Ensuring Independent Auditors: Increasing the ... - Springer Link

Group Decis Negot (2009) 18:41–56 DOI 10.1007/s10726-008-9123-0

Ensuring Independent Auditors: Increasing the Saliency of the Professional Identity Danielle E. Warren · Miguel Alzola

Published online: 6 August 2008 © Springer Science+Business Media B.V. 2008

Abstract We conceptualize threats to auditor independence as conflicts of social identity rather than interest and hypothesize that the greater the saliency of the professional identity among auditors, the more likely the auditor will engage in independent decision-making. Furthermore, we assert that saliency of non-professional identities and weakness of the professional image threaten independence. We hypothesize that a return to the traditional will relate positively to the saliency of the professional identity among auditors and ultimately, to independent decision-making. Actions for re-establishing the external image of the profession are drawn from historical references to the traditional image. Keywords Auditor independence · Conflict of interest · Professional responsibility · Social identity · Group membership · Objective decision-making How to reinforce auditor independence is a problem that has long puzzled theorists and practitioners. Typically auditor independence is conceptualized as a conflict of interest which arises when auditors have competing professional or personal interests. For instance, past research has found that non-auditing services threaten auditor independence (Bailey 1995; Briloff 1987). Some, however, view a model based upon conflict of interest as limiting and call for new approaches to advance the literature (Alm and McKee 1998). Here we draw from the organizational literature on identity

D. E. Warren (B) Accounting, Business Ethics & Information Systems Rutgers Business School – Newark & New Brunswick Rutgers, The State University of New Jersey, 111 Washington Street, Newark, NJ 07102, USA e-mail: [email protected] M. Alzola Department of Legal and Ethical Studies, Fordham University, 33 West 60th Street, New York, NY 10023, USA

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D. E. Warren, M. Alzola

and deviance as a means to reconceptualizing the factors affecting auditor independence with the goal of better understanding how to promote it. In essence, an auditor’s attempt to deliver independent, unfavorable decisions is not unlike the struggles of those who resist corrupt organizational norms for the purpose of meeting the demands of society and bettering the organization. Much like those who display constructive deviance or try to enforce regulatory rules in the face of corruption, the auditor experiences a myriad of social influences that can hinder the delivery of unpopular decisions (Kleinman and Palmon 2000; Kleinman et al. 2003; Moore et al. 2006; Warren 2003). By considering auditor independence as a matter of conformity and deviance in relation to specific group identities, we are able to fully consider the social influences that threaten independence and integrate findings from identity theory. Thus, we see the role of multiple group memberships and identification as a critical component of theory on auditor independence and assert that theories that do not recognize the existence of these multiple groups will fall short in predicting auditor independence. For instance, one may theorize that an individual difference of perceived autonomy is desirable for auditing positions because judgments must be free from client influence. Yet, while acting autonomously from the client’s perspective, the auditor must also conform to professional bodies and standards (Warren 2003). This has direct implications for assertions regarding individual differences because the same attribute that predicts resistance from client influence may also cause resistance from professional bodies. The complexity of social influence in the auditing context is further realized when an accounting firm’s practices depart from industry practices or societal expectations. In such scenarios, auditors must resist their own firm practices and the client firm practices in order to deliver independent decisions. As seen in the Enron case, Andersen managers allowed, if not supported, the corrupt practices of their client. If an auditor working for Andersen wanted to uphold professional standards, he or she would need to deviate twice (from the directives of managers at Andersen and from the expectations of the client, Enron). In such cases, auditors need to resist the influences of two corrupt influences, their employer and the client firm, in order to pursue a decision that serves society. In short, the auditor need not question or resist all group influence, just the wrong influence, that is, influence that departs from professional duties. What then causes an auditor to favor one set of practices over another or resist influence in both organizations? Rather than conceptualizing auditor behavior as the result of conflict of interest, we conceptualize it as conflict of salient identities and this difference allows for new theoretical advancements. We begin by reviewing conceptualizations of auditor independence and follow with a consideration of the groups that are most likely to influence auditor decisions. Using social identity theory, we present theory on the role of identity and image in accounting, which we argue affects the saliency of professional identity, and thereby increases the likelihood of independent decision-making among auditors. More specifically, an auditors’ most salient identity will focus on that which provides the most esteem and we assert that the most esteem-enhancing identity must be the source of standards for independence. We argue that changes to the profession have negatively affected the image of the profession and that a renewal of traditional professionalism is required to improve the

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profession’s image, which, in turn, affects auditor identification with the profession and, ultimately, independent decision-making. We end by proposing the way in which accounting firms play a role in projecting the traditional professional image.

