Wednesday, August 6, 2014

AUDIT BIZ | Award for Toffel and Peirce (Comment)

Prof. Michael Toffel, Harvard B School
The winners of the 2014 Research Impact on Practice Award are:
Professors Lamar Pierce (Washington University in St. Louis) and Michael Toffel (Harvard Business School) for their study on the key qualities of trustworthy auditors.
The award was just announced at the Academy of Management’s annual meeting in Philadelphia. Pierce and Toffel published their findings in the journal Organization Science. Their article, “The Role of Organizational Scope and Governance in Strengthening Private Monitoring,” was based on research about the conditions under which auditors provide more stringent audits.

Prof. Lamar Pierce, Olin
School of Business, Washington
University in St. Louis
They concluded that auditors are more lenient when auditing customers who buy their other services.

They recommend that audit committees and shareholders get more rigorous auditing from auditors that are:
  • Solely focused on auditing.
  • Franchises or subsidiaries of a parent firm that monitors them.
The award is given by a Canadian public-private partnership in business sustainability, formed by the Network for Business Sustainability (NBS) Canada, and the Organization and the Natural Environment (ONE) Division of the Academy of Management, the professional organization for management professors.

Comment

With hindsight, the award-winners' advice would have worked well as a warning about audit rigor on the part of the late firm of Arthur Andersen & Co. (founded 1913; its eponymous Chicago-based founder, known for his high audit standards, died in 1947). The firm in the late 1990s was 
(1) not solely focused on auditing, in fact its partners' revenues tripled in the 1990s through the firm's consulting work, and 
(2) composed of independent local offices which were neither franchises nor subsidiaries, with  internal controls and "peer audit reviews" that were found to be ineffective too late to halt the decline and fall of the firm.

In the wake of the bankruptcies of Enron (2001) and WorldCom (2002) and other firms, many Andersen audits were found to be flawed. When the firm was convicted of obstruction of justice - document-shredding by the counsel's office and the manager of the Enron account - its fate was sealed.  

From a high of 85,000 employees worldwide, the firm now has only about 200, all of them focused on winding it down - even though its obstruction-of-justice conviction was eventually reversed by the Supreme Court.