Description
The purpose of this paper is to use the sociology of professions, institutional theory, and outsourcing literatures to
examine the dramaturgy of exchange relations among the Big Five public accounting firms, the American Institute of
Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), and the Securities Exchange Commission
(SEC), as it concerns the outsourcing of internal audit services to international external audit firms.
Jurisdictional disputes over professional work: the
institutionalization of the global knowledge expert
§
Mark A. Covaleski
a,
*, Mark W. Dirsmith
b
, Larry Rittenberg
a
a
School of Business, University of Wisconsin-Madison,
975 University Avenue, Madison, WI 53706, USA
b
Smeal: Business at Penn State, and The Social Thought Program, University Park, PA 16802, USA
Abstract
The purpose of this paper is to use the sociology of professions, institutional theory, and outsourcing literatures to
examine the dramaturgy of exchange relations among the Big Five public accounting ?rms, the American Institute of
Certi?ed Public Accountants (AICPA), the Institute of Internal Auditors (IIA), and the Securities Exchange Com-
mission (SEC), as it concerns the outsourcing of internal audit services to international external audit ?rms. Toward
this end, a latent content analysis of a variety of public and private documents is performed where we ?nd that the
transformation of the jurisdiction of internal auditing to be rife with con?ict, characterized by a heated dramaturgy of
exchange relations among the Big Five, the AICPA, the IIA, the SEC, and also the US Congress. Rhetorical ploys
supporting this dramaturgy incorporated such key terms as: ‘‘world class services’’, ‘‘global economy’’, ‘‘market for-
ces’’, ‘‘commodi?cation’’, ‘‘monetization of professional services’’, ‘‘knowledge experts’’, ‘‘the knowledge millennium’’,
‘‘leveraging knowledge’’, ‘‘higher order platform of services’’, ‘‘value chains’’—all in addition to making more money.
At issue is how the competing factions seek to re-institutionalize societal expectations of proper professional behavior
to legitimate a transformation of jurisdictions, for example, to create the ‘‘knowledge expert’’ providing robust services
in a global economy.
#2003 Elsevier Science Ltd. All rights reserved.
1. Introduction
Amid hyperbole that we are a global, knowledge
society following the information highway across
the information bridge to a new information
age (e.g. Peters, 1992), it has increasingly been
proclaimed that knowledge and expertise infuse
with meaning human activities, organizational
arrangements and production processes (Zubo?,
1988). While prophesies of the ‘‘profes-
sionalization of everyone’’ (Wilensky, 1964, p. 137)
and ‘‘all ?rms are becoming professional service
?rms’’ (Peters, 1992, p. 11) have gone unful?lled, it
appears to be the case that experts are playing an
ever more central role in the restructuring of work,
both rhetorically and practically, across both
organizational and national boundaries. Conse-
quently the politics of expertise have become
much more intense because the stakes are so huge
(Leicht & Fennell, 1997; Reed, 1996; Smith, 1997).
0361-3682/03/$ - see front matter # 2003 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 02) 00029- 6
Accounting, Organizations and Society 28 (2003) 323–355
www.elsevier.com/locate/aos
§
Prior versions of this paper were presented at the Con-
ference of the Global Business and Technology Association
and the American Sociological Association.
* Corresponding author. Tel.: +1-608-262-4239; fax: +1-
608-263-0477.
E-mail addresses: [email protected]
(M.A. Covaleski), [email protected] (M.W. Dirsmith), lrittenberg@
bus.wisc.edu (L. Rittenberg).
The transformation of organizational ?elds,
particularly when it is hotly contested by vested
interests in highly institutionalized and profes-
sional contexts, has held a position of theoretical
prominence in a variety of literatures. For exam-
ple, the sociology of professions literature (e.g.
Abbott, 1988; Freidson, 1984, 1994) has reasoned
that key to survival and the claim of professional
stature is the development and maintenance of an
abstract system of knowledge, for it is from this
knowledge-base that a profession establishes its
jurisdiction. Accordingly, it is understandable that
‘‘knowledge work and knowledge workers are
now key issues [because] . . . knowledge is a strate-
gic resource of social power and control’’ (Black-
ler, Reed, & Whitaker, 1993, p. 851), and that
‘‘expertise is one of the primary arenas in which
struggles to control the organization and manage-
ment of work are fought out in modern societies’’
(Reed, 1996, p. 574).
Institutional theory has also addressed the issue
of contested transformation in professional ?elds.
While institutionalized structures and relation-
ships may go unquestioned by various vested
interests for years, DiMaggio and Powell (1991;
see also Mezias & Scarselletta, 1994, p. 654; Oli-
ver, 1991) reasoned that the ongoing processes by
which institutional arrangements are formed and
transformed tend to be highly political. Such poli-
tical con?ict may be expected to be closely asso-
ciated with a heated dramaturgy of exchange
relations (Bealing, Dirsmith, & Fogarty, 1996;
Ritti & Silver, 1986), wherein contending parties
seek to rhetorically hammer out an acceptable
social order to become once more institutionalized,
orderly and taken for granted. Moreover, Meyer
(in preparation) has theorized that the formation
and di?usion of new standards of organizational
practice are tending to take place on an increas-
ingly global scale, fostered in part by the work of
professionals.
One form of change that is sweeping across a
variety of organizations at a growth rate of 250%
in the past 10 years to impact 10% of the US
workforce, is the outsourcing of internal organi-
zational functions to external contractors (Cohany,
1996; Matusik & Hill, 1998; Morrow, 1993). Cur-
rently, 43% of multi-national companies outsource
professional functions (Wysocki, 1996). While a
body of empirical work related to this transfor-
mation of the workplace is emerging (e.g. Rood-
hooft & Warlop, 1999), it has tended to focus on
the economic bene?ts accruing to the outsourcing
organization (Smith, 1997). Lacking is a systema-
tic appraisal of how such a transformation may be
impacting institutionalized relationships between
internal organizational members and external
contracting parties, particularly in professionalized
settings.
The purpose of this analysis is to integrate the
sociology of professions, institutional theory and
outsourcing literatures to examine a major in?ec-
tion point in inter-organizational power relations
in the professional arena. This in?ection point
revolves around a contested transformation of the
professional ?eld of accounting that is intendedly
global in its reach—the outsourcing of internal
audit services to external public accountants, and
in particular the Big Five international public
accounting ?rms. At issue are: the commodi?ca-
tion of the traditional work of external certi?ed
public accounting ?rms; their expansion into the
jurisdictional domain of internal auditors using a
dramaturgy of ‘‘world-class services’’, ‘‘market
forces’’, knowledge professionals’’, ‘‘higher-level
platforms of services’’, and ‘‘client drivers’’; the
performance of more pro?table services that pro-
mote the potential loss of Certi?ed Public
Accountant (CPA) independence in auditing client
?nancial statements that could lead to an impair-
ment of investor con?dence; a potential backlash
by members of the Institute of Internal Auditors
(IIA) who would resist such a transformation;
threatened regulatory intervention by the Secu-
rities and Exchange Commission (SEC) and Con-
gress; and instrumental and symbolic bene?ts and
costs to be derived by the outsourcing client orga-
nization. By probing this professional ?eld, we will
address the following central research question:
What is the nature of the jurisdictional dis-
pute/dramaturgy of exchange relations
among the international public accounting
?rms, the AICPA, the IIA and the SEC con-
cerning the outsourcing of the internal audit
function to external auditors?
324 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
The remainder of this paper is organized into
four sections. In the second section, the three lit-
eratures drawn upon are discussed in more detail.
The third section discusses the latent content ana-
lysis of public and private archival material used
to address our central research question. Section
four presents the archival analysis of the contested
transformation of the accounting ?eld in terms of
three moments of jurisdictional disputes. The last
section explores implications.
2. A theory of institutionalized professional
jurisdictions
2.1. The sociology of professions perspective
The sociology of professions literature has
increasingly focused on inter and intraprofessional
competition in socially constituting a jurisdiction
by controlling an abstract system of knowledge
(Abbott, 1988; Tolbert, 1990). Abbott (1988, pp.
8–9) reasoned that it is essential for an occupa-
tional group to control its abstract system of
knowledge in order to claim professional stature.
It is through this control that a profession can
de?ne and rede?ne the societal problems it
addresses, develop the services and practical tech-
niques to be performed to address these problems
(that Abbott de?nes as the profession’s jurisdic-
tion), and defend this resultant jurisdiction against
competing professions or factions within the pro-
fession. So crucial is control of knowledge that
Abbott (1988) concluded that it is more important
than ethical behavior and professional detachment
in gaining stature and ?nancial rewards. This jur-
isdiction includes formal control over key de?ni-
tions of professional service and the language used
in describing the techniques performed, the prac-
titioners that perform them and the actual conduct
of the work (Abbott, 1988, p. 62). Such formal
control provides power, but as soon as a profes-
sional ?eld is fully translated into rules and pro-
grams or becomes codi?ed, the profession’s power
disappears. Therefore, it is necessary for a profes-
sion to continually re-generate its abstract sys-
tem of knowledge, thereby extending its
jurisdiction to possible encroach upon that of
adjacent professions (Crozier, 1964; Reed, 1996).
According to Abbott:
It is the history of jurisdictional disputes that
is the real, the determining history of the
professions. Jurisdictional claims furnish the
impetus and the pattern to organizational
developments. Thus an e?ective sociology of
professions must begin with case studies of
jurisdictions and jurisdiction disputes. . . .
Only from such portraits can one derive an
e?ective model for understanding and pre-
dicting professional development in modern
societies (1988, p. 2).
For one to understand jurisdictional disputes,
Abbott (1988, pp. 91–113) urged an examination
of three historical processes which we will term
moments in the transformation of a profession
that lead to a balance between the work per-
formed and the jurisdiction it claims: (1) a dis-
turbance, (2) a shifting of jurisdictional claims,
and (3) the modi?cation of a profession’s abstract
system of knowledge. We will organize our archi-
val analysis using these three moments.
A critical point in Abbott’s general argument
pertaining to jurisdictional disputes is a profes-
sion’s command over an abstract body of knowl-
edge. Important attributes of such knowledge are
that they are storable, controllable, indetermin-
able, and deployable to convince constituents that
the profession has expertise that is of utility to
them (Derber, Schwartz, & Magrass, 1990; Drazin,
1990; Larson, 1990). Blackler et al. (1993, p. 851),
for example, posited that knowledge is a strategic
resource for gaining power. However, once a
knowledge based becomes standardized and ren-
dered into a commodity, a profession can no
longer earn high pro?ts by applying it. What is
needed is to become ‘‘symbolic analysts’’ who
have the ‘‘skills of abstraction’’ and ability to ‘‘get
behind the data and ideas’’ to develop a ‘‘holistic
understanding’’ of the client by melding a ‘‘deep
understanding’’ of economic changes and infor-
mation technologies. Moreover, according to
Reed (1996, p. 575), ‘‘The political strategies and
tactics through which such expert jurisdictional
domains are constructed and policed need to be
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 325
supported by ideological resources and moral
prohibitions that legitimate monopoly control for
‘us’ by de legitimating predatory incursions by
‘them’.’’
Jurisdictional disputes are seen as giving rise to
the ‘‘politics of expertise’’ which tend to be more
intense and unstable during periods of profes-
sional transformation (see also Bloor & Dawson,
1994; Leicht & Fennell, 1997). Reed (1996) theo-
rized that jurisdictional disputes most often arise
at the boundaries separating three occupational
forms used to mobilize expertise—the liberal/
independent professions (e.g. some medical doc-
tors; not a direct focus in our analysis), organiza-
tional professions (in our study, internal auditors),
and entrepreneurial professions or knowledge
workers (in our study, the Big Five professional
service ?rms). Each form, Reed conjectured, has a
distinct power strategy for defending its jurisdic-
tion. The organizational professions’ basic power
strategy and corresponding legitimating discourse
lies in obtaining and displaying appropriate cre-
dentials that support the individual practitioner’s
claim to esoteric knowledge (in the case of internal
auditors, this would entail passing the Certi?ed
Internal Auditor, CIA, examination administered
by the IIA). The second legitimating discourse lies
in developing a knowledge base and repertoire of
skills that are speci?c to serving the particular
organization within which the professional is
housed. Such development, while pertinent to the
organization by de?nition, is localized in nature
and hence is not able to be committed to abstract,
generalized codi?cation that can be applied to
other settings (for related empirical support in
non-professional settings, see Burris, 1993; Casey,
1995; Greenwood, Suddaby, & Hinings, 2002;
Hinings, Brown, & Greenwood, 1991). Reed
(1996, p. 588) hypothesized that ‘‘Organization
speci?c expertise may become increasingly proble-
matic as an e?ective power base when movements
within the wider international political economy
seem to push inexorably towards generality,
mobility and ?exibility’’. The result is a legitima-
tion crisis for the organization and in consequence
for the organization-based profession.
The basic legitimating discourse for knowledge
workers, Reed (1996) theorized, also begins with
displaying appropriate, though more general cre-
dentials than organizational professionals (in our
case, the Certi?ed Public Accountant, CPA, is an
older and more widely recognized credential). In
addition, knowledge workers rely on developing,
deploying and displaying a highly esoteric, intan-
gible system of knowledge. This knowledge entails
a ‘‘sophisticated combination of theoretical
knowledge, analytical power and tacit or judg-
mental skills’’ (Reed, 1996, p. 588) that are re?ned,
even partially codi?able, but transferable to other
settings thus granting the knowledge worker a
competitive advantage. As Reed (1996, pp. 576,
581) reasoned ‘‘. . .it is the putative universality,
codi?cability, neutrality and mobility of modern,
[entrepreneurial] expertise that sets it apart from
the localism, particularlism and stability char-
acteristic of traditional [organizational] expertise.’’
It is by virtue of this very universality or generality
of expertise, which can be readily communicated
to external constituents, that enables the client
organization to be more mobile as it extends it
global reach in that these constituents are com-
forted that appropriate expertise is being applied.
Such globalization ‘‘o?ers to the entrepreneurial
professions/knowledge workers the opportunity to
exploit the potential for cognitive expansion,
material advancement and socio-political
enhancement that these developments present’’
(Reed, 1996, p. 588).
Bell (1973) argued that the growing power of
knowledge workers is based on their control of
theoretical, even mystical knowledge that is so
arcane, so idiosyncratic, that only the elite have
the ability to apply it on behalf of society. Within
an accounting context, Power (1997) reasoned that
the power of auditing rests in its vagueness, the
disconnect between what is tested and what e?ects
are achieved from this testing (e.g. giving ‘‘com-
fort’’ to stakeholders). Rather than being a ‘‘tech-
nical ?x’’ to ?awed ?nancial data, auditing has
come to be a form of ‘‘image management’’ sig-
nifying that the organization is transparent and
that the management is indeed auditable and
trustworthy. Power speculated that the ‘‘audit has
put itself beyond empirical knowledge about its
own e?ects in favor of a constant programmatic
a?rmation of its potential’’ (p. 142)—that the true
326 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
bene?ts to be derived from auditing are just
around the next corner, thus necessitating the
profession’s e?orts to ‘‘talk up expectations’’. The
dark side of this universality and serving the client
organization, and indeed society, is that the
knowledge professional could be seen as too clo-
sely aligned to the vested interests of the client
thereby undermining the professional claim of
neutrality and independence.
Finally, shaping the jurisdictional disputes of
organizational professionals is an institutional
environment, that Reed (1996, p. 586) character-
ized as being comprised of the ‘‘state, political
ideologies and policies highly suspicious of, if not
downright hostile to, professional power.’’ Such
an environment of suspicion tends to lead to both
fragmentation among professionals and dramatic
jurisdictional disputes. Reed (1996, p. 582) theo-
rized that ‘‘[T]he ‘technologists of control’ may
become even more divided amongst themselves as
they struggle to come to terms with the radical
organizational and institutional changes which
they have played such a vital role in creating.’’ It is
within such an institutional environment of jur-
isdictional disputes that we examine the forces at
play in the accounting profession.
2.2. Institutional theory
Consistent with Abbott’s (1988, esp. chap. 7)
and Reed’s (1996) general line of reasoning con-
cerning the importance of cultural environment to
professional transformation, institutional theory
(DiMaggio & Powell, 1983, 1991; Meyer &
Rowan, 1977) proposes that within the profes-
sions, concerted e?ort is directed at developing,
maintaining and managing legitimacy with such
constituent groups as Congress, regulators, the
press, clients and the ?nancial community. This
e?ort typically involves the symbolic display of
conformity to con?icting expectations through the
use of assuaging rhetoric (see also Czarniawska,
1997).
Prominent among criticisms of institutional the-
ory is its inattention to power and vested interest.
DiMaggio (1988) suggested that key to under-
standing power is viewing institutionalization as
an ongoing process; it is when relationships are
?rst being formed or altered that institutionaliza-
tion may be profoundly political (Mezias & Scar-
selletta, 1994; Oliver, 1991). During such an
episode, use of appropriate rhetoric may be espe-
cially important in the covert exercise of power,
where its overt exercise may be ine?ectual (Pfe?er,
1981). DiMaggio and Powell (1991) suggested that
in order to understand the political nature of
institutionalization processes, it might be neces-
sary to abandon the ‘‘cool imagery’’ that has
typi?ed institutional treatment in favor of a ‘‘hot
imagery’’.
Concerned with the use of compromising rheto-
ric in representing the self-interest of an organiza-
tion, Ritti and Silver (1986) examined the early
history of the Bureau of Consumer Services (BCS)
of a public utility regulator by means of examining
the symbols it displayed to a variety of external
constituents that included the state legislature, the
regulatory commission, the press and regulatees.
They found that these symbols were actively
manipulated by the bureau in an attempt to
develop a ritualistic ‘‘dramaturgy of exchange’’
which would legitimate its own survival and
growth. The authors showed how the bureau
developed a ritualistic pattern of interacting with
these utilities by employing a compromising
rhetoric.
Bealing et al. (1996) further probed the ‘‘dra-
maturgy of exchange relations’’ by conducting an
archival analysis of the formation of the Securities
and Exchange Commission in 1934. They found
that the SEC invoked a rhetorical campaign to
establish its own legitimacy with Congress, the
press and regulatees—the public accounting pro-
fession—in which it simultaneously took reg-
ulatory action against a large public accounting
?rm while using an assuaging rhetoric to appease
regulatees. This balancing between action and
rhetoric facilitated the negotiation of legitimized,
inter-organizational relations and enabled the
SEC to survive.
While the BCS and the SEC studies extended
the institutional theory perspective, both focused
on defensive strategies that relied on assuaging
‘‘cool’’ rhetoric directed at appeasing competing
interests, rather than a o?ensive strategy designed
to transform a professional ?eld. They also
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 327
emphasized the rhetoric used by a single focal
organization rather than the multiple organiza-
tions involved in the transformation process.
Thus, our study of how the ‘‘hot’’ dramaturgy of
exchange relations among contending social actors
unfolds has the potential for extending the insti-
tutional theory perspective.
