e a

Q, UK

p ofy aut wituntsudits,s and

corporations and management are not corrupt and thatcompanies and their directors are made accountable. Inan uncertain world, corporate audits areduce comfort by reassuring the stakeholdnology provides an external and objectway in which the nancial statements havand presented, and it is an essential part o

assuniesGove

measures of revenues, costs, assets, liabilities, and protsare contested technically as well as politically and also be-cause capitalist economies are inherently prone to crises(OConnor, 1987). The claims of expertise are frequentlypunctured by unexpected corporate collapses, frauds, andfailures. Such events fuel the suspicions that auditors lack

society.At the time of writing (December, 2008), major Western

Financial crisis and auditors

A salient feature of the current nancial crisis is that ithas been incubated by the nancialisation of Westerneconomies, most notably the US economy, which createdan abundance of credit and encouraged excessive risk-taking through complex nancial instruments (derivatives,credit default swaps) and corporate structures and

0361-3682/$ - see front matter 2009 Elsevier Ltd. All rights reserved.

E-mail address: prems@essex.ac.uk

Accounting, Organizations and Society xxx (2009) xxxxxx

Contents lists available at ScienceDirect

Accounting, Organiza

w.e

ARTICLE IN PRESSdoi:10.1016/j.aos.2009.01.004enables them to mediate uncertainty and construct inde-pendent, objective, true, and fair accounts of corporate af-fairs. This expertise, it is claimed, enables markets,investors, employees, citizens, and the state to limit andmanage risks. Such claims, however, are precarious as

amounts of fees from distressed enterprises. The secondsection offers reection on the role of auditors and sug-gests possible areas of research. The nal section brieysummarises the paper.Accountants, as auditors, have cemented their statusand privileges on the basis of claims that their expertise36). the nancial crisis and shows that a large number of enter-prises have collapsed within a short period after receivingunqualied audit reports. Auditors also received largebalances required. . . Audits are a rehave a nancial interest in compathe Financial Aspects of CorporatePlease cite this article in press as: SikkaSociety (2009), doi:10.1016/j.aos.2009.01expected to pro-ers that the tech-ive check on thee been preparedf the checks andrance to all who(Committee onrnance, 1992, p.

economies are going through a deepening nancial crisis,given visibility by banking failures and massive state inter-vention to rescue ailing nancial institutions. Against thebackdrop of increasing economic turbulence, this paperseeks to stimulate debates about the quality of auditingby examining the audit reports issued on the nancialstatements of distressed nancial enterprises. It consistsof three further sections. The next section contextualisesFinancial crisis and the silence of th

Prem SikkaCentre for Global Accountability, University of Essex, Colchester, Essex CO4 3S

a r t i c l e i n f o a b s t r a c t

Against the backdroabout contemporarsought state supporcollected large amovalue of company atives for good audit

Introduction

External audit is promoted as a trust engendering tech-nology (Power, 1999) to persuade the public that capitalist

journal homepage: ww, P. Financial crisis and.004uditors

the current nancial crisis, this paper seeks to stimulate debatesditing practices. It notes that many nancial enterprises havehin a short period of receiving unqualied audit opinion. Auditorsin audit and non-audit fees. The events raise questions about theauditor independence and quality of audit work, economic incen-the knowledge base of auditors.

2009 Elsevier Ltd. All rights reserved.

the requisite independence, expertise and incentives toconstruct the promised true and fair account of corpo-rate affairs. They also provide an opportunity to reectand (re)construct the role of auditing in contemporary

tions and Society

lsev ier .com/ locate/aosthe silence of the auditors. Accounting, Organizations and

ineffective regulatory mechanisms (Ferguson, 2008; Mor-ris, 2008; Soros, 2008). Banks, hedge funds and insurancecompanies have been key actors in the nancialisation ofthe economy and are estimated to have lost aroundUS$2.8 trillion (Bank of England, 2008).

