Critical Auditing Studies and “The Bigger Picture”

For many years, accounting researchers have studied the culture, the technology, and the regulation of audit firms. We’ve observed and explained the complex factors that have shaped the profession.

But while studying these details, is it possible that we have missed the bigger picture? Should we be critically appraising the audit function instead of simply understanding it? In order to assess its future relevance to our society, and to its role within it?

The Elsevier journal Critical Perspectives on Accounting is addressing these questions by publishing a special issue entitled “Critical Auditing Studies: Adopting a Critical Lens toward Contemporary Audit Discourse, Practice and Regulation.” The editors are Anna Samsonova-Taddei of the Alliance Manchester Business School of the University of Manchester and Yves Gendron of the Faculté des sciences de l’administration of Université Laval.

The editors are calling for manuscript submissions that focus a critical lens on our profession, addressing such topics as: (1) the consequences of the rise of audit firms’ commercialism, (2) the ongoing changes in regulatory approaches to auditing, (3) claims about auditors’ knowledge base, (4) auditing and the public interest, (5) the shifting identities of auditors, and (6) control and surveillance within accounting firms.

What type of content is suitable for the special issue? Anna cites a recent report and notes that:

The strong impression is that now is not a time for complacency but nor is it a time for knee-jerk reaction or base political point scoring. Substantive change and developments in the competencies and capabilities of audit and auditors requires more fundamental action than are offered by ‘quick fix’ solutions, audit rebranding exercises, tinkering with professional examination syllabi or the promotion of ‘new’ audit testing/analytical techniques.

In light of such concerns, there is a call for:

 … a fundamental contemplation of the overall competence of the audit function itself and what is required for the longer-term sustainability of audit as a service of high professional standing and broader public worth.

Skills, Competencies, and the Sustainability of the Modern Audit, by Turley, Humphrey, Samsonova-Taddei, Siddiqui, Woods, Basioudis, and Richard (2016)

And according to Yves:

Critical accounting research is a complex endeavor and it may be articulated in a range of relevant ways. That being said, one of the distinguishing features of critical accounting research is a high level of reflexivity in analyzing, from a “phronetic” viewpoint, socially-important phenomena – such as the trajectories (past, present and future) that surround the financial auditing concept … this phronetic exercise implies the following questions: “Where are we going? Is this desirable? What should be done?” – which we may translate as “Where is financial auditing going? Is this desirable? What should be done?”

On the Elusive Nature of Critical (Accounting) Research, Gendron (2018)

These are the critical issues that challenge the future of the auditing profession. We are gratified that our colleagues at Critical Perspectives on Accounting are dedicating a special issue to the topic, and we encourage you to contact them with any questions about potential submissions.

Mark Your Calendars! Our Mid-Year Conference Begins On March 23rd

Have you begun to mark your calendars for the next two months? Then please keep in mind that a pair of noteworthy events will occur in late March. One is the arrival of Spring in the northern hemisphere. And the other is the mid-year conference of the Public Interest Section of the American Accounting Association.

What if you are feeling impatient for Spring? To accelerate its arrival, you can always root for Punxsutawney Phil to fail to see his shadow. If this occurs, Spring will begin on February 2nd, just two days from today.

Regrettably, our favorite groundhog is powerless to advance the date of our mid-year conference. However, there are other ways to begin enjoying this academic experience before you join us in Chicago on March 23rd. You can volunteer, for instance, to serve as a reviewer, a moderator, or a discussant.

And you can register to attend the conference at any time.

You’ll undoubtedly find it worthwhile to join us in the Windy City. For instance, in addition to our manuscript presentation sessions, our conference will feature an Editor’s Panel. Richard Kravitz of The CPA Journal, Pamela Roush of Accounting and the Public Interest, and Marcia Annisette of Critical Perspectives on Accounting will provide valuable commentary about the publishing environment.