Most importantly as it concerns our analysis,
Meyer (in preparation; see also Meyer, Boli, &
Thomas, 1997) applied institutional theory to
examining the expansion and standardization of
‘‘proper’’ organizational practices across nations
and social structures, as well as address the ques-
tion of ‘‘how globalization produces a world of
argentic empowered, and managed organizations
that function as rational and dramatic actors.’’ He
reasoned that with globalization comes new forms
of nagging uncertainty. This uncertainty, knowl-
edge experts contend, may be rationalized in a
manner that enables responsible, progressive
organizations to treat uncertainty as an opportu-
nity rather than a threat, thereby creating a ‘‘risk
society’’ wherein risk may be scienti?cally mana-
ged (this treatment of risk, in turn, blends nicely
with attempts to introduce the ‘‘risk audit’’ as a
new form of ‘‘value added’’ forms of professional
service by Big Five ?rms; Beck, 1992; Fischer,
1996; Power, 1997, 2000). Thus, ‘‘not only tech-
nologies, but also sovereign decision making cap-
abilities, and coordination and control systems,
need to be upgraded in the globalized world’’
(Meyer, in preparation). With this enlightened,
liberated view, however, comes the destruction of
old practices, provided in part by the state that at
once o?ered security and constraint. Importantly,
Meyer theorized, this globalization of proper
business practices, wherein business transcends
national boundaries, may be expected to be asso-
ciated with creating an ‘‘expanded person’’:
Organizations organize people. And globali-
zation changes the practices, rules, and myths
de?ning what people are, what they are enti-
tled to and what they can do. On all these
dimensions, the changes amount to expansion
of personhood that organizations can and
must deal with . . . [T]he new globalized per-
sons provide new possibilities for organizing.
They have extraordinary capacity, and can be
educated or trained to become sort of the new
expanded management system. [T]he new glo-
bal citizen can be part of the new enhanced
and empowered organization . . . And with the
rise of this organization comes the rise of new
management possibilities—and then the social
movements spreading expanded management
ideologies everywhere (in preparation).
Although highly evocative, is Meyer’s view one
of abstract prognostication, or is it actively being
put into e?ect by contemporary agents of di?u-
sion? We will seek to address this question with
reference to the public accounting profession
seeking to ‘‘mobilize new technologies’’ and
‘‘upgrade [client] coordination and control sys-
tems,’’ and thereby enhance pro?ts.
2.3. The outsourcing of organizational functions
The rationale for outsourcing organizational
functions is predominantly stated in economic
terms: within a ‘‘new competitive landscape’’
demanding a reduction in costs, organizations can
manage their capacity more e?ciently and
enhance their ?exibility by focusing on their ‘‘core
activities’’ and outsourcing their ‘‘non-core activ-
ities’’ to external contractors. The company thus
averts the high costs of recruiting, training and
paying an internal workforce, though it incurs
both a higher marginal cost of paying contingent
workers and a potential cost of giving up the
advantage of utilizing unique local knowledge in
advancing the ?rm. Moreover, organizations may
gain access to a wider range of publicly available
information, though it may also ‘‘leak’’ proprie-
tary information to contingent workers, thus
impacting the organization’s competitive advan-
tage (Berman, Down, & Hill, 2002; Davis-Blake &
Uzzi, 1993; Nonaka, 1994).
Matusik and Hill (1998) reasoned that com-
mand of knowledge is key in outsourcing work to
external professionals, and identi?ed two impor-
tant dimensions of knowledge: (1) private versus
public knowledge, and (2) architectural versus
component knowledge. Private or localized
knowledge is the proprietary knowledge, which an
328 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
organization develops internally that involves
idiosyncratic procedures, processes, routines, doc-
umentation and trade secrets that grant an orga-
nization its competitive advantage; thus, there is
great concern as to its leakage (see also Berman et
al., 2002). Public knowledge resides in the external
environment and includes tools, techniques pro-
cesses, even accounting and auditing practices,
etc., found in a society, economic sector, industry
or professional group, that are applicable across a
number of organizational settings and are often
discussed using their acronyms—JIT, MBO,
TQM, etc. As a public good, such knowledge
cannot confer competitive advantage. The key
issue concerns the possession of su?cient expertise
to recognize its existence, understand it, tailor it to
?t the unique features of an organization, and
apply it. From a sociology of professions perspec-
tive, Reed (1996, p. 577), reasoned that it was
precisely in the area of public knowledge that jur-
isdictional disputes would be sharpest, and theo-
rized that the entrepreneurial professions would
eventually come to dominate because of their
‘‘putative universality, codi?ability, neutrality and
mobility’’ that set them apart from the ‘‘localism,
particularism and stability’’ of organizational pro-
fessionals whose province is private knowledge.
Architectural knowledge, Matusik and Hill
(1998) stated, relates to organization-wide philo-
sophies, schemas and routines that are gleaned
from deep, long-term emersion in an organi-
zation’s culture su?cient to develop a collective,
tacit understanding of the overall system. Com-
ponent knowledge relates to the concrete oper-
ation of organizational subsystems that consume
speci?c inputs and produce speci?c outputs. Such
components may be either ‘‘core’’ or ‘‘non-core’’
to the organization, and either private or public in
nature. Matusik and Hill hypothesized that orga-
nizations would most likely outsource work to
external contractors that predominantly con-
cerned public non-core component knowledge
because this would allow the least leakage of pro-
prietary knowledge, while gaining the most public
knowledge.
The contrast between Matusik and Hill’s theo-
rizing and the outsourcing of internal audit services
to CPA ?rms is striking. Within this context, not
only do international CPA ?rms have prodigious
access topublic information concerningcomponent
systems, but also, in the case of outsourcing com-
panies who are their external audit clients, such
?rms have penetrating access to private knowledge
and also architectural knowledge for they routinely
probe all aspects of a company in relationships
that sometimes last over half a century. Unlike
most professional groups, access to such sensitive,
proprietary knowledge may be protected by
AICPA code of ethics rules pertaining to client
con?dentiality. Nevertheless, it may be expected
that the outsourcing of professional work that
entails public and private knowledge, as well as
component and architectural knowledge, will be
rife with con?ict (Whittington, McNulty, &
Whipp, 1994).
The foregoing literature has focused almost
exclusively on the technical attributes of out-
sourcing (i.e. in reducing costs, importing knowl-
edge, and gaining competitive advantage) from the
standpoint of the outsourcing organization.
Neglected are institutionalized expectations span-
ning a variety of organizations as to its symbolic
facets. This neglect is not to be found in the busi-
ness press. For example, the ironic running title of
a Forbes (1997) article chronicling the fate of a
series of fads (e.g. TQM, Theory Z, Re-engineer-
ing, Virtualization) adopted by companies to
demonstrate their commitment to progressive
management, read ‘‘A Way Too Short History of
Fads: Don’t Outsource Your Common Sense. Not
Like the Last Time. . .’’ Prior studies employing
institutional theory (Ang & Cummings, 1997)
have found that institutional pressures strongly
in?uenced behavior of outsourcing organizations.
However, like the technical literature on out-
sourcing, these institutionally oriented studies
focused on the outsourcing organization rather
than on other social actors involved in this relo-
cation of expertise.
In summary of the outsourcing literature, it
appears that the outsourcing of work entailing
private and architectural knowledge is potentially
rife with con?ict. Furthermore, research examin-
ing outsourcing’s symbolic as well as technical
attributes, and social actors other than out-
sourcing organizations, has the potential for
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 329
enriching our understanding of this increasingly
important phenomenon.
3. Research methods
Evidence was gathered through a latent content
analysis of archival material supplemented with a
limited number of discussions with prominent
actors from these groups to elicit their guidance on
accessing relevant material. According to Berg
(1989, p. 107), latent content analysis represents
an ‘‘interpretive reading of the symbolism under-
lying the physically presented data’’ and thus
focuses on ‘‘the deep structural meaning conveyed
by the message’’. Although there are dangers
inhering in the drawing of inferences from such
symbolism, it is nevertheless a very useful
approach in examining archival material complicit
in the exercise of power and exertion of in?uence
(Merton, 1968, pp. 366–370). These dangers may,
however, be mitigated by incorporating indepen-
dent, corroborative techniques to methodologi-
cally triangulate on the phenomena of interest, as
well as including detailed excerpts from material
examined to substantiate interpretations (Berg,
1989, p. 107). Within our work, we attempted to
ensure the trustworthiness of ?ndings is several
ways. For example, we had at least two research-
ers interpret the same archival material until an
agreement was reached as to its meaning; after
following this protocol, there were no disagree-
ments on any of the material examined. Multiple
sources of archival material were also examined
whenever possible (e.g. not only were SEC mem-
ber speeches examined, but also press coverage of
these speeches). Information within institutions
examined were used whenever possible to guide us
to especially important material as well as to
ascertain if the manner in which we ‘‘bracketed’’
archival material made sense to them. We also felt
that it was important to include within this paper
exact, relatively lengthy, quotes from archives in
order to avoid the potential ?aw of quoting out of
context and substantiate interpretations. Finally,
we examined archival material until a point of
evidential saturation was attained (Lincoln &
Guba, 1985; Van Maanen, 1988).
Archival material took the form of both public
and private records (Denzin, 1978; noteworthy is
the striking consistency with public and private
knowledge in outsourcing expert services) as well
as business press coverage of the events examined
(Freidson, 1986; Herman & Chomsky, 1988; Zeli-
zer, 1992). Public material included: IIA exposure
drafts of proposed standards and de?nitions of
internal auditing; AICPA audit guides, ethics code
rulings and Public Oversight Board Reports, pro-
fessional accounting association meetings pertain-
ing to the XYZ credential; speeches by Big Five
?rms members, IIA o?cers and SEC o?cials;
SEC enforcement and ‘‘no action letter’’ corre-
spondence with regulatees; and IIA standards and
information pertaining to its history, membership
and functioning. Private material included IIA
board meeting minutes, memoranda, and corre-
spondence ?les of key social actors. Press coverage
involved minutes of CNBC, CNN and C-Span
broadcasts, and articles, editorials, and advertise-
ments appearing in the Wall Street Journal
(WSJ), Fortune, Business Week, Public Account-
ing Report (PAR), New York Times, Journal of
Accountancy, Internal Auditor, and Accounting
Today.
The four primary groups of social actors exam-
ined were the AICPA, the Big Five public
accounting ?rms (increasingly relabeled as ‘‘pro-
fession service ?rms’’), the IIA and SEC. The Big
Five are: Arthur Andersen, Ernst & Young,
Deloitte & Touch, PricewaterhouseCoopers, and
KPMG. These ?ve ?rms are among the largest
professional bureaucracies in the world (Min-
tzberg, 1989), with US (World) revenues ranging
from $3.4 ($9.0) billion to $6.8 ($15.3) billion (?g-
ures which on average grew by 26.4% in 1998),
and US professional sta? ranging from 14,790 to
38,340: their clients comprise over 98% of com-
panies listed on the New York Stock Exchange.
Collectively, they comprise the most dominant
recruiter of accounting majors at prominent uni-
versities (Public Accounting Report, 1999a). They
are alsothe predominant form of under-resear-
ched, organization-based profession that has
emerged as a direct consequence of commercial
enterprise within which expertise may ?rst be
expected to become commodi?ed (Abbott, 1988;
330 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Freidson, 1986)—a condition that our archival
analysis revealed as openly acknowledged and
used to justify the expansion of CPA’s jurisdic-
tional domain (AICPA, 1999a).
The IIA was founded in 1941 and has 60,000
members in more than 100 countries. Supported
by a sta? of 85 and an annual budget of $10 mil-
lion, the purposes of the IIA are to promote the
development of the profession of internal auditors
and advocate for its members. The IIA has devel-
oped a codi?ed set of Standards for the Profes-
sional Practice of Internal Auditors (IIA, 1978)
that includes the de?nition of internal auditing
examined in our archival analysis, as well as the-
Code of Ethics (IIA, 1999). Finally, the SEC was
formed in the 1934 Securities Exchange Commis-
sion Act as a consequence of the 1929 stock mar-
ket crash. The purposes of the SEC are to
administer the federal securities laws to protect
investors and ensure that they have access to all
relevant information. The SEC regulates the secu-
rities exchanges and the various parties involved
with selling securities, such as CPAs. While the
SEC does have ultimate responsibility for regulat-
ing CPAs, this function has largely been delegated
to the AICPA to self regulate as overseen by the
SEC (1999). The SEC, in turn, is overseen by
Congress with which it must maintain its legiti-
macy and continued funding.
4. Three moments in a jurisdictional dispute
The purpose of this section is to discuss the
three moments of jurisdictional disputes—dis-
turbances, shifting jurisdictional claims and trans-
forming an abstract system of knowledge—as
they relate to the outsourcing of internal audit
functions.
4.1. Moment I: disturbances
Since its founding in 1941, the professional
component of internal auditing developed as just
that—an internal organizational practice whose
purpose was to serve management by furnishing it
with analyses, appraisals and recommendations so
as to improve the operations of the organization
(IIA, 1978). This predominant character was
transformed by the Foreign Corrupt Practices Act
that amended the 1934 Securities Exchange Act to:
(1) make it unlawful to bribe foreign governmental
o?cials, (2) require companies registering with the
SEC to maintain accurate books and records, and
(3) develop and maintain an e?ective systems of
internal control that ensure transactions are exe-
cuted and properly recorded, access to assets is
limited to authorized personnel, and recorded
assets are compared to the assets themselves (Ric-
chiute, 1978).
Consistent with this technical, instrumental
character, at one level the FCPA imposed a ‘‘new
responsibility on internal auditors: to evaluate a
system of internal control as a basis for reliance
thereon in uncovering material questionable and
illegal activities’’ (Ricchiute, 1978, p. 59; Bradt,
1979). At a second level, however, the existence
and functioning of the internal audit e?ort may be
documented and displayed to regulators by man-
agement to demonstrate that it is complying with
the Act. In support of this point, just 3 months
after the Act became e?ective, the SEC brought
action against the management of one registrant
for failing to document and monitor compliance
with the Act (?nes against registrants may range
up to $1 million, and ?nes against company o?-
cers may range up to $10,000 and include impri-
sonment for up to 5 years; Ricchiute, 1978).
Consequently, it is important not only organi-
zationally, but personally, that management
demonstrates conformity with the Act.
Clarence Sampson (1979), SEC chief accountant
at the time the Act became e?ective, observed that
the FCPA’s impact on internal auditors was likely
to be profound. He stated that each company
must re?ect its own unique nature in implement-
ing internal control systems, thus underscoring the
importance of localized knowledge to be brought
to bear by the internal auditor:
Each company must maintain a system of
internal accounting control, and a method of
reviewing and monitoring that system, that
makes sense in the circumstances. Reviewing,
monitoring, and evaluating the system require
a great deal of familiarity with the company
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 331
and understanding of its potential exposures
and related controls. If these requirements
sound like they were taken from a description
of pre-requisites for an internal audit posi-
tion, then I think I’ve made my point (1979,
p. 31).
According to Sampson (1979, p. 32), because
such monitoring and evaluation could not be rele-
gated to codi?cation, professional judgment must
be brought to bear. Due to the dramatic impor-
tance of the FCPA to corporate management,
Sampson (1979, p. 34) saw an elevation of the
professional stature and responsibility of the IIA
and internal auditors as inevitable:
I think it is quite clear that the challenges to
the internal auditing profession—and to indi-
vidual internal auditors—are great. The IIA,
institutionally and through its members, has a
responsibility to ensure that the auditing pro-
fession continues to grow and respond to
changing circumstances. To do that, the
Institute must assume a leadership role and
speak out on issues—not only issues which
impact internal auditors, but perhaps more
importantly, issues on which internal auditors
can, and should, have an impact. This is an
important distinction. It is the distinction
between a trade association and a profes-
sional organization. If the IIA is to ful?ll the
latter role, it must provide a substantive voice
on issues like internal accounting control, not
merely a call for increased recognition of
internal auditors.
SEC Chairman Harold Williams (1979) added
that to e?ectively perform the work of monitoring
control systems, internal auditors might have to
give up their traditional focus on performing
operational audits designed to enhance the econ-
omy, e?ciency and e?ectiveness of organizational
operations. He added that professional indepen-
dence would be forti?ed if internal auditors were
to report to a company’s audit committee (com-
prised of external members of the board of direc-
tors) whose role is to directly monitor both the
internal and external audit functions.
In response to the coercive isomorphic force
(DiMaggio & Powell, 1983) of the FCPA, the late
1970s and 1980s saw a dramatic increase in the
number, stature and remuneration of internal
auditors as companies registered with the SEC
sought to demonstrate conformity to this act by
having internal auditors not only monitor internal
control, but also itself form a key component of
the internal control system. In part, internal audi-
tors, and particularly department directors, were
recruited from the senior ranks of the companies’
external audit teams whose members possessed
not only directly relevant experience, but also a
societally-prized credential—the CPA certi?cate.
Meanwhile, the public accounting profession
was undergoing challenge from a number of
fronts. Not only did the SEC continue to perform
an oversight function of the accounting profession
under the provisions of the Securities Exchange
Act of 1934 (Bealing et al., 1996), but also the US
Congress (1977, 1985) launched probes of the
accounting profession in the late 1970s and early
1980s (Wall Street Journal, 1985a, 1985b). Moti-
vated by a series of large, widely publicized com-
pany failures after having received ‘‘clean’’ audit
opinions, the purpose of these hearings was to
ascertain if the AICPA’s self-regulatory e?orts,
overseen by the SEC, were adequate to ensuring
e?ective audits or if the SEC should exert more
direct regulatory e?ort. While both hearings found
in favor of maintaining self-regulation, they
warned that the future might hold direct govern-
ment intervention.
Concurrent with Congressional hearings, exter-
nal auditors saw a dramatic increase in the num-
ber of lawsuits and damage claims assessed against
their ?rms (Palmrose, 1987). The threat of lawsuits
reached a ?rst crescendo in the late 1980s and
1990s, with one national CPA ?rm being driven
out of business by a lawsuit and a single damage
claim of $4 billion being asserted in 1997 (PAR,
1997a). It is estimated that there are $30 billion of
lawsuits pending against public accounting ?rms
and that litigation costs amount to approximately
12% of their revenue (Dalton, Hill, & Ramsey,
1994). A second crescendo is being reached in
2002 with a series of lawsuits against Arthur
Andersen. Thus, it is understandable that the
332 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
AICPA (1999a; PAR, 1999c) would conclude that
the external audit is a risky service to perform.
Along with the threat of regulation and increas-
ing litigation, public accounting has become an
increasingly competitive industry. Spurred by the
threat of anti-trust action by the US Justice
Department during the mid- to late-1970s for
restraint of trade, the AICPA deleted its ethic’s
code provisions prohibiting the direct solicitation
of competitors’ clients and sta? by CPA ?rms
(AICPA, 1999b). As a result, the ?rms engaged in
marked fee competition that increased the need to
tighten the e?ciency with which auditing proce-
dures were performed on client engagements, in
part a?ected by applying more technology (Mel-
cher, 1998; Power, 2000; WSJ, 1996a, 1996b), thus
leading to a commodi?cation of external audit
services (Berardino, 2002; Levitt, 1998; Public
Oversight Board, 1998). In expressing its ‘‘vision’’
for the third millennium, the AICPA (1999a, p. 4)
proclaimed that:
The increasing complexities of the global
environment and the commodity character-
istics of traditional [external audit] services
mandate that the profession migrate up the
economic value chain. Commodi?cation and
technology are challenging the economic via-
bility of the profession. Information-based
products and services are loosing value in the
marketplace and are rapidly being replaced
with knowledge-based products and services
that command higher fees.
