Why Can’t Things Just Stay the Same?An Assessment of Recent Structural Changes in the

Public Accounting Profession in the US

Timothy J. Fogarty*Professor and Chair

Weatherhead School of ManagementCase Western Reserve University

Cleveland, OH 44024Telephone: 216-368-3938

Fax: 216-368-4776Email: tjf@po.cwru.edu

William ShaferProfessor

California State University – Los Angeles Los Angeles, CA

June 2001

*corresponding author

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Why Can’t Things Just Stay the Same?An Assessment of Recent Structural Changes in the

Public Accounting Profession in the US

ABSTRACT

Three important changes to how public accounting in the USA is practiced haveoccurred in the last few years. Large firms have expanded their scope of services to sucha degree that multidisciplinary practice seems the next logical step. At the same time, thesuccess of consulting work has required some firms to bifurcate these activities intoseparate entities. Meanwhile, smaller practices are being consolidated into financialservices corporations. These developments should cause researchers to reconsiderfundamental questions that, for the most part, assume a set of practice conditions that arejeopardized by these changes. Importantly, the role of organizational structure needs tobe explicitly considered, now that it is a variable and not a constant.

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Why Can’t Things Just Stay the Same?An Assessment of Recent Structural Changes in the

Public Accounting Profession in the US

For many decades, the practice of public accounting took place in partnershiporganizations. Although a distinction was made between equity owners (partners) andstaff, commonalities existed in the licensing of individuals to practice and the identity ofthe work. Staff members aspired to partnership when they would succeed based upontheir ability to attract and service a loyal clientele that found value in traditionalaccounting services. Well described by Mautz and Sharaf (1961), the public accountingpractice offered considerable organizational stability for practitioners to perfect their artand luxuriate in their professional status.

The last quarter of the 20th century represented a gradual unraveling of theequilibrium of professional accounting. While considerable external forces such as legalliability, stock market changes and the globalization of capital have contributed, aninternal dynamic has also been at work in making the current nature of accountingpractice much different than it has been. Practice has been changed by those that practiceit in ways that were not forced by those outsiders that sought different results from it.

Many commentators have observed the progressive commercialization ofaccounting (e.g., Belkaoui, 1985; Zeff, 1987; Hanlon, 1996). Tantamount with this, adeprioritizing of other objectives has been noted. To the extent that aggressive growthrequires expansion into new areas, commercialization may also have weakened theprofession’s monopoly core (Toren, 1975). Strong as it may be, commercialization itselfdoes not provide a satisfyingly complete assessment of change. At best it provides anenvironmental condition that contributes to new arrangements.

The existence of five very large accounting organizations provides the media andaccounting researchers with the temptation of confuting change within these entities withchange in the accounting profession as a whole. The objective of studying accounting inthe organizational contexts in which it operates (Hopwood, 1983) necessitates a broaderrecognition of other practice venues, particularly those practices confined to local andregional scopes (see Tinker, 2001). With some small exceptions (e.g., Stevens, 1985;Ramirez, 2000), the large numbers of firms beyond the Big 5 have escaped notice despitetheir numerical domination of public accounting. At the same time, the large firms areuniquely important as bellwethers of change. Both because of their elite status and theirsize, developments in the Big 5 world may become precursors of more general evolutionselsewhere. Nonetheless, those that purport to discuss the accounting profession need torecognize its multi-sector nature. Otherwise, the profession itself becomes a taken-for-granted construct.

Recent changes to the entities that practice accountancy should focus attention onorganizational structure. Structure provides the basic “rules of the game” that define theorganization and allow it to have predictable interchanges with its environment (Scott,

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1991). This is accomplished by placing constraints on members, mostly throughdictating how they should relate to each other in furtherance of the organization’sobjectives. Organizational structure also sanctions various behaviors with constituentsthat help define the contours of boundaries (DiMaggio and Powell, 1991). Structurematters to organizations since it provides a degree of persistence that is independent fromspecific enactments and agencies (Giddens, 1984), as well as a certain distinctivevisibility (Dowling and Pfeffer, 1975). Economic theory tends to dismiss explicitconsideration of organizational structure within broad perspectives of economicallyrational behavior (e.g., Coase, 1937). However, organizational structures have beenshown to be socially constructed (DiMaggio and Powell, 1983) and therefore likely toaim at a broader rationality and not necessarily dovetail precisely with economicadvantage (e.g., Singh et al. 1991). This more open perspective allows an assessment offactors that cannot be readily reduced to pecuniary terms.

This paper endeavors to examine recent developments as structural changes. Thenext section will detail the nature of these changes. The second section will illustratehow these changes necessitate revised thinking about public accounting. A third sectionextends possible consequences from these structural changes. The paper concludes withmore generalized implications related to structural change.

The purposes of this paper are multiple. At first, it will attempt to convince thereader of the nature of the important changes to accounting organizations in the US. Thisinvolves several dimensions including pressures emerging from technology andcapitalism that coalesce in a certain degree of deprofessionalization. While the situationdescribed does not reduce to a “solution,” the paper points to alternative paths ofsubsequent development that have come into greater clarity. If it succeeds, this papershould be very familiar to practitioners yet have a critical edge that will fulfill the role ofthe academy to be a critical witness. The paper should also find a way to contextualizerecent developments in a manner that illustrates a bigger picture.

THREE CURRENT ISSUESWhat the organization is depends upon who compromise its members, what its

work is and how it is linked to other entities. Accordingly, this section describes recentsuggestions regarding multidisciplinary practice, consolidations and spin offs. All ofthese issues have immediate consequences for organizational size, decision makingcentralization and the nature of firm administration. All bear upon the individuals inthese firms even though they relate primarily to the firms themselves.

Multidisciplinary Firm MembershipThe sine qua non of professional partnerships has always been that all practicing

members of the organization be members of the same profession. In the classic model ofprofessional definition (e.g., Greenwood, 1957), the qualifications of individualpractitioners was so important that their groupings into firms was relatively incidental.Shared training and worldviews are also central to more modern conceptions whereingroups of such practitioners battle against other professions for contested jurisdictions(e.g., Abbott, 1988).

