The Inevitability of Enron and the Impossibility of 'Auditor Independence' Under the Current Audit System

73 Pages Posted: 11 Mar 2002

See all articles by Sean M. O'Connor

Sean M. O'Connor

George Mason University - Antonin Scalia Law School, Faculty

Date Written: March 1, 2002


The most surprising thing about the spectacular collapse of Enron may be that this kind of colossal public audit failure did not happen sooner. The kind of ploys that Enron executives seem to have been involved in are not new: indeed, versions of them formed part of the original impetus for the U.S. securities laws. The public company disclosure and audit procedures created by the securities laws established a watchdog in the form of accounting firms to certify the books and financial statements of public companies to curb just these kinds of abuses. Accordingly, the accounting firms are supposed to be "independent" of the audit client and act on behalf of shareholders and the public, not the audit client's management. The problem is that, however well this system worked at its inception, it is fundamentally flawed now such that as a practical matter it is impossible for auditors to be "independent" of their audit clients.

The current audit system sets up a fundamental tension for the auditor because the parties to whom he technically owes allegiance are not the party who hires him and pays for his services. Accordingly, auditors' objectivity and independence are potentially compromised simply by accepting the audit engagement: accountants, like other service providers, rely on repeat business from their customers and they may well consider the prospects of being retained for next year's audit even as they perform this year's audit. The provision of non-audit services by auditors to their audit clients has exacerbated this fundamental tension, but I argue that a changing business environment and culture for accountants - based on the commodification of professional services generally - has taken what may have been a manageable problem and rendered it unworkable as a practical matter. Thus, even a full prohibition on non-audit services will not remedy the current issues underlying the debate over auditor independence.

This paper is primarily intended to be a resource for those interested in auditor independence issues by analyzing the development of the accounting and audit profession, the background of the Securities Laws, the current state of private and public regulation of accountants who provide statutory audits, the dramatic changes in the business environment for professional services over the past few decades, and throughout it all, the evolution of the concept of "independence." Its secondary purpose is to suggest some alternative frameworks for performance and regulation of the statutory audit which map onto the important background political spectrum of ideologies ranging from a free market deregulation approach to a protective government agency regulation model.

Keywords: Enron,Aauditor independence, Accountants, Accounting, Audits, Auditor, Non-audit services, Securities regulation, Gatekeepers, Reputational intermediaries, Professional services, Commodification

JEL Classification: G18, G38, K22, M40, M49, Z13

Suggested Citation

O'Connor, Sean M., The Inevitability of Enron and the Impossibility of 'Auditor Independence' Under the Current Audit System (March 1, 2002). Available at SSRN: or

Sean M. O'Connor (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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