to the client’sdesires (Beeler & Hunton, 2003, but see alsoDeAngelo, 1981a, and Lee & Gu, 1998).

Some researchers have posited that the size ofthe audit firm will affect the degree to which thefirm fears being fired by its client. DeAngelo(1981a) and Simunic (1984) argue that larger au-dit firms ought to be more resistant to clientpressure to manipulate reported earnings, andEichenseher (1984) and Palmrose (1986) suggestthat “brand-name” auditors are at least per-ceived to be more independent. However, re-search in this area has been inconclusive. Panyand Reckers (1980) and McKinley, Pany, andReckers (1985) failed to find an effect of auditfirm size. Even if the audit firm itself does notdepend on any specific client for its survival, thecareers of particular audit partners depend agreat deal on their success with individual ac-counts. Overall, however, we only have indirectevidence of whether hiring and firing decisionsnegatively influence audit quality (for a morethorough review of this literature, see Nelson,2005).

Auditors taking jobs with clients. Auditors’ in-dependence from their clients is compromised


by any relationship that builds a common iden-tity between the two. Psychological research onthe “minimal group paradigm” has demon-strated how easy it is to establish a group iden-tity that leads people to favor fellow ingroupmembers (Tajfel & Turner, 1986). Thompson(1995) has shown that even the most superficialaffiliation with a partisan leads people to inter-pret ambiguous information in ways that areconsistent with the partisan’s interests. Indeed,several studies have found that auditor inde-pendence and the quality of auditing decisionsdeteriorate over time as the auditor-client rela-tionship lengthens (Beck, Frecka, & Solomon,1988; Dies & Giroux, 1992; Mautz & Sharaf, 1961).

In addition, there can hardly be a more effec-tive means of establishing a common identitybetween auditor and client than rotating per-sonnel between the two. This was the case inAndersen’s relationship with Enron, as it is withother accounting firms and their clients. Obvi-ously, independence is compromised when anauditor hopes to develop job opportunities withthe audited firm. The minimal restrictions onpersonnel rotation established by the Sarbanes-Oxley Act are clearly insufficient, given the highfrequency with which auditors at all levels takejobs with audit clients.

Auditors providing nonaudit services. Much ofthe debate surrounding auditor independencehas focused on the provision of nonaudit ser-vices by audit firms to their audit clients. In 1978the SEC required companies to disclose anynonaudit services their auditors performed forthem if and when the fees paid to the auditor fornonaudit services were at least 3 percent of theaudit fees paid. However, this requirement wasrepealed in 1982. The SEC concluded that therequired disclosure “was not generally of suffi-cient utility to investors to justify continuation”(SEC, 1982), despite evidence showing thatknowledge of a consulting relationship createsa perceived lack of auditor independence(Farmer, Rittenberg, & Trompeter, 1987; Gul,1991; Knapp, 1985; Pany & Reckers, 1983; Shock-ley, 1981; Turpen, 1995).

Nonaudit services proved to be an importantgrowth area for accounting firms. By 1999, feesfor nonaudit services had grown to 66 percent ofrevenues and 70 percent of profits for the majoraccounting firms (POB Panel on Audit Effective-ness Reports and Recommendations, 2002).Some evidence has suggested that high consult-

ing fees have indeed biased auditors’ judgment(Frankel, Johnson, & Nelson, 2002; Kinney, Palm-rose, & Scholz, 2004; Ruddock, Sherwood, & Tay-lor, 2004). However, these conclusions are con-troversial (Antle et al., 2002; Ashbaugh, LaFond,& Mayhew, 2003; Butler, Leone, & Willenborg,2002; Chung & Kallapur, 2003; Craswel, Stokes, &Laughton, 2002; Larcker & Richardson, 2004).

How Conflicts of Interest Affect Judgment

Perhaps the most notable feature of the psy-chological processes at work in conflicts of in-terest is that they can occur without any con-scious intention to indulge in corruption. Thisfact can also help explain why citizens acceptpolicies that allow conflicts of interest to persist.The field of accounting—and public policy inthe United States more broadly—has been dom-inated by an economic lens of analysis (Ferraro,Pfeffer, & Sutton, 2005). Consistent with this eco-nomic approach, in models of auditor indepen-dence, researchers have assumed that indepen-dence is a question of whether the auditorchooses to carry out a thorough, unbiased auditor collude with a firm’s managers (Antle, 1984;DeAngelo, 1981b; Simunic, 1984). Psychologicalresearch on the impact of motivated reasoningand self-serving biases questions the validity ofthis assumption. This evidence suggests thatintentional corruption is probably the exception,and that unconscious bias is far more pervasive.This distinction between conscious corruptionand unconscious bias is important, because thetwo respond to different incentives and operatein different ways.

Selective perception. Evidence on uncon-scious bias suggests that people are not verygood at disregarding their own self-interest andevaluating information impartially, even whenthey try to do so. When choosing how to allocatescarce resources, people honestly believe thatthey deserve more than independent observersthink they deserve (Messick & Sentis, 1979). Peo-ple justify self-serving decisions by using thearguments that happen to favor them (Diek-mann, 1997; Diekmann, Samuels, Ross, & Bazer-man, 1997; Messick & Sentis, 1983), withoutawareness of this selectivity. Ignorance of theseself-serving biases can have important conse-quences for economic decisions (Babcock & Loe-wenstein, 1997; Thompson & Loewenstein, 1992).


People appear to evaluate evidence in a se-lective fashion when they have a stake in reach-ing a particular conclusion. They focus on evi-dence that supports the conclusion they wouldlike to reach (Holyoak & Simon, 1999; Koehler,1991; Lord, Ross, & Lepper, 1979; Russo, Medvec,& Meloy, 1996; Russo, Meloy, & Medvec, 1998; seeRabin & Schrag, 1999, for a theoretical model).When they cannot ignore conflicting evidence,they often subject it to additional critical scru-tiny (Gilovich, 1991). This tendency toward bi-ased information processing prevails evenwhen people on different sides of an issue areexposed to the same information (Babcock, Loe-wenstein, Issacharoff, & Camerer, 1995).

While some observers have suggested thatprofessional auditors might be less affected bythese biases, research has shown that profes-sionals are vulnerable to the same motivatedbiases as laypeople (Buchman, Tetlock, & Reed,1996; Cuccia, Hackenbrack, & Nelson, 1995).Once auditors learn and encode informationfrom a partisan perspective, they are no longerable to objectively assess the data, and theyview ambiguous data consistent with the pref-erence of their clients (Babcock et al., 1995; Mes-sick & Sentis, 1979; Thompson & Loewenstein,1992).

Plausible deniability. When it comes to bi-ased judgments, evidence suggests that peopleare more willing to endorse a biased proposalmade by someone else than to make one on theirown. Diekmann et al. (1997) have shown thatpeople tend to be somewhat more cautiousabout indulging their biased preferences whenthey are asked to make their own independentproposals than when they are asked only to ap-prove or reject a proposal made by someoneelse. The current system, in which auditors arecharged only with assessing whether or not theclient’s reports comply with GAAP, is likely toexploit the tendency to “go along” with the ac-tions of another, even when those actions raisesome questions or concerns.

Escalation of commitment. Another importantbias specifically relevant to the realm of conflictof interest is the tendency of people to escalatetheir commitment to a previous course of action(Brockner & Rubin, 1985; Staw, 1976). One ques-tion that has repeatedly been asked since thecollapse of Enron is how Arthur Andersen eversigned off on Enron’s accounting procedures.Our hypothesis is that, at least in part, moral

seduction occurs one step at a time. For exam-ple, in one year, an auditor might decline todemand that the client change an accountingpractice that is at the edge of permissibility. Thenext year, the auditor may feel the need to jus-tify the previous year’s decision and may turn ablind eye when the client pushes just past theedge of permissibility. The following year, theauditor might endorse accounting that clearlyviolates GAAP in order to avoid admitting theerrors of the past two years, in the hope that theclient will fix the problem before the next year’saudit. By the fourth year, the auditor and clientwill both be actively engaged in a cover-up tohide their past practices. One regulatory reformthat would reduce escalation of commitmentwould be a requirement that companies rotateauditor firms on a specified time schedule.