The size and economic power of a small number of accounting firms hasthreatened the viability of such an organizing principle as the professions. Big 5 firms

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have invested so heavily in their own brand identity that they have reaped considerableadvantage from a scope of services that exceeds the conventional areas of the discipline.Justified in terms of their clients demand for “one stop shopping” this expansion is notlogically limited to auxiliary services not provided by others.

The essence of the multidisciplinary proposal is that members of differentprofessions could create firms that would offer entirely different professional services toa clientele with a diverse set of needs. This would facilitate the coordination of thedelivery of these services and might lead to the identification of synergies and thedevelopment of new products. This would allow the profitability inherent in professionalservices to be more effectively captured by a single business entity.

Although multidisciplinary practice could envelop a wide variety of specializedexpertise, the combination of accounting and law has been the lightning rod for this idea.This attention may reflect the high visibility and high organization of these twoautonomous professions. It may also attest to the natural fit of these two groups,especially as they combine to service the needs of a business clientele. The twoprofessions are also highly regulated and therefore their combination would not be easyto accomplish. Both groups continue to struggle with their recent commercialization (seeNelson, 1988) and multidisciplinary practice may represent an explicit acknowledgementthat the world has changed in such a direction.

Membership in a particular profession has always defined the boundary oforganizations devoted to its practice. In fact, recruits to firms have had to pass licensingexams and obtain professional experience before they could by anything more than aprovisional member. Multidisciplinary practice extends the walls of the entity to all thosethat have been certified as some sort of specialist. Apparently, it would be left to firms asto how this would be defined.

Multidisciplinary practice would also change the domain that organizations wouldbe likely to claim for their systematic attention. Whereas a pure public accounting firmwould feel obligated to provide coverage for all traditional lines, a professional servicesfirm could pick and choose a diverse and selected group of services guided bycompetitive conditions. The logic of the market is likely to be given fuller sway once theorganization is decoupled from a single profession.

A different array of specialties within the firm will alter the way that people in thefirm relate to each other. Structure has to be enacted through interaction but domaindecisions create somewhat persisting constraints and opportunities. Fully realized, themultidisciplinary practice concept cuts to the essence of the firm’s identity and radicallyalters its relationships with key constituents such as clients, regulators and theeducational community.

In support of such a revised organization, the idea of a professional credential hasalso come under scrutiny. A firm that would house professionals of different sorts wouldalways be ironing out differences created by varying professional socializationexperiences. At least in the near term, this training would continue to be predicted on theassumption of monoprofessional practice. Accordingly, multidisciplinary firm structurewould have to compromise on the realization of these assumptions. A more directapproach would be a newly credentialed business advisor who would combine the best ofseveral professions. Provisionally named the “Cognitor,” the new credential wouldcircumnavigate the aspects of the “legacy” professions that did not contribute to a

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synthesis. In effect, a new credential would provide multidisciplinary potential withoutthe political problems of forging and maintaining a balance between contestingprofessions.

To a certain extent, the idea of multidisciplinary practice has already occurred.For entities with global practices, the official admission of lawyers to full membership inaccounting firms has been accomplished in countries that permit such. Although theUSA remains notably resistant to this innovation, the structural changes that it bringshave already occurred elsewhere. Ernst & Young has bragged that this has already madethem the largest law firm in the world. Even relatively small accounting firms reportmovements in these directions (CPA Managing Partners Report, 2000). Theincorporation of lawyers qua lawyers followed the worldwide practice of admitting non-accounting professionals to non-partner equity participant statuses sometimes called“principals.” People trained in other professions also have worked for accounting firmsin capacities that utilize that background. However, lacking multidisciplinary abilities,this work needs to walk the thin line that separates it from unauthorized professionalpractice.

The large accounting firms seem to be the primary advocates for multidisciplinarypractice. Contrariwise, the legal profession has not supported the concept, at least as canbe inferred from a recent American Bar Association resolution. This overruled the finalreport of the commission by the ABA to study the desirability and practicality of this idea(Commission on Multidisciplinary Practice, 1999). Since others within the lawprofession have dreamed of incorporating related occupations for some time (e.g.,Galanter and Palay, 1991), the issue is far from resolved in this quarter. Based on theirsize and global reach, the accounting firms are much better prepared to incorporate otherprofessional groups. In the name of cooperation, professions still seek to define problemsin ways that subjugate other professions to auxiliary roles (Power, 1997). Therefore, formany professions the prospects of multidisciplinary practice are mixed with theirreluctance to be externally controlled by accountants. Nonetheless, the planning for fulland open multidisciplinary practice continues in large accounting firms under the bannerof an idea too powerful and too profitable to be anything other than a matter of time to itsrealization.

The Consolidation of Small FirmsIn addition to their homogenous composition, public accounting has been marked

by its organizational autonomy. Despite the fact that the membership of the premieraccounting trade association (the AICPA) has for some time been dominated byaccountants not in public practice (Young, 1995), the stand alone association ofaccountants selling services to the public remains the ideal type. The Big 5notwithstanding, accountancy is marked by a large number of relatively small practiceunits (Tinker, 2001). This provides ample empirical evidence that the structural statusquo in the profession had not been essentially disturbed since the profession’s inceptionat the turn of the last century.

Over the last ten years, large financial services companies have realized the valueof offering basic accounting services to their clientele. Either in their own right, or as ameans to cross-sell a set of other products, the basic services offered by accountantscaught the eye of financial services corporations. Firms such as American Express and

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H&R Block have accomplished this integration by purchasing accounting practices andrehiring the former equity owners as employees. Other firms, such as Century Businesswere formed expressly to exploit the economics of scale when previously separate firmswere consolidated.

