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Auditors thus became regulatory agents, which considerably increased their status and potentially emancipated them from companies.

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Yet their overall reluctance to change led to an incomplete control of their professional knowledge, as academics and other regulatory actors had co-opted the process. The paper seeks to make two contributions: first, while the sociology of professions emphasizes the need to control professional knowledge Larson, ; MacDonald, , little is known about knowledge conceptions in accounting Richardson, ; Hines, and the ways in which auditors have attempted to make a knowledge claim.

Outside pressure from the regulator and vocal academics made auditors shift their knowledge conception toward a more technical understanding. Second, the study adds to recent work on the regulatory context of securities regulation and the ideological foundations of the US accounting profession Doron, , , It connects what emerged as standard setting to the earlier regulatory conceptions of accounting as a means of corporate control Radcliffe et al. The historical narrative follows in Section 5 , while Section 6 discusses the narrative and concludes the paper.

While a knowledge mandate also explains how influence is wielded, it does not fully recognize the dynamics of regulatory debates Joyce, Viewing regulation as any kind of rule-making, the regulatory space focuses on the actors participating in the regulatory process as well as their roles, positions, and interactions that are constantly negotiated. If challenged, such as by looming regulation, a profession tends to retreat to how its knowledge is created by invoking its cognitive foundations.

Halliday , p. This prescriptive core empowers them to engage readily in regulatory debates. Since they are the main users of their knowledge, they also hold the original and most powerful claim to this knowledge. Yet their cognitive base is not secure and enables other actors to join in on discourses and engage in policy debates.

Normative professions thus need to constantly defend their knowledge to maintain authority and their claim to be useful to society Halliday, ; Joyce, In the regulatory space, knowledge becomes contested, as tensions emerge around what it means and whether rules should be found for its application. Richardson , p. Auditors may be most versed in the practical application of these rules, whereas other groups, such as academics, may be better equipped to consider the fundamental principles underlying financial statements. In some countries, this has led to a division of labor between these groups Evans and Honold, Such knowledge conceptions are now taken for granted, but had yet to emerge in the period of investigation.

Applying judgment, perhaps within a framework of broad accounting principles, would be conducive to this claim, whereas a detailed set of rules might restrict judgment and a professional claim. Regulation became both a solution and a problem, with regulatory actors acknowledging some need for it, but fearing that it would place too tight boundaries on the exercise of judgment. Dressing moral issues as technical ones, power exerted in one area can be transferred to another.

This blurring is often sought actively and may even become unclear for the profession itself. The further away a profession acts from its primary sphere and the less it is able to blur the lines between expert and moral authority, the lower its legitimacy and influence. The forms of authority and the institutional spheres resonate well with the set of activities that are bracketed in the regulatory space MacDonald and Richardson, As large organizations are not only loci of power and holders of expertise, but also subjects of regulation Hancher and Moran, , powerful representatives of these organizations access the space and aim to influence the debates.

Given the elusiveness of accounting knowledge Hines, , auditors likely aim to blur the boundaries between technical and normative inputs to increase their influence. The question of the form of authority is closely linked to the kind of knowledge a profession aims to claim.


As the distinction between these forms also blurs for auditors themselves, the regulatory boundaries surrounding judgment curtail their technical advice and have moral ramifications. An institutional sphere may be understood as flowing from the activities of a profession and defining a set of activities for which rules are to be found. These activities define the sphere, where the profession is the most central actor and where it is most embedded in the prevailing practices Greenwood and Suddaby, ; Bucher et al.

Peripheral actors speak with less authority and may naturally look to this profession to become active and exercise influence, be it in the form of expert or moral authority Joyce, Conversely, peripheral actors may join the regulatory debates, so as to undermine the profession and occupy a central position themselves. To reap the benefits of its influence on the state, a profession needs to organize. As normative professions often engage in debates where strong beliefs are held, homogeneity becomes decisive in successfully launching collective actions.

Being able to coordinate actions will thus translate into a more powerful position in the space.

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As a starting point, secondary sources were reviewed to gain a thorough understanding of events in the period of investigation Carey, ; Zeff, ; Previts and Merino, ; Seligman, Subsequently, a conscious and substantial effort was made to go back to the primary sources and access the available documentary data and archival material for the time period of interest. This set of sources was augmented by articles in the Journal of Accountancy and The Accounting Review , as well as secondary material on the histories of the audit firms and biographies of key professionals.

First, a solid understanding of the time period was a key objective with an eye not only to grasp the major events of the period, but also to document these events via an analysis of the available and accessible material as outlined above. A second analytical iteration comprised a revisiting of the material to find the theoretical lens most useful to understand and analyze the material for the purpose of this study. The following narrative first maps out the regulatory space prior to the period of investigation to explore the positions of the main actors and conceptions of accounting that were considered, albeit vaguely, in the space.

The stock market crash disrupted this balance of power and auditors saw an opportunity to gain status and initiated a claim based on their knowledge. For one, they were dispersed among two professional organizations. Yet, in the s, AIA elitism was slowly undermined, as the Institute itself was increasingly made up of non-British auditors Nissley, This was also reflected in membership numbers: in , the ASCPA had 2, members and was larger than the AIA with 2, members, compared to more than 13, practitioners in the country Springer, , p.

Adding to this heterogeneity, each state had its own society of certified public accountants, with the one in New York being the most influential with 1, members Certified Public Accountant, , p.

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Leadership and political influence by the professional organizations remained weak in the s and also did not come immediately after the stock market crash Doron, Rather, it came in the person of powerful individuals, primarily George O. Besides Price Waterhouse, several other audit firms had established a national presence in the market, but had done so to a varying degree. The Securities Acts were significant stimuli for this expansion McCraw, , providing the large firms with more powerful positions in the regulatory space and offering auditors the opportunity to forge powerful coalitions with other actors.