More broadly, we imagine that many behav-iors in the realm of conflicts of interest begin asminor questionable calls that sometimes esca-late into violations of ethical standards and thelaw. We expect that escalation in the accep-tance of unethical behavior will be especiallypronounced to the degree that acting ethicallywould require one to disappoint those withwhom one works every day and to accept imme-diate punishment (loss of income and social sta-tus, and perhaps legal penalties). In contrast,the unethical path would require one to livewith a difficult-to-gauge probability of eventualdisclosure and humiliation some time in the in-definite future. Faced with the choice between aguaranteed loss of income and status on the onehand and the chance of a more severe penalty(and the chance that one might never be pun-ished) on the other, people tend to opt for therisky option (Kahneman & Tversky, 1979, 2000;Schweitzer, Ordonez, & Duouma, 2004).

Many have argued that accounting firms havea real interest in reporting a breach of account-ing if it exists, given the real threats of legalpenalties and shareholder lawsuits. This inter-est should lead accounting firms to establishsystems that could counteract the threats to in-dependence posed by the issues describedabove. While it is clearly true that accountingfirms do have an interest in preserving theirreputations and avoiding legal charges of fraud,it is entirely unclear whether these distant andprobabilistic threats are sufficient to counteractreal and immediate incentives to build relation-ships with clients and sell them services, espe-


cially given reductions in the threat of legalpenalties.7 Furthermore, even if accountingfirms have an interest in creating unbiased re-ports, individual auditors, whose careers maydepend on building relationships with their cli-ents, and who may even be interested in work-ing for those clients, face very different incen-tives.

Inaccuracies in self-perception. Conflict of in-terest increases as financial incentives and pro-fessional obligations clash. The greater the in-centives created for professionals to act againsttheir obligations to society or to their clients, thegreater the expected deviation from profession-ally defined normative behavior will be. Theseincentives are likely to lead professionals bothto increase their defense of the ethical rectitudeof their profession and to resist changes thatcould actually resolve the conflict of interest.

Conflicts of interest hinder people from mak-ing objective assessments, yet professionals of-ten deny that their decisions are biased by con-flicts of interest. In medicine, ample evidencedocuments the biasing influence of gifts fromand sponsorship by pharmaceutical companies(Bower & Burkett, 1987; Caudill, Johnson, Rich, &McKinney, 1996; Dana & Loewenstein, 2003;Wazana, 2000), yet physicians strenuously denythat their clinical judgment is compromised bysuch blandishments (Hume, 1990). Accountantsalso deny corruption. In his testimony before theSEC, Gary Shamis, then chairman of the Man-agement of an Accounting Practice Committeeof the AICPA, stated, “We take the existing in-dependence rules quite seriously, and conse-quently abide by all the existing rules. We areprofessionals that follow our code of ethics andpractice by the highest moral standards. Wewould never be influenced by our own personalfinancial well being” (Shamis, 2000). Althoughsuch sentiments are noble, they do not consti-tute strong evidence for actual objectivity.

Effects of accountability. The literature on ac-countability predicts that the types of account-ability pressures operating on professionals inconflict-of-interest situations should exacerbaterather than attenuate the motivated reasoning

underlying moral seduction. The principal ac-countability pressure at work is justifying one’sprofessional practices to powerful, opinionatedaudiences with well-defined views—namely,one’s clients and one’s superiors. In a predeci-sional setting these accountability demands en-courage strategic attitude shifting, which neednot be conscious (Cialdini, Petty, & Cacioppo,1981), and the selective generation of reasons tojustify going along with dominant-audience ex-pectations (Tetlock, 1983, 1992). In a postdeci-sional setting these types of accountability de-mands encourage postdecisional bolstering andthe selective generation of reasons to justifywhat one has already done (Staw, 1976; Tetlock& Lerner, 1999).

The literature on debiasing judgment stronglysuggests that there is no silver-bullet account-ability solution for ensuring that auditing pro-fessionals do not engage in the types of moti-vated reasoning underlying moral seduction.Ironically, the accountability literature suggeststhat the best solution to the corrupting effects ofconflicts of interest may well be to create coun-tervailing interests that compel practitioners tobecome painfully self-conscious and preemp-tively self-critical about their auditing practices.Defenders of the status quo might argue that thecourts already serve this role. But this type offormal legal accountability is highly uncertain,activated only in the most egregious cases, gen-erally has been far removed in time, and is farless salient than immediate accountability pres-sures from clients who prefer self-serving solu-tions to auditing problems and from partnerswithin the accounting firm who prefer to maxi-mize billable hours.

To be effective, accountability for the imple-mentation of high professional standards mustcome much more rapidly and much more di-rectly from within the firm—as, in principle, ex-isted within Arthur Andersen through its inter-nal watchdogs in the Professional StandardsGroup, whose job it was to hold Andersen audi-tors to the highest standards of accuracy andindependence. However, the recommendationsof the Professional Standards Group regardingthe Enron account were overruled at the highestlevels of the firm (McRoberts, 2002). There is acritical need for regulatory and legal protectionof internal professional standards groups thatenforce the types of accountability shown in thelaboratory literature to encourage complex and

7 The Securities Reform Act of 1995, passed with generoussupport from the accounting industry, changed the standardfor assessing liabilities in securities fraud cases from jointand several to proportionate liability, thereby significantlyreducing the liabilities faced by accounting firms.


self-critical forms of reasoning—for example,accountability to audiences whose expertise isesteemed, whose respect is needed, and whoseown views cannot be easily inferred (Tetlock &Lerner, 1999).

The search for a smoking gun. Too many re-form efforts have fallen victim to the humantendency to focus on simple causes of complexproblems (McGill, 1989). In their 2000 hearings,SEC commissioners searched for the proverbial“smoking gun” that would prove bias on the partof identifiable auditor culprits. The commission-ers were looking for an email or memo thatwould provide clear evidence of knowing andintentional corruption. Lobbyists for the ac-counting industry and CEOs from Big Five ac-counting firms noted that there was no evidenceof a single audit being tainted as a result of theauditing-consulting relationship.

Although such evidence may sometimesemerge (as it did in the Waste Managementcase), proving that a particular case of auditfraud was caused by the presence of nonauditservices is nearly as difficult as proving thatany particular smoker’s lung cancer is due tosmoking; each case is complicated by numerousconfounding factors. More important, this stan-dard of proof falsely assumes that the most com-mon threat to auditor independence is intention-ally corrupt behavior. If the real threat isunconscious bias, auditors may never make asmoking gun statement that reveals corrupt in-tent, because no corrupt intent exists. We needto change the system, not simply lock up theguilty parties.

Recent legislative changes also address theproblem by attempting to pin the blame moreclosely on specific individuals. The Sarbanes-Oxley Act makes a firm’s chief executive andchief financial officers personally liable for in-accuracies in financial reports, yet it does littleto reform the deeper problems with the institu-tional structure of auditing.

The institutionalization of a search within thelegal system for corrupt actors is broadly con-sistent with the psychological tendency to at-tribute behavior to individual dispositions, tal-ents, or failings, rather than to situationalconstraints or opportunities (Jones & Harris,1967; Ross & Nisbett, 1991). This judgmental errorleads people to attribute the cause of an event orproblem to an individual, as opposed to thebroader situation or context (see Morris & Moore,

2000). Thus, even when institutional arrange-ments create conflicts of interest, we too oftenseek a corrupt person to punish, rather thanexamine the flaws in the system or fight againstthose who lobby to keep the broken system inplace. Therefore, legislative barriers to resolv-ing conflicts of interest are partly rooted in cog-nitive barriers.