These consolidators were opposed by those that objected to the destruction ofsmall scale practice. At issue was whether or not an individual could hold themselves outas a CPA when they did not work for an entity that was squarely within the regulatoryambit of state boards of accountancy. For the most part, courts have held that individualsare allowed to advertise their possession of an accounting license when they areemployed by one of these corporations as a matter of First Amendment protection.1

The loss of organizational autonomy involved when smaller practices becomeunits of a large corporate structure represents an obvious structural change. Instead offinding decision making autonomy within the entirety, such discretion is locatedelsewhere and in a place outside of the profession.

Operated as a division of a much larger corporate enterprise, the “rolled-up”accounting firm is no longer important in its own terms but only as it contributes to theprofitability and growth of the corporation. New roles that span the boundary betweenthe formerly autonomous accounting firm and the corporation now achieve criticalimportance. How the environment is monitored and interacted with is also likely to takeon a distinctively different flavor when such is done centrally by those that stress theaccounting unit’s profitability.

To the extent that the accounting firm is providing auditing services, a furtherstructural wrinkle comes into play. Current professional guidelines, most of whichpertain to independence, tend to preclude the provision of such service directly by theconsolidated accounting unit. Accordingly, auditing partners are obliged to retain theirpartnership for the limited purpose of rendering audit opinions. In order to do this at thesame time that the rest of the firm has been consolidated, the paper partnership has to rentback the assets necessary to perform audits. This thin artifice of separation pays homageto the letter of the professional standards without the consequence of giving themeconomic substance, as would be the case in a stand-alone partnership. This victory ofform over substance enacts a cynicism about the importance of professional standardsand is no doubt more honored in the breach than in the observance.

Alternative practice structures have been justified in terms of the large capitalneeds of current accounting practice. Large corporations are able to finance thetechnological upgrades that are deemed to be necessary for smaller firms to staycompetitive (Mauldin, 2000). They also can bring other innovations to a local practice bycross-fertilizing the best of other practices that have already been brought into thenetwork. Thus, this change in practice is very much about making smaller practices thatwhich they might have never become. These technological and conceptual movementsare likely to revise the self-idealization of the practice by its members. Often this createsnew generational tension and does not lead to the efficiencies that were promised (Fisher,1996).

1 The U.S. Court of Appeals’ decision in Steven Miller and American Express TBS vs.George Stuart et al. in 1997 spells out the most cited legal reasoning on this topic.

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The most pronounced change involved in the roll-ups of accounting practices isthe conversion of partners and potential partners into employees. The loss in professionalautonomy in this area is similar to what has occurred to other professional groups asfranchise arrangements and other forms of mass processing replaced the stand-aloneoperations of entrepreneurs (e.g., Torres, 1988). The accountant in this arrangement nolonger has to think of themselves as a business person and is no longer as directlyexposed to the riches and rewards of the market place. New attention will be needed toincentivization arrangements that will replace the lost entrepreneurial spirit that resided atthe heart of the small professional practice.

Unlike partners, accounting staff realize little or no financial reward in the sale ofthe practices to consolidators. Nonetheless, considerable career revision has occurred tothese people. Instead of equity participation as the reward for years of diligent work,staff will have to anticipate continuation of employee status. If they are very good, allthey can expect is higher wages. Ceteris paribus, higher turnover and lower satisfactioncould be expected. Staff will also have to be more fairly compensated for the loss of thehigher future rewards of partnership. In short, the conversion to a firm of employeeschanges much of the balance that encourages members to continue their participation.

The Provision of Non-Audit ServicesFor many decades, accounting firms have realized that the services that their

clients request often provide considerable expertise as a by-product. For example, in theconduct of an audit, many invaluable ideas pertaining to the improvement of operationsare generated. The systematic organization and dissemination of this knowledge madeaccounting firms very desired as consulting firms. This proceeded to such a degree thatthe audit itself became a commodilized loss leader relative to the management advisoryservices that once were a mere byproduct.

Whether the independence required for an audit existed in an environmentdominated by management advisory services has been extensively debated for the last 25years. Since this quickly became a position that public accounting could not afford tolose, a broad set of defenses were devised. Most notably, the suggestion that the auditwas actually improved by the greater familiarity achieved through consulting was oftenoffered. Until recently, the public accounting firms had been quite successful inconvincing the public that (a) no problem existed, or (b) if a problem existed, it was aminor one, or (c) if a major problem existed, it was counterbalanced by the moreimportant benefits that were produced (see AICPA, 1997).

The unusually spirited insistence upon a more traditional interpretation ofindependence by the SEC of the late 1990s has resurrected the non-audit service issue.Suggesting that the integrity of the capital markets required the perception (as well as theactuality) of independence, the agency has rejected the AICPA’s spin on the issue. At thesame time, the progressive widening of the scope of services opened new areas ofindependence concern. For example, the outsourcing of internal auditing by corporationshas created an instance whereby public accounting has undertaken more managerialfunctioning. The profession’s insistence that “Chinese walls” offer protection against theauditing of their own work has not met with uniform acceptance by constituencies (e.g.,Lowe et al. 1999). Likewise, the profession has sought to expand assurance servicesbased mostly on market considerations (Elliott, 1992). The modus operandi seems to be

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that if it can be done with modern information technology, it should be done,notwithstanding classic normative constraints.

In the last year, the public accounting firms have taken a radically differentapproach to the problem. They have, or are contemplating, bifurcated their consultingpractices from their auditing sides. This has been accomplished through outright sales toexternal groups and through spin-offs. This followed the lead of Arthur Andersen –Andersen Consulting which had been divided for more than a decade, but only recentlyfinancially severed (Brown, 2000). By these measures, the pure public accounting firmsof the past might be recovered, in the sense that they would once again offer onlytraditional lines of services.