Combining the regulatory, litigation and com-
petitive forces, it appears that the risk/return trade
o? had turned decidably unfavorable in the mar-
ket for external audit services and that public
accountants must diversify their portfolio of ser-
vices to remain economically viable. While it may
remain the case that CPAs at the Big Five ?rms
still enjoy higher status and remuneration than
other components of the profession, a series of
disturbances appear to have altered the relative
stature of services these di?erent components
enjoy. Beyond such a functionalist account of the
raw importance of money, it is also the case that
the profession must be seen as relevant to the
problems clients face in order for it to remain
legitimate. It is from this transformation of rela-
tive stature and the need to be relevant, that a
jurisdictional dispute arose.
4.2. Moment II: A shifting of jurisdictional claims
After the Foreign Corrupt Practices Act of
1977, one of the ?rst moves by the AICPA came
with the issuance of the Commission on Auditors’
Responsibilities Report in 1978. The Commission
observed (AICPA, 1978, p. 56) that customs and
traditions usually develop as a result of long peri-
ods of trial and error, and represent workable
responses to ?rsthand experience with problems.
Consequently, it proclaimed that traditional
boundaries should be respected as representing such
workable traditions. The Commission (AICPA,
1978, p. 98) stressed, however, that these tradi-
tional boundaries should be abandoned when they
can be demonstrated to have outlived their use-
fulness, or when compelling reasons take pre-
cedence over them. For example, such compelling
reasons might be that the users of ?nancial state-
ments would bene?t if the external auditors
increased their knowledge base by providing these
extra services thereby strengthening the overall
services rendered (AICPA, 1978, p. 98).
Closely following this position, and also con-
sistent with SEC Chairman Williams’ (1979) posi-
tion that internal auditors give up their own
traditional focus on performing operational audits
in favor of monitoring internal control, the
AICPA (1982) formed the Special Committee on
Operational and Managerial Auditing which re-
de?ned operational auditing from services per-
formed within a company to services that can be
rendered by external auditors as independent con-
tractors. The Special Committee (AICPA, 1982, p.
1) stated that while it would not give standards for
the conduct of operational audits, it did provide
information to anyone who wished to become
more familiar with such work, noting that ‘‘?nan-
cial auditing . . . provides an excellent background
for performing operational audits.’’ This guide
(AICPA, 1982, p. 5) concluded while the issue of
independence does not preclude the external
auditor from performing operational audits, this
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 333
consideration should be disclosed when accepting
the engagement and in the ?nal audit report. It
appears that the AICPA endorsed opening the
traditional jurisdiction of internal auditors to
external auditors, while bracketing and neutra-
lizing the ethical principle of independence that
prohibits external auditors from being internal
employees of clients.
Following the AICPA’s position on operational
auditing, the AICPA sought to further articulate
the manner in which external auditors evaluate the
internal audit function in conducting an engage-
ment, thereby commodifying the internal audit.
Statements of Auditing Standards 65, ‘‘The Audi-
tor’s Consideration of the Internal Audit Function
in the Audit of Financial Statements’’ (AICPA,
1999b, Au Section 322) provides guidance on
considering the work of the internal auditors and
gauging their competence and objectivity. Where
internal auditors are found to be competent and
objective, the external auditors may decrease the
amount and strength of evidence needed to sup-
port their own audit opinion. Another e?ect of
this standard was to further strengthen the tie
between the external and internal audit functions.
Consistent with the AICPA’s earlier action, in
May 1996 the Executive Committee of its Profes-
sional Ethics Division issued ethics rules inter-
pretation IDI-13, ‘‘Extended Audit Services,’’
stating several interpretations and guidelines for
the performance of extended audit services (such
as internal auditing) for external audit clients. This
pronouncement speci?cally concluded that out-
sourcing does not impair the external auditor’s
independence as long as (1) someone from man-
agement remains in charge of the internal audit
function; (2) the ?rm does not act or appear to act
in a capacity equivalent to a member of client
management or an employee; and (3) the internal
audit function does not perform ‘‘on-going’’
monitoring activities (Journal of Accountancy,
1996, p. 11). Supporting this position, the AICPA
formed the Special Committee on Assurance Ser-
vices chaired by Bob Elliott whose purpose was to
consider new forms of assurance services, which
could be o?ered. The Committee strongly encour-
aged CPA ?rms to expand their traditional audit
o?erings, and the AICPA institutionalized this
encouragement by forming the Assurance Service
Executive Committee to identify, develop and
introduce new services. The consequence of this
‘‘green light’’ into extended audit services by the
AICPA was a dramatic growth in the performance
of internal audits services by the Big Five.
According to a Public Accounting Report (1997b,
p. 2) article, for example, these ?rms’ ‘‘plotted
annual growth rates of 80% to 100% through the
year 2000 for this ?edgling practice area’’ (PAR,
1997b, p. 2; PAR, 1999b).
More speci?cally, almost taking as script the
outsourcing literature (e.g. Matusik & Hill, 1998),
the marketing brochure of Arthur Andersen
(1997), the most active ?rm in internal audit out-
sourcing (PAR, 1997b), stated that outsourcing is
a ‘‘strategic concept—a way to add value to a
business’’—that ‘‘converts an in-house cost center
into a customer-focused service operation with
you as the customer.’’ The ?rm appealed to cor-
porations to focus on the critical ‘‘core’’ areas of
the business that create and sustain competitive
advantage and outsource such non-core compe-
tencies such as internal auditing. Arthur Andersen
de?ned its outsourcing services wrapped around
internal auditing as including: performing partial
outsourcing services for peak period needs, inter-
national locations, regulatory compliance, and
EDP audits on both recurring and non recurring
bases; assisting management in the planning and
execution of the internal audit process; identifying
customer needs; assessing risks; and supervising
audits and communicating results. It listed the
bene?ts of outsourcing as: o?ering geographical
or technological ?exibility; eliminating the tasks of
recruiting, training and maintaining employees;
managing costs; engendering objectivity, expertise
and consistent quality; leveraging existing internal
audit resources to focus on more key organizational
needs; reducing ?xed salary costs; shifting liability
for attestation assignments; freeing management to
focus on core competencies; opening internal audit
services to the discipline of market forces; and
engendering a dynamic for continual improve-
ment—all in a competitively priced package.
As a speci?c exemplar of this rhetoric extending
to the actual performance of such services, a WSJ
article (1996c) described a situation where Arthur
334 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Andersen reached an agreement with the Camp
Fire Boys and Girls to give up their external
?nancial audit role due to the client’s insistence
(and a related $50,000 annual audit fee) in order
to make possible an outsourcing agreement to
provide full-time, on-site accounting and systems
services at approximately $400,000 per year.
Arthur Andersen defended this new arrangement
by arguing that they could better serve their client
through this outsourcing arrangement than
through the external audit arrangement. Upscal-
ing, PricewaterhouseCoopers reported a 5 year,
$850 million outsourcing contract with the Aus-
tralia and New Zealand Banking Group (PAR,
1999b). Joe Vater, the director for the ?rm’s busi-
ness process outsourcing services line, observed
that this contract is just the ‘‘tip of the iceberg’’
and that the market for such services will
‘‘explode’’ over the next few years. He predicted
that while 40% of the ?rm’s revenue for such ser-
vices comes from North America, the hottest
markets will be overseas, particularly Western
Europe, China, Taiwan, and Australia. The WSJ
proposed, however, that this recent expansion of
services by public accounting ?rms may also be
characterized as ‘‘an outrageous con?ict of inter-
est’’ (1996a) and as a trend which ‘‘could add to
the accounting profession’s credibility problems’’
(1996b, p. B8). It warned that the internal auditing
profession, as represented by the 60,000 member
IIA, ‘‘wants double duty auditing stopped
entirely’’ (WSJ, 1996a).
According to two other 1996 WSJ articles, this
expansion of services is attributable to a proble-
matic external audit market. The ?rst (1996a,
p. B1), aptly entitled ‘‘Who is Going to Audit the
Auditor,’’ stated that Big Five accounting ?rms,
worried about slowing revenues, have doubled or
tripled the amount of ‘‘double duty work’’ they
perform in the past 5 years. The second (1996b:
B1), further argued that accounting ?rms are try-
ing to broaden the scope of the audit business. It
noted that while the major public accounting ?rms
have almost doubled their consulting business
since 1990 (collectively they perform 23% of such
services worldwide; PAR, 1998b), their audit
business has edged up only 16%. The WSJ article
(1996a, p. B1) characterized the external or ‘‘plain
vanilla’’ ?nancial audit as having become ‘‘a stag-
nant commodity,’’ where clients resist fee increases
because ‘‘they increasingly feel that traditional
audits don’t help their business and that one is as
good as another.’’
Sensing a threat to its jurisdiction, the IIA
advocated for internal audit services remaining a
strictly in-house function and established the point
that keeping the internal auditing function as an
integral part of the organization o?ers clear
advantages. An IIA (1994, p. 2) white paper
emphatically stated that a ‘‘competent internal
audit department that is properly organized with
trained sta? can perform the internal audit func-
tion more e?ciently and e?ectively than [an
externally] contracted service.’’ Consistent with
the political advantage of organizational profes-
sionals being localized knowledge (Reed, 1996),
the primary rationale for this position was that
internal auditors are ‘‘intimately acquainted with
their organizations’ policies, procedures, operating
practices, and personnel’’ (IIA, 1994, p. 3). The
IIA argued that through day-to-day experience in
the business, internal auditors acquire an intimate
knowledge of an organization’s culture, processes,
risks, and controls, and thereby obtain the ‘‘pro-
prietary knowledge’’ that ?gures prominently in
giving competitive advantage to their company
(Matusik & Hill, 1998). This enables them to pro-
vide management with tailored services, especially
in the FCPA regulated areas of internal control
risk analysis and system assessments. In short, the
IIA’s position was that internal auditing profes-
sionals know and understand the organizations to
a degree that CPAs cannot, and their loyalty and
con?dentiality are ensured by the internal nature
of their function (Pelfrey & Peacock, 1995).
Moreover, almost taking as script the outsourcing
literature (Matusik & Hill, 1998), the IIA’s posi-
tion elaborated on the disadvantages of out-
sourcing which they de?ned as: the lack of
independence on part of external auditor violates
AICPA ethics and thereby contributes to an irre-
vocable diminishment of the value of the external
audit services in ?nancial markets; it attempts to
take away management’s responsibility for internal
control high learning curve costs; high total cost;
possible loss of potent informal communications;
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 335
disruption caused by a change in the locus of who
performs the services; and potential loss of com-
petitive advantage concerning leakage of proprie-
tary information.
The most forceful expression of the IIA’s posi-
tion against the outsourcing of internal audit ser-
vices to the external auditor came on 19 January
1996 when the IIA boldly presented its views at
the open session of the Professional Ethics Execu-
tive Committee of the AICPA (this open session
was part of the protocol whereby the Committee
solicited input for its May, 1996 o?cial position,
Extended Audit Services). At this 19 January
meeting the IIA made its position clear:
The IIA is opposed to total outsourcing of
the internal audit function to a company’s
external auditor because it impairs the [CPA]
?rm’s independence. Internal auditing is a key
management function that con?icts with the
public accountants’ responsibilities to be
independent of management.
In this open hearing, the IIA also made strong
reference to the frustration that the SEC was hav-
ing over the lack of guidance from the AICPA
regarding the implications of outsourcing on
auditor independence. The IIA stressed that its
representative to the SEC was going to take the
o?cial position on behalf of the IIA that ‘‘mon-
itoring and control activities’’ could not be
assumed by external auditors without impairment
of independence.
The strong advocacy position which the IIA
took on behalf of the internal audit profession,
and against the public accounting ?rms, at the 19
January 1996 session with the AICPA Profes-
sional Ethics Executive Committee was followed
by an urgent request from the Big Five ?rms to
have a meeting with representatives of the IIA
leadership. As the minutes from the 31 January
1996 meeting indicate, the Big Five ?rms were able
to impress upon the IIA several critical points:
The Big Five are allies of the IIA—com-
prising 5 of top 10 member organizations.
The focus of discussions should more
properly be on enhancing internal audit
quality overall and best serving the client,
regardless of which component of the pro-
fession provides this service.
The greatest challenge to internal auditing
and external auditing lies in the accounting
profession’s becoming irrelevant to client
organizations, i.e. the greatest risk is failing
to provided ‘‘value added services’’ to the
enterprise.
The Big Five are major contributors to
quality improvement for all auditors.
It is important to be ‘‘outsourcing neutral,’’
i.e. outsourcing is not for all, but there is
some bene?t to outsourcing the internal
audit function in select settings, thus sug-
gesting there be no ‘‘one size ?ts all’’ out-
sourcing strategy. Furthermore, in some
organizations, external auditing e?ective-
ness may be enhanced through partial, or
even full outsourcing of internal audit ser-
vices deriving from the symbiosis of pro-
viding joint services.
The ultimate test should be determining
which component of the auditing profes-
sion audit provides maximum overall e?ec-
tiveness in achieving corporate strategic
objectives and protecting the public interest.
Perhaps most importantly, the Big Five are
the major ?nancial donors to the IIA.
The Big Five ?rms were e?ective in presenting
their case. Even before the IIA representatives
exited the meeting, the position of the IIA, as
espoused by its Chairman of the Board and the
IIA President, had become one of a dramaturgy of
conciliation:
Internal auditing is no longer the exclusive
domain of employees. Perhaps it hasn’t been
for along time. Our profession is our primary
linkage and our ?rst concern must be that the
managements, which invoke internal audit-
ing, receive quality, full scope auditing
results. Thus, it is time to begin a new era of
relationships. If the Berlin Wall can come
down, and the Union of Soviet Socialist
Republics can break apart, then internal
auditors and external auditors can begin to
336 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
build partnership arrangements at both the
national and local chapter levels.
The IIA (1996a) subsequently published its
March/April newsletter explaining its new con-
ciliatory position, largely using the rhetoric
deployed by the Big Five at the 31 January 1996
meeting. Here, re?ecting a dramaturgy of ‘‘due
diligence’’, no explicit reference was made to the
substance of the 19 or 31 January meetings, but
instead sought to indicate that preservation of the
IIA as an institution, not the location of internal
auditing, was of manifest importance:
During recent months, there has been con-
siderable activity at IIA regarding the out-
sourcing of internal auditing to third-party
providers. The IIA has written to the Secu-
rities and Exchange Commission’s Chief
Accountant, participated in a meeting of the
AICPA’s Professional Ethics Executive Com-
mittee, released the IIA’s views to the press,
and ?nally, initiated a meeting with repre-
sentatives of major accounting ?rms that
provide internal auditing services. As a result
of supporting analysis and associated dialo-
gue, the IIA’s leadership concluded that there
is a need to chart a new path for the future,
which is in line with the IIA’s goals and
objectives. The ?rst of these goals is for the
IIA to be the recognized authority on internal
auditing. The second goal is for The IIA to be
the acknowledged leader of the internal
auditing profession. The most important sin-
gle document in the achievement of these
goals is the Standards for the Professional
Practice of Internal Auditing (the Standards),
the basic guidelines for the profession. The
IIA believes that all internal auditing prac-
tices and procedures, regardless of who con-
ducts the auditing, should conform to the
Standards (IIA, 1996a, p. 3).
The newsletter opened up the possibility of
external auditors conducting an internal audit,
providing such audits conform to IIA standards.
Further, it went on to outline an ‘‘enlightened’’
view of future directions of the IIA:
The IIA and its membership must refocus
energy spent in challenging the outsourcing
issue to improving the quality of internal
audit functions. The answer to ‘‘who does it
best’’ should be determined in the competitive
market place . . . The door must be opened to
include internal audit professionals regardless
of employer. The path to this position has
been a very di?cult one. Even though we still
have independence concerns and preferences
for internal operations, the trend toward
greater e?ciencies and involvement by third-
party providers is very evident. In order to
maintain a position of leadership and
authority, the IIA must begin to adapt our
thinking and processes so that we can help all
practitioners and ensure that the profession
of internal auditing is well understood by its
clients. Thus, the IIA intends to recognize
internal auditors as potential members based
on what they do rather than who employs
them. The IIA will continue to make the case
for the protection of external auditor inde-
pendence, but will recognize the rulings of the
AICPA Committee, the SEC, and other reg-
ulatory agencies (IIA, 1996a, p. 4).
The newsletter even went on to criticize its dues-
paying members—internal auditors—by telling
them that the IIA is also aware that many internal
audit departments are not ‘‘world-class’’. It also
stated that many professionals who are now
employed by public accounting ?rms are often
experienced internal auditors, and by implication,
are ‘‘world-class’’ by being members of inter-
national ?rms. Thus, the IIA now argued, con-
tracting with this level of external provider may be
useful as management attempts to improve the
quality of its internal auditing services to become a
part of an organization’s arsenal to enter global
markets. In a fairly candid confession of its
acquiescence to the Big Five ?rms, the IIA (1996a,
p. 3) newsletter acknowledged that:
Outsourcing is increasingly used as part of re-
engineering and downsizing, and this trend is
much larger than the function of internal
auditing. All major public accounting ?rms
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 337
now seem to be pursuing these services with
some degree of enthusiasm. Given the growth
and possible success of these e?orts, the
question for the IIA is whether it is positions
to achieve its goals and objectives if it cannot
help increase the internal audit e?ciency and
e?ectiveness of the outsourced providers.
The IIA newsletter also conceded that:
It is important for the IIA to reassess our
bedrock mission and chart a course that
identi?es common ground on which future
activity can take place. As more and more
contract providers enter the public and pri-
vate sectors, the IIA must address their pro-
fessional needs. Otherwise we may end up
trying to achieve objectives of leadership and
authority, only to ignore a large segment of
internal audit practitioners. At a minimum
this calls for another look at who we consider
to be internal auditors and how the IIA
relates to major providers, e.g. public
accounting ?rms that provide internal audit
services (IIA, 1996a, p. 3).
The closing comments in the IIA newsletter
provide a realistic perspective of: the needs of the
IIA taking precedence over those of internal audi-
tors; the economic imperative of ‘‘clients’’; and
trends of public accounting ?rms, now reclassi?ed
from being ‘‘a?liates’’ to ‘‘fellow’’—not compet-
ing—practitioners, being in the relatively lucrative
domain of internal auditing:
A large segment of IIA members feel threa-
tened by the growth of outsourcing, and the
IIA believes it has a responsibility to provide
them with some guidance in dealing with this
practice. The IIA is positioned to work with
public accounting ?rms in all aspects of the
profession and will not oppose the develop-
ment of this market. The door is open to
cooperation across the full range of IIA
activities. . . . The greatest risk to both exter-
nal and internal auditors is to be considered
irrelevant to the successful attainment of cor-
porate objectives (IIA, 1996a, p. 6).
A signi?cant shift in the dramaturgy of
exchange relations in the Spring of 1996 came to
be more formally embodied in the Fall with the
IIA’s (1996b) o?cial position being expressed in a
Exposure Draft of a Professional Issues Pamphlet
on Internal Auditing and Outsourcing:
Quality is the key ingredient of internal
auditing, irrespective of it being performed
by internal or external auditors.
We have now come to a position, which
recognizes the reality of outsourcing and
should serve to challenge internal auditors
to objectively assess their contribution to
their organization.
The IIA recognizes that internal auditing is
no longer the exclusive domain of employ-
ees. The ?rst concern is that management
receives quality, full scope auditing
results—that is, in accord with the Stan-
dards of the Professional Practice of Inter-
nal Auditing. The AICPA presented new
professional guidance to establish more
speci?c guidelines for extended audit ser-
vice for existing attest clients. These ser-
vices would not impair independence,
provided the auditor does not act or appear
to act in a capacity equivalent to a member
of client management or as an employee.
Outsourcing of internal auditing services is
neutral—neither necessarily good or bad.