1 Auditor Independence Unlike the average employee who tries to resist corrupt influences, the auditor has an obligation to resist corrupt influences when judging the financials of the firm. The auditor is formally required to resist pressures to conform to firm or client practices when such practices depart from professional rules, which embody societal expectations. Society’s expectations are oriented towards the auditors’ roles as trustworthy evaluators of accounting reports and society values this work because the financial markets depend upon the reliability of such reports. Thus, promoting auditor independence benefits society because the auditor plays an essential function in the operation of the economic system. Some may use the term “independent” to refer to the profession, an auditing firm, an individual, or a specific act. As Antle (1984, p. 1) indicates, “’auditor independence’ traditionally has had no precise meaning.” Conceptualizations of independence vary in focus from the nature of the decision (unbiased, objective) to the groups involved in the decision (clients, shareholders, public). For instance, some definitions emphasize the source of specific group influence, such as the client, which the auditor must avoid as well as groups who need to be protected. Duska and Duska (2003, p. 125) provide Justice Burger’s account of auditor independence: “The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.” In this conceptualization of independence, the auditor must avoid client influence and focus on protecting other groups such as creditors, stockholders, and the greater population of investors. Others describe auditor independence without mention of specific groups but with a focus on the attributes of an auditor’s decisions. According to Vatter’s (1950, p. 8) Managerial Accounting textbook, “The major function served by both public and managerial accountants is to use their independent judgment with complete freedom; thus they may observe and evaluate objectively, the fortunes and results of enterprise operations...” Similarly the American Institute of Certified Public Accountants (AICPA 2007) defines independence as a, “…state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.” These notions of independence mention no specific groups to avoid or protect. They are focused on the nature of the evaluation as an accurate depiction of the firm’s financial standing. A third approach to defining auditor independence specifically appeals to professional responsibility and duties. Dunfee and colleagues explain, (2004, pp. 73–74)

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“The general responsibilities of auditors to act objectively and to perform audits with competency and due care arise from their professional roles. Some of an auditor’s specific obligations are imposed by law or contract; others stem from the actions of professional bodies and general social norms.” This definition blends the preceding two by focusing on the quality of the decision and professional responsibilities that stem from groups such as professional bodies. Building on past approaches, we refer to auditor independence as the delivery of objective decisions that align with professional obligations to the public. Decisions that involve the objective evaluation of firm’s financial reporting, we assert, will best meet societal expectations. To make progress in understanding motivations for a lack of alignment between auditor decisions and societal expectations, we must also understand the other reference group norms to which auditors may be conforming. Therefore, we will consider both, conformity and deviance, in relation to the multiple reference groups of an auditor.

2 Salient Social Identities of Auditors Auditors, like other employees, identify with different groups inside and outside the organization for a variety of reasons (shared work tasks, proximity, career path) and the strength of these affiliations motivates auditors to align themselves with the beliefs held by these workplace groups. Because of this influence, we assert that group identification affects auditor decisions, specifically their independence. Borrowing from literature on social identity theory, we present theory on the relationship between group identification and auditor independence. In doing so, the influences facing auditors are better understood and recommendations for promoting independent decision-making are offered. Ashforth and Mael (1989) apply social identity theory to the work setting and describe group identification as a cognitive process that involves a perception of affiliation with a group and sense of personal success and failure related to group outcomes and well-being. Building on Ashforth and Mael’s definition, others describe identification as a similarity or congruence between an individual’s perception of self and that of the organization. This process occurs when an individual’s beliefs about his or her organization become self-referential or self-defining (Ashforth and Johnson 2001; Dutton et al. 1994). This sense of association with group well-being and outcomes is particularly meaningful for auditors who may identify with their non-professional reference groups. To the extent that these identifications lead to ingroup–outgroup distinctions, the auditors’ sense of identification may lead to important biases in judgments that threaten independence. Past research documents the importance of ingroup membership in decision-making, particularly negotiations. These studies suggest that negotiating with an ingroup member leads to more cooperation, more generosity, and more favorable distribution of resources than negotiating with outgroup members (Glac et al. 2005; Gomez et al. 2000; Robert and Carnevale 1997). To the extent that negotiations relate to other types of social interactions, we may assume that these ingroup-outgroup distinctions