The social cost of the unfolding crisis is difcult to esti-mate, but vast amounts of public money are being used toprop-up distressed nancial enterprises. For example, in

accounting practices have passed muster (New YorkTimes, 13 April, 2008).5 Table 1 shows that distressednancial enterprises, whether in the UK, USA, Germany,Iceland, The Netherlands, France or Switzerland, received

2 P. Sikka / Accounting, Organizations and Society xxx (2009) xxxxxx

ARTICLE IN PRESSaddition to providing huge sums to stimulate bankingliquidity, the UK government has set aside 500 billion(about US$750 billion) to support nancial enterprises(The Guardian, 8 October 2008). It has closed London Scot-tish Bank, nationalised Northern Rock and is taking a stakein a number of other banks. The US government has closed22 banks,1 including Lehman Brothers, Washington Mutualand Indymac. It has rescued Freddie Mac, Fannie Mae, BearStearns and created a bailout fund of $700 billion to pur-chase stakes in troubled banks (Los Angeles Times, 4 Octo-ber, 2008). Altogether the US government has committednearly $8.5 trillion, around 60% of its gross domestic prod-uct, to arrest the collapse of its nancial system (San Fran-cisco Chronicle,2 26 November, 2008). The EuropeanCentral Bank has provided around 467 billion to supportbanks. Germany has set aside over US$400 billion to bail-out ailing banks (Wall Street Journal, 11 October, 2008).So far, Ireland, Iceland, Hungary and Turkey have soughtnancial assistance from the International Monetary Fund(IMF) to manage the crisis (The Guardian, 21 October,2008, 29 October, 2008, 20 November, 2008).

Regulators and investors have traditionally relied uponcorporate nancial statements to make sense of bank lia-bilities, risks and economic exposure, but this has beenhighly problematic (Stiglitz, 2003). An early estimate sug-gested that despite a raft of accounting standards, bankshad around US$5000 billion of assets and liabilities off bal-ance sheet (Financial Times, 3 June, 2008) though this g-ure is being constantly revised. Citigroup alone has someUS$1.23 trillion of assets in entities which are not shownon its balance sheet (Wall Street Journal,3 24 November,2008). Some banks have shown assets, especially subprimemortgages, at highly inated values and derivatives havelong been a powerful tool for inating company protsby hiding losses and hence the risks of company opera-tions (Hildyard, 2008, p. 30). The chief executive of a lead-ing nancial advisory business argued that a big part ofthe problem is that accounting rules have allowed banksto inate the value of their assets. Accounting has becomea new exercise in creative ction, with the result thatbanks are carrying a lot of sludge assets clogging upthe balance sheet (Reuters,4 30 October, 2008).

Attention has focused on auditors because of the beliefthat a green light from an auditor means that a companys

1 As per information on the Federal Deposit Insurance Corporation(FDIC); http://www.fdic.gov/index.html-accessed on 25 November 2008.

2 http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/26/MNVN14C8QR.DTL; accessed on 26 November 2008.

3 http://online.wsj.com/article/SB122747680752551447.html; accessedon 24 November 2008.

4 h t tp : / /www. reute r s . com/a r t i c l e /GCA-Cred i tC r i s i s / i dUS-TRE49T77O20081030; accessed on 30 October 2008.Please cite this article in press as: Sikka, P. Financial crisis andSociety (2009), doi:10.1016/j.aos.2009.01.004unqualied audit opinions on their nancial statementspublished immediately prior to the public declaration ofnancial difculties. These opinions were provided byone of the Big Four accounting rms PricewaterhouseCo-opers (PwC), Deloitte & Touche (D&T), Ernst & Young(E&Y), and KPMG.

Admittedly, the list in Table 1 is incomplete, but it isuseful for highlighting a number of issues. Adverse keynancial ratios are considered to be an indicator of goingconcern problems (Auditing Practices Board, 2004a), andmajor institutions acquired leverage ratios in the range of11:183:1 (Gros & Micossi, 2008). Excessive leverage hasthe potential to increase liquidity risk and jeopardise banksurvival. For example, a report by the US Securities and Ex-change Commission (SEC) noted that Bear Stearns washighly leveraged, with a gross leverage ratio of approxi-mately 33 to 1 prior to its collapse (US SecuritiesExchange Commission, 2008, p. 19). One expert informedthe US House of Representatives Committee on Oversightand Government Reform that Lehman Brothers, the fourthlargest investment bank, had a leverage of more than30 to 1. With this leverage, a mere 3.3% drop in the valueof assets wipes out the entire value of equity and makesthe company insolvent.6