In the early s, however, auditors were constituted only loosely and held together mainly by some vocal individuals. Another actor that turned out to be significant was accounting academics, who, like auditors, were so far suffering from a lack of recognition. From the beginning, there was a degree of overlap between professors and practitioners, which, however, did not translate into uniformly positive attitudes by auditors toward the academic association.

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Only when the ASCPA entered the arena in were academics seen more positively and those with a CPA were accepted as full members into the rival organization. When, in the mids, increasing numbers of auditors were university graduates, higher education began to be seen as important Nissley, ; Carey, The graduates often came from universities in the Midwest, whose accounting programs grew considerably at the time. While academics generally began to embrace research activities and association activities broadened, those located at Midwestern institutions also became active in professional affairs.

As managers invoked a right to corporate secrecy, they applied capricious accounting practices. This was enabled by a concurrent lack of auditing: A survey found that only of about 15, industrial companies had been audited Richardson, [2]. After , as will be detailed below, companies did not have much regulatory clout and were largely absent from the regulatory space. Instead, they would become the objects of government regulation, which aimed to engage professional groups, among them auditors, as part of the regulatory framework. As a result, and unlike a contemporary conjecture might suggest Botzem, , auditors were not representing companies by proxy in the space, but were to become regulatory agents, which conflicted somewhat with the previous views of them being in the grip of corporate management.

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Yet these intermediaries were slowly replaced by other actors who had little regard for transparency, but subscribed largely to market forces in their speculative activities. These players were mostly active in the over-the-counter market, where thousands of independent brokers and dealers traded absent any regulation McCraw, What emerged was a large information asymmetry between companies, who withheld accounting information, and retail investors, who relied on financial intermediaries that had little interest in reducing this asymmetry.

The only regulatory force was the stock exchanges, which varied widely in their requirements and their concern for disclosure. Edward H. Installed in to regulate interstate trade, it was set up in the spirit of the Progressive movement that saw the break-up of Standard Oil, American Tobacco, and DuPont Chemical. Regulatory conceptions of accounting mirrored the progressive thought, in that accounting was seen as part of a system of corporate control to ensure competition and oversight Clark, ; Radcliffe et al.

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Such a system of uniform accounting methods was used in the strictly regulated railway sector Adams, , but was at times also considered for other industries and on a national level Miranti, If carried out, it would entail detailed regulation in the form of standardized industry accounts. Between the stock market crash and , stocks listed on the NYSE lost more than 80 percent in value Seligman, Not only companies came under pressure, but also stock exchanges as the arbiters of accounting practices and overseers of securities markets in the spirit of self-regulation.

As Sobel , p. Unable to cope with the depression, finance capitalism conceded that it lacked powers formerly ascribed to the private sector of the economy. Leadership would have to come from another quarter. A government investigation was launched in April Lasting until June , the hearings, led by Ferdinand Pecora, focused on the corporate misbehavior prior to the stock market crash, and culminated in the Securities Acts.

At the hearings, auditors were praised for their involvement in investigating the frauds. May, who participated in the hearings, fostered the impression that auditing was indeed a possible solution to dubious accounting practices. The exchange quickly required audits of listing applicants and planned to extend this requirement to all listed companies, making auditing a private sector regulatory mechanism. We have been having, therefore, a series of meetings and conferences with accountants with a view to seeing whether as long as the public is going to be asked to place so much reliance on the statements of independent auditors, if we cannot get some agreements in cooperation with the accountants in regard to some of the general governing principles of accounting and in regard to accounting practice.

Stock Exchange Practices, , p. Altschul submitted to the Senate Committee a preliminary report that was based on a letter from George May. A first step was thus made toward the codification of accounting knowledge and that it featured in the Senate investigation showed its significance, but also its regulatory urgency.

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Yet, instead of a decisive move by auditors to define their knowledge, the principles represented a minimum consensus of well-established practice. By endorsing and institutionalizing standard procedures, the pamphlet was merely a regulatory expedient that served as an epistemological argument to address the concerns of other actors, enabling auditors to frame their work as a remedy to fraud and position themselves in the regulatory space. That is, auditors had meant to use their cognitive core only to enter the regulatory space. Prescriptive statements conflicted with their epistemological basis.

As the Pecora investigation shed light on corporate misbehavior, auditors portrayed their work as a private sector solution to improve accounting and disclosure practices. Emerging as a technical authority in their primary institutional sphere, auditors did not expect that they might also be at the receiving end of regulation. In May , the Securities Act was enacted to prevent corporate excesses and frauds, requiring detailed disclosure of information on securities offered for public sale.

This disclosure approach was backed by various enforcement mechanisms, such as mandatory financial statement audits and wide-ranging liability for the parties involved in producing registration statements. First, the principal draftsmen of the Securities Act — a group surrounding Harvard Law Professor Felix Frankfurter — had different regulatory views than those proclaimed in the Progressive era and on which the FTC was founded.

Such a common purpose of regulator and regulatees implied that rules and regulations would arise out of dialogue, thereby increasing participation and commitment to the rules so crafted, rather than relying on decrees and litigation Parrish, In , Congress enacted the Securities Exchange Act to extend regulation to securities traded on stock exchanges. As Parrish details, the Securities Exchange Act also had been subject to intense bickering, which can be summarized as a debate about the extent of intervention in the market. Yet the SEC proponents prevailed and the Commission was given broad powers over all aspects of securities trading, including rules for the preparation of financial statements.

These extensive powers brought the SEC as a new powerful actor into the regulatory space of accounting. The SEC had wide discretion as to enacting its mandate, which included any additional rules and further legislation McCraw, That is, the regulatory conception outlined above needed to be acted upon and implemented by the Commissionership, which consisted of five individuals.