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will affect social interactions between auditors and those that they consider ingroup members and, in turn, could threaten independence. Existing literature on auditors emphasizes three important group affiliations for auditors: Client Firm, Accounting Firm, and Professional Bodies (Kleinman and Palmon 2000). In the remainder of the paper, we consider the auditors’ identification with these groups and hypothesize the effects of such identifications on auditor independence.

2.1 Client Firm Identification with client firms has long plagued the auditing industry. While accounting firms desire auditors who are focused on client relations and satisfaction, such associations should not overpower the auditor’s relationship with the accounting firm. To the extent that the client relationships do overpower the firm relationships, the accountant is more likely to focus on pleasing the client than management at the accounting firm. According to documentation of decision-making during Enron’s downfall, senior partners at Andersen expressed concerns about Enron’s special partnerships and decided to tell Enron to create a special committee to oversee the partnership transactions (McLean and Elkin 2003). Even though the senior partner assigned to Enron, David Duncan, was present at the Andersen meeting and involved in the decision regarding the special committee, he never relayed the message from the partners to the Enron Board of Directors, who met the following week. Instead, Duncan suggested Andersen was satisfied with Enron’s internal controls (McLean and Elkin 2003, p. 317). Duncan’s failure to carry through on the decisions of the Andersen partners suggests that he would rather deviate from Andersen partners’ mandates than disappoint the Enron Board. Presumably, Duncan’s actions were affected by the strength of his affiliation with Enron. Similarly, others argue that the widespread practice of auditors taking positions with clients undermines the sense of separation between auditor and client identities and promotes auditor identification with the client group. As Moore and colleagues explain, “….there can hardly be a more effective means of establishing a common identity between auditor and client than rotating personnel between the two” (Moore et al. 2006, p. 16). Many of these issues have led to calls for auditor rotation where auditors must switch clients on a regular basis. Determining the right length of auditor assignment is difficult because some familiarity is needed to effectively conduct an audit but longer attachments strengthen identification and favoritism. Sarbanes Oxley is meant to address these issues but some find Sarbanes-Oxley Act provisions insufficient because they do not address all of the ways in which auditors take jobs with the audited client firm (Moore et al. 2006). In order to resolve the phenomenon of client firms hiring ex-auditors to fill senior-level accounting positions, the Sarbanes-Oxley Act requires that “the CEO, Controller, CFO, Chief Accounting Officer or any person serving in an equivalent position cannot have been employed by the company’s audit firm during the one-year period preceding the audit” (Public Company Accounting Reform and Investor Protection Act 2002, Section 206). This measure, however, may not be satisfactory because it does not bar the entire audit firm, just the lead auditor

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(Strier 2006) and a one-year ban may be insufficient to prevent identification with the client firm. Strier notes further weaknesses in that, “there is no bar on transfers from the auditor to higher-level positions within the former audit client that are directly below positions such as the CEO, CFO, and controller” (Strier 2006, p. 69). After being an auditor for a certain period, one can immediately become an assistant vice president of accounting, wait a year and take one of the restricted positions. For example, an Arthur Young partner in charge of a Lincoln Savings’ audit, took a job with the client less than a month after completing the audit, and received a salary that was four times higher than his auditing salary (Morris et al. 2003). In short, even after accounting for recent regulatory changes, auditor identification with the client is likely to continue and the extent to which it does occur will affect auditor independence. Resolving all issues with auditor rotation will not ensure independence because identification with clients is not the only threat to independent decision-making. Another threat, identification with the accounting firm, still exists and can present considerable influence away from professional behaviors and independent decisions.