The UK auditing standards, closely aligned with interna-tional auditing standards, state that the auditors proce-dures necessarily involve a consideration of the entitysability to continue in operational existence for the foresee-able future. In turn that necessitates consideration of boththe current and the possible future circumstances of thebusiness and the environment in which it operates(Auditing Practices Board, 2004a, p. 8). Auditing standardsalso require auditors to perform audit procedures de-signed to obtain sufcient appropriate audit evidence thatall events up to the date of the auditors report that may re-quire adjustment of, or disclosure in, the nancial state-ments have been identied (Auditing Practices Board,2004b, p. 3). How the auditors constructed audits to satisfythemselves that banks were a going concern are open toconjecture, but the nancial difculties of many becamepublicly evident soon after receiving unqualied auditreports.

For example, Lehman Brothers received an unqualiedaudit opinion on its annual accounts on 28 January 2008,followed by a clean bill of health on its quarterly accountson 10 July 2008. However, by early August it was experi-encing severe nancial problems and led for bankruptcyon 14 September 2008. Bear Stearns, Americas fth largestinvestment bank, received an unqualied audit opinion on28 January 2008. However, by 10 March its nancial prob-lems hit the headlines and on 14 March, with state sup-port, it was sold to JP Morgan Chase (US Securities

5 http://www.nytimes.com/2008/04/13/business/13audit.html?_r=1&oref=slogin.

6 http://oversight.house.gov/documents/20081006103223.pdf; accessedon 14 November 2008.the silence of the auditors. Accounting, Organizations and

ditor

and Tand TCand TMGCMGC + Md Guand TMG +CCMGMGand Yand YMGCand YCCand TMGMGandYand Y

P. Sikka / Accounting, Organizations and Society xxx (2009) xxxxxx 3

ARTICLE IN PRESSTable 1Auditors and distressed Banks

Company Country Year end Au

Abbey National UK 31 December 2007 DAlliance and Leicester UK 31 December 2007 DBarclays UK 31 December 2007 PwBear Stearns USA 30 November 2007 DBradford and Bingley UK 31 December 2007 KPCarlyle Capital Corporation Guernsey 31 December 2007 PwCitigroup USA 31 December 2007 KPDexia France/

Belgium31 December 2007 Pw

anFannie Mae USA 31 December 2007 DFortis Holland 31 December 2007 KPFreddie Mac USA 31 December 2007 PwGlitnir Iceland 31 December 2007 PwHBOS UK 31 December 2007 KPHypo Real Estate Germany 31 December 2007 KPIndymac USA 31 December 2007 EING Holland 31 December 2007 EKaupthing Bank Iceland 31 December 2007 KPLandsbanki Iceland 31 December 2007 PwLehman Brothers USA 30 November 2007 ELloyds TSB UK 31 December 2007 PwNorthern Rock UK 31 December 2006 PwRoyal Bank of Scotland UK 31 December 2007 DTCF Financial Corp USA 31 December 2007 KPThornburg Mortgage USA 31 December 2007 KPUBS Switzerland 31 December 2007 EUS Bancorp USA 31 December 2007 EExchange Commission, 2008; The Guardian 15 March2008). Carlyle Capital Corporation received an unqualiedaudit opinion on 27 February 2008. On 9 March, the com-pany was known to be discussing its precarious nancialposition with its lenders. On 12 March, the company an-nounced that it has not been able to reach a mutually ben-ecial agreement to stabilize its nancing and was placedinto liquidation (cited in Sikka, 2008a). Thornburg Mort-gage, Americas second largest independent mortgage pro-vider received an unqualied audit opinion on 27 February2008. On March 7, the company received a letter, datedMarch 4 2008, from its independent auditor, KPMG LLP,stating that their audit report, dated February 27 2008,on the companys consolidated nancial statements as ofDecember 31 2007, and 2006, and for the two-year periodended December 31 2007, which is included in the com-panys Annual Report on Form 10-K for 2007, should nolonger be relied upon (cited in Sikka, 2008a).