From the standpoint of moral seduction the-ory, one does not need to be Machiavellian orsociopathic to succumb to conflicts of interest.Indeed, psychological evidence suggests thatthe overwhelming majority of human beings,placed in such circumstances, would respond inroughly the same fashion. Although many ob-servers are surprised and depressed that so fewwhistle-blowers protest moral lapses in their or-ganizations, the psychological literature tells usto appreciate the fact that any individuals comeforward to blow the whistle at all.

WHY ARE CONFLICTS OF INTEREST SOPERVASIVE?

Through its minimal oversight of the auditingprofession, the U.S. legislative system allowedconflicts of interest to become pervasive in theindustry. The history of the accounting profes-sion in the twentieth and now early twenty-firstcenturies fits a cyclical pattern in political is-sues that has been well documented by politicalscientists who study the lobbying efforts of spe-cial interest groups (such as accountants, CEOs,medical doctors) seeking regulatory and legaladvantages for their members. Just as one per-son’s freedom fighter is another’s terrorist, so,too, one observer’s venal special interest is an-other’s legitimate professional association exer-cising its voice in a democracy (Tetlock & Mitch-ell, 1993). The advantages secured by specificinterest groups can occasionally become so fla-grant that they attract the attention of thebroader public. The resulting scandals triggercountervailing political influence and wide-spread condemnation of the excesses of privateaction, causing at least temporary setbacks forthe special interests. Once the outrage wanes,the special interests once again take the politi-cal offensive, poking low-visibility loopholes inthe high-visibility legislation (e.g., Sarbanes-Oxley Act) that politicians point to as evidenceof their responsiveness to the public’s concerns.


This issue-cycle analysis draws on two keystrands of political theory: stasis theory andcountervailing power theory. Interest group sta-sis theory posits an inevitable trend in whichwell-connected interests gain control over gov-ernment policies on a piecemeal basis, eachgroup controlling policies in its own area of ac-tivity. Over time, this produces the political eco-nomic equivalent of arteriosclerosis (sometimescalled “demosclerosis”; Rauch, 1995). Stasis the-ory posits the trend to be inevitable because it isindividually rational. It is rational because itwould not benefit any individual to incur thetime and money costs of organizing the largersociety around widely shared interests, such asthe desire for true auditor independence or aloophole-free tax system. As a result, theseshared interests will receive less direct supportin the political process (Lowi, 1964, 1969; Olson,1965, 1982). Symbolic political commitments canovercome this powerful inertial lag for only briefperiods of time, usually through bouts of out-rage. Smaller concentrated groups thus have aninherent advantage over larger diffuse ones forthe simple reason they are less subject to thefree rider problem (Brewer & Kramer, 1986; Kerr,1989; Pruitt, 1998; Yamagishi, 1992).

Some stasis theorists also add that very dif-fuse and unorganized publics are particularlyprone to irrational perceptions of political real-ity (Rauch, 1995). Such publics confuse symbolwith substance, making it easy to manipulatemass opinion by creating political forms thatgive the impression that a problem is beingsolved or a policy is being pursued when this isnot the case. For example, many observers havenoted the political advantages that have ac-crued from the confusion over the “Healthy For-ests Initiative” (the Healthy Forests RestorationAct of 2003), a law opening up significant newareas to logging and deforestation by privateinterests. While 70 percent of the American pub-lic identifies itself as environmentalist (per aNational Environmental Survey conducted forthe Competitive Enterprise Institute in 1998), thislarge and inchoate group is less likely to appre-ciate the niceties of forest regulation than arethe logging companies themselves. Politicalgroups consisting of a well-defined sector ofbusiness do not usually confuse symbol withsubstance. Such small groups, following orga-nized political strategies, will frequently prevailover the interests of large publics confused by

political symbols and strategies. The combina-tion of intelligence and money is hard to beat.

Of course, stasis theory explains only thebuild-up-to-scandal phase of the issue cycle.Countervailing power theorists, such as Wilson(1980) and Walker (1983), have noted that thepattern of interest group organization is oftencomplex, with many groups effectively orga-nized to influence policy in particular arenas.The complex pattern of group organizationmeans that other groups often exercise counter-vailing power to the special interest group thatmight otherwise dominate an area of policy(Becker, 1983). Building on this work, and on be-havioral economic theories of fairness that positthe willingness of observers to incur additionallosses to punish cheaters (Fehr & Gachter, 2000),we hypothesize that countervailing power ismost likely to be mobilized when coalitions ofadversely affected group members perceive thatparticular concentrated interests have gone toofar, “pigging out” and inflicting real losses (be-yond opportunity costs) on the members of thelarger society.

While clearly in tension with each other, sta-sis and countervailing power theories are notmutually exclusive. It is perfectly possible thatinterest group stasis is a widespread back-ground condition of political and economic lifebut that concentrated interest groups often over-reach, producing the backlash effects describedby countervailing power theorists. This dynamicgoes a long way toward explaining the ambiv-alence of the American public toward interestgroup politics. Most Americans recognize thatinterest group actions (especially those of theirown interest groups, which they tend to identifyas professional associations or community ac-tion) are indispensable for the functioning of amodern democracy. But they also distrust inter-est groups (especially those of others), fearingthat groups will abuse their legitimate power(Schlozman, 1984).

To our issue-cycle approach we add that thesuccess of interest groups in pursuing their pri-vate ends without activating countervailingpower is a function of both how careful they areto avoid pushing their agenda too aggressivelyand how skillfully they mask rent seeking in therhetoric of the public good. Accountants did notdeclare that they wanted to be free to make asmuch money as possible by offering as wide arange of profitable services as possible. Rather,


they cloaked their claims in the ideology of thefree market and economic efficiency, as in anow-famous letter from Kenneth Lay, then chair-man of Enron, to Arthur Levitt, then chairman ofthe SEC, explaining why Andersen should beallowed to continue offering both auditing andconsulting services to Enron. This letter, whichwas authored not by Lay but by Andersen’s leadaudit partner at Enron, David Duncan, claimedthat Andersen’s expanded role was “valuable tothe investing public, particularly given the risksand complexities of Enron’s business and theextremely dynamic business environment inwhich Enron and others now operate” (Lay,2000).

The willingness of outsiders—potentialsources of countervailing power—to give cre-dence to the rhetorical posturing of one’s inter-est group will decline in relation to the magni-tude of the perceived losses one’s interest groupis inflicting on outsiders. Kenneth Lay’s letteronce packed considerable political clout; today,it is a painful reminder of past excesses. Thus,issue-cycle theory suggests a definition of pru-dent long-term political advocacy for interestgroups: good advocates know where they are inthe issue cycle. These advocates capitalize onopportunities to push hard for regulatory advan-tages in benign environments where they canfly below the radar screens of potential adver-saries. Good advocates also know when it willbe difficult to hide under rhetorical smoke-screens and when to back off before triggeringscandal and backlash.

Finally, when thinking about the dynamics ofissue cycles, it is critical to consider the politicalpsychological nature of the most common targetof special interest influence: our legislative sys-tem. Legislators are not philosopher kings whoseek ideal solutions to problems such as auditorindependence or sugar price supports (Wil-davsky, 1988). Rather, they typically ask whatadjustments, if any, should be made to the sta-tus quo (Baron, 1996; Bazerman, Baron, & Shonk,2001), making the existing system an anchor forfuture policy (Samuelson & Zeckhauser, 1988).Solving conflicts of interest requires significantchanges to government policy.

When it comes to changing the status quo,Baron (1988) argues that humans have an irra-tional preference for harms of omission overharms of action. When contemplating a changein policy, many people (legislators) follow the

rule of thumb, “Do no harm.” Thus, legislatorsare more likely to be concerned with the harmsthat they create through action (legislativechange) than those they create through inaction.This tendency to harm through omission ratherthan commission leads parties to maintain thestatus quo, even when change would improvecumulative societal welfare.