2.2 Accounting Firm As we just discussed, auditor rotation is seen as a way to weaken the sense of identification with clients such that the auditor experiences less influence when delivering decisions. Such rotation, however, can cause undesirable changes in the accounting firm identities and threaten independence. Some argue that rotation breeds instability and that firms will focus on reputation from the client’s perspective because of their need to frequently win new business (Moore et al. 2006). This, in turn, may move the accounting firms further towards impression management and away from delivering objective and possibly unpopular decisions. Furthermore, if the auditing firm upholds values that depart from regulators or society, rotating the auditing firm may not affect independent decision-making. If the accounting firms possess values that depart from traditional professional values, then auditors who rotate clients will still experience influence from their biased firms. Under such circumstances, socializing auditors to better comply with firm values will only harm independent decision-making. This misalignment between accounting firms and professional obligations is viewed as a major cause of the financial scandals in 2001 and the requirement to split accounting services from consulting services can be viewed as an attempt to reorient the accounting firms towards professional obligations (Duska and Duska 2003; Moore et al. 2006; Zeff 2003). As we will discuss later, this split does not perfectly align accounting firm values with professional values and the extent to which differences still exist will affect independent decisions among auditors. To summarize, we assert that the saliency of non-professional identities—more specifically the client and the accounting firm—will affect auditor independence such that identification with these groups will cause influence in judgment that can run counter to independence. In such circumstances, the auditor takes the client’s or accounting firm’s concerns into consideration when judging the financial reporting of the client and thereby exhibits decisions that are not independent.

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H1: The greater the saliency of non-professional identities (client, accounting firm) among auditors the less likely the auditor will deliver independent decisions.

3 Professional Identity & Image The professional groups which provide guidance to auditors include state societies, state boards and the American Institute of Certified Public Accountants (Kunitake and White 1986). Of all the groups that influence auditors, these are the only ones that possess values and rules that are designed to align with the professional obligations of auditors. In this section, we present theory on increasing the saliency of professional identity and, ultimately, the likelihood of independent auditor decisions. Our theory centers on the esteem associated with the identity that stems, in part, from the external image of the profession. Social identity theorists assert that individuals identify with certain groups as a means to improving self-esteem (Tajfel and Turner 1986). Scholars explain that the groups with higher status will be more appealing than those that have less status because higher status groups offer more opportunities for esteem enhancement. Extending this proposition to auditors and saliency of identities, status associated with the accounting firm and client identities poses threats to the saliency of the professional identity. If auditors find more esteem associated their “non-professional” identities, such as the firms that employ them or their clients, then the status of the profession is an obstacle preventing the saliency of the professional identity and, in turn, independent decision-making. Much like a cancer specialist may find an association with Memorial Sloan Kettering as more esteem enhancing than an affiliation with American Medical Association, an auditor may find an affiliation with a top accounting firm more esteem enhancing than an affiliation with the AICPA. Similarly, an assignment with a fastgrowing, well regarded client may provide more opportunities for esteem enhancement than an affiliation with the AICPA. Ultimately, the theory suggests changing the member’s perception of the profession and increasing the attractiveness of the professional identity will produce greater member identification (Dutton et al. 1994). As Roccas and Brewer (Roccas and Brewer 2002, p. 97) explain, when there are differences in the relative status of in-group, “self-representation will be dominated by the highest status group.” The status of a group is, to some extent, dependent on its image. In the past, researchers have examined the role of multiple perceptions of an organizational image but with a focus on the differences between the internal and external perceptions. For instance, researchers note the importance of an organization’s external image as well as the individual’s perceived organizational identity (see Dutton et al. 1994; Dukerich et al. 2002). Thus, individual identification is not only a matter of the individual’s perception of the firm but a result of how the individual perceives the external image of the organization. Returning to the earlier example, a doctor will identify more closely with Memorial Sloan Kettering than the American Medical Association because, in part, the hospital possesses a very favorable external image. Here we advance a similar argument but add another dimension, namely, image over time. More specifically, we assert that the saliency of the traditional professional identity is critical to auditor

