EGC affiliate in The New York Times: See Red Flags, Hear Red Flags
Michael Greenstone reports on research with Esther Duflo, Rohini Pande, and Nicholas Ryan conducted in the state of Gujarat, India, examining how altering auditors’ incentives might lead auditors to report more truthfully.
by Michael Greenstone
WHAT do Enron and the corporate-accounting scandals of the early 2000s have in common with the subprime-mortgage crisis and the Great Recession? In both cases, the delivery of accurate information to the broader economy was compromised because auditors were hired and paid by the firms they audited.
Auditors face a conflict of interest between reporting the truth and running their businesses successfully. Our economy and many markets throughout the world remain vulnerable to this conflict. But it does not have to be this way.
There have been efforts to strengthen auditing regulations. In the early 2000s, Congress created a watchdog organization, the Public Company Accounting Oversight Board, to reduce the chances of accounting scandals. But the board’s work to implement even modest reforms has faced strenuous opposition from the auditing profession.