In response to attendee feedback at our previous conferences, we’ll dedicate our Friday lunch period to catching up with old and new friends. And the President of the American Accounting Association will deliver an address on Saturday at noon.

We have also invited a spokeswoman from the Roosevelt Institute to discuss their projects. In addition, she will describe how the Institute is working with students on college campuses to “make a difference” in society. Our attendees are sure to discover that the Institute’s agenda matches our own values and beliefs.

So please join us on March 23rd and March 24th. And in the meantime, if you’re able to serve as a volunteer, we’ll be delighted to hear from you!

Our Colleagues Respond …

As you may recall, on December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? And then, on December 20th, we published responses by our colleagues Andrew Felo of Nova Southeastern University and Wm. Dennis Huber of Capella University.

But we still are not yet ready to bring our taxation policy conversation to a close! Lawrence Murphy Smith of Texas A&M in Corpus Christi recently responded:

Corporate earnings are taxed like people, as the people who own the corporation (i.e. stockholders) receive dividends or capital gains from selling stock. For that reason, I’ve always thought the corporate income tax should be zero, thereby avoiding double taxation at the corporate and then the individual level. Further, as you may be aware, the U.S. corporate income tax rate is currently second only to Japan. You might find my paper on taxes and economic activity of interest.

He elaborated:

My point is that corporate income shouldn’t be taxed at all. In other words, if the corporate income tax rate is zero, that would not mean corporate income avoids tax. The people who own the corporation would pay taxes on all the corporate earnings, either when they receive dividends or when they sell the stock. Thus, corporations need have no income tax imposed on the corporation itself, as the owners/people/stockholders ultimately pay taxes on whatever the corporation earns.

As shown in my paper, the US corporate income tax rate is currently second highest in the world, not to mention the most complex, creating high compliance costs. Lowering or eliminating the US corporate income tax would be a boon to the economy.

These are interesting questions, aren’t they? They certainly carry broad public interest ramifications.

We thank Murphy for responding to our recent posts with his astute comments. We continue to welcome, and we shall continue to publish, our colleagues’ perspectives regarding the system of taxation in the United States.

If You Sense That You Need A Different Approach, Why Not Explore Alternative Accounting Practices?

One of the strengths of mainstream accounting research is its standardized regularity. We define our exogenous and endogenous variables based on prior research studies. Then we develop our experimental hypotheses. And after drawing a sizable sample from our clearly defined population of transactions, we use large-scale statistical methods to test those hypotheses.

But what if the variables aren’t easily defined? Or the population, for that matter? Or what if a sizable sample cannot be extracted and quantitatively tested at a meaningful level of significance?

In other words, what if you sense that you need a different approach? How should you proceed? Under such circumstances, you may wish to explore alternative accounting research practices.

For instance, let’s say that you’re evaluating the anti-theft preventive controls at the card, dice, and roulette tables of a casino. How can an auditor test those controls while the games are in progress on a floor that never closes?

The best approach for testing whether controls are in place to prevent dealers from stealing chips may be to employ the auditing method of focused observation. And to make the system more “auditable,” the casino may choose to keep all of the stacks of chips in plain sight.

Indeed, the “plain sight” tactic may convey an additional benefit by deputizing gamblers to serve as auditors. In other words, by enhancing the visibility and thus the “auditability” of the preventive controls regarding chip theft, the casino can enable the players to form a transitory social community to observe and police the dealers.

Likewise, according to Ingrid Jeacle’s 2017 Accounting, Auditing & Accountability article entitled Constructing audit society in the virtual world: the case of the online reviewer, the reviewers of online services like Amazon have formed virtual communities that feature audit logics. Ingrid utilizes a new research methodology entitled “netnography” as a means of “… becoming familiar with the operational features of the site and analyzing its textual discourse.”

It’s not a traditional method of accounting research, is it? But its alternative approach is necessary for studying emerging communities in virtual online spaces.