In retrospect, the SEC’s bark (e.g., CPA Letter, 2000; CPA Managing PartnerReport, 2000) proved worse than its actual bite. Proposed rules now call for thedisclosure of non-audit service provision when audits of publicly traded companies areinvolved. This may prove no less burdensome than similar disclosures under ASR 250 adecade earlier (Palmrose, 1988). Nonetheless, the organizational changes triggered bythe threat of regulation proceed even in the absence of a worse case scenario and thelikely end of proactive enforcement by a Republican-headed SEC. 2

Evidence has suggested that the presence of non-audit revenue potential affectsaudit decision making (Moreno and Bhattacharjee, 2000) and facilitates the managementof earnings by clients (Ferguson et al. 2000). However, it would be naïve to believe thatbetter results could be obtained by the sudden redirection of non-audit revenue to anaffiliated company. Audits are time-series phenomenon which are gainsaid by the cross-sectional approach used in the studies that constitute most of our knowledge. Changes tothe organizational form are more likely to drive changes to firm market share (Wooton etal. 1994; Beattie and Fearnly, 1994) and in pricing of the two now separated services(Ezzamel et al. 1996). Thus, the organizational response to the public interest problemshould not necessarily be viewed as a victory over self-interested behavior. By creatingnew structures, many consequences would be anticipated.

The structural change concocted by public accounting to address theirindependence problem tends to fly in the face of a primary generator of that conflict.Consulting emerged in part because the demand for the traditional audit itself was weak.The audit, as a public good, was not highly valued by the companies that were required topurchase it. Following agonizing and somewhat destructive efforts at price-competition,the firms achieved greater success at subsidizing the audit with auxiliary high-marginconsulting services. Therefore, absent price fixing or government interference, theprospects of returning to an organization that only did audits is tantamount to arevocation of the law of supply and demand.3

The most likely scenario is that the separated firms will materially changefollowing their division. The non-consulting “audit” practice will immediately begin toreestablish a consulting practice. To some extent, firms have engaged in a covertprogram of reengineering the audit as a consulting project (Jepperson, 1998; Fogarty,

2 Shortly after the announcement of the George W. Bush presidential victory, Arthur Levitt (head of theSEC in the Clinton administration) announced his retirement.3 In fairness, these firms could also sell tax and bookkeeping services. These services, however, are notprofitable enough to subsidize the provision of expensive audit services. These other services also havebecome commodities for which it is difficult to charge a premium.

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2000). At first, this will need to be closely connected to the audit work and be relativelysmall. To do otherwise would probably violate the letter of the separation agreement andpossibly attract the attention of regulators. For some time, this may bring the audit firminto competition with the severed consulting firm. This follows the Arthur Andersen –Andersen Consulting legacy. After some time, the consulting entity may concede someportions of this domain since it will be positioned to compete with other entities for larger,more esoteric and more lucrative engagements.

Thus, this type of structural change may be less permanent and consequential thanthe others. The organization can be expected to slowly relearn an approximation of itsoriginal structure. In the interim, boundary roles (perhaps supplemented by continuingfinancial ties) will be critical in the process of reestablishing that which was untethered.However, no guaranties exist that reproduction will be complete or even successful. Inthe meantime, financial entanglements between the two entities may result in theaccounting practice being controlled by the non-accounting practice. Even in the absenceof such, the bifurcation may lead to some accounting work escaping the control of thosethat call themselves accountants as well as those empowered to regulate accountants.

SummaryThis section has reviewed three different issues that the accountancy profession

continues to struggle with. All involve structural changes and have consequences formembership, job description and risk bearing. The magnitude and nature of thesechanges suggests a highly dynamic time. This presents an opportunity to reexaminefundamental questions.

REVISIONS TO OUR THINKINGThis section suggests that the structural changes of accounting practice require

fresh theorizing about at least seven building blocks of our reasoning. For the most part,an effort is made to accept the changes for what they are rather than to develop normativearguments about them.

What is a Professional?The structural changes in accounting practice intensify the search for the sine qua

non of the disciplines’ claim to professionalism. None of the three changes have much todo with the specialized knowledge accountants have. None are linked to the best waysthat this knowledge can be delivered and extended. The time that goes into these changesis consistent with the basic indifference of accountants to accounting knowledge(Johnson, 1972) as well as an illustration of how accounting knowledge is subjugated toeconomic interests (Belkaoui, 1989). The knowledge available for the problem seems tochange in ways unassociated with the nature of the problem itself. Similarly, the status ofaction resides at the firm level in all these changes. The muteness of bodies that speak onbehalf of the profession (i.e., AICPA) suggests a diminishment of the relevance of thiscollective body (see also Shafer et al. 1999).

The new accounting professional will not be marked by their autonomy, as theclassic model of professionalism would have suggested. As such, they are less likely topresent a deeply socialized idea of ethicality with which to resist client pressure. Dourma(1982) found that accountant autonomy was most important to key constituents. The

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eroded autonomy brought by structural change may also cause further problems for theprestige and mystique of the group, already seen as problematic (Paton, 1971; Burns andHaga, 1977). The net result of the structural changes will probably render an even moremixed and ideological claim to professional status for accountants. Resembling more theclients that they serve, accountants will probably merit the same status that managerspossess. Work that starts with the maintained hypothesis that accounting is a profession,and that its practitioners either should or do accordingly, would seem suspect.

IndependenceAll three structural changes pose different types of independence issues.

Independence resides at the core of the value of accountants, especially when they areengaged in audits. Whether one prefers classic (e.g., Carey, 1947) or modern rationales(e.g., Sutton, 1997), independence is the core cruciality for accountants. In an era markedby intense client pressure (Saul, 1996) conjoined by intensified fears of losing clientsover matters of principle (Arnold et al. 1999), independence is jeopardized even withoutorganizational change. Independence is at stake since all three change issues entail somedegree of retreat from the idea that the full ownership of the firm within the profession isessential to its adherence to normative standards.

