by Simi Kedia, Urooj Khan, and Shivaram Rajgopal

Given the high incidence of financial misrepresentation over the past two decades, there is continued interest in understanding the contribution of different gatekeepers in deterring and detecting financial misrepresentation. There is little agreement, however, on the role and responsibility of these gatekeepers, especially that of the auditor.  On the one hand, the audit industry asserts that it is not possible for the auditor to detect intentional fraud by company executives.  On the other hand, is the view exemplified by Steven M. Cutler, former Director of the SEC’s Division of Enforcement, following the collapse of Enron: “While I believe the causes of this phenomenon [seemingly unprecedented corporate fraud] are multiple, a significant contributing factor was the laxity of the so-called gatekeepers — the accountants, lawyers, research analysts, board members and others controlling access to our capital markets. Perhaps foremost among these is the auditor.” Continue reading →