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The dominant senior manager and the reasonably careful, skilful, and cautious auditor

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  • Lee, T.A.
  • Clarke, F.
  • Dean, G.

Abstract

This paper examines a paradox in corporate audit history that threatens the credibility of the current audit as a means of protecting stakeholders from corrupt senior managers. Using a historical analysis of legal cases of fraudulent reporting and subsequent public accountancy responses, the study reveals the paradox of a corporate auditor denying or limiting responsibility to detect material accounting misstatement (MAM) facilitated by dominant senior managers (DSM), while relying on the honesty of senior managers. The primary finding of the legal case analysis is the persistent presence of a DSM or team of DSM in the context of various contributing features, and the creation by Victorian lawyers of a model of excuses for the corporate auditor. The primary finding from the responses of public accountants is, within the context of the model of excuses and the assumption of managerial honesty, continuous denial, or limitation of auditor responsibility for detecting MAM facilitated by DSM. The consequence of this history is that DSM intent on MAM currently face corporate auditors generally untrained to assess the audit risk of managerial domination facilitating MAM. The paper's single recommendation is that corporate auditors be educated and trained to assess the audit risk associated with DSM facilitating MAM. The paper's contribution to corporate auditing is its use of historical analysis to bring together previously known but relatively disparate matters into a coherent whole that signals a fatal flaw in existing practice.

Suggested Citation

  • Lee, T.A. & Clarke, F. & Dean, G., 2008. "The dominant senior manager and the reasonably careful, skilful, and cautious auditor," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 19(5), pages 677-711.
    • Handle: RePEc:eee:crpeac:v:19:y:2008:i:5:p:677-711
    DOI: 10.1016/j.cpa.2006.12.001
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    References listed on IDEAS

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    1. Rod Johnson, 2000. "Back-to-Back Loans: A Fraud in Transition," Australian Accounting Review, CPA Australia, vol. 10(22), pages 62-72, November.
    2. Joel Amernic & Russell Craig, 2004. "Reform of Accounting Education in the Post‐Enron Era: Moving Accounting ‘Out of the Shadows’," Abacus, Accounting Foundation, University of Sydney, vol. 40(3), pages 342-378, October.
    3. W. T. Baxter, 1999. "McKesson & Robbins: a milestone in auditing," Accounting History Review, Taylor & Francis Journals, vol. 9(2), pages 157-174.
    4. Josephine Maltby, 1999. "'A sort of guide, philosopher and friend': the rise of the professional auditor in Britain," Accounting History Review, Taylor & Francis Journals, vol. 9(1), pages 29-50.
    5. Dale L. Flesher & Gary John Previts & William D. Samson, 2005. "Auditing in the United States: a historical perspective," Abacus, Accounting Foundation, University of Sydney, vol. 41(1), pages 21-39, February.
    6. DeAngelo, Linda Elizabeth, 1981. "Auditor independence, `low balling', and disclosure regulation," Journal of Accounting and Economics, Elsevier, vol. 3(2), pages 113-127, August.
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    Cited by:

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    3. Agnes Aurora Ngelo & Yani Permatasari & Siti Zaleha Abdul Rasid & Iman Harymawan & Wulandari Fitri Ekasari, 2022. "Ex-Auditor CEOs and Corporate Social Responsibility (CSR) Disclosure: Evidence from a Voluntary Period of Sustainability Report in Indonesia," Sustainability, MDPI, vol. 14(18), pages 1-23, September.

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