Caroline Lambert, the Chair of the Conference Organizing Committee of the May 2018 Alternative Accounts Conference at HEC Montreal, also utilizes alternative accounting practices when necessary. According to Caroline:

Alternative Accounting is both an approach and a state of mind. It’s a way to look at events and characteristics with different lenses. It requires us to re-think our assumptions about the influences of accounting in our daily lives, encompassing the largest meaning possible.

For instance, together with Claire Dambrin, in an article entitled Beauty or not beauty: Making up the producer of popular culture that was published in Management Accounting Research in 2017, we analyzed the control mechanisms — mostly cultural controls — through which brand managers embody their product. The managers must continuously brand themselves within their own organizations to be considered “performing individuals.”

Alternative accounting is an interesting approach, isn’t it? Clearly, it is needed to study cultural, sociological, and other topics when traditional approaches fail to offer practical research methods. And given the prevalence of such topics in the Public Interest field, it’s the type of research approach that is sure to attract our colleagues.

Our Colleagues Respond …

On December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? You can find that piece, and all of our other blog posts, on our blog page at

But Michael’s post did not bring an end to our taxation policy conversation! Two of our colleagues then responded with follow-up comments.

First Andrew Felo of Nova Southeastern University noted that “individual owners of the corporation also pay income tax on the corporation’s earnings. That means the income is taxed at a much higher rate than 20%.”

Why is that important? Because it addresses the concern that the corporate tax rate is about to be reduced to a level that is far less than the individual tax rate. Nevertheless, the two-tiered nature of our system of corporate taxation does illustrate Michael’s original observation that “corporations aren’t taxed like people.”

And then Wm. Dennis Huber of Capella University suggested that: “To see how the Supreme Court has created corporations as persons, see Law, Language, and Corporatehood: Corporations and the U.S. Constitution, and The Supreme Court’s Subversion of the Constitutional Process and the Creation of Persons ex nihilo.” Both are available at Dennis’ SSRN page.

We thank Andrew and Dennis for responding to our recent post with these insightful comments. And we shall continue to publish our colleagues’ perspectives regarding the American system of taxation.

If Corporations Are People, Why Aren’t They Taxed Like People?

Editorial Note

We are delighted to publish this “opinion piece” by Dr. Michael Kraten, a member of the AAA Public Interest Section and a frequent contributor to our social media blog. As always, when you read this contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Author Biography

Michael Kraten, PhD, CPA (Mike) is an Associate Professor of Accounting at Providence College, where he teaches the graduate accounting capstone course and an interdisciplinary undergraduate course in sustainability. He serves as the publisher and editor of the AAA Public Interest Section’s social media blog.

Mike specializes in valuation, risk management, and management accounting issues, with functional interests in sustainability and corporate social responsibility. He has written papers for Accounting and the Public Interest, the Journal of Banking and Finance, the International Journal of Accounting, the CPA Journal, and other publications.


Have you been keeping track of the U.S. Republican Party’s proposal to transform the American system of income taxation as it wends its way through the legislative process? If you’re doing so, you may be wondering about the answer to a very simple question:

If the Republican Party truly believes that “corporations are people,” why is it willing to tax corporations at rates that fall so far below comparable personal (or individual) rates?

After all, if corporations are people, one may conclude that they should be taxed like people. Conversely, if they are not, then one may conclude that several recent Republican legislative positions are dissonant in nature.

To elaborate on this question, it may be helpful to review some historical background. And to do so, we may wish to begin with the birth of the American nation in 1776.

In June 1776, for instance, Virginia ratified its Declaration of Rights, a document that later evolved into its State Constitution. The declaration included an assertion that “… all men … have certain inherent rights … namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.

The Declaration clearly drew upon John Locke’s earlier assertion, in his Two Treatises of Government, of an individual’s natural rights to life, liberty, and estate (or property). And at roughly the same time that the colony of Virginia was ratifying its Declaration of Rights, Virginian Thomas Jefferson was defining life, liberty, and the pursuit of happiness as unalienable rights in the American Declaration of Independence.