. . . The ultimate test of this determination
will always be what arrangement provides
maximum overall e?ectiveness in achieving
strategic objectives.
The developments in 1996 had not gone un-
noticed by the SEC, which is charged with exercis-
ing regulatory oversight, as voiced by its Chairman.
I’m deeply concerned that ‘‘independence’’
and ‘‘objectivity’’ are increasingly regarded
by some as quaint notions. . . . There are
those who say that increasing competition
puts pressure on accountants to branch out
and try new ways to generating pro?ts. I
caution the industry, if I may borrow a
338 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Biblical phrase, not to ‘‘gain the whole world,
and lose [its] own soul.’’ (Levitt, 1996).
This sentiment was ampli?ed by SEC Commis-
sioner Norman Johnson who observed that:
I fear that many of these independence pro-
blems are rooted in the dramatic organi-
zational changes that have taken place in the
accounting profession over the last several
years. Accounting ?rms have found that the
audit business that has been their bread and
butter just does not allow for maximum
business and ?nancial growth. So accounting
?rms have looked for new sources of income
and have ventured into services well beyond
their traditional businesses, which may con-
?ict with their established roles as auditors.
. . . The con?icts of interest, or at the least, the
appearance of con?icts of interest arising
from these developments, are troubling. It
hardly seems accidental that ?nancial fraud
has rapidly increased at the same time non-
audit services performed by accounting ?rms
have proliferated and become more pro?table
. . . However, you can expect, in turn, that the
Commission will carefully scrutinize all its
regulatory and enforcement alternatives in
order to redress the problems posed by the
lack of auditor independence (1999, p. 3).
Extending this view, SEC Chief Accountant,
Michael Sutton (1996), reasoned that:
At what point does the auditor become so
involved in the success of the company and its
management—as a consultant or an advisor
to a provider of a variety of newer services—
that there is a risk that private interests might
be placed ahead of those investors, or that the
public will perceive it that way? . . . Internal
auditing traditionally has been a management
responsibility that, in critical ways, has been
integral to the system of internal control. In
that context, the question becomes, ‘‘Can the
independent auditor perform the internal
auditing function and also provide a truly
independent second look at the system of
internal control?’’ . . . The external auditor
would, in part, be attesting to the quality of
his or her own work. Clearly, in the view of
some, the auditor could not be viewed as a
‘‘disinterested party.’’
Thus, while the external audit profession is
making signi?cant gains in claiming the jurisdic-
tion of internal auditors, it is not a fete de accom-
pli. Remaining is the task of successfully
negotiating a transformation of its abstract system
of knowledge.
4.3. Moment III: Transforming an abstract system
of knowledge
It is not enough to merely advocate for a change
in jurisdiction and then perform the professional
services; this advocacy must be accompanied by a
modi?cation of a code of ethics and an abstract
system of knowledge (Abbott, 1983, 1988; Reed,
1996), as well as attaining tacit agreement as to
this modi?cation among various vested interests
(Czarniawska, 1997; DiMaggio, 1988; Zucker,
1988). As noted in Moment II, the Executive
Committee of the Professional Ethics Division had
already issued interpretation (101–113), ‘‘Exten-
ded Audit Services,’’ of the AICPA’s widely pro-
claimed ‘‘hallmark’’ ethics ruling 101—
Independence, partially in response to an SEC
request for a clari?cation on the outsourcing issue
(Barker, 1996). This interpretation speci?cally
concluded that internal audit outsourcing to
external auditors does not impair independence as
long as the external auditor does not serve as a
manager or employee of the client, and manage-
ment retains internal audit responsibility (AICPA,
1996).
The interpretation of the AICPA’s Executive
Committee appeared to comply with the SEC’s
call for guidance in this matter, constrained by the
provision that CPAs not act as members of man-
agement or as employees of the client:
The purpose of the (SEC) sta?’s considera-
tion of the issues surrounding the outsourcing
of internal audit functions is not to preclude
auditors from providing such services.
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 339
Rather, if auditors provide these services to
their audit clients, the sta? believes that the
impact of those arrangements on auditors’
independence should be considered carefully
in each situation. The SEC sta? supports the
e?orts of the Professional Ethics Executive
Committee and looks for the Committee to
complete its project and issue guidance in the
near future (Barker, 1996, p. 3).
Indeed, the IIA, in its 1996 newsletter examined
in Moment II, also acquiesced to and used to jus-
tify its own new position, the AICPA ethics inter-
pretation. Thus, it appears that the AICPA not
only modi?ed its ethics code to support a new
jurisdiction, but also gained the support of two
key constituents—the SEC and the IIA.
In addition to the speci?c ethics interpretation
of outsourcing, the SEC requested the formation
of a new body whose purpose would be to estab-
lish independence standards for the auditors of
public companies. The AICPA complied with this
coercive pressure by forming the Independence
Standards Board (ISB) in 1997 (Deloitte &
Touche, 1997), to be overseen by the SEC, which
would provide enforcement actions where neces-
sary. The ISB’s purpose is to provide indepen-
dence guidance to CPAs that have entered into
new service areas, or merged and restructured
operations. Initially, the ISB gained the drama-
turgical support of the SEC, with SEC Chairman
Levitt commending ‘‘the AICPA for its commit-
ment to professionalism,’’ while the AICPA Pre-
sident ‘‘hailed the ISB as an extension of an
ongoing commitment to protect and serve the
public interest, and maintain the strength of our
profession’s hallmark—independence’’ (Deloitte &
Touche, 1997, p. 1). This support quickly faded as
the ISB found out upon issuing a major docu-
ment, ‘‘Serving the Public Interest: A New Con-
ceptual Framework for Auditor Independence’’
(ISB, 1998):
The Independence Standards Board con-
cluded not to circulate a white paper sub-
mitted on behalf of the AICPA on the topic
of auditor independence, after the SEC criti-
cized the document for lacking neutrality and
balance. . . . According to the SEC, another
problem in the white paper was the conclu-
sion that individual ?rms are best positioned
to recognize threats to auditor independence
and, therefore, should police themselves, with
the ISB providing core principles of indepen-
dence. Adapting such a regulatory framework
could undermine investor con?dence, the
SEC maintains. Furthermore, the SEC hinted
at reinstating a requirement that auditors
must disclose speci?c nonaudit services pro-
vided to the public client on the registrant’s
?nancial statements (PAR, 1998a, p. 3).
In addition to modifying the ethics code and
forming the ISB, the Big Five ?rms sought to
modify their own structure to demonstrate their
commitment to maintaining independence by seg-
regating auditing from other services—a modi?-
cation that did not prove wholly successful:
Accounting industry advocates point to
internal controls used by the Big Five—so
called Chinese Walls designed to insulate
auditors from the other services o?ered by
their company. Sarah Teslik runs the Council
of Institutional Investors [CII], whose mem-
bers include mutual, pension, and trust funds.
Together, CII represents investors with a
combined $1.5 trillion under management.
‘‘Chinese Walls are a bunch of garbage. We
are human beings and human nature is
everywhere and always the same,’’ she said.
‘‘And the notion that you will within a ?rm
create an invisible wall and say to some
human beings, ‘You will not talk to these
other human beings, when everyone knows
how the money is coming in,’ is ridiculous.
We know better. We know that secrets
don’t get kept. We know that everyone
knows everything in an o?ce’’ (MSNBC,
1999, p. 5).
Faced with a lack of acquiescence toward, if not
support of, such speci?c actions, the AICPA
ascended to a more abstract level by seeking to
enhance the image of certi?ed public accountants
being ‘‘knowledge professionals’’ (Reed, 1996).
340 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
For example, the AICPA presented its ‘‘Vision
Project’’ whose purpose is to reposition the CPA
for the new millennium. Recipient of the Gold
Quill Award from the International Association of
Business Communicators, the Crystal Award of
Excellence in the Organizational/Corporate Image
Category of the Communicator Awards, and
Communication Award of Distinction for Excel-
lence in Writing, the AICPA’s ‘‘Vision Project’’
for the third millennium was launched in the Fall
of 1999 with the overt proclamation that:
The increasing complexities of the global
environment and the commodity character-
istics of traditional [audit] services mandate
that the profession migrate up the economic
value chain. Commodi?cation and technol-
ogy are challenging the economic viability of
the profession. Information-based products
and services are losing value in the mar-
ketplace and are rapidly being replaced
with knowledge-based products and services
that command higher fees (AICPA, 1999a,
p. 4).
On the CD featuring visuals scrolling the phra-
ses ‘‘internet economy’’, ‘‘global highway’’, ‘‘arti-
?cial intelligence’’, ‘‘convergence’’, ‘‘private space
exploration’’, and ‘‘Bottom Line: Financial Secur-
ity’’ (see also www.cpavision.org), which won a
Videographic Award of Excellence, CPAs were
encouraged to expand their own vision by:
Developing a deep understanding of the glo-
bal, national, and marketplace environment
and the impact of forces on various types of
organizations, including their own business.
CPAs will align with other areas of business
practice and other professionals to provide
value-added services in the marketplace.
CPAs will continuously expand their know-
ledge and competencies to meet a broader
range of market needs and enhance the role
of the profession in the business world.
Keeping abreast of technology is critical to
increased opportunities for CPAs to optimize
performance and expand services (AICPA,
1999a).
This ‘‘deep understanding’’ would culminate in
rendering less commodi?ed, more knowledge
based services:
The Economic Platforms model describes the
distribution of knowledge and e?ect along the
economic value chain. The most successful
future for the profession lies in moving from
information services on Platform 1–2 [exter-
nal audit of ?nancial statements] to services in
the emerging knowledge industry on Plat-
forms 3–5 [internal auditing, and implement
and manage audit control systems—the con-
trast with the IIA’s and SEC’s positions that
the management of internal auditing remain
internal and the organization is noteworthy]
and beyond. The more a product or service is
re?ned and de?ned, the less market value it
will have. Higher Platform services are, and
will increasingly be, the most valued services
and functions, and therefore will command
higher fees and salaries. Traditional services
are the foundation from which CPAs can
leverage to higher value services. If your work
falls lower on the economic value chain, rev-
enue will be lower. The higher your work is
on the economic value chain, the higher the
revenue. This is the imperative for the pro-
fession to thrive in the knowledge-based, glo-
bal economy (AICPA, 1999a).
Founded on ‘‘a history of public interest’’ and a
‘‘stringent code of professional conduct and
unquestionable ethics’’, the Vision statement
asserted that ‘‘new standards may be established
to further support the role of CPA’s as trusted
individuals in the competitive marketplace’’, who
nevertheless would continue to place ‘‘professional
responsibility above personal gain’’. Thus, the
external auditing profession is very deliberately
extending its abstract system of knowledge to
?rmly embrace the socially prized role of the
knowledge expert treading the information high-
way across the information bridge to a new infor-
mation age in a global economy. The ?rst stop on
this itinerary from Level 2, ?nancial audits, is
Level 3—performing outsourced internal audit
services.
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 341
Also at this time, in his opening speech as
incoming AICPA Chair, Bob Elliott (1999, 2000)
both supported the Vision Project and introduced
the new ‘‘XYZ credential’’ (with XYZ being a
place-holder term), de?ned as a professional cre-
dential of ‘‘one who helps people or organizations
achieve their objective through the strategic use of
information and creation of new knowledge’’
(Elliott, 2000). Elliott stated that the CPA creden-
tial basically ‘‘doesn’t cover the work we do’’ and
has the inherent problem that it is regulated at the
state level through licensing procedures, rather
than being global in nature and directly controlled
by an as yet to be formed international profession
(Elliott, 2000). Thus, XYZ ‘‘should be rooted in
intellectual property rights, not government, so
that it can be changed nimbly’’ (AICPA, 2000). In
turn, because the ‘‘technology threat is chewing up
lower level chain links,’’ CPAs must leverage their
knowledge of clients and move up the value added
chain from data and information services to
knowledge and decision services. Stating that the
‘‘CPA is not just a license’’ but also a ‘‘brand’’, he
described the AICPA’ use of a brand consultant
who advised that the CPA brand could not be
‘‘stretched’’ far enough to incorporate the global
knowledge expert. Hence the development of the
XYZ credential for a name being market-tested
across the professional associations of 11 coun-
tries expressing an interest in it; the budget neces-
sary to bring the credential to market is $347
million (AICPA, 2000, p. 46). Asking the rheto-
rical question ‘‘Why now?’’ Elliott answered say-
ing that: (1) the knowledge economy demands a
knowledge leveraging credential; (2) the emer-
gence of a global economy a global credential; and
(3) the internet (the AICPA is developing a new
internet portal—CPA2Business.Org) provides the
platform for a global credential (Elliott, 2000).
Subsequently, after an aborted attempt to name it
the ‘‘Cognitor’’, the credential came to be refer-
red to as the Interdisciplinary Global credential
to be administered by a newly formed Institute
of Strategic Business Professionals (IISBP;
AICPA, 2001). Elliott (1999, pp. 4–6) speci?cally
saw the need to re-generate the professions’
abstract systems of knowledge through the XYZ
credential and what he called ‘‘knowledge
science’’, seemingly taking as script from Abbott’s
(1988) line of reasoning:
I foresee that these e?orts, together with the
work of our members in the academic
world, will re-de?ne the body of knowledge
that is the de facto stamp of an accounting
professional. Every profession is de?ned by
the body of knowledge that di?erentiates it
from non-professionals and from other
professions. There has always been some
jostling at the boundaries between profes-
sions. Where is the boundary between law
and a CPA’s tax work? Where does attes-
tation end and product testing begin? So a
little fuzziness at the boundaries of a pro-
fession’s body of knowledge is in no way
troubling. What is important is that the
body of knowledge successfully establishes a
claim to expertise deserving recognition as a
profession.
Countering critics holding that professionalism
must be protected against commercialism and a
‘‘watering down’’ of the CPA credential (AICPA,
2002a), Elliott (1999, p. 6) concluded that:
Our ethical rules, however, are not ends, they
are means. The end we seek as a profession is
to equip decision makers with high quality
information . . . We must do nothing that
obstructs us from our obligation to provide
high quality information, that is information
that is relevant, reliable, and timely. To
repeat, our ethical rules are only means to
achieve that end and are not sacrosanct on
their own account . . . For our profession to
realize the great opportunities within its
reach, we must have a clear goal, su?cient
resources, and e?ective leadership. Let me
restate that more precisely: we need the
vision, the power, and the courage. We cer-
tainly have the vision: our members have
provided a powerful, forward-looking vision.
And, as a profession we have the power,
because the half million CPAs in America
produce nearly one percent of total value
added in our economy.
342 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Consistent with Elliott’s (1999) position and
also the risk of the ‘‘risk society’’ (Beck, 1992), the
Independence Standards Board (2000, p. 10) has
begun to speak in terms of ‘‘independence risk’’ in
its revised independence conceptual framework
which can and should set at di?erent levels of risk
tolerance, rather than as an immutable standard
of ethical conduct (for general discussion of ‘‘risk’’
in auditing, see Power, 2000).
Meanwhile, the internal auditing profession
sought to likewise modify its own code of ethics
and abstract system of knowledge. At ?rst it may
seem paradoxical that the IIA should seek to
modify its code of ethics given that the question of
independence was raised pertaining to the role of
external auditors. However, if external auditors
performing internal auditing services were to be
governed by the IIA’s standards (IIA, 1996b), its
code also had to be modi?ed. The old code
squarely stated in its Standard 100 (IIA, 1978, p. 16)
‘‘Independence—Internal auditors should be
independent of the activities they audit.’’ The code
(IIA, 1978, pp. 18–19) went on to elaborate at
length that independence is ensured by internal
audit’s organizational status (e.g. if its director
reports to a su?ciently high member of manage-
ment or the board, independence is enhanced) and
objectivity. Concerning the latter, the code states:
120.01 Objectivity is an independent mental
attitude, which internal auditors should
maintain in performing audits. Internal audi-
tors are not to subordinate their judgment on
audit matters to that of others.
However, in its 1999 Code of Ethics Exposure
Draft, the IIA pointed to the problematic exis-
tence of the terms ‘‘independent’’ and ‘‘objective’’:
While in common usage the terms ‘‘indepen-
dent’’ and ‘‘objective’’ are more or less
synonymous, the profession has attempted to
make an important distinction between these
terms by de?ning ‘‘independence’’ in the con-
text of the internal auditing function itself
and ‘‘objective’’ as an attribute of the indivi-
dual auditor. In short, the function must
remain independent by not being under the
in?uence of the organizational component
being audited. The individual auditor, on the
other hand, must remain objective by having
an independent mental attitude and the
requisite competence such that his or her
judgment is not subordinated to others who
may have a vested interest in the audit out-
come. The Task Force concluded that this
distinction was not clear in the existing de?-
nition and that this lack of clarity may have
contributed to some ambiguity in the Stan-
dards. The proposed de?nition attempts to
pull these two concepts apart by linking the
personal attribute of ‘‘objectivity’’ with the
individual performance process (i.e. assurance
and consulting activity) and connecting
‘‘independence’’ with the organizational posi-
tioning of the activity (i.e. independently
managed). We believe such a partitioning of
these related, but distinct, concepts not only
incorporates the spirit of the dialogue within
the IIA but also leads to a conceptually
superior framework for standards-setting
(IIA, 1999, p. 5).
Thus, the auditor performing the work need
only be concerned with being objective, while the
issue of being independent could be satisfactorily
addressed by reporting directly to the board of
directors, be it by an internal auditor or an exter-
nal auditor performing internal audit services. The
Exposure Draft went on to discuss the ‘‘funda-
mental principles’’ individual internal auditors are
to uphold that included integrity, objectivity, con-
?dentiality, professionalism and competency—but
excluded independence for the ?rst time since 1947
(IIA, 1999, p. 3).
While the Exposure Draft recognized that the
internal audit function should remain ‘‘managed
within’’ the company (IIA, 1999, p. 3, but recall
Arthur Andersen’s (1997) pledge to help manage-
ment plan and execute the internal audit function),
it went on to recognize that a ‘‘paradigm like shift
seems to be occurring’’ by acknowledging the
possibility that the ‘‘value added proposition’’
may ‘‘replace independence as a traditional value
governing internal auditing work in organi-
zations’’ (IIA, 1999, p. 3).
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 343
‘‘Internal auditing’’ also needed to be rede?ned
from the traditional stance that it
. . . is an independent appraisal function
established within an organization to examine
and evaluate its activities as a service to the
organization. The objective of internal audit-
ing is to assist members of the organization in
the e?ective discharge of their responsibilities.
To this end, internal auditing furnishes them
with analyses, appraisals, recommendations,
counsel, and information concerning the
activities reviewed. The audit objective
includes promoting e?ective control at rea-
sonable cost (IIA, 1978, p. 16).
As such, it was an internal organizational activ-
ity designed to be information-oriented appraisal
function (Krogstad, Rutley, & Rittenberg, 1999).
According to the Exposure Draft this de?nition
was to be modi?ed:
Internal auditing is an independent, objective
assurance and consulting activity designed to
add value and improve an organization’s
operations. It helps an organization accom-
plish its objectives by bringing a systematic,
disciplined approach to evaluate and improve
the e?ectiveness of risk management, control,
and governance processes (IIA, 1999, p. 2).
Internal auditing was to become an objective
assurance and consulting, knowledge-based ser-
vice designed to ‘‘add value’’ to the company from
the perspective of its entire value chain ‘‘regardless
of who performs the work’’ (Krogstad et al., 1999,
p. 29)—the already claimed jurisdiction of external
auditors.