The status quo and omission biases make usreluctant to eliminate important conflicts of in-terest when their elimination would imposesmall costs on specific, and likely vocal, mem-bers of society. Those with a vested interest inthe status quo (such as the major accountingfirms and investment banks) are typically morewilling to invest resources to maintain the sta-tus quo than the forces for reform can expend oninducing change. Overwhelming evidence is of-ten necessary to build up the necessary politicalmomentum to change legislation (Tetlock &Boettger, 1994). Rather than ask what the bestsystem would look like, legislators ask whetherpublic pressure warrants changes to the statusquo. As legislators might say in their defense,politics is the art of the possible.

A second set of issues arises when we con-sider why we, as a society, fail to adequatelyaddress destructive conflicts of interest. In asense, the failure of auditor independence isrooted in the failure to resolve politicians’ con-flicts of interest between representing the votersand funding their political campaigns. In thepresidential primaries of the 2000 election, cam-paign finance reform finally caught the atten-tion of the public when both Bill Bradley andJohn McCain made it an issue. Public outragewas fanned by publicity about wasteful andharmful subsidies, such as the U.S. govern-ment’s $83.5 million annual assistance to to-bacco growers (Bazerman et al., 2001). How dospecial interest group politics and the failure ofmeaningful campaign finance reform play outin the U.S. auditing system?

When SEC Chairman Arthur Levitt consideredsignificant reforms to the auditing system, hebecame the target of what he later called an“intensive and venal lobbying campaign” (La-baton, 2002). The accounting industry convincedforty-six members of Congress to call or writeletters to Levitt questioning the proposed re-forms (Center for Responsive Politics, 2002). Mostof the lawmakers argued that accounting firmsshould be trusted. Some threatened to withdraw


funding from the SEC and to conduct ethics re-views of the commissioners. Especially vocifer-ous in their defense of the accounting industrywere Representative Billy Tauzin, who went onto oversee the House Energy and CommerceCommittee’s investigation into Enron, and Rep-resentative Dick Armey, the House majorityleader.

In total, these forty-six members received mil-lions of dollars in campaign contributions fromthe Big Five accounting firms (Center for Re-sponsive Politics, 2002). The major accountingfirms and the AICPA, their trade association,contributed more than $38 million to the politicalprocess between 1989 and 2001 (see Table 1). Inthe face of this political pressure, Levitt backeddown from his tough stance, although he latercalled his decision to back down the biggestmistake of his SEC tenure (Mayer, 2002). TheSarbanes-Oxley Act ultimately passed afterpublic outrage created by the fall of Enron andother firms, accomplishing some of Levitt’sgoals. While the current law introduces someimportant reforms, they are clearly insufficient,focusing on intentional corruption and overlook-ing the conflicts of interest built into the system.

While we do not deny that corrupt auditorsexist, we argue that a focus on corruption ne-glects what is probably a far more importantsource of violations of auditor independence:unconscious, and hence unintentional, bias.This brings us to the point of reconciling the twotiers of our theory. At the macro level, we havedepicted organizations as aggressively andstrategically exploitative. Yet our microlevel ex-planation for the behavior of individuals sug-gests far less avaricious intent; indeed, our re-view of the individual-level psychologicalevidence suggests that people strive to viewthemselves as fair and even-handed. We do notbelieve that these two views are, in fact, contra-dictory. It is precisely because individuals areso good at serving their own self-interests whilepersuading themselves that their actions areperfectly reasonable that firms and individualscan provide sensible explanations for their ex-ploitative behavior. The most effective lies arethose we believe ourselves. Furthermore, even ifmost people are constrained from exploitingothers for individual gain, the competitive forcesat work on organizations favor those groups thateffectively seek their own gain, even if thismeans establishing routines and practices that

circumvent or modify the more fair-minded mo-tives of most of the organization’s members.

FUTURE RESEARCH OPPORTUNITIES

The explanations we have offered in this pa-per point to a number of testable propositions.Here, we mention five topics that offer opportu-nities for future study. First, the theory of issuecycling outlined in this article implies that spe-cial interest groups will be more effective atachieving the interests of their members whentheir motives for seeking special advantage fortheir members are effectively veiled behind ex-planations that invoke more virtuous motives.Indeed, the direct and declared attempt to pur-sue one’s self-interest at the expense of societyas a whole will be rare, because such nakedpower grabs are both unseemly and ineffective.Political lobbying will be less unseemly andmore persuasive to the degree it can be plausi-bly justified in terms of the broader social good.And attempts at political influence will be lesslikely to be effective when their uncamouflagedannouncement activates countervailing politi-cal pressure. Of course, there are plausibilityconstraints and the attitude change literaturesuggests that, especially in a repeated-playgame, interest groups are well advised not tomake morally self-aggrandizing claims thatshade into the audience’s latitude of rejection(Petty & Wegener, 1998). Persuasion is a delicateart.

Second, our theory of moral seduction pro-poses that ethical lapses are more likely to oc-cur gradually, as the result of the process ofescalation, than they are to occur rapidly. Giventhat ethical standards often create gray areas ofambiguous ethical propriety, people will findthemselves crossing into the zone of ethical vi-olation after they have first committed actionsthat are ambiguous in their appropriateness.We predict that it will be relatively rare for peo-ple’s behavior to lapse suddenly into ethicalviolation, because such a jump is more difficultto justify or rationalize to oneself.

Third, we have argued that moral seduction isfacilitated by automatic (unconscious) psycho-logical processes. Because few people think ofthemselves as intentionally corrupt, our theorypredicts that corruption more likely will occurwhen the cognitive processes can operate un-consciously and the individual can preserve a


view of himself or herself as moral. We havealso claimed that the distinction between con-scious and unconscious processing is important,because conscious corruption and unconsciousbias respond to different incentives. Exactly howcorruption and bias respond to incentives is atopic that deserves future study. When are biasand corruption likely to act in concert, and whenare they likely to move independently? Underwhat circumstances do biases become con-scious, and under what circumstances does cor-ruption become so automatic that it becomesunconscious?

Fourth, our perspective raises important ques-tions regarding the view of individuals and oforganizations. The two are at odds in the picturepainted by our theory. If people genuinely preferto behave morally and fairly, even when it iscostly for them to do so (Fehr, Kirchler, Weich-bold, & Gaecher, 1998; Loewenstein, Thompson,& Bazerman, 1989), how is it that organizationsso often behave in devious and exploitativeways? How do organizations circumvent orco-opt their members’ preferences? What organ-izational practices or routines facilitate thisco-optation? One possibility is that many orga-nizations tacitly adopt a personality-based divi-sion of labor, in which personnel with hardballMachiavellian world views do disproportionateshares of ethically compromising corporatework: wooing large, ethically suspect clientsand funneling campaign money and other im-plicit quid pro quos to key political actors (for areview of the extensive literature on Machiavel-lianism, see Wilson, Near, & Miller, 1996).

Fifth, our theory raises some questions aboutthe political processes by which business activ-ity is regulated. Our economic system assumes

that corporations will pursue the goal of maxi-mizing the wealth of their owners within thebounds of the law (Carr, 1968; Friedman, 1953).We, the people, elect legislators who create thelaws that regulate the run of business interestsand create the legal boundaries within whichbusinesses must operate. The problems wehighlight in this article arise from a situation inwhich corporations wield political influenceover the laws that govern their own actions. Thereason why issue-cycle theory matters for busi-nesses is that it can help us understand howbusiness interests obtain political advantage.Free market systems have tremendous virtues,such as the way in which competition and self-interest spur the efficient allocation of wealth.However, our approach questions whether it isappropriate for corporations to exercise undueinfluence over the rules under which they oper-ate. The question of corporations’ rightful role inthe political process—of what constitutes undueinfluence—is a complex topic that we do notresolve, but we do note that there is, once again,plenty of ambiguity on which motivated reason-ing can operate in specific controversies.