Table 1 shows that in many cases, auditors providednon-auditing services and this inevitably raises the age-old question about auditor independence. The issues wereagged by the US Senate Committees report on the col-lapse of Enron (US Senate Committee on Governmental Af-fairs, 2002) and revisited by the UK House of CommonsTreasury Committee report on Northern Rock. The Com-mittee stated that there appears to be a particular conictof interest between the statutory role of the auditor, and

Wachovia USA 31 December 2007 KPMGWashington Mutual USA 31 December 2007 D and T

Notes: Data as per nancial statements and statutory lings shown on the respeAudit fee also includes audit related fees.* Denotes that audit report draws attention to some matters already contained

Please cite this article in press as: Sikka, P. Financial crisis andSociety (2009), doi:10.1016/j.aos.2009.01.004Date of auditreport

Auditopinion

Fee (millions)

Audit Non-audit

4 March 2008 Unqualied 2.8 2.119 February 2008 Unqualied 0.8 0.87 March 2008 Unqualied 29 1528 January 2008 Unqualied $23.4 $4.912 February 2008 Unqualied 0.6 0.827 February 2008 Unqualied N/A N/A22 February 2008 Unqualied* $81.7 $6.4

azarsrard

28 March 2008 Unqualied 10.12 1.48

26 February 2008 Unqualied $49.3 PwC 6 March 2008 Unqualied 20 17

27 February 2008 Unqualied* $73.4 31 January 2008 Unqualied ISK146 ISK21826 February 2008 Unqualied 9.0 2.425 March 2008 Unqualied 5.4 5.728 February 2008 Unqualied* $5.7 $0.517 March 2008 Unqualied 68 730 January 2008 Unqualied ISK421 ISK7428 January 2008 Unqualied ISK259 ISK4628 January 2008 Unqualied $27.8 $3.521 February 2008 Unqualied 13.1 1.527 February 2007 Unqualied 1.3 0.727 February 2008 Unqualied 17 14.414 February 2008 Unqualied $0.97 $0.0527 February 2008 Unqualied $2.1 $0.46 March 2008 Unqualied CHF61.7 CHF13.420 February 2008 Unqualied $7.5 $9.6the other work it may undertake for a nancial institution(UK House of Commons Treasury Committee, 2008, p. 115).

Table 1 also shows that auditors received considerableincome from their audit clients, which may be very signif-icant for regional ofces managing the audit. The feedependency and related advancement of career can createconict of interests. The insolvency examiner of New Cen-tury Financial Corporation, Americas second largest sub-prime mortgage lender, stated that the company wasengaged in a number of signicant improper and impru-dent practices related to its loan originations, operations,accounting and nancial reporting processes.. . . KPMGengagement team acquiesced in New Centurys departuresfrom prescribed accounting methodologies and often re-sisted or ignored valid recommendations from specialistswithin KPMG. At times, the engagement team acted moreas advocates for New Century, even when its practiceswere questioned by KPMG specialists who had greaterknowledge of relevant accounting guidelines and industrypractice (United States Bankruptcy Court for the DistrictDelaware, 2008, pp. 2, 6, and 8).

Concerns about auditing practices have been ampliedby a number of commentators. A former minister in Irelandhas described auditors as a joke and a waste of time. Theyare lick-arses for the management of companies, becausecorporate governance doesnt work in our society. . . thebanks are in difculty because of their auditing. [Auditors]

25 February 2008 Unqualied $29.2 $4.128 February 2008 Unqualied $10.7 $4.3

ctive companys website.

in the notes to nancial statements.

the silence of the auditors. Accounting, Organizations and

are not independent but they are bloody-well paid (IrishTimes,7 18 October, 2008). One commentator askedWhats the point of having armies of number cruncherson fancy fees if they cannot spot the difference betweena shack in Alabama and a triple-A security? (The DailyTelegraph,8 22 October, 2008). Another commentator won-dered, . . . did the so-called Big Four accountancy rms getpaid by the banking industry to make all those sub-primeassets seem like they had value? Who was kicking thetyres and checking the inventories? Surely someone, some-where with a degree in Adding-Up must have peered into

4 P. Sikka / Accounting, Organizations and Society xxx (2009) xxxxxx

ARTICLE IN PRESSthe loan book and questioned its contents? (The DailyTelegraph,9 17 September, 2008). However, unlike the pre-vious banking failures (Arnold & Sikka, 2001) auditors havereceived comparatively light press scrutiny although theUS authorities are said to be investigating allegations offraud (The Daily Telegraph, 24 September, 2008). Somehave argued that the crisis may not result in criminalcharges against auditors, but it is certain to renew interestin how accountants conducted themselves (New YorkTimes, 13 April, 2008).10

