A series of financial scandals, climaxing in the 2002 bankruptcy of the Enron Corporation, revealed a key weakness in the American business model: the failure of the U.S. auditing system to deliver true independence. We offer a two-tiered analysis of what went wrong. At the more micro tier, we advance moral-seduction theory which explains why professionals are often unaware of how morally compromised they have become by conflicts of interest. At the more macro tier, we offer issue-cycle theory which explains why conflicts of interest of the sort that compromised major accounting firms are so pervasive. The latter theory depicts organizations as norm creatures (not just followers) that: (a) relentlessly seek out rent-seeking opportunities under rhetorical smokescreens designed to create attributional ambiguity about their intentions; (b) retreat only under intense pressure, such as that created when conflicts of interest lead to significant losses among important political constituencies; and (c) as soon as outrage wanes, reconcentrate their lobbying efforts to gain the upper hand against countervailing diffuse interest. We close by proposing potential solutions to conflicts of interest.
NOM
46 pages
Complete Text (Acrobat PDF Version on faculty web site)
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