RESOLVING CONFLICTS OF INTEREST

Given the cognitive and political barriers tosolving the problems created by conflicts of in-terest, it is unlikely that society will ever en-tirely eliminate them. Nevertheless, that doesnot mean that it is impossible to limit their worstexcesses. Here, we explore possible avenues forcreating auditor independence. Congress, Pres-ident George W. Bush, and the SEC have all putforth or passed measures aimed at making au-ditors more independent. But these policy

TABLE 1Lobbying Expenditures of Accounting Firms During Calendar Years 1997–2003

Year Arthur AndersenDeloitte &Touche Ernst & Young KPMG

PricewaterhouseCoopersa

1997 $2,380,000 $ 785,000 $1,380,000 $ 600,000 $ 900,0001998 1,985,000 360,000 1,420,000 420,000 960,0001999 1,840,000 890,000 1,200,000 850,000 1,220,0002000 2,480,000 2,524,000 1,200,000 1,340,000 1,425,0002001 1,540,000 580,000 1,320,000 1,175,000 1,240,0002002 — 1,027,455 2,343,860 1,430,000 3,160,0002003 — 660,000 1,980,000 925,000 1,680,000

Source: Data from the Office of Public Records (http://sopr.senate.gov).a The 1997 total is a combined total of Price Waterhouse and Coopers & Lybrand, which were then separate companies.


changes have focused on increasing penaltiesfor corruption and punishing corrupt individu-als. While important first steps, research sug-gests that they are based on an incorrect under-standing of the main source of auditor bias and,therefore, are inadequate solutions to a sys-temic problem. Mild reforms and the occasionallegal penalty will not provide true auditor inde-pendence, and more corporations will fail as aresult.

One popular response to the problems associ-ated with conflicts of interest has been disclo-sure (Farmer et al., 1987; Independence Stan-dards Board, 2000; Shafer, Morris, & Ketchand,1999; Shockley, 1982). But recent research sug-gests that disclosure cannot be assumed to pro-tect consumers of biased information. Indeed,disclosure can sometimes make matters worse;professionals may be more willing to give bi-ased advice when they know that the personreceiving the advice is aware of their conflict ofinterest (Cain, Loewenstein, & Moore, 2005).Also, recipients of biased advice are likely tohave difficulty using disclosures effectively. Ev-idence has shown that people are easily influ-enced by advice, even when they know that ithas been designed to manipulate them and theyconsciously attempt to resist its influence (Cam-erer, Loewenstein, & Weber, 1989; Strack & Muss-weiler, 1997).

We believe there are two possible means offixing the U.S. auditing system. The first solu-tion would leave the existing auditor-clientrelationship largely intact but increase its reg-ulation in five key ways. First, we believe thatauditors should perform audits and no otherservices. Second, we believe that an audit firmshould be hired for a fixed period, perhaps fiveyears. During this period, to reduce the audi-tor’s incentive to please the client with a pos-itive opinion, the client must not be able to firethe auditor. Following this fixed period, theauditor assignment should rotate, not to an-other partner within the same firm (as is thecase under the Sarbanes-Oxley Act), but to adifferent accounting firm.8 Third, all parties

involved in the audit— executives and staffalike—should be prohibited from taking jobswith the firms they audit. Fourth, auditorsshould make a set of independent assess-ments, rather than simply ratify the account-ing of the client firm. Fifth, the auditor shouldbe chosen not by company management butby the audit committee of the board of direc-tors. The hiring decision concerning whoshould make an independent assessment of afirm’s finances should not reside with thosewhose work will be evaluated.

These five steps would add a great deal ofgovernmental regulation to the auditor-client re-lationship. Enforcing these laws would likely becostly to government. For those who do not likesuch heavy-handed regulation, another solutioncan be created based on market principles.Ronen (2002) has proposed eliminating the legalrequirement that publicly traded firms submit toregular audits of their financial reports. Instead,firms would be required to buy financial state-ment insurance to insure against the possibilityof being sued for issuing inaccurate financialreports. In this system the sellers of such insur-ance—the insurance companies—would hirethe auditors, and the insurance premiums theycharged would be a signal of their confidence inthe accuracy of public reports.

Neither of these solutions is costless or easy.But we have a real problem, and the accountingindustry has done its best to deny the problem.We believe that the costs created by either ofthese proposals makes sense compared to thecurrent system, which offers false claims of in-dependence and false assurance to the users ofcorporate financial statements.

We view these recommendations as a blue-print for thinking about how to solve conflict ofinterest problems in a general sense. To cureconflicts of interest, we need to study them,

8 Our proposal of forced audit firm rotation is not new. Itwas considered as a means of increasing auditor indepen-dence at least as early as the 1976 Metcalf Report (U.S.Senate, 1976; as cited in Zeff, 2003) and as recently as 2003(U.S. General Accounting Office, 2003). Opponents of man-datory auditor rotation have noted the costs of implementing

such a change, as well as the potential erosion of auditquality that may theoretically result. We believe, however,that this risk is overstated, for the following two reasons.First, a cozy, long-term relationship between auditor andclient is as great a risk to audit quality as is auditor unfa-miliarity with the client. Second, auditors’ concern for theirreputations will, if anything, increase, since they will needto find future clients once they are required to leave theircurrent clients. Note, however, that empirical research ismixed as to whether mandatory rotation actually enhancesor harms audit quality (Arel, Brody, & Pany, 2005; Dopuch,King, & Schwartz, 2001; George, 2004).


identify the structural changes needed to elimi-nate them, and think strategically about how toovercome the cognitive and political barriers tostructural reforms. Conflict of interest is easilyunderstood, yet mobilizing action to correctdeeply rooted problems is difficult. Similarly,auditor independence is an easy concept tograsp, yet it is difficult to implement. In thisarticle we have attempted to show that a cor-rupting system has been institutionalizedacross levels in one domain of conflict of inter-est—from the mind of the auditor to the struc-tures that govern the industry, and from legisla-tion to the political process that creates it.Investors, shareholders, and financial marketsdepend on independently audited corporate fi-nancial reports, yet the system has never pro-vided true independence. Only through a radi-cal reorganization of the industry will the termauditor independence accurately describe audi-tors’ work in the United States. Many may arguethat such dramatic reforms may be costly. Yetdoing nothing yields even greater risks; indeed,we may not be able to afford not to make thesechanges.

Clearly, there are multiple causes for the fail-ure of auditor independence. The basic groundrules of our political system have prevented nec-essary legislative reform, this faulty legislativesystem has institutionalized a corrupt set ofstructures, and these structures have led to bi-ased decisions and occasionally outright cor-ruption. Current laws have created an ineffi-cient, unethical, and wasteful system. Stiglitz(1998) argues that wise government shouldstrive to create near-Pareto efficient changes.With 280 million citizens in the United States, itis difficult to create changes that have no losers.However, in some cases there exist parties thathave an unfair advantage owing to their distor-tion of the political process. We believe that thisis the case in the auditing system and that thecosts of creating true independence are worth-while for the government, the financial markets,and for the vast majority of citizens. As is gen-erally the case in problems of conflict of interest,only those audit firm partners and co-opted ex-ecutives who have benefited from the corruptsystem would lose in the creation of true auditorindependence. In the case of the U.S. auditingsystem, basic structural reform will be pro-foundly difficult to achieve, yet essential.

REFERENCES

Antle, R. 1984. Auditor independence. Journal of AccountingResearch, 22: 1–20.

Antle, R., Gordon, E. A., Narayanamoorthy, G., & Zhou, L.2002. The joint determination of audit fees, non-auditfees, and abnormal accruals. Working paper, Yale Uni-versity, New Haven, CT.

Arel, B., Brody, R. G., & Pany, K. 2005. Audit firm rotation andaudit quality. CPA Journal, 75: 36–39.