Some issues

The nancial crisis raises some old and new questionsabout auditing practices. Traditionalists have often claimedthat external audit adds credibility to nancial statements.Such claims may be based upon the view that auditorshave inside knowledge and are thus able to curb manage-ment enthusiasm and impart superior information. Thedifculty with such a hypothesis is that the current nan-cial crisis shows that markets and signicant others werenot comforted by unqualied audit opinions issued by ma-jor auditing rms. For example, the 2006 nancial state-ments of Northern Rock, UKs fth largest mortgageprovider, carried an unqualied audit opinion. On 25 July2007, the banks interim accounts for six months to 30 June2007 received a positive report from its reporting accoun-tants. However, this did not prevent a run on the bank dur-ing August and September (UK House of CommonsTreasury Committee, 2008). Indeed, within days of receiv-ing unqualied audit opinions many banks listed in Table 1were seeking nancial support from the state. Overall, lit-tle is known about how credibility to accounts is addedand at whose behest, especially as audit evidence is notavailable to the general public. It would be useful to ex-plore how condence in auditing is eroded and the circum-stances that persuaded signicant others to ignore auditorassurances.

7 Firms have case to answer on banks crisis, Irish Times, 18 October2008 http://www.irishtimes.com/newspaper/ireland/2008/1018/1224233216915.html; accessed on 28 October 2008).

8 http://www.telegraph.co.uk/nance/comment/jeffrandall/3212394/If-anyone-can-nd-George-Osborne-tell-him-his-country-needs-him.html;accessed on 24 October 2008.

9 http://www.telegraph.co.uk/nance/comment/jeffrandall/2972337/Fantasy-nance-cuts-many-of-the-giants-of-global-banking-down-to-size.html; accessed on 28 October 2008.10 http://www.nytimes.com/2008/04/13/business/13audit.html?_r=1&oref=slogin.Please cite this article in press as: Sikka, P. Financial crisis andSociety (2009), doi:10.1016/j.aos.2009.01.004The issuing of audit reports is subject to organizationaland regulatory politics. Auditors may be reluctant to qual-ify bank accounts for fear of creating panic or jeopardisingtheir liability position. During previous banking failureslegislators argued that auditor silence caused substantialinjury to innocent depositors and customers (US SenateCommittee on Foreign Relations 1992, p. 4). To reassuremarkets and promote condence in nancial institutions,the UK government has enacted the Financial Servicesand Markets Act, 2000. It formalises exchange of informa-tion between auditors and regulators. It also requires audi-tors to inform the regulators if during the course of theiraudit they become aware of anything that materially af-fects the regulators functions of consumer protectionand maintenance of market condence (Auditing PracticesBoard, 2007). Within this context, auditors are obliged toinform regulators of their intention to issue a qualiedaudit report. Whether auditors did so or were dissuadedfrom issuing qualied opinions is not known. The politicsof audit opinion beg questions about the value of an audit.They draw attention to power relations and ideologies thatshape regulation of capital. Perhaps, in the coming monthsparliamentary inquiries will address such matters.Researchers might also consider mobilising the freedomof information laws to explore the relationship betweenthe state and accounting rms.

Auditors may argue that the nancial crisis unfoldedsuddenly and they were thus ill-prepared to make judg-ments about the likely nancial distress. The difcultywith such an argument is that nance capitalism has beenin ascendancy (Ferguson, 2008) and played a leading rolein the banking crises in Latin America (Collyns & Kincaid,2003), Sweden, Norway and Japan (Basel Committee onBanking Supervision., 2004; Englund, 1999). The US expe-rienced a Savings and Loan crisis (Lowy, 1991) and FannieMae has a history of accounting and auditing problems (USOfce of Federal Housing Enterprise Oversight., 2006). Thecollapse of the UK based Bank of Credit and CommerceInternational (BCCI) was the biggest banking failure ofthe twentieth century (Arnold & Sikka, 2001) and the de-mise of Barings attracted considerable international atten-tion (Zhang, 1995). Previous episodes have highlightedissues about earnings management, income shifting,excessive leverage and failures of conventional auditingtechnologies. Yet regulators have paid little attention tochanges in capitalism and emerging issues (Sikka, Haslam,Kyriacou, & Agrizzi, 2007). It would be useful to explore thelessons that can be learnt from recent scandals and trans-formations in the nature capitalism.

