Open Access. Powered by Scholars. Published by Universities.®
Articles 1 - 1 of 1
Full-Text Articles in Law
Too Big To Fail: Moral Hazard In Auditing And The Need To Restructure The Industry Before It Unravels, Lawrence A. Cunningham
Too Big To Fail: Moral Hazard In Auditing And The Need To Restructure The Industry Before It Unravels, Lawrence A. Cunningham
GW Law Faculty Publications & Other Works
Large audit firms may believe that they are too big to fail. Arthur Andersen's 2002 criminal indictment reduced their number from five to four, and the government decided in 2005 to avoid indicting KPMG for crimes it admitted committing. If audit firms interpret the government's reluctance to indict as signaling aversion to tough action against them, moral hazard arises. This offsets auditing improvements mandated by the Sarbanes-Oxley Act of 2002 that are designed to strengthen auditors' reputations with managers for thoroughness and improve financial statement reliability. Neutralizing this moral hazard requires a credible alternative industry structure so that when a …