Arens, A. A., Elder, R. J., & Beasley, M. S. 2003. Auditing andassurance services (9th ed.). Upper Saddle River, NJ:Prentice-Hall.

Ashbaugh, H., LaFond, R., & Mayhew, B. 2003. Do non-auditservices compromise auditor independence? Further ev-idence. Accounting Review, 78: 611–639.

Babcock, L., & Loewenstein, G. 1997. Explaining bargainingimpasse: The role of self-serving biases. Journal of Eco-nomic Perspectives, 11: 109–126.

Babcock, L., & Loewenstein, G., Issacharoff, S., & Camerer,C. F. 1995. Biased judgments of fairness in bargaining.American Economic Review, 85: 1337–1343.

Baker, C. R. 1993. Self-regulation in the public accountingprofession: The structural response of the large publicaccounting firms to a changing environment. Account-ing, Auditing, & Accountability Journal, 6: 99–108.

Baron, J. 1996. Do no harm. In D. M. Messick & A. E. Tenbrun-sel (Eds.), Codes of conduct: 197–213. New York: RussellSage Foundation.

Baron, J. 1998. Judgment misguided: Intuition and error inpublic decision making. New York: Oxford UniversityPress.

Bazerman, M. H., Baron, J., & Shonk, K. 2001. You can’t en-large the pie: The psychology of ineffective government.New York: Basic Books.

Bazerman, M. H., Loewenstein, G., & Moore, D. A. 2002. Whygood accountants do bad audits. Harvard Business Re-view, 80(1): 87–102.

Bazerman, M. H., Morgan, K. P., & Loewenstein, G. F. 1997.The impossibility of auditor independence. Sloan Man-agement Review, 38(4): 89–94.

Beck, P., Frecka, T., & Solomon, I. 1988. An empirical analysisof the relationship between MAS involvement and au-ditor tenure: Implications for auditor independence.Journal of Accounting Literature, 7: 65–84.

Becker, G. S. 1983. A theory of competition among pressuregroups for political influence. Quarterly Journal of Eco-nomics, 98: 371–400.

Beeler, J. D., & Hunton, J. E. 2003. Contingent economic rents:Insidious threats to auditor independence. Working pa-per, Millsaps College, Jackson, MS.

Brockner, J., & Rubin, J. Z. 1985. The social psychology ofentrapment in escalating conflicts. New York: Springer-Verlag.

Bower, A., & Burkett, G. 1987. Family physicians and genericdrugs: A study of recognition, information sources, pre-


scribing attitudes, and practices. Journal of Family Prac-tice, 24: 612–616.

Brewer, M. B., & Kramer, R. M. 1986. Choice behavior in socialdilemmas: Effects of social identity, group size, and de-cision framing. Journal of Personality and Social Psy-chology, 50: 543–549.

Buchman, T. A., Tetlock, P. E., & Reed, R. O. 1996. Account-ability and auditors’ judgment about contingent events.Journal of Business Finance and Accounting, 23: 379–398.

Burger, W. 1984. United States v. Arthur Young & Co., Vol.82-687, Supreme Court of the United States.

Butler, M. B., Leone, A. J., & Willenborg, M. 2002. An empiricalanalysis of auditor reporting and its association withabnormal accruals. Working paper, University of Roch-ester, Rochester, New York.

Cain, D. M., Loewenstein, G., & Moore, D. A. 2005. The dirt oncoming clean: Perverse effects of disclosing conflicts ofinterest. Journal of Legal Studies, 34: 1–25.

Camerer, C. F., Loewenstein, G., & Weber, M. 1989. The curseof knowledge in economic settings: An experimentalanalysis. Journal of Political Economy, 97: 1232–1254.

Carey, J. L. 1970. The rise of the accounting profession: Toresponsibility and authority, 1937–1969. New York: Amer-ican Institute of Certified Public Accountants.

Carr, A. Z. 1968. Is business bluffing ethical? Harvard Busi-ness Review, 46(1): 143–153.

Caudill, T., Johnson, M., Rich, E., & McKinney, P. 1996. Phy-sicians, pharmaceutical sales representatives, and thecost of prescribing. Archives of Family Medicine, 5: 201–206.

Center for Responsive Politics. 2002. http://www.opensecrets.org. Washington, DC: Center for Responsive Politics.

Chung, H., & Kallapur, S. 2003. Client importance, non-auditfees, and abnormal accruals. Accounting Review, 78:931–955.

Cialdini, R. B., Petty, R. E., & Cacioppo, J. T. 1981. Attitude andattitude change. Annual Review of Psychology, 32: 357–404.

Cowen, A., Groysberg, B., & Healy, P. 2003. Which types ofanalyst firms make more optimistic forecasts? HarvardBusiness School NOM Working paper No. 03-46. http://ssrn.com/abstract�436686.

Craswell, A., Stokes, D. J., & Laughton, J. 2002. Auditor inde-pendence and fee dependence. Journal of Accountingand Economics, 33: 253–275.

Cuccia, A. D., Hackenbrack, K., & Nelson, M. W. 1995. Theability of professional standards to mitigate aggressivereporting. Accounting Review, 70: 227–248.

Dana, J., & Loewenstein, G. 2003. A social science perspec-tive on gifts to physicians from industry. Journal of theAmerican Medical Association, 290: 252–255.

DeAngelo, L. E. 1981a. Auditor independence, low balling,and disclosure regulation. Journal of Accounting andEconomics, 3: 113–127.

DeAngelo, L. E. 1981b. Auditor size and audit quality. Journalof Accounting and Economics, 3: 183–199.

Diekmann, K. A. 1997. “Implicit justifications” and self-serving group allocations. Journal of Organizational Be-havior, 18: 3–16.

Diekmann, K. A., Samuels, S. M., Ross, L., & Bazerman, M. H.1997. Self-interest and fairness in problems of resourceallocation: Allocators versus recipients. Journal of Per-sonality and Social Psychology, 72: 1061–1074.

Dies, D., & Giroux, G. 1992. Determinants of audit quality inthe public sector. Accounting Review, 67: 462–479.

Dopuch, N., King, R. R., & Schwartz, R. 2001. An experimentalinvestigation of retention and rotation requirements.Journal of Accounting Research, 39: 93–117.

Dopuch, N., King, R. R., & Schwartz, R. 2004. Contingent rentsand auditors’ independence: Appearance vs. fact. AsiaPacific Journal of Accounting and Economics, June: 45–68.

Eichenseher, J. 1984. The effects of foreign operations ondomestic auditor selection. Journal of Accounting, Au-diting, and Finance, 8: 195–209.

Farmer, T. A., Rittenberg, L. E., & Trompeter, G. M. 1987. Aninvestigation of the impact of economic and organiza-tional factors on auditor independence. Auditing: A Jour-nal of Practice and Theory, 7: 1–14.

Fehr, E., & Gachter, S. 2000. Cooperation and punishment inpublic goods experiments. American Economic Review,90: 980–994.

Fehr, E., Kirchler, E., Weichbold, A., & Gaecher, S. 1998. Whensocial norms overpower competition: Gift exchange inexperimental labor markets. Journal of Labor Econom-ics, 16: 324–351.

Ferraro, F., Pfeffer, J., & Sutton, R. I. 2005. Economics lan-guage and assumptions: How theories can become self-fulfilling. Academy of Management Review, 30: 8–24.

Fogarty, T. J., Heian, J. B., & Owen, D. 1991. The rationality ofdoing “nothing”: Auditors’ responses to legal liability inan instutionalized environment. Critical Perspectives onAccounting, 2: 201–226.

Frankel, R. M., Johnson, M. F., & Nelson, K. K. 2002. Therelation between auditors’ fees for non-audit servicesand earnings management. Accounting Review, 77: 71–105.

Friedman, M. 1953. Essays in positive economics. Chicago:University of Chicago Press.