Auditing rms received considerable income from alldistressed banks, which may be signicant for local ofcesresponsible for issuing audit opinions. This raises twoquestions. Firstly, there are long standing questions aboutauditor provision of non-auditing services and the relatedimpairment of auditor independence (Powers, Troubh &Winokur, 2002; UK Department of Trade, 1976; UK Depart-ment of Trade, 1979; US Senate Committee on Governmen-tal Affairs, 2002). As a result of scandals, some restrictionshave been placed on the sale of consultancy services toaudit clients (for example, Sarbanes-Oxley Act, 2002), butthe change is always resisted. When, in the aftermath ofthe silence of the auditors. Accounting, Organizations and

the nationalisation of Northern Rock, the UK House ofCommons Treasury Committee (2008) expressed its con-cerns about the provision of consultancy services to auditclients, the immediate response from the Auditing Prac-

ports, court cases, case studies, oral histories and a variety

P. Sikka / Accounting, Organizations and Society xxx (2009) xxxxxx 5

ARTICLE IN PRESStices Board (APB), UKs auditing standard setter, was thatAfter Enron we consulted on this question of auditor con-icts of interest and there was no appetite for a blanketban on non-audit services (Accountancy Age,11 7 Febru-ary, 2008). The APB is dominated by the auditing industry(Sikka, 2002). Seemingly, control of regulatory bodies is animportant resource in organising unwelcome develop-ments off the political agenda, especially when they havethe potential to dilute rm income (Sikka, 1992). It wouldbe useful to examine the politics of regulatory change andparticularly the tactics used to resist and dilute auditingreforms.

The second question relates to the basic auditing modeland total auditor income. The auditing rms are capitalistenterprises and are dependent upon companies and theirdirectors for income. The fee dependency impairs claimsof independence and has the capacity to silence auditors(Powers et al., 2002; United States Bankruptcy Court forthe District Delaware, 2008). It poses fundamental ques-tions about the private sector model of auditing which ex-pects one set of capitalist entrepreneurs (auditors) toregulate another set of capitalist entrepreneurs (companydirectors). The aws of such a model persuaded an earlierUK conservative government to create an independentstatutory body for appointment and remuneration of audi-tors for public bodies (Heseltine, 1987). The auditors,including the Big Four accounting rms, are generally pro-hibited from selling consultancy services to audit clients.The proponents of such a model hoped to extend it tothe private sector, but this was not done. The aws of theprivate sector model were also recognised in the US inthe 1930s and the draft legislation creating the Securitiesand Exchange Commission (SEC) proposed that the Com-mission should be the auditor for public companies.12

However, under the weight of corporate lobbying the pro-posal was abandoned. The current nancial crisis is anopportunity to consider alternative institutional arrange-ments for auditing. Alternative models need not directlyinvolve accounting rms and audits of banks could be con-ducted by statutory regulators. This would also improvebanking regulators knowledge of banks.

Audit reports are the publicly visible evidence of anaudit. However, little is known about the processes andorganisational values associated with their production ofan audit. Such processes involve management of labour,economic incentives and images of clients, public and reg-ulators. Some prior literature has provided a glimpse of theingredients used to produce audits. For example, Hanlon(1994) argues that audit staff are inculcated to appease cli-ents and neglect wider social interests. In pursuit of prots,rms exert time budget pressures on audit personnel andsome have responded by adopting irregular practices and