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independence and that the identity’s saliency can be improved by promoting the image of the traditional professional identity. We argue that the return to the traditional professional identity is necessary to justify the very existence of the auditing profession at the societal level. In this section, we explain these assertions regarding the importance of the traditional professional identity in more detail. We begin by discussing multiple interpretations of the professional identity and then, by drawing on historical depictions of the accounting profession, we argue for the reinstatement of traditional professional identity. We see this reinstatement as a precursor to an improved professional image, saliency of professional identity and, ultimately, auditor independence. Just as the Sarbanes-Oxley Act separated consulting services from accounting services with the goal of reestablishing traditional auditor-client relationships, we assert that the professional identity may be re-established through a return to traditional professional activities.

3.1 Traditional versus Contemporary Interpretations Accountants identify the 1950s and 1960s as the Golden Age, where traditional professional values were upheld and independence was the foundational principle of the profession (Gendron et al. 2006). Even before the post-Enron era, during the 80s and early 90s, accountants were concerned about the erosion of professional values and the transformation of their profession into a business activity (Berton 1985a,b; Zeff 1987). Today, there is a transformation in the accounting and auditing profession, which some authors describe as an evolution from profession toward business (Kosmala and Herrbach 2006). As Duska and Duska (2003, p. 174) explain, “What seems to be going on, at least from the point of view of those critical of the direction the accounting profession is taking today, is that the profession has ceased to be a profession and succumbed to the pressures endemic to being a business driven by the profit motive.” What initially was an overreaching principle of independence is today seen as an obstacle to the generation and development of new businesses by contemporary auditors and a constraint to attract new clients. As Zeff (1987, p. 66) explains, “Independence is an anathema; serving as clients’ advocates is in vogue.” Many claim a symptom of the declining values is the identification of companies as “the client” (Czaja 2005; Zeff 1987). According to this perspective, the very existence of the accounting profession ought to be justified in terms of the real client, which is the public interest and trust, the investors and creditors on whose behalf the audit is conducted, not the reporting entity. Ultimately, the true problem may not be the lack of identification with the profession but, rather, identification with a different identity, a contemporary professional identity, which differs greatly from the traditional ideal (Strier 2006; Zeff 1987, 2003). Many argue that the most important change in the professional practice of accounting and auditing is the migration away from traditional types of accounting work (Preston et al. 1995). The reduction of the profit margins in auditing has lead to a diversification of services, from auditing to non-auditing services. This diversification was driven, in part, by the client firms that pressured accounting firms to reduce the

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costs of professional services in general and the accounting fees in particular. In the early 70s the AICPA removed the ban on competitive bidding from its code of ethics (Code of Professional Ethics Rule 303) and some say this move threatened independence by weakening rules on encroachment, solicitation, and advertising (Kunitake and White 1986). Auditors are now more sensitive to making money and, consequently, the main client of their services is not the general public but corporate management and boards of directors. We view this difference in the conceptualization of an auditor’s “client” as an important distinction between the contemporary and traditional professional identity. Further distinctions lie in the contemporary professional identity’s acceptance of non-accounting services, diversification of professional tasks, heightened concern for commercial issues, and sensitivity to the client’s needs and interests. In other words, the nature of auditor’s professionalism has changed and moved from an auditing culture toward an emphasis on multiple professional services. According to this perspective, the auditors need not perceive any conflict between professional and accounting firm values: the contemporary professional identity de-emphasizes auditing and independence and, in turn, emphasizes the business of accounting, which aligns with the firm’s identity. Even if this picture of the contemporary professional identity is accurate and auditors find more esteem in this identity, the very existence of the accounting profession is socially justified on the basis of its attachment to the traditional values of objectivity and to the notion that the real client is the public trust. If the traditional values of objectivity are no longer upheld, external auditors are not needed because the diversity of tasks—which are nowadays attached to the “contemporary” professional identity— could be performed by internal auditors and other business consultants. The traditional professional identity, which emphasizes objectivity and obligation to society, must be salient to promote independent decisions. This argument serves as the foundation for our arguments favoring a return to the traditional professional identity. H2: The greater the saliency of the traditional professional identity among auditors, the more likely the auditor will deliver independent decisions. The shift from the traditional to contemporary forms of professional identity could be conceptualized in terms of Fiske’s (1992) relational models, which categorize most basic forms of social relationships and have implications for identification. More specifically, Fiske (1992) differentiates relational models by the way they guide action. In a communal-sharing relational model, individuals contribute their resources to the group and access to group resources depends only upon membership with the group. Past conceptualizations of the auditor’s professional identity reflect this relational approach in the pooling of knowledge and experience that were shared across the community. The distinction between relational models is best realized when notions of social influence are considered. According to Fiske (1992, p. 695), social influence in the communal-sharing relational model encourages a “desire to be similar to others, to agree, maintain unanimity…” From the standpoint of augmenting the auditors’ sense of alignment with the profession, a form of identification that depends upon the communal-sharing relational model will cause the auditors to not only contribute more to the profession in terms of expertise but also feel a sense of unity and conformity with the profession and its rules. Thus, one might characterize the shift from the traditional