Putting organizational structure into the independence picture implies thatindividual action is affected by the context that surrounds it. Accordingly, it joins withearly work by Hall (1969) to suggest that the compatibility of professional norms andbureaucratic systems of control is a central question. More colloquially, all structuresimpose “strings” that make some actions tempting and others difficult. In theseapplications the basic issue is the more explicit pursuit of profitability that becomesexplicit when the partnership form is compromised or when a shared profession no longerprovides an alternative common denominator.

Independence is a tricky characteristic to operationalize. The choice of anobjective or a subjective mode is critical because it illustrates that which can becompromised. When trust and credibility are sought, it is hard to say how much issufficient. Some structures lend themselves more readily to the inculcation of a skepticalmindset. Others are passable only in terms of a judgmental cost/benefit analysis. Theaccounting profession has seemingly abandoned a moral grounding for independence infavor of an economic one (Reiter and Williams, 2000). The full realization of thestructural revisions discussed in this paper reflects and extends such a transition.

The Supremacy of the IndividualThe theorizing of organizational structure in this paper implicitly questions the

role of the individual in studies that touch upon the design of CPA firms and practices.For the most part, a new beginning is needed for work to be of value in this area.

The first flaw that exists is the tendency to place the individual accountant in thecenter of the analysis. Large conceptual, and philosophical issues like independence thatquestion the role and importance of public accounting are reduced and distorted by issuessuch as recruiting motivations (e.g., CPA Personnel Report, 2000). When focused upon,the individual level of analysis is tempted by imagery of “the fallen man” whoseimprovement is viewed as the only real objective (Tinker, 2000).

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Too often structure is introduced in a manner that is subservient to the wrongquestions. Regularly, the issue is framed as one of fit between the individual and theorganization (e.g., Chatman, 1990; Hyatt and Prawitt, 2000) usually toward theproduction of an individual level outcome. Thus, our understanding of structure is auseful independent variable (see also Pei and Davis, 1989). Structure is nearly lost asauthors investigate psychological variables such as locus of control (Hyatt, 1995) anddemographic differences (Shaub and Lawrence, 2000). At other times, that which mightbe attributable to organizational structure is instead presented as organizational culture(Ashkanasy and Windsor, 1997) or national culture (e.g., Arnold et al. 1999). Since theseattributes are measured at the individual (and not the organizational) level, they represent,at best, perceptions about audit structure, and therefore better inform us about those thathold them rather than about structure.

Unquestioningly, no structure exists apart from its enactment by individuals.However, the rich agency story that exists will not be told at the individual level ofanalysis. Without question the purpose of structure is to constrain, and make predictable,individual judgment and decision making. Current approaches will not allow us toevaluate the ways that CPA firms will change practice by undergoing the revisions topractice described in the previous section.

EthicalityAn important question that lies not too far removed from any evaluation of the

structural changes in public accounting is its impact upon the ethicality of practice. Thecomplicity of accountants in the many financial scandals of the last three decades haveleft no one willing to just assume that accountants will invariably do the right thing.Assuming that the firm has an interest in its reputational capital, systems need to bedesigned to ensure that individual behavior conforms to social expectations andprofessional guidelines. Differing organizational structures create different monitoringcapabilities and tendencies.

For the most part, the study of ethics in accounting presumes a firm withoutstructure. Since most studies implicitly assert that ethical behavior is an individualchoice, how the firm organizes them for the production of the work does not matter. Noris ethicality seen to be affected by peers on either side of organizational boundaries.Despite sufficient criticism of the Kohlberg-Rest paradigm (e.g., Reiter and Williams,2000; Reiter, 2000), accounting research has not found ways to integrate the shape ofaccounting organizations into the normative decision making process.

Organizational self interest and its service to the public interest are intertwined incomplex ways (see Parker, 1994). The firm does not have an appetite for the unlimitedpursuit of either. Structure opens up certain possibilities and closes down others in thisbalance. It also acts as a symbolic barometer for that which is valued and that which isgiven lip service. This duality is also mirrored in the enforcement process and in thepromotion process (O’Leary and Boland, 1987; Ponemon, 1992). Studies limited to themoral development of individuals are severely restricted in their conception of the impactof opportunities and incentives for both individuals and the firms that employ them.

Bureaucratization

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When accounting first donned its mantle as a profession, research explored thecontours of these claims. Following Hall (1968a; 1968b), who suggested a generalantagonism between professionalism and bureaucratization, several researchers attemptedto find the fulcrum between these attributes. Although a certain degree of tension wasassumed, this work identified a multidimensional equilibrium. For example, Montagna(1974) saw professional norms making bureaucratic structure unnecessary. Larson(1977) found professionalism picking up as the control device after bureaucratization haddefined roles and their relationships. However, the bulk of this work sought personalorientations towards one or the other that created depravations of the preferred, thatwould in turn lead to dysfunctional outcomes (e.g., Sorensen and Sorensen, 1974). Thus,it was generally concluded that, properly managed, the two forces could be madecompatible in the modern services organization (see also Abernathy and Stockwinder,1995).

This agreed upon synthesis has allowed most to ignore the disquiet between theconstituent modes of control. The change in public accounting discussed above wouldseem to tip the balance (if indeed there ever was one) toward bureaucratization. This isconsistent with Larson’s (1977) prediction and contrary to Wade’s (1987) idea ofprofessionalization as a fully viable alternative. Comforted by the idea thatprofessionalism protects practitioners in several ways, researchers have underestimatedthe shaping power of bureaucratic roles and procedures (Merton, 1940) and the taskspecific seriousness of the conflict (Gillespie and Morrissey, 1975).

The emergence of new forms of accounting practice calls for new theory bywhich professionalism merely tempers the power of bureaucratization. Followingdevelopments in medicine and other occupations, a new hybrid rationality may exist(Ritzer and Walczak, 1988). Public accounting may follow a path of corporate inclusionsimilar to that of managerial accounting (see Roslender, 1992). This may meanrecharacterizing professionalism as a quality control mechanism (Ross and Duff, 1978)and accepting the subversion of professional norms by organizational policies (Harris-Jenkins, 1970).