11 http://www.accountancyage.com/accountancyage/analysis/2209088/rock-failure-casts-shadow-3792762.12 Corporate Crime Reporter 8, February 14, 2007 (http://www.corporate-crimereporter.com/turner021407.htm; accessed on 24 November 2008).Please cite this article in press as: Sikka, P. Financial crisis andSociety (2009), doi:10.1016/j.aos.2009.01.004of social science methodologies.The intensication of nance capitalism poses ques-

tions about the knowledge base of auditors. For over a cen-tury auditors have utilised methods of an industrial age inwhich tangible things could be examined, counted andmeasured and their values could be checked from invoicesand vouchers. Such a world has been eclipsed by complexnancial instruments (e.g. derivatives) whose value de-pends on uncertain future events and can be anything fromzero to several million dollars/pounds. Derivatives werecentral to the collapse of nancial and non-nancial busi-nesses such as Barings (Zhang, 1995), Enron (Powerset al., 2002; US Senate Committee on Governmental Af-fairs, 2002) and Parmalat (The Times, 17 March 2004).The US government bailout of Long Term Capital Manage-ment (LTCM) showed that even the Nobel Prize winners ineconomics had difculties in valuing derivatives (Dunbar,2000). It is doubtful that auditor knowledge surpasses thatof Nobel Prize winners. Seemingly, we have reached thelimits of conventional auditing technologies and ought tobe considering alternative forms of accounting, disclosuresand accountabilities.

Summary

The deepening nancial crisis poses questions about therole and value of external audits. Markets do not seem tohave been assured by unqualied audit opinions and manynancial institutions either collapsed, or had to be bailedout within a short period of receiving unqualied auditopinions. The events fuel the suspicions that auditors lackthe claimed expertise to render an independent and objec-tive account of corporate affairs. The episodes encouragereection on the role, value and independence of auditors.They also present opportunities for research into regula-tion, independence, politics, production and knowledgebase of auditors.

An independent inquiry into the role of auditing, espe-cially at nancial institutions, would help to highlight theshortcomings of the current practices. A UK legislator hasaccused accounting rms of delivering dodgy auditingeven resorting to falsication of audit working papers(Willett & Page, 1996). Auditing rms have shown increas-ing willingness to violate laws, regulations and assist theirclients to publish attering nancial statements (Sikka,2008c). Arguably, a steady stream of auditor liability con-cessions have also eroded economic incentives to delivergood audits (Sikka, 2008b). In the words of a former seniorVice-President of the World Bank, there are plenty of car-rots encouraging accounting rms to look the other way. . .there had been one big stick discouraging them. If thingswent awry, they could be sued. . . In 1995, [US] Congress. . .provided substantial [liability] protection for the auditors.But we may have gone too far: insulated from suits, theaccountants are now willing to take more gambles. . .(Stiglitz, 2003, p. 136). The above literature draws atten-tion to inherent contradictions in the design of auditsand also offers research opportunities for exploring theproduction of audits through examination of regulatory re-the silence of the auditors. Accounting, Organizations and

(Hansard, House of Commons Debates, 13 October, 2008,col. 553) and demanded a full scale inquiry into the con-duct of the audit work that signed off the banks accounts(Accountancy Age,13 23 October, 2008). Unsurprisingly,such calls are resisted by major auditing rms (Accoun-tancy Age,14 13 November, 2008) though they are usingthe crisis to demand further liability concessions15 and in-crease their prots. The auditing regulators have shown lit-tle interest in exploring the issues raised in this paper andare content to claim that auditing has had a good crisis,16

i.e., it has received little sustained press scrutiny.The auditing industry has mediated previous crises by

Hildyard, N. (2008). A (Crumbling) wall of money nancial bricolage,derivatives, and power. London: The Cornerhouse.

Lowy, M. (1991). High rollers: Inside the savings and loan debacle. NewYork: Praeger.

Morris, C. R. (2008). The trillion dollar meltdown: Easy money, high rollers,and the great credit crash. New York: Public Affairs.

OConnor, J. (1987). The meaning of crisis: A theoretical introduction.

6 P. Sikka / Accounting, Organizations and Society xxx (2009) xxxxxx

ARTICLE IN PRESSrevising auditing standards and codes of ethics (Sikka &Willmott, 1995) and the early signs are that the same strat-egies will be deployed again. For example, without exam-ining the processes associated with the production ofaudits, changes in capitalism, or limits of auditing, the USPublic Company Accounting Oversight Board (PCAOB)17

has issued seven new draft auditing standards.18 Suchmyopic policies are unlikely to reinvigorate auditing.

References

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Financial crisis and the silence of the auditorsIntroductionFinancial crisis and auditorsSome issuesSummaryReferences