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to the contemporary professional identity as a shift away from the communal-sharing model. Building upon the communal-sharing relational model, we consider two components of the profession—a sense of community and expertise—which we assert will promote the reinstatement of the traditional identity. While we discuss the components separately, we believe they interact and reinforce one another.

3.2 Community As a result of this increasing diversity and heterogeneity of tasks, some argue that the sense of community in the auditing profession has been damaged (Zeff 1987, 2003; Gendron et al. 2006). Past changes to the work within accounting firms have led to an increase in the frequency of interactions with other professions, which can erode the sense of a professional community of auditors. In turn, the auditors are not reminded daily of the professional rules and norms that should guide their behavior. Thus, exposure to non-professional identities at work hinders a sense of professional community. Other factors working against a sense of community include the shift in auditor role models within the accounting firms. The current role models with accounting firms are not necessarily auditors by training. Tinker (2002) estimates in 1999 that 33% of the more than ten thousands partners in the Big Five accounting firms were non-CPA partners who possessed diverse specializations such as information technology, engineering, and consulting. This shift in leadership could be a reflection of changes in the business as auditing activities only accounted for approximately a third of these firms’ revenues (SEC 2001; Panel on Audit Effectiveness Report and Recommendations 2000). The breakdown of revenue, coupled with the orientation of the leadership, suggests auditing services did not hold a central role in large accounting firms and this arguably contributed to the firms’ orientation away from the traditional professional image of accounting. As the leadership shifted towards other areas of specialization, the auditor’s role models became more diversified and we assert that this negatively affected the sense of community among auditors. To recreate a sense of community that is oriented towards the traditional identity, the accounting profession needs to focus on problems related to auditing services and common professional interests. Empirical literature indicates that in the accounting profession, professional values and behavior are influenced more by informal than formal processes (Chatman 1991; Iyer et al. 1997). This research suggests that informal processes should be targeted when creating a sense of community. Therefore, any change in the regulation of the accounting profession should be concerned with not only restoring the homogeneity of tasks but also the reinforcement of the traditional auditing community. Recent bans on the practice of consulting by accounting firms provide some help with respect to the nature of the work (Duska and Duska 2003; Moore et al. 2006; Reiter and Williams 2004; Zeff 2003) but further steps may be required to augment the sense of community. Other means for re-emphasizing a sense of community can be discerned from empirical research on auditor attachments to accounting firms. In a study of accounting firm

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alumni, Iyer et al. (1997) found that accounting firm policies enhanced employee identification with the firm such that auditors would continue to make decisions that favored the accounting firm even after they left the firm. More specifically, the accounting firm alumni were more likely to make decisions that benefit their former employer if the accounting firm had favorable policies and practices regarding personnel recruiting, counseling, and alumni relations when the alumni was still employed. Much of this research stems from a desire to understand the benefits of enhancing auditor identification with their current or former employer but provides some insights for professional organizations which desire long lasting relationships with auditors that extend beyond employment with one firm. From this study, it appears that the professional identification could be enhanced if professional organizations establish continuing professional education, counseling, and programs that focus on collegiality and mentoring. Some also suggest the profession must also seek changes to teaching methods in accounting, provide professional and ethical training in the classroom, emphasize ethical content in the CPA examination, and provide ethical training during induction to the professional practice (Bean and Bernardi 2005). Thus, the empirical evidence on strengthening the sense of community and attachment among firm alumni may be used to strengthen the sense of community and attachment among members of the profession. A stronger sense of community is likely to reinforce the values of the profession, heighten the saliency of the professional identity, and thereby promote independent decisionmaking.