But did Locke, Jefferson, and their peers intend to imply that business organizations also possess these unalienable rights? Or were they strictly referring to rights that are held by individuals?

Their writings appear to be focused on individual rights. Nevertheless, the U.S. Republican Party now supports the libertarian position that corporations are associations of individuals. Thus, consistent with recent U.S. Supreme Court decisions, certain human rights that are held by individuals can be aggregated into rights that are held by associations of individuals, and thus by corporations.

That’s why, during the 2012 Presidential campaign, candidate Mitt Romney declared that “corporations are people” in regards to the legal rights of corporations. Despite subsequent public criticism of Romney’s declaration, he was accurately describing the Supreme Court’s position in various decisions (such as the Citizens United and Hobby Lobby cases) that confirmed the existence of corporate rights.

In a fiscal sense, President Ronald Reagan’s earlier Tax Reform Act of 1986 also established a rough equivalence between corporations and individuals by bringing the maximum corporate tax rate and the maximum personal rate into rough equality. Specifically, it reduced the nominal corporate rate to 34% and the nominal personal rate to 28%. However, due to the phase-out of personal exemptions, it “topped out” the effective personal rate at 33%.

So how can we summarize these established (or “establishment”) Republican positions? Although the Founding Fathers and their predecessors defined individual rights without explicit reference to corporate rights, U.S. Republican Party leaders from Ronald Reagan to Mitt Romney implicitly or explicitly declared that “corporations are people,” and concluded that business entities should enjoy many of these same rights.

But then what are we to make of the fact that President Donald Trump favors a reduction in the top corporate tax rate to 15.0%? While only supporting a slight reduction in the top individual rate to 35.0% from 39.6%?

That’s a bit inconsistent with the established Republican position, isn’t it? After all, if business corporations possess many of the natural rights of individuals, it is reasonable to believe that they should be taxed as individuals. Instead, the President favors an ostensibly dissonant policy of treating corporations like people on legal matters when it favors business entities to do so, while treating them differently than people on tax matters when it likewise favors the entities to do so.

On the one hand, there may be nothing illegal about such a position. But on the other hand, its natural dissonance may breed a sense of cynicism about a lack of equity in our system of government.

Ethical Claims of Large Accountancy Firms Smack of Hypocrisy

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Prem Sikka, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Prem Sikka is Professor of Accounting and Finance at the University of Sheffield and Emeritus Professor of Accounting at the University of Essex in UK. His research on accountancy, auditing, tax avoidance, tax havens, corruption, corporate governance, money laundering, insolvency and business affairs has been published in international scholarly journals, books, newspapers and magazines. He has appeared on domestic and international radio and television programs to comment on business matters. He has advised and given evidence to a number of UK and EU parliamentary committees. Most recently (2016-2017), he advised the UK House of Commons Work and Pensions Committee for its investigation into the collapse of BHS, one of the largest retailers, and related pension matters.
Prem holds the Working for Justice Award from Tax Justice Network, Accounting Exemplar Award from the American Accounting Association (AAA), Lifetime Achievement Awards from the British Accounting and Finance Association (BAFA) and PQ Magazine, Personality of the Year Award from Accountancy Age and the inaugural Abraham Briloff Award from The Accountant and International Accounting Bulletin for promoting transparency and public accountability of businesses.

All over the world there is concern about tax avoidance by large corporations and wealthy elites. The latest revelations known as the Paradise Papers add further fuel to the debate. The Paradise Papers consist of some 13.5 million pages of internal information leaked from Appleby, a law firm specializing in international tax planning. The documents are publicly available on the website of the International Consortium of Journalists.

