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Professionals’ implication in corporate corruption

By Claudia Gabbioneta, Rajshree Prakash, and Royston Greenwood


Professional service firms have been implicated in numerous cases of corporate fraud. Enron is probably the most striking – albeit by no means the only – example of this involvement. Arthur Andersen (who audited Enron’s financial statements) was accused of helping the company ‘design accounting techniques or models’ that Enron used to boost its performance (Batson Report, 2003: 40-41). Nine banks were named as key players in a series of fraudulent transactions that ultimately cost shareholders more than $25 billion. Two law firms were accused of malpractice as they failed to respond to red flags about Enron’s accounting practices. The three major credit rating agencies were blamed for not lowering their ratings of the company as its financial situation deteriorated. Securities analysts were criticized for not taking into account the company’s cryptic ‘mark to market’ accounting, which allowed Enron to include as current earnings the profits they expected from future contracts, and for staying positive in their assessments and ratings well after the company’s earnings had begun to plummet.

But why did professional service firms – whose collective function is to ensure the probity of financial markets and to nurture the trust necessary for markets to function – fail to recognize and expose corporate corruption? In our paper, we argue that one reason why professionals may fail to recognize and expose corporate corruption is because of the processes of institutional ascription that take place within professional networks.

Enron Complex.jpg
“Enron Complex” by Alex. Licensed under CC BY 2.0 via Wikimedia Commons.

Institutional ascription occurs when professionals assume that other professionals are behaving ‘professionally’- that is, when professionals assume that other professionals have conducted and completed their work honestly and diligently, and consistent with the idealized version of professional behaviour. This assumption, in turn, makes them accept uncritically the work done by other professionals. Professionals assume that the opinions expressed by other professionals are reliable and robust, and – importantly – base their own work also on these opinions.  Ascription is consistent with the ‘moral seduction’ thesis put forward by Moore et al. (2006) who emphasize that, contrary to popular imagery, corruption is often not an occurrence of a personal decision to deviant from an ethical code, but the outcome of systemic structural features that shape professional behaviour.

The assumption that others are acting professionally means that, if any link in a professional network is weak, the entire network is at risk of ‘contagion’ and thus vulnerable to collective blindness. The initial weakness propagates inside the network as more and more professionals rely on the work of other professionals to reach their own – supposedly independent – assessment of the firm. The initial involvement of a few actors results in the entire network being implicated in the failure to expose corporate corruption. As a consequence, networks of professionals, which are supposed to act as gatekeepers against corporate corruption, may actually – albeit unwittingly – enable its concealment because of reciprocal and socially emphasized processes of collective ascription.

Emblematic of professionals’ reliance upon other professionals is again the case of Enron.  In 2001, Curt Launer of Credit Suisse First Boston wrote that ‘the so-called LJM Partnerships were fully disclosed in Enron’s financial statements and were subject to appropriate scrutiny by Enron’s board, outside auditors and outside legal counsel. Considering the disclosures made and the appropriateness of the accounting treatment… we anticipate that the negative sentiment surrounding these issues will dissipate over time’ (Financial Oversight of Enron: The SEC and Private-Sector Watchdogs, 2002; emphasis added). And, when asked if she ‘thought that because Vincent & Elkins had said there was no problem, …that did not trigger any kind of requirement…’, Nancy Temple, in-house attorney for Arthur Andersen, answered that she ‘noted that the law firm reported that there was nothing further to follow up on at that point in time; and this was a very large law firm representing Enron Corporation’ (Enron Hearings).

The development of the idea of institutional ascription has two important implications. First, it helps explaining why and how networks of professionals may fail to recognize and expose corporate corruption, whereas prior research has focused mainly on the dyadic relationship between a professional service firm and its clients. Second, it seriously questions the behavior of financial markets as currently designed and, intriguingly, cautions against our own ascription of trust to them.

Claudia Gabbioneta is Assistant Professor of Business Economics at the University of Genoa. Her research interests focus upon institutional, political, and social processes on financial markets. She is currently studying the role of professionals in corporate corruption. Rajshree Prakash is Assistant Professor in the Management Department at John Molson School of Business, Concordia University. Her research interests include examining the changing relationship of the professions with their stakeholders and its impact on professional responsibility. Royston Greenwood is the Telus Professor of Strategic Management in the School of Business, University of Alberta. His research interests focus upon institutional and organizational change. Currently he is examining how hybrid organizations cope with the presence of multiple, often competing institutional demands. They are the authors of the paper ‘Sustained corporate corruption and processes of institutional ascription within professional networks‘, which is published in the Journal of Professions and Organization.

The Journal of Professions and Organization (JPO) aims to be the premier outlet for research on organizational issues concerning professionals, including their work, management and their broader social and economic role.

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