3.3 Expertise Specialized Knowledge. Another feature of the transition from the traditional model of auditing to the contemporary commercialist trend is the transformation of a principle-based activity into a rule-dominated profession. According to some researchers, the practice of auditing is no longer oriented towards professional judgment but to following arbitrary rules and looking for loopholes that benefit the client firm instead of obeying the economic reality of a transaction (Bamber and Iyer 2002). Rules also dominate the teaching of accounting and the examination of accountants for the CPA (Zeff 1987). As Montagna (1968, p. 143) notes, “…because of the tremendous increase in the number, extent, and specificity of these rules, CPA’s fear a severe limitation on the scope of their professional judgment. What was once unwritten rule or mystique is now rationalized; in the process of formalizing its rules, the profession transforms that knowledge from an intellectual to a mechanical technique.” Accounting education overemphasizes technical education and the technical features of the profession to the neglect of the moral aspects of the job (Rest 1986 cited in Patterson 2001, p. 139). As a result, auditors may be less sensitive to ethical issues in their profession and may be more disposed to perform unethical acts and be involved in unethical practices when they follow the orders of their superiors, especially when those orders are expressed in the technical language of the profession (Patterson 2001). Thus, by shifting attention away from the underlying principles of the traditional identity to the rule-oriented contemporary identity, auditors lost their sense of specialized knowledge and area of

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expertise. This loss, in turn, weakens the saliency of the professional identity because it provides less esteem. Knowledge Creation. Traditionally, expertise for the accountant did not only fall within the domain of existing knowledge but also extended to the creation of new knowledge. Zeff (1987) notes that during the 60s and 70s, it was common in the U.S. to see articles written by accounting firm partners in journals which pointed the way towards trends and advancements in financial reporting. Today, however, the partners and the big firms design publications with the sole purpose of acquiring and retaining clients. Their interests have migrated away from educating staff members, academics, and the general public in new approaches to accounting practices. Furthermore, Zeff (1987) asserts that many firms are less involved with professional boards and, given the intensity of competition, are averse to taking public positions on controversial issues that may affect their actual and potential clients. By participating actively in writing articles in professional journals and other publications, auditors may regain a sense of specialization. Aside from sharing new knowledge, these publications would reinforce a sense of community and serve to remind auditors of the foundational values of the accounting profession and the role of audit in society. Critics may argue that the evolution away from knowledge-creation practices was sensible because all that was needed in terms of accounting knowledge was already known. The stance is difficult to accept as globalization of business and use of intangible assets grows. Such expansion adds new complexity and challenges to the practice of valuation. By reclaiming their position as experts in the creation of new knowledge, auditors may promote the status and saliency of the traditional professional identity and thereby increase the likelihood of independent decision-making. In short, we assert that by reinstating the community and activities traditionally practiced by auditors, the professional identity will increase in status. To the extent that auditors align themselves with the traditional professional identity, auditors will be more likely to deliver independent decisions and thereby realize the purpose of the profession. H3: Emphasizing auditor community and expertise will relate positively to the saliency of the traditional professional identity among auditors.