Similar to the AICPA’s Vision Project, the IIA
sought to modify its abstract system of knowledge
to ensure its future. In the IIA’s pamphlet The
IIA’s Perspective on Outsourcing Internal Auditing
(1994; see also IIA, 1996b, p. 4), the IIA advocated
that internal auditors take a long-term perspective,
once more using the rhetoric of external auditors:
By marketing professionalism and demon-
strating value-added qualities to management,
internal auditing can further increase its sta-
ture within the environment of corporate
governance and reduce its vulnerability to
outside contractors.
The pamphlet further stated that they should
evaluate their mission and customer-oriented stra-
tegies, as well as prepare and implement a ‘‘vision
statement’’ that speaks to the ‘‘core values’’ of
being ‘‘proactive, innovative, focused, integrated
and motivated’’. This thrust was more recently
rea?rmed with the June 1999 issue of Internal
Auditor whose cover proclaimed the importance of
the knowledge worker ‘‘Managing Intellectual
Capital: Audit’s New and More Urgent Chal-
lenge’’ (noteworthy is absence of the word ‘‘Inter-
nal’’ before ‘‘Audit’s’’). Introducing the IIA’s
Consulting/Advisory Services area, the feature
article (Collins, 1999, p. 26) entitled ‘‘Auditing in
the Knowledge Era’’ (noteworthy once more is
absence of the word ‘‘Internal’’), proclaimed
‘‘Internal auditing’s relevance will be inextricably
linked to our capacity to co-op organizational
knowledge and our willingness to exchange com-
pliance for commitment, and control for empow-
erment.’’ Apparently internal auditors are also to
be knowledge workers treading the information
highway across the information bridge to the new
information age.
This transformation of both external and inter-
nal auditing, meanwhile, and as expected, had
been monitored by the SEC. Following a few
widely reported violations of SEC and AICPA
?nancial independence rules, with one ?rm found
to have committed over 8000 violations, largely
for ‘‘dot-com’’ clients, and SEC amnesty relat-
ing thereto (PAR, 2000a, for criticism of this
amnesty, see Hood, 2000; Journal of Accoun-
tancy, 2000a), SEC Chairman Levitt (2000a, pp.
2–3) lamented the ‘‘monetization’’ of the pro-
fession and how partners had become client
‘‘relationship managers’’ protecting their ‘‘repu-
tational capital,’’ and how ‘‘too many auditors
are being judged not just by how well they
manage the audit, but by how well they cross-
market their ?rm’s non audit services.’’ He con-
cluded ‘‘it’s no wonder that the Big 5 now posi-
tion themselves globally as ‘multi-disciplinary
344 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
professional service’ organizations rather than
accounting ?rms.
1
On 27 June 2000 the SEC proposed extensive
new regulations (SEC, 2000a, 2000b) that would
‘‘force a restructuring of the accounting profession
and radically alter independence requirements for
accounting ?rms the audit SEC registrants’’
(AICPA, 2001). Among the various provisions the
regulation would prohibit ?rms from simulta-
neously performing audit services and ten cate-
gories of non-external audit services, including
internal auditing. It would also bar contingent fees
or ‘‘value-added billing.’’ The AICPA responded
that the ‘‘new rule would cripple the ability of the
accounting ?rms to operate in the new economy.’’
It encouraged its 330,000 members to write Con-
gress strongly opposing the proposed regulation,
and o?ered guidance on the content of letters
(AICPA, 2001). Anticipating the SEC’s proposal,
two letters signed by seven mostly Republican
members of Congress, as well as one from the US
House Commerce Committee that oversees the
SEC—all recipients of signi?cant campaign con-
tributions from the Big Five during an election
year—were sent to the SEC ‘‘demanding the SEC
Chairman Arthur Levitt defend his aggressive
stance on auditor independence’’ and to ‘‘provide
Congress with empirical evidence that would
prove accounting ?rms have non-external audit
relationships with audit clients are less indepen-
dent than those ?rms that have no such relation-
ships’’ (PAR, 2000d).
The business press picked up on the frontal
assault on external auditor independence, with the
editor-in-chief of Accounting Today, for example,
commenting that:
The SEC calls this ‘‘the Year of the Accoun-
tant,’’ for its focus on earnings management
and independence issues. And chairman
Arthur Levitt and [new] chief accountant
Lynn Turner are convincingly outraged by
the arrogance that they see in Corporate
America and the Big Five. But if the SEC
cannot stop or restrict [various ?nancial-rela-
ted independence issues], the regulators will
have proved to be toothless watchdogs. If so,
then the profession’s entire system and philo-
sophy of independence will need re-thinking.
In fact, we are probably past the time when
independence mattered. CPAs, who once
valued fairness and truthfulness in ?nancial
reporting, would then promise little more
than nods and winks, all beyond the reach of
meaningful oversight. If the profession won’t
defend it’s own principles, then who will?
(Telberg, 1999, p. 6; see also Journal of
Accountancy, 1999; WSJ, 1999a, 1999b,
1999c, 1999d).
The SEC subsequently held four days of public
hearings on the proposed set of independence
standards in September 2000 and heard testimony
from almost 100 witnesses (SEC, 2000c, p. 4).
Predictably, the testimony of those representing
the external audit profession, such as the AICPA
President Barry Melancos (SEC, 2000c: /testi-
mony/melanc/.htm) and Chairman Bob Elliott
(SEC, 2000c: /testimony/elliott/.htm) used an
assuaging dramaturgy of commending the Com-
mission for initiatives to enhance the profession,
but then voiced their strong opposition to the
proposed standards. It deployed a dramaturgy of
undermining ‘‘market forces’’ and limiting the
ability of the profession to become knowledge
experts in the information age and thereby serve
the global economic community, reasoning that
perfect independence is not the ‘‘Holy Grail’’ with
governmental power threatening to transform
‘‘aspirational goals’’ into ‘‘coercive rules.’’ The
risk of approving the proposed rules, it asserted,
would be to ‘‘ruin a crown jewel of the American
Economy—its public accounting profession.’’
In the meantime, the IIA leadership had di?-
culty mobilizing the support of its membership
1
Another e?ort directed at becoming multi-discipline ser-
vice ?rms and o?ering of ‘‘one stop shopping’’ to clients
involves e?orts by the Big Five to o?er legal services. Already
having extensive tax practices (Abbott, 1998) and legal services
in Europe, they supported e?orts by a special commission of
the American Bar Association to recommend a modi?cation to
the guidelines enabling lawyers to ‘‘partner’’ with CPA’s
(AICPA Guidelines already allow non-accountants to own a
minority share of CPA ?rms, PAR, 1999d). However, the
ABA’s House of Delegates voted in July 2000 to disallow law-
yers from forming MDPs—multi-disciplinary practices (Journal
of Accountancy, 2000b)—and thus the Big Five cannot o?er
legal service to clients in the USA, yet.
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 345
around its pro-Big Five position on outsourcing.
Not all practitioners’s agreed with this ‘‘new’’
direction; according to one IIA member in speech
addressing fellow members:
Why has the IIA [Institute of Internal Audi-
tors] abandoned its original constituents and
aided and abetted those who would a?ect the
demise of the internal auditing profession? . . .
t appears that the IIA’s decision to embrace
our competition as fellow internal auditors
had nothing to do with internal auditors—
those who created the organization. Rather, it
was based on a belief that such an approach
is the best way to save the IIA. I’m not sure
that this is a real cause; this just might be
about money. . . . I suggest that we stop acting
like sheep, that we recognize that there’s a
war being waged against our profession, and
that we take back the IIA and put it into
battle on our side (Speech at an IIA meeting).
And in a more dramatic move, a petition was
initiated by the grassroots membership to remove
the IIA leadership:
We the undersigned are aware that internal
auditing departments are being displaced by
public accounting ?rms and that the IIA,
rather than defending the profession, has
chosen to welcome the public accounting
?rms as fellow internal audit practitioners
and has taken various steps to accommodate
the public accountants, with the most well-
known being the revision of the de?nition of
internal auditing. . . . We are not pleased with
the IIA’s actions to date nor with the IIA’s
current course in response to the challenge of
our profession presented by the Big 5 public
accounting ?rms. . . . [W]e do not wish to see
any of the current [IIA Board] members re-
elected (Petition amongst IIA members, 4
January 2000).
Following the petition, the IIA leadership
reversed its previously supportive position con-
cerning outsourcing to the Big Five ?rms (which, of
course, was itself a reversal of a an earlier position
opposing outsourcing to the Big Five ?rms) to
that of cautious opposition. IIA President William
Bishop in o?ering testimony at the SEC hearings
(SEC, 2000c, /testimony/bishop/,htm), agreed
with ‘‘the SEC that now is the time to address
independence issues’’. Speci?cally, Bishop stated
that:
The IIA believes that total outsourcing of the
internal audit function by the organization’s
external auditing ?rm impairs that ?rm’s
independence, [and that] there is a con?ict
with: (a) provisions regarding acting as man-
agement or as employee of the audit cli-
ent. . .[and] (b) provisions regarding auditing
the accountant’s own work. . .[because] inter-
nal auditing is moving even closer to integra-
tion with the organization’s risk management
control processes [i.e. Platform 3 of 4 of the
AICPA’s Vision].
Bishop did, however, concede, ‘‘Outsourcing
individual audit projects or a well-de?ned portion
of the internal audit function, under the manage-
ment and direction of the chief internal audit
executive, does not necessarily impair indepen-
dence,’’ although operational audits should
remain within the province of internal auditors.
Following the hearings, as well as CPA ?nan-
cially backed challenges from Congress, SEC
Chairman Levitt (2000b) adopted a more con-
ciliatory dramaturgy, apparently absolving the
profession of losing its soul:
As one of the professions’ greatest admirers,
I’m here to celebrate the importance of a
profession that has grown in stature along
side the great American economy. . . . The
auditing profession is, in my mind, one of the
most noble in our marketplace. At the very
core of the auditors’ mandate is preserving
the sanctity and purity of the numbers. In
that sense, its also one of the most elegant.
But its elegance does not overshadow what is
a hard, and sometimes thankless, job. . . . You
can expect the Commission to help you
address the di?culties that arise in serving the
interests of the large ?rms and the small
346 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
practices alike; to be active in those areas
where you strive to bring even greater luster
to the auditor’s franchise and the public
interest. More speci?cally, you can expect the
Commission to be responsive to the changing
nature of business, the emerging information
age, and how these impact our ?nancial
reporting framework. . . .
One generation of accountants passes on the
light of independence to the next. That light
sustains the profession’s life through a culture
of integrity, a mission of objectivity and an
ethic of responsibility. You have been handed
a precious legacy. What you do with it will
determine the future of this profession. It is a
heavy burden and an awesome privilege. Lift
the light far and wide for the next generation
of accountants to see. Lift the light far and
for America’s investors to see. And, lift the
light far and wide not just as a profession—
but as individuals—committed, passionate
and resolute to a ?delity that is a much about
the profession’s past as it is about the profes-
sion’s future.
The SEC (2000c) unanimously passed a sub-
stantially revised set of rules, for the most part
a?rming prior SEC and AICPA independence
standards (including not prohibiting the value-
added fee, p. 48). Concerning the outsourcing
issue, the new rules adopted a compromise, stating
‘‘an auditors’ independence is impaired by per-
forming more than 40% of the [external] audit
client’s internal audit work related to the internal
accounting controls, ?nancial systems, or ?nancial
statements, unless the audit client has $200 million
or less in assets’’ (SEC, 2000c, p. 43). Operational
audits are permitted if they are properly overseen
by management (SEC, 2000c, p. 89). In addition,
the rule requires disclosure of ‘‘all other fees’’ to
include internal auditing services in proxy state-
ments (SEC, 2000c, p. 54), as well as disclosure
that the client’s audit committee has considered
whether this category of services is ‘‘compatible
with maintaining the principal accountant’s inde-
pendence’’ (SEC, 2000c, p. 55). Still, rendering
40% or less of restricted internal auditing services,
and properly overseen operational audits, in addi-
tion to internal auditing services o?ered in the
international, non-SEC regulated arenas, repre-
sents a huge potential market.
The business press (e.g. PAR, 2000f, p. 1) saw
the new rules as clearly signaling that the Big Five
won the independence war:
In a startling victory for the profession, the
SEC’s independence rule does almost nothing
to stop the increasing ?ow of consulting work
from CPA ?rms to their audit clients. . . .
[T]he ?nal product is a remarkably weak rule
that does little more than stick the SEC’s seal
on existing prohibitions. Limited restrictions
on internal audit outsourcing and disclosure
requirements for IT [information technology]
work were the only new twists approved by
the SEC. Neither provision stands to sig-
ni?cantly cut into the Big Five in revenue
streams (see also PAR, 2000g, 2000h, 2000i).
The business press also predicted that based
upon $8.2 million of campaign contributions from
the AICPA an Big Five to key, predominantly
Republican politicians (each of the Big Five
ranked in the top 20 of Bush’s contributors; PAR,
2001), which excludes contributions from indivi-
dual partners, that there would arise a turnover of
key SEC personnel:
The battle between Levitt’s SEC and ‘‘the
accounting establishment’’ runs parallel to
the electoral battle between Vice President
Gore and Governor W. Bush [who received
over three times the contributions from the
Big Five as Gore, PAR, 2000g] since a Bush
victory would mean an end to Levitt’s reign.
Champaign parties would prevail at 1211
Avenue of the Americas, where the AICPA
resides, and each of the Big Five headquarters
as well (Mason, 2000, p. 45)
Immediately following Bush’s victory, Arthur
Levitt did indeed announce his resignation (WSJ,
2000) as did Lynn Turner the following July (Dow
Jones News Service, 2001). Also during this per-
iod, the Independence Standards Board
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 347
announced its closing with the issuance of its con-
ceptual framework (www.cpaindependence.org/
generalinformation), despite outgoing SEC chief
accountant Turner’s observation it ‘‘does not pro-
vide the type of de?nitive guidance or transparency
that enhances investor con?dence . . . Resulting in a
fox guarding a henhouse. . . . because accounting
?rms become the sole and ?nal arbiter of whether
the accounting ?rm’s independence has been
impaired’’ (ISB, 2001).
Washington lawyer Harvey Pitt subsequently
replaced Arthur Levitt as SEC Chair: ‘‘Pitt, who
was nominated by President George W. Bush is
not expected to be sympathetic toward the indivi-
dual as was his predecessor. As a lawyer who
represented investment bankers during his career,
Pitt is widely regarded as a Wall Street advocate’’
(Industry Standard, 2001). This appointment was
praised by AICPA president Melancan as pre-
senting an opportunity to ‘‘create an open and
progressive dialogue with the Commission’’
(Klein, 2001, p. 1). Indeed, Pitt represented each
of the Big Five concerning the regulation of the
scope of services and ?rm structures, as well as the
AICPA in establishing the Independence Stan-
dards Board (Klein, 2001, p. 37). Speaking before
the AICPA, Pitt announced his intention to have
the SEC form a ‘‘partnership’’ with the profession:
In the past, the accounting profession was not
always willing to speak to the SEC and the SEC
was not always willing to speak to the profession.
I’m here to say that those days are over (Carlino,
2001, p. 1). In turn, Pitt named Robert Herdman
as SEC Chief Accountant, formerly Vice Chair for
Ernst & Young, to start this dialogue and form
this partnership.
Despite the apparent victory by the Big Five in
preserving their ability to perform outsourced
internal audit services for external audit clients in
the late summer of 2001, things quickly unraveled
with the collapse of Enron and questions as to the
e?cacy of its external auditors—Arthur Andersen.
Although detailed descriptions of the event sur-
rounding Enron are beyond the scope of the cur-
rent paper, questions arose as to Andersen’s
independence in view of the $27 million paid to the
?rm by Enron for non-external audit services, con-
trasted with the $25 million paid for its ?nancial
audit. In particular, attention was focused on
Andersen’s performance of the outsourced inter-
nal audit services for Enron, with challenges that
the ?rm was ‘‘auditing its own work’’ by rendering
such ‘‘double duty’’ services which could in turn
‘‘expose Andersen to greater liability for damages
in shareholder lawsuits (WSJ, 2001a, A4). More-
over, as revealed in court documents, Enron was
seen as a key building block for developing
Andersen’s internal audit service during the 1990s:
The cozy relationship between Enron Corp.
and its former auditor Arthur Andersen LLP
developed more than a decade ago as Ander-
sen came to view the energy company as a key
building block in its e?orts to expand a nas-
cent business of providing internal auditing
services along with its traditional external-
auditing function.
The Enron outsourcing business was a big
prize. Andersen’s original proposal included a
?ve-year guaranteed contract, $18 million in
net fees for Andersen and ‘‘value-building
opportunities’’ of as many as 44,400 guaran-
teed consulting hours, as well as potential
savings for Enron of $12 million over ?ve
years.
Once it won the contract, rather than physi-
cally separate internal and external auditors
working at Enron to prevent con?icts of
interest, Andersen encouraged a ‘‘culturiza-
tion’’ of the work teams, bringing the audi-
tors together on the same ?oor at Enron
(WSJ, 2002a, p. A4).
Subsequent to the press coverage accorded the
internal audit and fearing direct regulation, four
of the Big Five (the ?fth later capitulated)
announced they would no longer provide such
services to external audit clients:
Four of the ?ve biggest accounting ?rms
(Andersen, PWC, E&Y, and KPMG) said
yesterday that they would reject the industry
practices that have prompted extensive criti-
cism of Arthur Andersen, which audited
348 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
?nancial statements of the Enron
Corporation. . .
The scramble by most of the big ?rms to bol-
ster their image shows just how worried
accountants are about the prospect of new
regulations or legislation. By acting now, the
?rms’ executives’ hope to preempt such
moves and preserve as much business as pos-
sible (New York Times, 2002, p. A1).
This fear of regulation was not unfounded, as
evidenced by the Auditor Independence Act of
2002, SB 1896, introduced by Senator Boxer on 25
January 2002. This bill, modeled after former SEC
Chairman Levitt’s original June 2000 proposal,
would bar CPA ?rms from rendering non-external
audit services that would impair independence
(PAR, 2002). Meanwhile, in the House of Repre-
sentatives, a bill is being developed by its Finan-
cial Services Committee and supported by the
SEC that would bar internal audit services, estab-
lish a predominantly independent Public Reg-
ulatory Board that would set and enforce auditing
standards, and increase the SEC’s budget by 45%
to improve the oversight function (Rankin, 2002;
WSJ, 2002b). In response to the proposed Public
Regulatory Board, the existing, AICPA-sponsored
Public Oversight Board announced that it was
disbanding (Carlino, 2002).
Following a well-?nanced AICPA campaign to
support the Interdisciplinary Global/XYZ creden-
tial/IISBP Association, the proposal came up for a
vote by the AICPA membership on 28 December
2001 (AICPA, 2001). The proposal was voted
down with, with 62.7% of the members voting
against, and 37.3% of the members voting in favor
out of 134,000 members participating, with
approval by two-thirds majority being required
for passage (AICPA, 2002a, 2002b). Primary rea-
sons given for the defeat were that the new cre-
dential would ‘‘water down’’ the CPA credential
and that the larger ?rms were already providing
related services globally thus obviating the need
for a new credential (AICPA, 2002a). Thus, the
march of the accounting profession to follow the
information highway across the information
bridge to the new information age and become
global knowledge experts o?ering higher platform,
more powerful services higher up in the value chain
has become, temporarily perhaps, problematic.