Nature of Organizational StructureEarly studies of auditing revealed a dichotomy regarding how the work was

performed. Ideal types were constructed that highlighted the differences between thestructured/mechanistic and the unstructured/organic (Sullivan, 1987; Mullarkey, 1987;Dirsmith and McAllister, 1982). This lead to the Cushing and Loebbecke (1986)characterization of firm types that has been used consistently as the definition of auditstructure (e.g., Bamber et al. 1989; Hermanson, 1997). Despite criticism that it is notinternally consistent (McMillian et al. 1996) and impossible to achieve in practice(Francis, 1994), this simple binary idea continues to capture the idea of structure inaccounting (e.g., Hyatt and Prawitt, 2000).

The thinking that persists in making the organization of accounting workexogenous ignores many important features that become obvious in periods of rapidorganizational change. First, the work of an organization is a social and cognitiveendeavor not reducible to a series of steps (Power, 2001; Meyer, 1988). Activity isconstantly resistant to codification and boundaries are in perpetual negotiation (Davis and

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Powell, 1992). Structure cuts to the essence of what the organization is and can be.Anything less does not do the concept justice.

The realization that organizations are not completely free to design theirstructures presents another research agenda. Institutional theory suggests thatorganizational structure is partly symbolic and designed to ensure societal approval(DiMaggio and Powell, 1983). The extent to which these displays affect actualoperations is a question that has not yet been satisfactorily approached (Powell, 1985). Inaccounting, structure at the team level (Rudolf and Welker, 1998) may therefore beinconsistent with that of the organizational level. This also complicates our appreciationof organizational change, since we cannot rely upon economic rationality (Powell, 1991).

StratificationEvery profession engages in the myth of homogeneity within its ranks. The belief

that all practitioners have equal prestige is essential to public confidence (Johnson, 1972).In fact, elites tend to define the hierarchy of segments that pattern mobility, interactionand even values (Richardson, 1987).

Accounting has been a two-tier profession for some time (Olson, 1978). Thestructural changes discussed in this paper promise to increase the distinction between theBig 5 and all others in several ways. The former tends to work extensively in growthareas of consultancy at the periphery of practice, while the latter tends to be moreorthodox in its service mix. This also makes the Big 5 more likely to “push theenvelope” on rules that restrict its ability to embrace the resources needed to aggressivelyexpand practice. This suggests an emergent task-based distinction that would intertwinewith the already existent status-based one.

The stratification of accountancy may also reflect changes in the organization ofcapital. The subservience of those professions that have a primary business clientelecannot escape this influence. Brint (1997) suggests that this reflects the means by whichknowledge is translated into goods and services. Although probably overstated, recentcapital shifts into intangible domains might demand the efficiency of “one stop shopping”for the solution to problems that cannot be easily pigeonholed. Although economicsituations do not determine particular structures, they might be highly influential indetermining the robustness of current arrangements.

POSSIBLE CONSEQUENCES

Hall (1968) suggests a delicate balance exists between organizations andprofessions. Purposeful changes in one threaten corresponding necessary changes in theother. Accordingly, the organizational changes discussed above can be considered tohave a set of possible consequences.

Pursuit of the Public InterestThe shortcomings of accountancy in its accomplishment of the public interest

have been recognized for some time (e.g., Dyckman, 1974; Olson, 1978). Duties owed tomany constituent groups and their representatives are gainsaid by a practice that hasincreasingly grown comfortable with corporate management as the only client that

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matters (Hanlon, 1994). The public interests that do not coincide with these privateinterests are marginalized since the market perceives the former to be externalities. Thestructure changes now contemplated (or in progress) seem to merely continue thisfamiliar story.

Dedication to purely private interests is rarely a societally acceptable posture.Instead, professions are routinely obligated to attempt to speak on behalf of some versionof the common good (Jepperson and Meyer, 1991). As part of this, professions tend todeny conflict that might be more obvious if the public good was defined in different ways.In the changes currently proposed, accountancy has become less guarded and lesscircumspect in its articulations. The public interest arguments tend to be couched inassumptions about the lack of a difference between that and private interests. The“news,” in other words, is that much of the pretense has been stripped away. We arebeing asked to believe that the furthering of profitability within current capitalisticarrangements is the only real public interest.

Truth in AccountingThe work of any profession is characterized by its particular truth claims

following its diagnostic routines. This persists in accounting in many ways, most notablythrough the tenor of the auditors’ opinion and homage to “true and fair” financialstatements. Although a generation of work on judgment biases has eroded an academic’sview on the empirical validity of any truth in the work of accountants, it persists as acommodity traded in the world of practice. Nonetheless, truth does not exist but isinstead produced. As such, the organizational conditions for its production need to beappreciated.

In auditing, the dangers of accepting client positions may be endemic to theundertaking (Pasewark et al. 1990). Furthermore, these temptations are associated withaccepting accuracy goals (Kadous et al. 2000). That which increases the search foraccuracy may therefore be problematic in its consequence. As firms grow larger and lesshomogenous, centralization may search for common denominators in order to standardizeand successfully manage from afar. This may call for increased attention on appropriatemeasures and consequences of centralization (e.g., Chang, 1996). Beyond auditing, thecentralization that might come from managing the firm from a singular place mightreduce problems of valuation and predictability that plague organizations such as we findin public accounting (Bloom and Alexander, 1982). Here, however, over managementmay also produce its own problems. Professionals tend to rely more on a situationalspecific, contextually sensitive type of knowledge that is a socially developed feel-for-the-landscape (Brint, 1997). Accordingly, it may defy the rules that a more explicitstructure may bring.

Audit QualityHow to define audit quality should be an important concern for both practice and

research. Lacking sufficient outcomes other than those provided by the legal system inthe event of audit failures, audit quality has turned to the process of auditing fordefinition. If auditing is judged by its intention to pursue quality, a close examination of

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organizational structure is needed. Structure creates incentives and constraints to searchfor additional information, to accept clients positions, and to qualify opinions all of whichbear greatly upon quality.