George, N. 2004. Auditor rotation and the quality of audits.CPA Journal, 74: 22–27.

Gilovich, T. 1991. How we know what isn’t so: The fallibilityof human reason in everyday life. New York: Free Press.

Gul, F. 1991. Size of audit fees and perceptions of auditors’ability to resist management pressure in audit conflictsituations. Abacus, 27: 162–172.

Holyoak, K. J., & Simon, D. 1999. Bidirectional reasoning indecision making by constraint satisfaction. Journal ofExperimental Psychology: General, 128: 3–31.

Hume, A. L. 1990. Doctors, drug companies, and gifts [letter].Journal of the American Medical Association, 263: 1693–1697.


Independence Standards Board (ISB). 2000. Statement of in-dependence concepts: A conceptual framework for au-ditor independence. Exposure draft ED 00-2. http://www.nasba.org/NASBAfiles.nsf/Lookup/ED002/$file/ED002.pdf, accessed March 2005.

Jones, E. E., & Harris, V. A. 1967. The attribution of attitudes.Journal of Experimental Social Psychology, 3: 1–24.

Kahneman, D., & Tversky, A. 1979. Prospect theory: An anal-ysis of decision under risk. Econometrica, 47: 263–291.

Kahneman, D., & Tversky, A. (Eds.). 2000. Choices, values, andframes. New York: Russell Sage Foundation.

Kawamoto, D. 2004. New piece of Sarbanes-Oxley kicks in.CNET News.com. http://news.com.com/New�piece�of�Sarabanes-Oxley�kicks�in/2100-7355_3-5453279.html,accessed March 2005.

Kerr, N. L. 1989. Illusions of efficacy. The effect of group sizeon perceived efficacy in social dilemmas. Journal ofExperimental Social Psychology, 25: 287–313.

Kinney, W. R., Palmrose, Z., & Scholz, S. 2004. Auditor inde-pendence, non-audit services, and restatements: Wasthe U. S. government right? Journal of Accounting Re-search, 42: 561–588.

Knapp, M. 1985. Audit conflict. An empirical study of theperceived ability of auditors to resist management pres-sure. Accounting Review, 60: 202–211.

Koehler, D. J. 1991. Explanation, imagination, and confidencein judgment. Psychological Bulletin, 110: 499–519.

Kunda, Z. 1990. The case for motivated reasoning. Psycholog-ical Bulletin, 108: 480–498.

Labaton, S. 2002. Enron’s collapse. The lobbying: Audit firmsexercise power in Washington. New York Times, January19: 1.

Larcker, D., & Richardson, S. 2004. Fees paid to audit firms,accrual choices, and corporate governance. Journal ofAccounting Research, 42: 625–658.

Lay, K. 2000. Letter to Arthur Levitt. http://www.pbs.org/wgbh/pages/frontline/shows/regulation/congress/lay.html, ac-cessed July 2004.

Lee, C., & Gu, Z. 1998. Low balling, legal liability and auditorindependence. Accounting Review, 73: 533–555.

Lee, T. 1995. The professionalization of accountancy. Ac-counting, Auditing, & Accountability Journal, 8(4): 48–70.

Leuz, C., Nanda, D., & Wysocki, P. D. 2003. Earnings manage-ment and investor protection: An international compar-ison. Journal of Financial Economics, 69: 505–527.

Levinthal, D. A., & Fichman, M. 1988. Dynamics of interorga-nizational attachments: Auditor-client relationships.Administrative Science Quarterly, 33: 345–369.

Levitt, A., & Dwyer, P. 2002. Take on the street: What WallStreet and corporate America don’t want you to know,and what you can do to fight back. New York: Pantheon.

Loewenstein, G., Thompson, L., & Bazerman, M. H. 1989. So-cial utility and decision making in interpersonal con-texts. Journal of Personality and Social Psychology, 57:426–441.

Lord, C. G., Ross, L., & Lepper, M. R. 1979. Biased assimilation

and attitude polarization. Journal of Personality and So-cial Psychology, 37: 2098–2109.

Lowi, T. J. 1964. American business, public policy, case stud-ies and political theory. World Politics, 16: 677–715.

Lowi, T. J. 1969. The end of liberalism. New York: Norton.

Mautz, R., & Sharaf, H. 1961. The philosophy of auditing.Sarasota, FL: American Accounting Association.

Mayer, J. 2002. The accountants’ war. New Yorker, April 22:64–72.

McGill, A. L. 1989. Context effects in judgments of causation.Journal of Personality and Social Psychology, 57: 189–200.

McKinley, S., Pany, K., & Reckers, P. 1985. An examination ofthe influence of CPA firm type, size, and MAS provisionon loan officer decisions and perceptions. Journal ofAccounting Research, 23: 887–896.

McRoberts, F. 2002. The fall of Andersen. Chicago Tribune,September 1: A1.

Messick, D. M., & Sentis, K. P. 1979. Fairness and preference.Journal of Experimental Social Psychology, 15: 418–434.

Messick, D. M., & Sentis, K. P. 1983. Fairness, preference, andfairness biases. In D. M. Messick & K. S. Cook (Eds.),Equity theory: Psychological and sociological perspec-tives: 61–94. New York: Praeger.

Moore, D. A., & Loewenstein, G. 2004. Self-interest, automa-ticity, and the psychology of conflict of interest. SocialJustice Research, 17: 189–202.

Morris, M. W., & Moore, P. C. 2000. The lessons we (don’t)learn: Counterfactual thinking and organizational ac-countability after a close call. Administrative ScienceQuarterly, 45: 737–765.

Nelson, M. W. 2005. A review of experimental and archivalconflicts-of-interest research in auditing. In D. A. Moore,D. M. Cain, G. Loewenstein, & M. H. Bazerman (Eds.),Conflicts of interest: Challenges and solutions in law,medicine, and organizational settings: 41– 69. Cam-bridge: Cambridge University Press.

Olson, M. 1965. The logic of collective action. Cambridge,MA: Harvard University Press.

Olson, M. 1982. The rise and decline of nations. New Haven,CT: Yale University Press.

Palmrose, Z. 1986. Audit fees and auditor size. Journal ofAccounting Research, 24: 97–110.

Pany, K., & Reckers, P. 1980. The effect of gifts, discounts, andclient size on perceived auditor independence. Account-ing Review, 55: 50–61.

Pany, K., & Reckers, P. 1983. Auditor independence and non-audit services: Director views and their policy implica-tions. Journal of Accounting and Public Policy, 2: 43–62.

Petty, R., & Wegener, D. 1998. Attitude change: Multiple rolesfor persuasion variables. In D. Gilbert, S. Fiske, &G. Lindzey (Eds.), Handbook of social psychology, vol. 1:323–390. New York: McGraw-Hill.

POB Panel on Audit Effectiveness Reports and Recommen-dations. 2002. http://www.pobauditpanel.org/down-load.html, accessed August 2003.


Pruitt, D. G. (Ed.). 1998. Social conflict (4th ed.). New York:McGraw-Hill.

Rabin, M., & Schrag, J. L. 1999. First impressions matter: Amodel of confirmatory bias. Quarterly Journal of Eco-nomics, 114: 37–82.

Rauch, J. 1995. Demosclerosis: The silent killer of Americangovernment. New York: Random House.

Reiter, S. A., & Williams, P. F. 2000. The history and rhetoricof auditor independence concepts. http://les.man.ac.uk/ipa/papers/44.pdf, accessed March 2005.

Ronen, J. 2002. Post-Enron reform: Financial statement insur-ance, and GAAP revisited. Stanford Journal of Law, Busi-ness, and Finance, 8(1): 1–30.

Ross, L., & Nisbett, R. E. 1991. The person and the situation:Perspectives of social psychology. New York: McGraw-Hill.

Ruddock, C., Sherwood, K., & Taylor, S. 2004. Non-audit ser-vices and earnings management: Is auditor indepen-dence impaired? Working paper, University of NewSouth Wales, Sydney, Australia.