5. Concluding remarks
The purpose of this analysis was to address our
central research question and thereby gain an
understanding of the dramaturgy of exchange
relations among the AICPA, international public
accounting ?rms, the IIA and the SEC concerning
the jurisdictional dispute over which component
of the accounting profession should perform
internal audit services. Rather than being a pro-
cess of institutionalization or de-institutionali-
zation (e.g. DiMaggio & Powell, 1983, 1991;
Meyer & Rowan, 1977; Scott, 1987), what we
found was a process of re-institutionalization
wherein the Big Five public accounting ?rms
actively sought to reconstitute their professional
?eld or jurisdictional domain so that they could
perform the internal audit services for their exter-
nal audit clients (Abbott, 1988; Reed, 1996). This
process of re-institutionalization proved to be rife
with con?ict and profoundly political (DiMaggio,
1988).
The dramaturgy of exchange relations of this
reconstitution proceeded by means of the Big Five
deploying a rhetorical velvet glove over an iron
hand of ?nancial force with unrelenting resolve.
The rhetoric was one fashioned around ‘‘knowl-
edge-speak,’’ and deployed such societally-prized,
though highly abstract, even mythical (Alvesson,
1993) terms as ‘‘market forces’’, ‘‘globalization’’,
‘‘world class’’, ‘‘client-driven’’, ‘‘core compe-
tencies’’, ‘‘value-added’’, ‘‘value chains’’, knowl-
edge professional’’ and ‘‘higher-order platforms of
service’’. At ?rst, the IIA resisted this rhetoric
using its own dramaturgy of ‘‘unique, local
knowledge’’, ‘‘con?dentiality arising from being
employees’’, and the charges that the ‘‘indepen-
dence’’, and hence value of external auditors
would be impaired if they were to perform internal
audits. Thus, the dramaturgy of exchange rela-
tions between external and internal auditors were:
global versus local expertise (Abbott, 1988; Meyer,
in preparation; Reed, 1996); and public versus
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 349
private information (Matusik & Hill, 1998). The
SEC likewise spoke to the issue of external audi-
tors ‘‘losing their souls’’ if they transgressed
beyond the ‘‘monopoly’’ granted them to perform
‘‘nontraditional services’’.
Our results point to the ability of a prominent,
resolute component of a profession being able to
temporarily overcome the coercive force of gov-
ernment (DiMaggio & Powell, 1983), in part by
co-opting its professional adversary, the IIA, in
the jurisdictional dispute. Reminded by the Big
Five that they comprise ?ve of the ten major
members of the IIA and provided a very sig-
ni?cant portion of the IIA’s ?nancial support, the
rhetoric of resistance quickly became infected by
the rhetoric of ‘‘knowledge speak’’, as the coercive
force of the Big Five engendered mimetic iso-
morphism on the part of the IIA (DiMaggio &
Powell, 1983). The IIA, too, bespoke a concern
with internal audit services being ‘‘world class’’,
being subject the discipline of ‘‘market forces’’,
‘‘adding value to the client’’, being intimately
linked to the ‘‘client’s value chain’’, all the while
‘‘co-opting organizational knowledge’’, and being
re-de?ned as a ‘‘consulting activity’’, wherein
CPA’s are really ‘‘a?liates’’ of the internal audit-
ing profession rather than adversaries. But then,
faced with an IIA membership petition encoura-
ging membership to not re-elect the board mem-
bers, the IIA leadership once more reversed itself
to cautiously oppose outsourcing in SEC hearings.
Meanwhile, from the SEC’s perspective, given
an expanding set of issues to be addressed with a
dwindling resource base and Congressional philo-
sophical quandaries as to regulation in a know-
ledge era, as well as campaign contributions to
strategically important members of Congress by
the profession, external auditors went from a sta-
tus of potentially ‘‘losing their souls’’ to once more
become ‘‘the noblest of professions’’ guarding the
‘‘sanctity and purity of numbers’’ in the ‘‘emerging
information age’’. The rhetoric of confrontation
became replaced by rhetoric of appeasement
(Dacin, 1997; Oliver, 1991, 1997) as the jurisdic-
tional boundaries became redrawn to hopefully
become once more taken for granted. But then,
external events in the form of Enron’s bankruptcy
compelled reconsideration of barring internal
audit services and increasing the intensity with
which the SEC monitored the profession (New
York Times, 2002).
We also found the marketization or ‘‘moneti-
zation’’ (Levitt, 2000a) of the two codes of ethics
to be complicit in the transformation of profes-
sional endeavor (Abbott, 1988). The AICPA’s
Code of Ethics proved to be elastic enough to
merely need an interpretation to temporarily at
least grant CPAs the jurisdiction of performing
internal audit services for external audit clients,
subject to such provisos that the management of
such services would remain within the client; such
provisos, however, may also prove elastic as the
CPA as ‘‘knowledge professional’’ ascends the
‘‘value chain’’ to render new ‘‘platforms of ser-
vices’’ where they ‘‘implement and manage audit
control systems’’, and marketing brochures pro-
mise to ‘‘assist management in planning and
executing the internal audit process’’. Meanwhile,
the IIA’s code proved to be less elastic in that a
mere interpretation would be insu?cient, but still
malleable in that an exposure draft would, for
example, drop the concept of independence as not
applicable to human internal auditors. Thus,
independence appeared to have become at least
partially obsolete in legitimating the profession as
is traditionally held at least until the Enron deba-
cle when an apparent lack of independence caused
a major diminishment of the profession’s cred-
ibility. Instead, consistent with Abbott’s (1983)
position that crafts attain ‘‘professional heroism’’
not so much by having codes of ethics, but by
‘‘confronting the charismatic disorder of clients’’,
we found that ‘‘independence’’ may be ultimately
replaced by the concept-of ‘‘value-added’’, deemed
more relevant for the new ‘‘information age’’ by
both external and internal auditors.
Our results vibrantly corroborate the theorizing
found in the sociology of professions area
(Abbott, 1988; Freidson, 1994; Reed, 1996), that
the transformation of a jurisdiction should be
accompanied by not only con?ict, but by modi?-
cation of both codes of ethics, per above, and the
profession’s abstract system of knowledge. Indeed,
we found that the profession of knowledge work
was highly abstract and reliant on a series of
societally prized, though vaporous, even mythical
350 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
(Alvesson, 1993) terms that have become institu-
tionalized in their own right as demonstrating
organizational/professional progressivism. Lack-
ing in the discussion of ‘‘value chains’’, ad nau-
seam, is substance. But that is the point. If the new
‘‘knowledge work’’ can be readily codi?ed and
communicated to the layperson, it is destined to
become quickly commodi?ed and ergo not the
work of professionals (AICPA, 1999b). But if it is
so arcane and is so suggestive of an endemic
‘‘charismatic disorder’’ (Abbott, 1983) and a low
‘‘technicality/ indeterminacy ratio’’ (Larson, 1990)
knowledge threshold, then surely a professional
must be engaged to assist the client survive in this
new era of global relations and rapidly changing
conditions. Thus, the knowledge worker was pro-
posed as having a higher status than the organi-
zation-based professional (Reed, 1996).
Implicit in the institutionalization of ‘‘know-
ledge-speak’’ and ‘‘outsourcing’’ is the complicity
of academic discourse. Here, the rhetoric used in
establishing the jurisdictional claims of Big Five
?rms as to internal auditing appeared to almost
draw on as script both the sociology of professions
(e.g. Abbott, 1988; Reed, 1996) and outsourcing
(e.g. Davis-Blake & Uzzi, 1993; Matusik & Hill,
1998) literatures in voicing, for example, their
attributes of being global knowledge professionals
having unparalleled access to public and global,
albeit arcane information. Likewise, the IIA
appeared to draw upon as script this same litera-
ture in voicing its unique local knowledge and
command of private information. Combined, both
professional groups appeared to compromise that
external auditors could, in essence, perform inter-
nal audit services of ‘‘component systems’’, but
that ‘‘architectural-level’’ work should remain
within the organization because of the strategic
sensitivity of such proprietary information
(Matusik & Hill, 1998)—a specious conclusion
given the pervasive access granted CPAs if they
were to perform internal let alone external audit
services.
At a more general level, our results suggest an
intersecting web of institutionalization vectors, as
the Big Five and AICPA sought to re-institu-
tionalize a new set of societal expectations as to
their proper jurisdictional domain. These e?orts
were interpenetrated with the IIA’s e?orts to re-
institutionalize its jurisdiction to transition from
an organization-based profession to knowledge
workers that include not only a hopefully
acquiescent group of internal auditors, but also
external audit ?rms who will see ?t to pledge alle-
giance to its professional standards of practice. In
turn, these battles against professional ?rms and
associations were impacted by the SEC’s e?orts to
remain legitimate with a profession-?nanced Con-
gress glacially groping to work out the role of
regulation in the knowledge era and providing the
SEC with limited resources until it worked out a
solution. Finally, this web of institutionalization
was interpenetrated with the e?orts by the client
companies themselves who employ external and
internal auditors, and register with the SEC, to
demonstrate their own commitment to entering
the knowledge era to an ever expanding set of
organizational constituents through such e?orts as
outsourcing professional services to highly XYZ-
credentialed, global experts; that is until these
experts became marked by a tarnished image in
rendering these double-duty services.
Acknowledgements
We wish to thank John Meyer, John Hepp, and
an anonymous reviewer for their useful suggestions.
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doc_979750895.pdf
The purpose of this paper is to use the sociology of professions, institutional theory, and outsourcing literatures to
examine the dramaturgy of exchange relations among the Big Five public accounting firms, the American Institute of
Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), and the Securities Exchange Commission
(SEC), as it concerns the outsourcing of internal audit services to international external audit firms.
Jurisdictional disputes over professional work: the
institutionalization of the global knowledge expert
§
Mark A. Covaleski
a,
*, Mark W. Dirsmith
b
, Larry Rittenberg
a
a
School of Business, University of Wisconsin-Madison,
975 University Avenue, Madison, WI 53706, USA
b
Smeal: Business at Penn State, and The Social Thought Program, University Park, PA 16802, USA
Abstract
The purpose of this paper is to use the sociology of professions, institutional theory, and outsourcing literatures to
examine the dramaturgy of exchange relations among the Big Five public accounting ?rms, the American Institute of
Certi?ed Public Accountants (AICPA), the Institute of Internal Auditors (IIA), and the Securities Exchange Com-
mission (SEC), as it concerns the outsourcing of internal audit services to international external audit ?rms. Toward
this end, a latent content analysis of a variety of public and private documents is performed where we ?nd that the
transformation of the jurisdiction of internal auditing to be rife with con?ict, characterized by a heated dramaturgy of
exchange relations among the Big Five, the AICPA, the IIA, the SEC, and also the US Congress. Rhetorical ploys
supporting this dramaturgy incorporated such key terms as: ‘‘world class services’’, ‘‘global economy’’, ‘‘market for-
ces’’, ‘‘commodi?cation’’, ‘‘monetization of professional services’’, ‘‘knowledge experts’’, ‘‘the knowledge millennium’’,
‘‘leveraging knowledge’’, ‘‘higher order platform of services’’, ‘‘value chains’’—all in addition to making more money.
At issue is how the competing factions seek to re-institutionalize societal expectations of proper professional behavior
to legitimate a transformation of jurisdictions, for example, to create the ‘‘knowledge expert’’ providing robust services
in a global economy.
#2003 Elsevier Science Ltd. All rights reserved.
1. Introduction
Amid hyperbole that we are a global, knowledge
society following the information highway across
the information bridge to a new information
age (e.g. Peters, 1992), it has increasingly been
proclaimed that knowledge and expertise infuse
with meaning human activities, organizational
arrangements and production processes (Zubo?,
1988). While prophesies of the ‘‘profes-
sionalization of everyone’’ (Wilensky, 1964, p. 137)
and ‘‘all ?rms are becoming professional service
?rms’’ (Peters, 1992, p. 11) have gone unful?lled, it
appears to be the case that experts are playing an
ever more central role in the restructuring of work,
both rhetorically and practically, across both
organizational and national boundaries. Conse-
quently the politics of expertise have become
much more intense because the stakes are so huge
(Leicht & Fennell, 1997; Reed, 1996; Smith, 1997).
0361-3682/03/$ - see front matter # 2003 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 02) 00029- 6
Accounting, Organizations and Society 28 (2003) 323–355
www.elsevier.com/locate/aos
§
Prior versions of this paper were presented at the Con-
ference of the Global Business and Technology Association
and the American Sociological Association.
* Corresponding author. Tel.: +1-608-262-4239; fax: +1-
608-263-0477.
E-mail addresses: [email protected]
(M.A. Covaleski), [email protected] (M.W. Dirsmith), lrittenberg@
bus.wisc.edu (L. Rittenberg).
The transformation of organizational ?elds,
particularly when it is hotly contested by vested
interests in highly institutionalized and profes-
sional contexts, has held a position of theoretical
prominence in a variety of literatures. For exam-
ple, the sociology of professions literature (e.g.
Abbott, 1988; Freidson, 1984, 1994) has reasoned
that key to survival and the claim of professional
stature is the development and maintenance of an
abstract system of knowledge, for it is from this
knowledge-base that a profession establishes its
jurisdiction. Accordingly, it is understandable that
‘‘knowledge work and knowledge workers are
now key issues [because] . . . knowledge is a strate-
gic resource of social power and control’’ (Black-
ler, Reed, & Whitaker, 1993, p. 851), and that
‘‘expertise is one of the primary arenas in which
struggles to control the organization and manage-
ment of work are fought out in modern societies’’
(Reed, 1996, p. 574).
Institutional theory has also addressed the issue
of contested transformation in professional ?elds.
While institutionalized structures and relation-
ships may go unquestioned by various vested
interests for years, DiMaggio and Powell (1991;
see also Mezias & Scarselletta, 1994, p. 654; Oli-
ver, 1991) reasoned that the ongoing processes by
which institutional arrangements are formed and
transformed tend to be highly political. Such poli-
tical con?ict may be expected to be closely asso-
ciated with a heated dramaturgy of exchange
relations (Bealing, Dirsmith, & Fogarty, 1996;
Ritti & Silver, 1986), wherein contending parties
seek to rhetorically hammer out an acceptable
social order to become once more institutionalized,
orderly and taken for granted. Moreover, Meyer
(in preparation) has theorized that the formation
and di?usion of new standards of organizational
practice are tending to take place on an increas-
ingly global scale, fostered in part by the work of
professionals.
One form of change that is sweeping across a
variety of organizations at a growth rate of 250%
in the past 10 years to impact 10% of the US
workforce, is the outsourcing of internal organi-
zational functions to external contractors (Cohany,
1996; Matusik & Hill, 1998; Morrow, 1993). Cur-
rently, 43% of multi-national companies outsource
professional functions (Wysocki, 1996). While a
body of empirical work related to this transfor-
mation of the workplace is emerging (e.g. Rood-
hooft & Warlop, 1999), it has tended to focus on
the economic bene?ts accruing to the outsourcing
organization (Smith, 1997). Lacking is a systema-
tic appraisal of how such a transformation may be
impacting institutionalized relationships between
internal organizational members and external
contracting parties, particularly in professionalized
settings.
The purpose of this analysis is to integrate the
sociology of professions, institutional theory and
outsourcing literatures to examine a major in?ec-
tion point in inter-organizational power relations
in the professional arena. This in?ection point
revolves around a contested transformation of the
professional ?eld of accounting that is intendedly
global in its reach—the outsourcing of internal
audit services to external public accountants, and
in particular the Big Five international public
accounting ?rms. At issue are: the commodi?ca-
tion of the traditional work of external certi?ed
public accounting ?rms; their expansion into the
jurisdictional domain of internal auditors using a
dramaturgy of ‘‘world-class services’’, ‘‘market
forces’’, knowledge professionals’’, ‘‘higher-level
platforms of services’’, and ‘‘client drivers’’; the
performance of more pro?table services that pro-
mote the potential loss of Certi?ed Public
Accountant (CPA) independence in auditing client
?nancial statements that could lead to an impair-
ment of investor con?dence; a potential backlash
by members of the Institute of Internal Auditors
(IIA) who would resist such a transformation;
threatened regulatory intervention by the Secu-
rities and Exchange Commission (SEC) and Con-
gress; and instrumental and symbolic bene?ts and
costs to be derived by the outsourcing client orga-
nization. By probing this professional ?eld, we will
address the following central research question:
What is the nature of the jurisdictional dis-
pute/dramaturgy of exchange relations
among the international public accounting
?rms, the AICPA, the IIA and the SEC con-
cerning the outsourcing of the internal audit
function to external auditors?
324 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
The remainder of this paper is organized into
four sections. In the second section, the three lit-
eratures drawn upon are discussed in more detail.
The third section discusses the latent content ana-
lysis of public and private archival material used
to address our central research question. Section
four presents the archival analysis of the contested
transformation of the accounting ?eld in terms of
three moments of jurisdictional disputes. The last
section explores implications.
2. A theory of institutionalized professional
jurisdictions
2.1. The sociology of professions perspective
The sociology of professions literature has
increasingly focused on inter and intraprofessional
competition in socially constituting a jurisdiction
by controlling an abstract system of knowledge
(Abbott, 1988; Tolbert, 1990). Abbott (1988, pp.
8–9) reasoned that it is essential for an occupa-
tional group to control its abstract system of
knowledge in order to claim professional stature.
It is through this control that a profession can
de?ne and rede?ne the societal problems it
addresses, develop the services and practical tech-
niques to be performed to address these problems
(that Abbott de?nes as the profession’s jurisdic-
tion), and defend this resultant jurisdiction against
competing professions or factions within the pro-
fession. So crucial is control of knowledge that
Abbott (1988) concluded that it is more important
than ethical behavior and professional detachment
in gaining stature and ?nancial rewards. This jur-
isdiction includes formal control over key de?ni-
tions of professional service and the language used
in describing the techniques performed, the prac-
titioners that perform them and the actual conduct
of the work (Abbott, 1988, p. 62). Such formal
control provides power, but as soon as a profes-
sional ?eld is fully translated into rules and pro-
grams or becomes codi?ed, the profession’s power
disappears. Therefore, it is necessary for a profes-
sion to continually re-generate its abstract sys-
tem of knowledge, thereby extending its
jurisdiction to possible encroach upon that of
adjacent professions (Crozier, 1964; Reed, 1996).
According to Abbott:
It is the history of jurisdictional disputes that
is the real, the determining history of the
professions. Jurisdictional claims furnish the
impetus and the pattern to organizational
developments. Thus an e?ective sociology of
professions must begin with case studies of
jurisdictions and jurisdiction disputes. . . .
Only from such portraits can one derive an
e?ective model for understanding and pre-
dicting professional development in modern
societies (1988, p. 2).
For one to understand jurisdictional disputes,
Abbott (1988, pp. 91–113) urged an examination
of three historical processes which we will term
moments in the transformation of a profession
that lead to a balance between the work per-
formed and the jurisdiction it claims: (1) a dis-
turbance, (2) a shifting of jurisdictional claims,
and (3) the modi?cation of a profession’s abstract
system of knowledge. We will organize our archi-
val analysis using these three moments.
