The rise of regulatory capitalism and the decline of auditor independence: A critical and experimental examination of auditors’ conflicts of interests

Abstract

Abstract This study investigates the decline of auditor independence coinciding with the rise of regulatory capitalism. A critical analysis supported by experimental evidence reveals regulatory capitalism's influence on auditor independence. Regulatory capitalism began in the United States during the 1970s when state enforced neo-liberal free-market doctrines of competition and deregulation commercialized the profession. Since then, regulatory capitalism's economic neo-liberal agenda has transformed the auditing profession and the employer firms into a transnational network of professional services firms that now promote and diffuse regulatory capitalism worldwide. Regulatory capitalism is further facilitated by the Sarbanes-Oxley Act and the PCAOB that provide interconnections of powerful non-democratic private regulators such as the IFAC and IAASB. An experiment reveals auditors’ ethical predisposition to provide consistently high quality independence judgments required by IFAC's code of ethics. The majority of this sample of 174 Danish auditors was not consistently independent in the context of client economic factors, indicating that the code of ethics’ appeal to auditors’ altruistic behavior has failed. Moreover the transformed profession has become the transformer but at a price, the loss of public confidence and the decline of auditor independence. Conflicts of interests still abound.