Russo, E. J., Medvec, V. H., & Meloy, M. G. 1996. The distortionof information during decisions. Organizational Behav-ior and Human Decision Processes, 66: 102–110.

Russo, J. E., Meloy, M. G., & Medvec, V. H. 1998. Predecisionaldistortion of product information. Journal of MarketingResearch, 35: 438–452.

Samuelson, W., & Zeckhauser, R. 1988. Status quo bias indecision making. Journal of Risk and Uncertainty, 1:7–59.

Schlozman, K. 1984. What accent the heavenly chorus? Polit-ical equality and the American pressure system. Journalof Politics, 46: 1006–1032.

Schweitzer, M. E., Ordonez, L., & Duouma, B. 2004. Goal set-ting as a motivator of unethical behavior. Academy ofManagement Journal, 47: 422–432.

Seabright, M. A., Levinthal, D. A., & Fichman, M. 1992. Role ofindividual attachments in the dissolution of interorga-nizational relationships. Academy of Management Jour-nal, 35: 122–160.

Securities and Exchange Commission (SEC). 1982. Relation-ships between registrants and independent accountants.Accounting Series Release (ASR) No. 304. Washington,DC: SEC.

Securities and Exchange Commission (SEC). 2000. Final rule:Revision of the commission’s auditor independence re-quirements. SEC Standard Release. Securities and Ex-change Commission 17 CFR Parts 210 and 240, file No.S7-13-00 [RIN: 3235-AH91]. http://www.sec.gov/rules/final/33-7919.htm, accessed August 2004.

Shafer, W. E., Morris, R. E., & Ketchand, A. A. 1999. The effectsof formal sanctions on auditor independence. Auditing:A Journal of Practice and Theory, 18(Supplement): 85–101.

Shamis, G. 2000. SEC hearing on auditor independence.http://www.sec.gov/rules/proposed/s71300/testimony/shamis1.htm, accessed August 2004.

Shockley, R. A. 1981. Perceptions of auditors’ independence:An empirical analysis. Accounting Review, 55: 785–800.

Shockley, R. A. 1982. Perceptions of auditor independence: Aconceptual model. Journal of Accounting, Auditing, andFinance, 5: 126–143.

Simunic, D. 1984. Auditing, consulting, and auditor indepen-dence. Journal of Accounting Research, 22: 679–702.

Stark, A. 2005. Why are (some) conflicts of interest in medi-cine so uniquely vexing? In D. A. Moore, D. M. Cain,G. Loewenstein, & M. H. Bazerman (Eds.), Conflicts ofinterest: 152–180. Cambridge: Cambridge UniversityPress.

Staw, B. M. 1976. Knee-deep in the big muddy: A study ofescalating commitment to a chosen course of action.Organizational Behavior and Human Performance, 16:27–44.

Stiglitz, J. 1998. The private uses of public interests: Incen-tives and institutions. Journal of Economic Perspectives,12: 3–22.

Strack, F., & Mussweiler, T. 1997. Explaining the enigmaticanchoring effect: Mechanisms of selective accessibility.Journal of Personality and Social Psychology, 73: 437–446.

Tajfel, H., & Turner, J. C. 1986. The social identity theory ofintergroup behavior. In S. Worchel & W. Austin (Eds.),The psychology of intergroup relations (2nd ed.): 7–24.Chicago: Nelson-Hall.

Tetlock, P. E. 1983. Accountability and complexity of thought.Journal of Personality and Social Psychology, 45: 74–83.

Tetlock, P. E. 1992. The impact of accountability on judgmentand choice: Toward a social contingency model. Ad-vances in Experimental Social Psychology, 25: 331–376.

Tetlock, P. E., & Boettger, R. 1994. Accountability amplifiesthe status quo effect when change creates victims. Jour-nal of Behavioral Decision Making, 7: 1–23.

Tetlock, P. E., & Lerner, J. S. 1999. The social contingencymodel: Identifying empirical and normative boundaryconditions on the error-and-bias portrait of human na-ture. In S. Chaiken & Y. Trope (Eds.), Dual-process theo-ries in social psychology: 571–585. New York: GuilfordPress.

Tetlock, P. E., & Mitchell, P. G. 1993. Liberal and conservativeapproaches to justice: Conflicting psychological por-traits. In B. Mellers & J. Baron (Eds.), Psychological per-spectives on justice: 234–255. Cambridge: CambridgeUniversity Press.

Thompson, L. 1995. “They saw a negotiation”: Partisanshipand involvement. Journal of Personality and Social Psy-chology, 68: 839–853.

Thompson, L., & Loewenstein, G. 1992. Egocentric interpreta-tions of fairness and interpersonal conflict. Organiza-tional Behavior and Human Decision Processes, 51: 176–197.

Turpen, R. A. 1995. Audit fees: What research tells us. CPAJournal, 65: 54–56.

Unger, L. 2001. How can analysts maintain their indepen-dence? Speech given to the Ray Garrett Jr. Corporate


and Securities Law Institute, Northwestern UniversitySchool of Law, Chicago.

U.S. General Accounting Office. 2003. Public accountingfirms: Required study on the potential effects of manda-tory audit firm rotation (GAO-04-216). http://www.gao.gov/cgi-bin/getrpt?GAO-04-216, accessed March2005.

U.S. Senate. 1976. The accounting establishment. Staff studyprepared by the Subcommittee on Reports, Accounting,and Management of the Committee on Government Op-erations, United States Senate, 94th Congress, 2nd Ses-sion. Washington, DC: U.S. Government Printing Office.

Walker, J. L. 1983. The origins and maintenance of interestgroups in America. American Political Science Review,77: 390–406.

Wazana, A. 2000. Physicians and the pharmaceutical indus-

try: Is a gift ever just a gift? Journal of the AmericanMedical Association, 283: 373–380.

Wildavsky, A. 1988. The new politics of the budgetary pro-cess. Glenview, IL: Scott, Foresman.

Wilson, D. S., Near, D., & Miller, R. R. 1996. Machiavellianism:A synthesis of the evolutionary and psychological liter-atures. Psychological Bulletin, 119: 285–300.

Wilson, J. Q. (Ed.). 1980. The politics of regulation. New York:Basic Books.

Yamagishi, T. 1992. Group size and the provision of a sanc-tioning system in a social dilemma. In W. B. G. Liebrand,D. M. Messick, & H. A. M. Wilke (Eds.), Social dilemmas:Theoretical issues and research findings: 267–287. Ox-ford: Pergamon Press.

Zeff, S. A. 2003. How the U.S. accounting profession got whereit is today: Part II. Accounting Horizons, 17: 267–286.

Don A. Moore is an associate professor of organizational behavior at the TepperSchool of Business at Carnegie Mellon University. He received his Ph.D. from North-western University. He studies human decision making, including how people com-pare themselves with others and how decisions can be distorted by conflicts ofinterest.

Philip E. Tetlock is the Lorraine Tyson Mitchell Chair in Leadership and communica-tion professor of leadership at the Haas School of Business at the University ofCalifornia, Berkeley. He received his Ph.D. from Yale University. His research exam-ines learning from experience, accountability, and how to debias judgment andchoice.

Lloyd Tanlu is a doctoral student in accounting at Harvard Business School, HarvardUniversity. His research interests include budgeting, internal control systems, andconflicts of interest in accounting.

Max H. Bazerman is the Jesse Isidor Straus Professor of Business Administration atHarvard Business School, Harvard University. He received his Ph.D. from CarnegieMellon University. His research interests include managerial decision making,bounded awareness, bounded ethicality, and societal decision making.


Documents

CONFLICTS OF INTEREST AND THE CASE OF AUDITOR INDEPENDENCE: MORAL SEDUCTION … · 2019-12-12 · model: the failure of the U.S. auditing system to deliver true independence. We offer