A critical point in Abbott’s general argument
pertaining to jurisdictional disputes is a profes-
sion’s command over an abstract body of knowl-
edge. Important attributes of such knowledge are
that they are storable, controllable, indetermin-
able, and deployable to convince constituents that
the profession has expertise that is of utility to
them (Derber, Schwartz, & Magrass, 1990; Drazin,
1990; Larson, 1990). Blackler et al. (1993, p. 851),
for example, posited that knowledge is a strategic
resource for gaining power. However, once a
knowledge based becomes standardized and ren-
dered into a commodity, a profession can no
longer earn high pro?ts by applying it. What is
needed is to become ‘‘symbolic analysts’’ who
have the ‘‘skills of abstraction’’ and ability to ‘‘get
behind the data and ideas’’ to develop a ‘‘holistic
understanding’’ of the client by melding a ‘‘deep
understanding’’ of economic changes and infor-
mation technologies. Moreover, according to
Reed (1996, p. 575), ‘‘The political strategies and
tactics through which such expert jurisdictional
domains are constructed and policed need to be
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 325
supported by ideological resources and moral
prohibitions that legitimate monopoly control for
‘us’ by de legitimating predatory incursions by
‘them’.’’
Jurisdictional disputes are seen as giving rise to
the ‘‘politics of expertise’’ which tend to be more
intense and unstable during periods of profes-
sional transformation (see also Bloor & Dawson,
1994; Leicht & Fennell, 1997). Reed (1996) theo-
rized that jurisdictional disputes most often arise
at the boundaries separating three occupational
forms used to mobilize expertise—the liberal/
independent professions (e.g. some medical doc-
tors; not a direct focus in our analysis), organiza-
tional professions (in our study, internal auditors),
and entrepreneurial professions or knowledge
workers (in our study, the Big Five professional
service ?rms). Each form, Reed conjectured, has a
distinct power strategy for defending its jurisdic-
tion. The organizational professions’ basic power
strategy and corresponding legitimating discourse
lies in obtaining and displaying appropriate cre-
dentials that support the individual practitioner’s
claim to esoteric knowledge (in the case of internal
auditors, this would entail passing the Certi?ed
Internal Auditor, CIA, examination administered
by the IIA). The second legitimating discourse lies
in developing a knowledge base and repertoire of
skills that are speci?c to serving the particular
organization within which the professional is
housed. Such development, while pertinent to the
organization by de?nition, is localized in nature
and hence is not able to be committed to abstract,
generalized codi?cation that can be applied to
other settings (for related empirical support in
non-professional settings, see Burris, 1993; Casey,
1995; Greenwood, Suddaby, & Hinings, 2002;
Hinings, Brown, & Greenwood, 1991). Reed
(1996, p. 588) hypothesized that ‘‘Organization
speci?c expertise may become increasingly proble-
matic as an e?ective power base when movements
within the wider international political economy
seem to push inexorably towards generality,
mobility and ?exibility’’. The result is a legitima-
tion crisis for the organization and in consequence
for the organization-based profession.
The basic legitimating discourse for knowledge
workers, Reed (1996) theorized, also begins with
displaying appropriate, though more general cre-
dentials than organizational professionals (in our
case, the Certi?ed Public Accountant, CPA, is an
older and more widely recognized credential). In
addition, knowledge workers rely on developing,
deploying and displaying a highly esoteric, intan-
gible system of knowledge. This knowledge entails
a ‘‘sophisticated combination of theoretical
knowledge, analytical power and tacit or judg-
mental skills’’ (Reed, 1996, p. 588) that are re?ned,
even partially codi?able, but transferable to other
settings thus granting the knowledge worker a
competitive advantage. As Reed (1996, pp. 576,
581) reasoned ‘‘. . .it is the putative universality,
codi?cability, neutrality and mobility of modern,
[entrepreneurial] expertise that sets it apart from
the localism, particularlism and stability char-
acteristic of traditional [organizational] expertise.’’
It is by virtue of this very universality or generality
of expertise, which can be readily communicated
to external constituents, that enables the client
organization to be more mobile as it extends it
global reach in that these constituents are com-
forted that appropriate expertise is being applied.
Such globalization ‘‘o?ers to the entrepreneurial
professions/knowledge workers the opportunity to
exploit the potential for cognitive expansion,
material advancement and socio-political
enhancement that these developments present’’
(Reed, 1996, p. 588).
Bell (1973) argued that the growing power of
knowledge workers is based on their control of
theoretical, even mystical knowledge that is so
arcane, so idiosyncratic, that only the elite have
the ability to apply it on behalf of society. Within
an accounting context, Power (1997) reasoned that
the power of auditing rests in its vagueness, the
disconnect between what is tested and what e?ects
are achieved from this testing (e.g. giving ‘‘com-
fort’’ to stakeholders). Rather than being a ‘‘tech-
nical ?x’’ to ?awed ?nancial data, auditing has
come to be a form of ‘‘image management’’ sig-
nifying that the organization is transparent and
that the management is indeed auditable and
trustworthy. Power speculated that the ‘‘audit has
put itself beyond empirical knowledge about its
own e?ects in favor of a constant programmatic
a?rmation of its potential’’ (p. 142)—that the true
326 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
bene?ts to be derived from auditing are just
around the next corner, thus necessitating the
profession’s e?orts to ‘‘talk up expectations’’. The
dark side of this universality and serving the client
organization, and indeed society, is that the
knowledge professional could be seen as too clo-
sely aligned to the vested interests of the client
thereby undermining the professional claim of
neutrality and independence.
Finally, shaping the jurisdictional disputes of
organizational professionals is an institutional
environment, that Reed (1996, p. 586) character-
ized as being comprised of the ‘‘state, political
ideologies and policies highly suspicious of, if not
downright hostile to, professional power.’’ Such
an environment of suspicion tends to lead to both
fragmentation among professionals and dramatic
jurisdictional disputes. Reed (1996, p. 582) theo-
rized that ‘‘[T]he ‘technologists of control’ may
become even more divided amongst themselves as
they struggle to come to terms with the radical
organizational and institutional changes which
they have played such a vital role in creating.’’ It is
within such an institutional environment of jur-
isdictional disputes that we examine the forces at
play in the accounting profession.
2.2. Institutional theory
Consistent with Abbott’s (1988, esp. chap. 7)
and Reed’s (1996) general line of reasoning con-
cerning the importance of cultural environment to
professional transformation, institutional theory
(DiMaggio & Powell, 1983, 1991; Meyer &
Rowan, 1977) proposes that within the profes-
sions, concerted e?ort is directed at developing,
maintaining and managing legitimacy with such
constituent groups as Congress, regulators, the
press, clients and the ?nancial community. This
e?ort typically involves the symbolic display of
conformity to con?icting expectations through the
use of assuaging rhetoric (see also Czarniawska,
1997).
Prominent among criticisms of institutional the-
ory is its inattention to power and vested interest.
DiMaggio (1988) suggested that key to under-
standing power is viewing institutionalization as
an ongoing process; it is when relationships are
?rst being formed or altered that institutionaliza-
tion may be profoundly political (Mezias & Scar-
selletta, 1994; Oliver, 1991). During such an
episode, use of appropriate rhetoric may be espe-
cially important in the covert exercise of power,
where its overt exercise may be ine?ectual (Pfe?er,
1981). DiMaggio and Powell (1991) suggested that
in order to understand the political nature of
institutionalization processes, it might be neces-
sary to abandon the ‘‘cool imagery’’ that has
typi?ed institutional treatment in favor of a ‘‘hot
imagery’’.
Concerned with the use of compromising rheto-
ric in representing the self-interest of an organiza-
tion, Ritti and Silver (1986) examined the early
history of the Bureau of Consumer Services (BCS)
of a public utility regulator by means of examining
the symbols it displayed to a variety of external
constituents that included the state legislature, the
regulatory commission, the press and regulatees.
They found that these symbols were actively
manipulated by the bureau in an attempt to
develop a ritualistic ‘‘dramaturgy of exchange’’
which would legitimate its own survival and
growth. The authors showed how the bureau
developed a ritualistic pattern of interacting with
these utilities by employing a compromising
rhetoric.
Bealing et al. (1996) further probed the ‘‘dra-
maturgy of exchange relations’’ by conducting an
archival analysis of the formation of the Securities
and Exchange Commission in 1934. They found
that the SEC invoked a rhetorical campaign to
establish its own legitimacy with Congress, the
press and regulatees—the public accounting pro-
fession—in which it simultaneously took reg-
ulatory action against a large public accounting
?rm while using an assuaging rhetoric to appease
regulatees. This balancing between action and
rhetoric facilitated the negotiation of legitimized,
inter-organizational relations and enabled the
SEC to survive.
While the BCS and the SEC studies extended
the institutional theory perspective, both focused
on defensive strategies that relied on assuaging
‘‘cool’’ rhetoric directed at appeasing competing
interests, rather than a o?ensive strategy designed
to transform a professional ?eld. They also
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 327
emphasized the rhetoric used by a single focal
organization rather than the multiple organiza-
tions involved in the transformation process.
Thus, our study of how the ‘‘hot’’ dramaturgy of
exchange relations among contending social actors
unfolds has the potential for extending the insti-
tutional theory perspective.
Most importantly as it concerns our analysis,
Meyer (in preparation; see also Meyer, Boli, &
Thomas, 1997) applied institutional theory to
examining the expansion and standardization of
‘‘proper’’ organizational practices across nations
and social structures, as well as address the ques-
tion of ‘‘how globalization produces a world of
argentic empowered, and managed organizations
that function as rational and dramatic actors.’’ He
reasoned that with globalization comes new forms
of nagging uncertainty. This uncertainty, knowl-
edge experts contend, may be rationalized in a
manner that enables responsible, progressive
organizations to treat uncertainty as an opportu-
nity rather than a threat, thereby creating a ‘‘risk
society’’ wherein risk may be scienti?cally mana-
ged (this treatment of risk, in turn, blends nicely
with attempts to introduce the ‘‘risk audit’’ as a
new form of ‘‘value added’’ forms of professional
service by Big Five ?rms; Beck, 1992; Fischer,
1996; Power, 1997, 2000). Thus, ‘‘not only tech-
nologies, but also sovereign decision making cap-
abilities, and coordination and control systems,
need to be upgraded in the globalized world’’
(Meyer, in preparation). With this enlightened,
liberated view, however, comes the destruction of
old practices, provided in part by the state that at
once o?ered security and constraint. Importantly,
Meyer theorized, this globalization of proper
business practices, wherein business transcends
national boundaries, may be expected to be asso-
ciated with creating an ‘‘expanded person’’:
Organizations organize people. And globali-
zation changes the practices, rules, and myths
de?ning what people are, what they are enti-
tled to and what they can do. On all these
dimensions, the changes amount to expansion
of personhood that organizations can and
must deal with . . . [T]he new globalized per-
sons provide new possibilities for organizing.
They have extraordinary capacity, and can be
educated or trained to become sort of the new
expanded management system. [T]he new glo-
bal citizen can be part of the new enhanced
and empowered organization . . . And with the
rise of this organization comes the rise of new
management possibilities—and then the social
movements spreading expanded management
ideologies everywhere (in preparation).
Although highly evocative, is Meyer’s view one
of abstract prognostication, or is it actively being
put into e?ect by contemporary agents of di?u-
sion? We will seek to address this question with
reference to the public accounting profession
seeking to ‘‘mobilize new technologies’’ and
‘‘upgrade [client] coordination and control sys-
tems,’’ and thereby enhance pro?ts.
2.3. The outsourcing of organizational functions
The rationale for outsourcing organizational
functions is predominantly stated in economic
terms: within a ‘‘new competitive landscape’’
demanding a reduction in costs, organizations can
manage their capacity more e?ciently and
enhance their ?exibility by focusing on their ‘‘core
activities’’ and outsourcing their ‘‘non-core activ-
ities’’ to external contractors. The company thus
averts the high costs of recruiting, training and
paying an internal workforce, though it incurs
both a higher marginal cost of paying contingent
workers and a potential cost of giving up the
advantage of utilizing unique local knowledge in
advancing the ?rm. Moreover, organizations may
gain access to a wider range of publicly available
information, though it may also ‘‘leak’’ proprie-
tary information to contingent workers, thus
impacting the organization’s competitive advan-
tage (Berman, Down, & Hill, 2002; Davis-Blake &
Uzzi, 1993; Nonaka, 1994).
Matusik and Hill (1998) reasoned that com-
mand of knowledge is key in outsourcing work to
external professionals, and identi?ed two impor-
tant dimensions of knowledge: (1) private versus
public knowledge, and (2) architectural versus
component knowledge. Private or localized
knowledge is the proprietary knowledge, which an
328 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
organization develops internally that involves
idiosyncratic procedures, processes, routines, doc-
umentation and trade secrets that grant an orga-
nization its competitive advantage; thus, there is
great concern as to its leakage (see also Berman et
al., 2002). Public knowledge resides in the external
environment and includes tools, techniques pro-
cesses, even accounting and auditing practices,
etc., found in a society, economic sector, industry
or professional group, that are applicable across a
number of organizational settings and are often
discussed using their acronyms—JIT, MBO,
TQM, etc. As a public good, such knowledge
cannot confer competitive advantage. The key
issue concerns the possession of su?cient expertise
to recognize its existence, understand it, tailor it to
?t the unique features of an organization, and
apply it. From a sociology of professions perspec-
tive, Reed (1996, p. 577), reasoned that it was
precisely in the area of public knowledge that jur-
isdictional disputes would be sharpest, and theo-
rized that the entrepreneurial professions would
eventually come to dominate because of their
‘‘putative universality, codi?ability, neutrality and
mobility’’ that set them apart from the ‘‘localism,
particularism and stability’’ of organizational pro-
fessionals whose province is private knowledge.
Architectural knowledge, Matusik and Hill
(1998) stated, relates to organization-wide philo-
sophies, schemas and routines that are gleaned
from deep, long-term emersion in an organi-
zation’s culture su?cient to develop a collective,
tacit understanding of the overall system. Com-
ponent knowledge relates to the concrete oper-
ation of organizational subsystems that consume
speci?c inputs and produce speci?c outputs. Such
components may be either ‘‘core’’ or ‘‘non-core’’
to the organization, and either private or public in
nature. Matusik and Hill hypothesized that orga-
nizations would most likely outsource work to
external contractors that predominantly con-
cerned public non-core component knowledge
because this would allow the least leakage of pro-
prietary knowledge, while gaining the most public
knowledge.
The contrast between Matusik and Hill’s theo-
rizing and the outsourcing of internal audit services
to CPA ?rms is striking. Within this context, not
only do international CPA ?rms have prodigious
access topublic information concerningcomponent
systems, but also, in the case of outsourcing com-
panies who are their external audit clients, such
?rms have penetrating access to private knowledge
and also architectural knowledge for they routinely
probe all aspects of a company in relationships
that sometimes last over half a century. Unlike
most professional groups, access to such sensitive,
proprietary knowledge may be protected by
AICPA code of ethics rules pertaining to client
con?dentiality. Nevertheless, it may be expected
that the outsourcing of professional work that
entails public and private knowledge, as well as
component and architectural knowledge, will be
rife with con?ict (Whittington, McNulty, &
Whipp, 1994).
The foregoing literature has focused almost
exclusively on the technical attributes of out-
sourcing (i.e. in reducing costs, importing knowl-
edge, and gaining competitive advantage) from the
standpoint of the outsourcing organization.
Neglected are institutionalized expectations span-
ning a variety of organizations as to its symbolic
facets. This neglect is not to be found in the busi-
ness press. For example, the ironic running title of
a Forbes (1997) article chronicling the fate of a
series of fads (e.g. TQM, Theory Z, Re-engineer-
ing, Virtualization) adopted by companies to
demonstrate their commitment to progressive
management, read ‘‘A Way Too Short History of
Fads: Don’t Outsource Your Common Sense. Not
Like the Last Time. . .’’ Prior studies employing
institutional theory (Ang & Cummings, 1997)
have found that institutional pressures strongly
in?uenced behavior of outsourcing organizations.
However, like the technical literature on out-
sourcing, these institutionally oriented studies
focused on the outsourcing organization rather
than on other social actors involved in this relo-
cation of expertise.
In summary of the outsourcing literature, it
appears that the outsourcing of work entailing
private and architectural knowledge is potentially
rife with con?ict. Furthermore, research examin-
ing outsourcing’s symbolic as well as technical
attributes, and social actors other than out-
sourcing organizations, has the potential for
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 329
enriching our understanding of this increasingly
important phenomenon.
3. Research methods
Evidence was gathered through a latent content
analysis of archival material supplemented with a
limited number of discussions with prominent
actors from these groups to elicit their guidance on
accessing relevant material. According to Berg
(1989, p. 107), latent content analysis represents
an ‘‘interpretive reading of the symbolism under-
lying the physically presented data’’ and thus
focuses on ‘‘the deep structural meaning conveyed
by the message’’. Although there are dangers
inhering in the drawing of inferences from such
symbolism, it is nevertheless a very useful
approach in examining archival material complicit
in the exercise of power and exertion of in?uence
(Merton, 1968, pp. 366–370). These dangers may,
however, be mitigated by incorporating indepen-
dent, corroborative techniques to methodologi-
cally triangulate on the phenomena of interest, as
well as including detailed excerpts from material
examined to substantiate interpretations (Berg,
1989, p. 107). Within our work, we attempted to
ensure the trustworthiness of ?ndings is several
ways. For example, we had at least two research-
ers interpret the same archival material until an
agreement was reached as to its meaning; after
following this protocol, there were no disagree-
ments on any of the material examined. Multiple
sources of archival material were also examined
whenever possible (e.g. not only were SEC mem-
ber speeches examined, but also press coverage of
these speeches). Information within institutions
examined were used whenever possible to guide us
to especially important material as well as to
ascertain if the manner in which we ‘‘bracketed’’
archival material made sense to them. We also felt
that it was important to include within this paper
exact, relatively lengthy, quotes from archives in
order to avoid the potential ?aw of quoting out of
context and substantiate interpretations. Finally,
we examined archival material until a point of
evidential saturation was attained (Lincoln &
Guba, 1985; Van Maanen, 1988).
Archival material took the form of both public
and private records (Denzin, 1978; noteworthy is
the striking consistency with public and private
knowledge in outsourcing expert services) as well
as business press coverage of the events examined
(Freidson, 1986; Herman & Chomsky, 1988; Zeli-
zer, 1992). Public material included: IIA exposure
drafts of proposed standards and de?nitions of
internal auditing; AICPA audit guides, ethics code
rulings and Public Oversight Board Reports, pro-
fessional accounting association meetings pertain-
ing to the XYZ credential; speeches by Big Five
?rms members, IIA o?cers and SEC o?cials;
SEC enforcement and ‘‘no action letter’’ corre-
spondence with regulatees; and IIA standards and
information pertaining to its history, membership
and functioning. Private material included IIA
board meeting minutes, memoranda, and corre-
spondence ?les of key social actors. Press coverage
involved minutes of CNBC, CNN and C-Span
broadcasts, and articles, editorials, and advertise-
ments appearing in the Wall Street Journal
(WSJ), Fortune, Business Week, Public Account-
ing Report (PAR), New York Times, Journal of
Accountancy, Internal Auditor, and Accounting
Today.
The four primary groups of social actors exam-
ined were the AICPA, the Big Five public
accounting ?rms (increasingly relabeled as ‘‘pro-
fession service ?rms’’), the IIA and SEC. The Big
Five are: Arthur Andersen, Ernst & Young,
Deloitte & Touch, PricewaterhouseCoopers, and
KPMG. These ?ve ?rms are among the largest
professional bureaucracies in the world (Min-
tzberg, 1989), with US (World) revenues ranging
from $3.4 ($9.0) billion to $6.8 ($15.3) billion (?g-
ures which on average grew by 26.4% in 1998),
and US professional sta? ranging from 14,790 to
38,340: their clients comprise over 98% of com-
panies listed on the New York Stock Exchange.