In common with previous leaks known as the Panama Papers, Luxembourg Leaks and HSBC Leaks (see References, below), once again attention is focused on the role of the Big Four accounting firms in crafting schemes that enable wealthy elites and large corporations to avoid taxes. All too often the firms sell tax avoidance schemes to their audit clients and then report on the resulting transactions. Audited Company accounts rarely provide information about corporate tax avoidance strategies. Whether the tax avoidance schemes are legal or otherwise can only be established by test cases, and these are comparatively scarce as tax authorities frequently lack the resources to investigate and challenge the schemes.

In any case, the revelations raise questions about ethics and morality of practices that deprive elected governments of resources for alleviation of poverty and investment in social infrastructure. Faced with the ability of capital and wealthy elites and corporations to avoid taxes, citizens are left with stark choices: either pay more for a crumbling infrastructure or forego hard-won social rights. Neither is palatable or conducive to social stability.

The Big Four accounting firms routinely seek to distinguish themselves from others by appealing to ethics and social responsibility. Their websites boast of ethics. The website of PricewaterhouseCoopers (PwC) claims that the firm’s “high standards of ethical behavior, are fundamental to everything we do … We are willing to walk away from engagements and clients if our independence, integrity, objectivity, or professionalism could be called into question if we continued”. Deloitte claims that “Integrity and ethical behavior are central to maintaining our reputation”. Ernst & Young boldly states that “We reject unethical or illegal business practices in all circumstances … We are alert for personal and professional conflicts of interest”. KPMG boasts “high ethical principles”. In the light of a steady stream of revelations, the above seem to be just cynical PR statements designed to disarm critics and it is unlikely that journalists and general public attaches too much credibility to the claims.

Big accounting firms have a long history of profiting from tax avoidance. In 2003, a report by the US Senate Permanent Subcommittee on Investigations concluded that

“respected professional firms are spending substantial resources, forming alliances, and developing the internal and external infrastructure necessary to design, market, and implement hundreds of complex tax shelters, some of which are illegal … They are now big business, assigned to talented professionals at the top of their fields and able to draw upon the vast resources and reputations of the country’s largest accounting firms …”.

Here is an interesting extract from a 2013 UK House of Commons inquiry into the role of the Big four firms in tax avoidance. Just before the hearing, the chairperson of the Committee met a senior person connected with PwC and then said

“I have talked to somebody who works in PwC, and what they say is that you will approve a tax product if there is a 25% chance—a one-in-four chance—of it being upheld. That means that you are offering schemes to your clients—knowingly marketing these schemes—where you have judged there is a 75% risk of it then being deemed unlawful”.

Partners of other firms admitted to having a threshold of 50%.

The Paradise Papers once again show a huge gap between the public claims and actual practices of accounting firms. How can this be explained?

The gap persists because the internal dynamics of the firms are decoupled from external responses. Firms manage external pressures and public skepticism with claims of ethical behavior and social responsibility. Well, they can hardly do anything else. At the same time, internal processes cannot easily be aligned with such claims. Internally, staff are trained to design and sell tax avoidance schemes. Tax departments and staff are assigned revenues and profit generating targets. Those failing to meet the targets are disciplined whilst those meeting the targets are rewarded with promotions and salary increments. Over a period of time, certain habits and practices become normalized and tax avoidance becomes just another part of daily organizational life. As the internal and external dynamics remain decoupled, any claims of ethical conduct come across as hypocritical. The hypocrisy is not an accidental or unintentional outcome, but rather it is the intentional outcome of policies deliberately chosen and implemented by senior executives of the firms.

The tensions between internal and external responses are exposed by whistle blowers, court cases, media investigations and leaks such as the Paradise Papers. The negative publicity and public anger should encourage firm to align organizational culture, goals, practices and mindsets of staff with social expectations but they have shown little inclination to do so, especially as large amounts of profits are at stake. So the prospect is of further loss of legitimacy, public anger and possibilities of tougher regulatory responses.


HSBC Leaks

Luxembourg Leaks

Panama Papers