3.4 Accounting Firms’ Image of the Auditing Profession The weakness with any reform in the regulation of the accounting profession is that individuals do not identify with rules; they identify with groups and, to date, the profession is largely seen as a distal rule-generating group while the firms are more proximal and engaged in daily social interactions with auditors. Roccas and Brewer (2002) note that task groups are related through personal ties and develop face-to-face links while loose associations cultivate symbolic and depersonalized relationships. Using this conceptualization, the accounting firm represents a task group for the auditor while the profession is only a loose association. Given the close contact of task groups, we would expect their identities to possess stronger saliency than those of loose associations, which presents serious concerns regarding the saliency of the profession relative to the accounting firm. We assert, however, that in the case of the auditor’s

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professional identity, the accounting firms can serve as conduits for strengthening the reflection of the professional image. Just as accounting firms can negatively affect saliency of the professional identity, they can serve as a positive influence and promote professional and organization identification. Empirical evidence suggests that professional identification and organizational commitment can coexist in the big accounting firms (Bamber and Iyer 2002). In an empirical study of 252 auditors, Bamber and Iyer (2002) found identification with an auditor’s employing organization related positively to identification with the profession and reduced organization-profession conflict. It appears the accounting firm, to some extent, is a conduit for the individual auditor’s professionalism.1 Given the accounting firm’s role in advancing the profession’s image, it appears necessary to shift the accounting firm’s image of the profession from the contemporary to the traditional professional identity for the traditional to become salient. We believe this endeavor serves the accounting firms because the justification for an auditor’s existence lies in their independent decision-making, which is best promoted using the traditional identity of the profession. Indeed, the accounting firm can provide a professionally-oriented culture and the best vehicle to exercise independent judgments as professional auditors. This begins with an emphasis of the traditional image of the professional identity.

Saliency of Non-Professional Identities

(-) H1

Saliency of Traditional Professional Identity (+) H3

Independent Decisions (+) H2

(+)H4 Accounting Firms Image of Traditional Professional Identity

Profession s Emphasis Community Expertise Model 1 Salient social identity & Independent decisions

1 This research, however, was not focused on matters of independence in that the study did not address issues related to specific issues where the two groups depart in their desires and influence regarding auditor decisions. Yet the findings are still useful because they display a potential for harmonious relationships between accounting firm identification and professional identification.

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H4: Shifting the accounting firms’ image of the profession towards the traditional identity will relate positively to the saliency of the traditional professional identity among auditors. 4 Model Our hypotheses combine to create a model of auditor independence which relies upon the saliency of the traditional professional identity. We describe multiple means for promoting a return to the traditional professional identity: reemphasizing auditors’ community and expertise and shifting the accounting firms’ image of the profession (model 1). 5 Conclusion What do we gain by conceptualizing auditor independence in terms of a conflict of identities rather than a conflict of interests? We assert that group identification is an underappreciated component of auditor independence and that framing auditors’ decisions as a matter of identification leads to theoretical advancements; even if auditors want to be as impartial as required by professional bodies, they cannot be independent if they identify with non-professional groups such as clients and thereby favor them due to ingroup biases. It also suggests that mere economic incentives meant to align auditor interests with those of a particular group may fail because the set of motivations driving auditor identification extend beyond economic self-interest. A group’s image plays an important role in shaping one’s sense of esteem and thereby affects an auditor’s sense of their most salient social identity. By addressing the auditor’s relationship with the profession in terms of identification, we are able to present theory on the means for reinforcing attachments to the profession and its rules that depends upon desirability of membership with a respected community rather than simple financial gain. Because auditors’ most salient identities will likely focus on those that provide the most esteem, those that provide the most esteem must be the source of standards for independence. We assert that changes to the profession have negatively affected the image of the profession and that a renewal of traditional professionalism is required to reinstate the image of the profession, which, in turn, affects auditor identification with the profession and leads, ultimately, to independent decision-making. References Alm J, McKee M (1998) Extending the lessons of laboratory experiments on tax compliance to managerial and decision economics. Managerial Decis Econ 19:259–275 American Institute of Certified Public Accountants (2007) ET Section 101—independence, Accessed on March 12, 2007 on http://www.aicpa.org/about/code/et_101.html#et_101 Antle R (1984) Auditor independence. J Account Res 23:1–20. doi:10.2307/2490699 Ashforth BE, Johnson S (2001) Which hat to wear? The relative salience of multiple identities in organizational contexts. In: Hogg MA, Terry DJ (eds) Social identity processes in organizational contexts. Ann Arbor, MI Ashforth BE, Mael F (1989) Social identity theory and the organization. Acad Manage Rev 35:232–244.

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