Changes to the entities that perform audits are likely to translate into certainattitudes toward costs. How much quality one is willing to purchase is a question morerealistic than quality in the abstract. Managing audit firm as businesses creates pressuretoward pursuing efficiency, even as it conflicts with effectiveness (McNair, 1991).Nagging concerns over effectiveness, however, can underestimate the pursuit ofefficiency (Fisher, 1996). The cost/quality dilemma may be decided by the extent ofredundancy and review built-in to systems. The firm also has to balance short term andlong term advantage (see Houston, 1999) by protecting in various degrees against aninsufficient of business and over aggressiveness.

All three structural changes viewed in this paper bear upon increases in the scopeof services offered by accountants. In its most extreme, the reflection of the audit as aspecialized consulting engagement (Jepperson, 1998) requires choices to be made aboutaudit quality. This degree of customization may blind auditors to systematic weaknessesand unreliable information (Saul, 1996). The emergence of value-added auditingdisguises, but does not solve, continuing problems with auditing in general (Swift et al.2000). New structures may likewise board the bandwagon of continuous improvementwithout adequate understanding of its antecedents.

Research on quality reduction acts has uncharacteristically reached beyond theindividual auditor. Profitability pressures (Houston, 1999) and supervisory practices(McNair, 1991) point toward structural concerns, perhaps even more precisely than thoseexplicitly invoking structure (e.g., McDaniel, 1990). More consideration of structure willbe needed as recent changes to audit organizations will influence the ability of the firm tohandle increased social responsibilities (Braun, 2000) and boundary spanning duties(Gramling, 1999) in an environment where quality reduction is a recurring phenomenon.To the extent that firms may actually benefit from such, audit quality reduction reflectsboth incentives and opportunities (Willett and Page, 1996) but in ways that do not mimictraditional deviance.

Practice DevelopmentNo structural change that is considered is far removed from positioning the firm

to appeal to a broader clientele. As businesses, growth through practice development iscritical to the success of accounting organizations. Now that the numerical strength ofthe profession has reached a certain saturation point (Young, 1995), a proactive pursuit ofclients, combined with innovation in services is required. Structures may be not onlyaligned with this objective, but might prioritize it above other objectives.

Extant research suggests that a practice development preference may be in theprocess of occurring. Auditors seem to bypass, or ignore risk screening client procedures(Johnstone, 2000). Auditors seem to be willing to see gray areas in furtherance of clientdevelopment opportunities (Cohen and Trompeter, 1999). Most tellingly, inexperiencedauditors are more profoundly affected by the need to bring in business (Moreno andBhattacharjee, 2000). Especially for those that are unfamiliar with any other regime, thenormalization of a business logic is well underway. That accounting organizations no

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longer stand somewhat outside the marketplace is useful in justifying some of the“logical” changes to practice that have been in progress.

The structures that govern compensation and performance evaluation are criticalto the members of an organization. To the extent that they reiterate the importance ofpractice development, the values of the organization are clarified. Trompeter (1994)differentiated the degree offices of a firm emphasized profitability and illustrated a nexusto audit decision making. That the structural changes in the offering all seem to point inthe direction of a higher emphasis on money making, consistency would seem to havebeen achieved.

AutonomyProfessionals are differentiated from other people by their ability to contrive their

own work product (Freidson, 1970). When employed by organizations, structures mustbe in place to preserve this autonomy, least they be turned into regular corporateemployees. Organizations, through job description and review procedures, communicatethe value of independent behavior versus the degree conformity and uniformity are moreimportant. Autonomy for professionals is always under threat when they are employedby large organizations (Shaw, 1987). A sense of autonomy is believed to be the key to apositive work orientation, triggering many valuable outcomes (Bishop, 1977; Meiksensand Watson, 1989) and preventing the development of negative ones (Podsakoff et al.1986; Kerr et al. 1977).

Accountants exhibit a similar pattern. Dourma (1982) shows autonomy to be thesingularly important feature of accountants’ professionalism. However, relative to otherprofessions, accountants may have modest professionalism, judged by a low level ofcommunity identification (Dyckman, 1974) and weak interpersonal ties (Morrill, 1992).They may be more accustomed to limited roles in their own self-direction (Belkaoui,1991). Even so, accountants can exhibit resistance to some pressures of conformity andcontrol (e.g., Covaleski et al. 1998).

The structural changes considered by this paper offer mixed autonomy results.The movement toward multidisciplinary practice may actually tend to increase autonomysince other professions with stronger histories of such claims within organizations maymake demands that are contagious. On the other hand, consolidations appear to be adistinct threat to professional autonomy (Mauldin, 2000). The spin-off of consulting maywork in either direction, dependent upon the speed at which consulting and the “newaudit” (Fogarty, 2000) regenerates.

DiffusionAt present, none of the three innovations in practice discussed in this paper

represent the norm for public accounting. The importance of this examination ispredicated on an assumption that certain obstacles will be cleared so that they will growmore common, perhaps to the point that they will come to dominate practice. Until thatpoint, a wide variation of hybrids will exist as the structural changes slowly diffuse intoconventional practice.

Very little research considers the rate of adoption for new structures in publicaccounting. In other literatures, such a topic has been approached in a variety of ways,including the speed of adoption (e.g., Greenburg, 1997), the antecedents of adoption (e.g.,

18

Tolbert and Zucker, 1983) and conditions that underlie the level of nonconformity thatwill be tolerated (Miller and Chen, 1996). The struggle between alternative structureshas been approached as one of selection ecology (e.g., Carroll and Huo, 1986) and ofpower politics (Torres, 1988). In a rather regulated but yet very profitable sector,accountancy would seem to depend upon the latter more than the former.

Why changes are adopted require explanations more robust than transaction costmodels can provide. DiMaggio and Powell (1983) provide a template for change thatinvolves coercive, mimetic and normative forces. This, combined with Oliver’s (1990)insights on choices available to organizations, provides a useful beginning to thisquestion. At a strategic level, one could also envision organizational learning at work,even in an environment sufficiently beneficent so that survival is not at stake.

Organizational CultureLarge scale changes to organizations tempt changes to that which make the

organization special. Often developed as organizational culture, this idea ofunduplicatability and uniqueness may be comprised by new marching orders broughtabout by structural revision. In the past, this has most often occurred in the merger oflarge practices where culture differences have been said to preclude deals and todetermine their success (CPA Partners’ Report, 2000). Although organizational culturehas been poorly operationalized, it possesses broad potential to capture variation about animportant phenomenon.

Holms and Marsden (1996) explicitly grapple with organizational culture inpublic accounting firms. In addition to hypothesizing firm differences, they also illustratedifferences between exterior and interior tonalities and posturings. This straddles theessential issue of whether organizational culture is a strategic resource that can bemanaged toward some particular firm objective, or whether culture is an ascribedattribute that is beyond the control of firm leaders. The former, if at all valid, wouldprove difficult to manipulate, since culture reaches well beyond the tacit behavior ofmembers. For these purposes, self knowledge (CPA Partners’ Report, 2000) can only bea start rather than a prescription for successful symbolic management. Multidimensionalsocialization efforts over an intergenerational timeframe would be needed.

The structure changes now facing accounting are very culture laden. Theaccounting profession has long held itself out as qualitatively different than those it nowproposes to join with. It has also steadfastly maintained that it is not just a business likethe businesses that are now buying accounting firms. The work done by these firms alsohangs in the balance. The skill that practitioners are encouraged to develop and exercisecan be directed towards solving some of the neglected puzzles of the discipline (i.e.,materiality, recognition), just as well as they can be encouraged to conquer problems thatare distinctly non-accounting in nature.

New organizational structures convey that which may be the most serious threatto conventional organizational culture, advanced information technology. The computerat the heart of practice deskills some, and enskills others. In the process, technology hasthe potential to change what the firm is all about. The culture of the accounting firmdepends on the resolution of whether the technology is a tool to deliver services better oris the service to be delivered.

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CONCLUSIONSThis paper has sought to connect proposed changes in the structure of accounting

organizations to their environment. This interface is rarely investigated per se, andtherefore tends to be a taken-for-granted background for work focused on more specificquestions.

The argument in this paper sought to appreciate the interplay between economicand social factors. Strong economic rationales for change have been brought to bear onthe shape of public accounting. Undeniably, accounting is not only subsumed by, butalso a constituent part of, the contested ideological terrain of capitalism that produces aneed to constantly grow and brings with it a large parcel of techniques to do so.Nonetheless, economic factors rarely create a particular imperative. In fact, they areequally likely to rationalize strategies that originate elsewhere.

Organizational change, especially in the professions, cannot just be imposed.They need to align with societal expectations for these occupations that are deeply rootedin prevalent beliefs and values. The importance of symbolic capital in these areassuggests that organizational change may undermine important elements of trust(Llewellyn, 1995). In order to acquire necessary resources that facilitate institutionalreproduction, the legitimation of these changes will be necessary. For these purposes, acertain degree of external control over what many would characterize as internaldecisions, needs to be acknowledged. Much of what has been explored in this paperpertains to struggles over the trajectory of important outcomes that can be linked to thesechanges.

Accounting organizations are dynamic entities that can become many things thatthey are not. Structural change puts what people want from them in a clearer light.Many have argued that the benefits produced by these changes merely create largerdeficiencies in other outcomes such as perceived independence (Mauldin, 2000),professional status (Dyckman, 1974) and contribution to the integrity of the capitalmarkets (Levitt, 1998). On the other hand, putting expertise to work in new areas ofuncertainty, and in the gaps between existing areas, has a considerable value.

This paper has argued for a critical updating of the classic ideas ofprofessionalism that still enter these debates. As applied to accounting, the classicprofession is no longer an empirical reality. What accounting professionalism is nowvaries in its context from being a control device within firms to being an ideology forexternal consumption. What is also clear is that accountancy is a heterogeneous set ofinterests that have few shared agendas. Nonetheless, a conspiracy to believe to thecontrary is often useful to achieve a variety of purposes.

The regulation that still exists around the practice of accounting did not createmuch of a focus for this paper. Governments still possess the power to control thevariation of practice, both at the micro level of specific engagements and the macro levelof organizational design. Professional authority is still intertwined with legal mandates inauditing and taxation work. Differences between nations have not been completelyerased. However, the accountancy profession does have an impressive track record ofgetting its way. The legal obstacles to organizational change have been crumbling onboth a de jure and a de facto basis. In advance of official legal “reform,” the professionhas been successful at decoupling its formal self from its operational self in ways thatallow it to pursue its strategic objectives. Over time, the subterranean is blessed, usually

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in the name of collective economic well-being. Therefore, regulation seems to be atransient phenomena that should not be treated seriously when contrary to the economicinterests of powerful groups. There is also a growing ability of accountancy to overcomedifficulties caused by variations in nations’ regulatory treatments. Capital is transnational.

This paper has selectively underplayed certain aspects that merit recognition fortheir involvement. Very little treatment was provided for changes in the actual conductof the accountants’ work. The technological dimensions of this could have beensuccessfully brought to the foreground. Most notably, this paper has obscured thelanguage that has been employed to bring about the structural changes that are considered.Language is central to how values become embedded and enacted. Ultimately, it alsoarticulates the macro level phenomena of organizational structure into everyday work.

This paper could be accused of a certain degree of present-minded bias. It hassomewhat blatantly engaged in the bad history of imagining more distant times asrelatively static for the purpose of focusing on recent turbulence. It is quite possible thatevery era thought of itself as particularly beset with unprecedented change, and that acase for such could be made. Nonetheless, such does not gainsay the importance of theissues raised in this paper, although it might question the historical uniqueness of them.

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