Collectively, they comprise the most dominant
recruiter of accounting majors at prominent uni-
versities (Public Accounting Report, 1999a). They
are alsothe predominant form of under-resear-
ched, organization-based profession that has
emerged as a direct consequence of commercial
enterprise within which expertise may ?rst be
expected to become commodi?ed (Abbott, 1988;
330 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Freidson, 1986)—a condition that our archival
analysis revealed as openly acknowledged and
used to justify the expansion of CPA’s jurisdic-
tional domain (AICPA, 1999a).
The IIA was founded in 1941 and has 60,000
members in more than 100 countries. Supported
by a sta? of 85 and an annual budget of $10 mil-
lion, the purposes of the IIA are to promote the
development of the profession of internal auditors
and advocate for its members. The IIA has devel-
oped a codi?ed set of Standards for the Profes-
sional Practice of Internal Auditors (IIA, 1978)
that includes the de?nition of internal auditing
examined in our archival analysis, as well as the-
Code of Ethics (IIA, 1999). Finally, the SEC was
formed in the 1934 Securities Exchange Commis-
sion Act as a consequence of the 1929 stock mar-
ket crash. The purposes of the SEC are to
administer the federal securities laws to protect
investors and ensure that they have access to all
relevant information. The SEC regulates the secu-
rities exchanges and the various parties involved
with selling securities, such as CPAs. While the
SEC does have ultimate responsibility for regulat-
ing CPAs, this function has largely been delegated
to the AICPA to self regulate as overseen by the
SEC (1999). The SEC, in turn, is overseen by
Congress with which it must maintain its legiti-
macy and continued funding.
4. Three moments in a jurisdictional dispute
The purpose of this section is to discuss the
three moments of jurisdictional disputes—dis-
turbances, shifting jurisdictional claims and trans-
forming an abstract system of knowledge—as
they relate to the outsourcing of internal audit
functions.
4.1. Moment I: disturbances
Since its founding in 1941, the professional
component of internal auditing developed as just
that—an internal organizational practice whose
purpose was to serve management by furnishing it
with analyses, appraisals and recommendations so
as to improve the operations of the organization
(IIA, 1978). This predominant character was
transformed by the Foreign Corrupt Practices Act
that amended the 1934 Securities Exchange Act to:
(1) make it unlawful to bribe foreign governmental
o?cials, (2) require companies registering with the
SEC to maintain accurate books and records, and
(3) develop and maintain an e?ective systems of
internal control that ensure transactions are exe-
cuted and properly recorded, access to assets is
limited to authorized personnel, and recorded
assets are compared to the assets themselves (Ric-
chiute, 1978).
Consistent with this technical, instrumental
character, at one level the FCPA imposed a ‘‘new
responsibility on internal auditors: to evaluate a
system of internal control as a basis for reliance
thereon in uncovering material questionable and
illegal activities’’ (Ricchiute, 1978, p. 59; Bradt,
1979). At a second level, however, the existence
and functioning of the internal audit e?ort may be
documented and displayed to regulators by man-
agement to demonstrate that it is complying with
the Act. In support of this point, just 3 months
after the Act became e?ective, the SEC brought
action against the management of one registrant
for failing to document and monitor compliance
with the Act (?nes against registrants may range
up to $1 million, and ?nes against company o?-
cers may range up to $10,000 and include impri-
sonment for up to 5 years; Ricchiute, 1978).
Consequently, it is important not only organi-
zationally, but personally, that management
demonstrates conformity with the Act.
Clarence Sampson (1979), SEC chief accountant
at the time the Act became e?ective, observed that
the FCPA’s impact on internal auditors was likely
to be profound. He stated that each company
must re?ect its own unique nature in implement-
ing internal control systems, thus underscoring the
importance of localized knowledge to be brought
to bear by the internal auditor:
Each company must maintain a system of
internal accounting control, and a method of
reviewing and monitoring that system, that
makes sense in the circumstances. Reviewing,
monitoring, and evaluating the system require
a great deal of familiarity with the company
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 331
and understanding of its potential exposures
and related controls. If these requirements
sound like they were taken from a description
of pre-requisites for an internal audit posi-
tion, then I think I’ve made my point (1979,
p. 31).
According to Sampson (1979, p. 32), because
such monitoring and evaluation could not be rele-
gated to codi?cation, professional judgment must
be brought to bear. Due to the dramatic impor-
tance of the FCPA to corporate management,
Sampson (1979, p. 34) saw an elevation of the
professional stature and responsibility of the IIA
and internal auditors as inevitable:
I think it is quite clear that the challenges to
the internal auditing profession—and to indi-
vidual internal auditors—are great. The IIA,
institutionally and through its members, has a
responsibility to ensure that the auditing pro-
fession continues to grow and respond to
changing circumstances. To do that, the
Institute must assume a leadership role and
speak out on issues—not only issues which
impact internal auditors, but perhaps more
importantly, issues on which internal auditors
can, and should, have an impact. This is an
important distinction. It is the distinction
between a trade association and a profes-
sional organization. If the IIA is to ful?ll the
latter role, it must provide a substantive voice
on issues like internal accounting control, not
merely a call for increased recognition of
internal auditors.
SEC Chairman Harold Williams (1979) added
that to e?ectively perform the work of monitoring
control systems, internal auditors might have to
give up their traditional focus on performing
operational audits designed to enhance the econ-
omy, e?ciency and e?ectiveness of organizational
operations. He added that professional indepen-
dence would be forti?ed if internal auditors were
to report to a company’s audit committee (com-
prised of external members of the board of direc-
tors) whose role is to directly monitor both the
internal and external audit functions.
In response to the coercive isomorphic force
(DiMaggio & Powell, 1983) of the FCPA, the late
1970s and 1980s saw a dramatic increase in the
number, stature and remuneration of internal
auditors as companies registered with the SEC
sought to demonstrate conformity to this act by
having internal auditors not only monitor internal
control, but also itself form a key component of
the internal control system. In part, internal audi-
tors, and particularly department directors, were
recruited from the senior ranks of the companies’
external audit teams whose members possessed
not only directly relevant experience, but also a
societally-prized credential—the CPA certi?cate.
Meanwhile, the public accounting profession
was undergoing challenge from a number of
fronts. Not only did the SEC continue to perform
an oversight function of the accounting profession
under the provisions of the Securities Exchange
Act of 1934 (Bealing et al., 1996), but also the US
Congress (1977, 1985) launched probes of the
accounting profession in the late 1970s and early
1980s (Wall Street Journal, 1985a, 1985b). Moti-
vated by a series of large, widely publicized com-
pany failures after having received ‘‘clean’’ audit
opinions, the purpose of these hearings was to
ascertain if the AICPA’s self-regulatory e?orts,
overseen by the SEC, were adequate to ensuring
e?ective audits or if the SEC should exert more
direct regulatory e?ort. While both hearings found
in favor of maintaining self-regulation, they
warned that the future might hold direct govern-
ment intervention.
Concurrent with Congressional hearings, exter-
nal auditors saw a dramatic increase in the num-
ber of lawsuits and damage claims assessed against
their ?rms (Palmrose, 1987). The threat of lawsuits
reached a ?rst crescendo in the late 1980s and
1990s, with one national CPA ?rm being driven
out of business by a lawsuit and a single damage
claim of $4 billion being asserted in 1997 (PAR,
1997a). It is estimated that there are $30 billion of
lawsuits pending against public accounting ?rms
and that litigation costs amount to approximately
12% of their revenue (Dalton, Hill, & Ramsey,
1994). A second crescendo is being reached in
2002 with a series of lawsuits against Arthur
Andersen. Thus, it is understandable that the
332 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
AICPA (1999a; PAR, 1999c) would conclude that
the external audit is a risky service to perform.
Along with the threat of regulation and increas-
ing litigation, public accounting has become an
increasingly competitive industry. Spurred by the
threat of anti-trust action by the US Justice
Department during the mid- to late-1970s for
restraint of trade, the AICPA deleted its ethic’s
code provisions prohibiting the direct solicitation
of competitors’ clients and sta? by CPA ?rms
(AICPA, 1999b). As a result, the ?rms engaged in
marked fee competition that increased the need to
tighten the e?ciency with which auditing proce-
dures were performed on client engagements, in
part a?ected by applying more technology (Mel-
cher, 1998; Power, 2000; WSJ, 1996a, 1996b), thus
leading to a commodi?cation of external audit
services (Berardino, 2002; Levitt, 1998; Public
Oversight Board, 1998). In expressing its ‘‘vision’’
for the third millennium, the AICPA (1999a, p. 4)
proclaimed that:
The increasing complexities of the global
environment and the commodity character-
istics of traditional [external audit] services
mandate that the profession migrate up the
economic value chain. Commodi?cation and
technology are challenging the economic via-
bility of the profession. Information-based
products and services are loosing value in the
marketplace and are rapidly being replaced
with knowledge-based products and services
that command higher fees.
Combining the regulatory, litigation and com-
petitive forces, it appears that the risk/return trade
o? had turned decidably unfavorable in the mar-
ket for external audit services and that public
accountants must diversify their portfolio of ser-
vices to remain economically viable. While it may
remain the case that CPAs at the Big Five ?rms
still enjoy higher status and remuneration than
other components of the profession, a series of
disturbances appear to have altered the relative
stature of services these di?erent components
enjoy. Beyond such a functionalist account of the
raw importance of money, it is also the case that
the profession must be seen as relevant to the
problems clients face in order for it to remain
legitimate. It is from this transformation of rela-
tive stature and the need to be relevant, that a
jurisdictional dispute arose.
4.2. Moment II: A shifting of jurisdictional claims
After the Foreign Corrupt Practices Act of
1977, one of the ?rst moves by the AICPA came
with the issuance of the Commission on Auditors’
Responsibilities Report in 1978. The Commission
observed (AICPA, 1978, p. 56) that customs and
traditions usually develop as a result of long peri-
ods of trial and error, and represent workable
responses to ?rsthand experience with problems.
Consequently, it proclaimed that traditional
boundaries should be respected as representing such
workable traditions. The Commission (AICPA,
1978, p. 98) stressed, however, that these tradi-
tional boundaries should be abandoned when they
can be demonstrated to have outlived their use-
fulness, or when compelling reasons take pre-
cedence over them. For example, such compelling
reasons might be that the users of ?nancial state-
ments would bene?t if the external auditors
increased their knowledge base by providing these
extra services thereby strengthening the overall
services rendered (AICPA, 1978, p. 98).
Closely following this position, and also con-
sistent with SEC Chairman Williams’ (1979) posi-
tion that internal auditors give up their own
traditional focus on performing operational audits
in favor of monitoring internal control, the
AICPA (1982) formed the Special Committee on
Operational and Managerial Auditing which re-
de?ned operational auditing from services per-
formed within a company to services that can be
rendered by external auditors as independent con-
tractors. The Special Committee (AICPA, 1982, p.
1) stated that while it would not give standards for
the conduct of operational audits, it did provide
information to anyone who wished to become
more familiar with such work, noting that ‘‘?nan-
cial auditing . . . provides an excellent background
for performing operational audits.’’ This guide
(AICPA, 1982, p. 5) concluded while the issue of
independence does not preclude the external
auditor from performing operational audits, this
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 333
consideration should be disclosed when accepting
the engagement and in the ?nal audit report. It
appears that the AICPA endorsed opening the
traditional jurisdiction of internal auditors to
external auditors, while bracketing and neutra-
lizing the ethical principle of independence that
prohibits external auditors from being internal
employees of clients.
Following the AICPA’s position on operational
auditing, the AICPA sought to further articulate
the manner in which external auditors evaluate the
internal audit function in conducting an engage-
ment, thereby commodifying the internal audit.
Statements of Auditing Standards 65, ‘‘The Audi-
tor’s Consideration of the Internal Audit Function
in the Audit of Financial Statements’’ (AICPA,
1999b, Au Section 322) provides guidance on
considering the work of the internal auditors and
gauging their competence and objectivity. Where
internal auditors are found to be competent and
objective, the external auditors may decrease the
amount and strength of evidence needed to sup-
port their own audit opinion. Another e?ect of
this standard was to further strengthen the tie
between the external and internal audit functions.
Consistent with the AICPA’s earlier action, in
May 1996 the Executive Committee of its Profes-
sional Ethics Division issued ethics rules inter-
pretation IDI-13, ‘‘Extended Audit Services,’’
stating several interpretations and guidelines for
the performance of extended audit services (such
as internal auditing) for external audit clients. This
pronouncement speci?cally concluded that out-
sourcing does not impair the external auditor’s
independence as long as (1) someone from man-
agement remains in charge of the internal audit
function; (2) the ?rm does not act or appear to act
in a capacity equivalent to a member of client
management or an employee; and (3) the internal
audit function does not perform ‘‘on-going’’
monitoring activities (Journal of Accountancy,
1996, p. 11). Supporting this position, the AICPA
formed the Special Committee on Assurance Ser-
vices chaired by Bob Elliott whose purpose was to
consider new forms of assurance services, which
could be o?ered. The Committee strongly encour-
aged CPA ?rms to expand their traditional audit
o?erings, and the AICPA institutionalized this
encouragement by forming the Assurance Service
Executive Committee to identify, develop and
introduce new services. The consequence of this
‘‘green light’’ into extended audit services by the
AICPA was a dramatic growth in the performance
of internal audits services by the Big Five.
According to a Public Accounting Report (1997b,
p. 2) article, for example, these ?rms’ ‘‘plotted
annual growth rates of 80% to 100% through the
year 2000 for this ?edgling practice area’’ (PAR,
1997b, p. 2; PAR, 1999b).
More speci?cally, almost taking as script the
outsourcing literature (e.g. Matusik & Hill, 1998),
the marketing brochure of Arthur Andersen
(1997), the most active ?rm in internal audit out-
sourcing (PAR, 1997b), stated that outsourcing is
a ‘‘strategic concept—a way to add value to a
business’’—that ‘‘converts an in-house cost center
into a customer-focused service operation with
you as the customer.’’ The ?rm appealed to cor-
porations to focus on the critical ‘‘core’’ areas of
the business that create and sustain competitive
advantage and outsource such non-core compe-
tencies such as internal auditing. Arthur Andersen
de?ned its outsourcing services wrapped around
internal auditing as including: performing partial
outsourcing services for peak period needs, inter-
national locations, regulatory compliance, and
EDP audits on both recurring and non recurring
bases; assisting management in the planning and
execution of the internal audit process; identifying
customer needs; assessing risks; and supervising
audits and communicating results. It listed the
bene?ts of outsourcing as: o?ering geographical
or technological ?exibility; eliminating the tasks of
recruiting, training and maintaining employees;
managing costs; engendering objectivity, expertise
and consistent quality; leveraging existing internal
audit resources to focus on more key organizational
needs; reducing ?xed salary costs; shifting liability
for attestation assignments; freeing management to
focus on core competencies; opening internal audit
services to the discipline of market forces; and
engendering a dynamic for continual improve-
ment—all in a competitively priced package.
As a speci?c exemplar of this rhetoric extending
to the actual performance of such services, a WSJ
article (1996c) described a situation where Arthur
334 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Andersen reached an agreement with the Camp
Fire Boys and Girls to give up their external
?nancial audit role due to the client’s insistence
(and a related $50,000 annual audit fee) in order
to make possible an outsourcing agreement to
provide full-time, on-site accounting and systems
services at approximately $400,000 per year.
Arthur Andersen defended this new arrangement
by arguing that they could better serve their client
through this outsourcing arrangement than
through the external audit arrangement. Upscal-
ing, PricewaterhouseCoopers reported a 5 year,
$850 million outsourcing contract with the Aus-
tralia and New Zealand Banking Group (PAR,
1999b). Joe Vater, the director for the ?rm’s busi-
ness process outsourcing services line, observed
that this contract is just the ‘‘tip of the iceberg’’
and that the market for such services will
‘‘explode’’ over the next few years. He predicted
that while 40% of the ?rm’s revenue for such ser-
vices comes from North America, the hottest
markets will be overseas, particularly Western
Europe, China, Taiwan, and Australia. The WSJ
proposed, however, that this recent expansion of
services by public accounting ?rms may also be
characterized as ‘‘an outrageous con?ict of inter-
est’’ (1996a) and as a trend which ‘‘could add to
the accounting profession’s credibility problems’’
(1996b, p. B8). It warned that the internal auditing
profession, as represented by the 60,000 member
IIA, ‘‘wants double duty auditing stopped
entirely’’ (WSJ, 1996a).
According to two other 1996 WSJ articles, this
expansion of services is attributable to a proble-
matic external audit market. The ?rst (1996a,
p. B1), aptly entitled ‘‘Who is Going to Audit the
Auditor,’’ stated that Big Five accounting ?rms,
worried about slowing revenues, have doubled or
tripled the amount of ‘‘double duty work’’ they
perform in the past 5 years. The second (1996b:
B1), further argued that accounting ?rms are try-
ing to broaden the scope of the audit business. It
noted that while the major public accounting ?rms
have almost doubled their consulting business
since 1990 (collectively they perform 23% of such
services worldwide; PAR, 1998b), their audit
business has edged up only 16%. The WSJ article
(1996a, p. B1) characterized the external or ‘‘plain
vanilla’’ ?nancial audit as having become ‘‘a stag-
nant commodity,’’ where clients resist fee increases
because ‘‘they increasingly feel that traditional
audits don’t help their business and that one is as
good as another.’’
Sensing a threat to its jurisdiction, the IIA
advocated for internal audit services remaining a
strictly in-house function and established the point
that keeping the internal auditing function as an
integral part of the organization o?ers clear
advantages. An IIA (1994, p. 2) white paper
emphatically stated that a ‘‘competent internal
audit department that is properly organized with
trained sta? can perform the internal audit func-
tion more e?ciently and e?ectively than [an
externally] contracted service.’’ Consistent with
the political advantage of organizational profes-
sionals being localized knowledge (Reed, 1996),
the primary rationale for this position was that
internal auditors are ‘‘intimately acquainted with
their organizations’ policies, procedures, operating
practices, and personnel’’ (IIA, 1994, p. 3). The
IIA argued that through day-to-day experience in
the business, internal auditors acquire an intimate
knowledge of an organization’s culture, processes,
risks, and controls, and thereby obtain the ‘‘pro-
prietary knowledge’’ that ?gures prominently in
giving competitive advantage to their company
(Matusik & Hill, 1998). This enables them to pro-
vide management with tailored services, especially
in the FCPA regulated areas of internal control
risk analysis and system assessments. In short, the
IIA’s position was that internal auditing profes-
sionals know and understand the organizations to
a degree that CPAs cannot, and their loyalty and
con?dentiality are ensured by the internal nature
of their function (Pelfrey & Peacock, 1995).
Moreover, almost taking as script the outsourcing
literature (Matusik & Hill, 1998), the IIA’s posi-
tion elaborated on the disadvantages of out-
sourcing which they de?ned as: the lack of
independence on part of external auditor violates
AICPA ethics and thereby contributes to an irre-
vocable diminishment of the value of the external
audit services in ?nancial markets; it attempts to
take away management’s responsibility for internal
control high learning curve costs; high total cost;
possible loss of potent informal communications;
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 335
disruption caused by a change in the locus of who
performs the services; and potential loss of com-
petitive advantage concerning leakage of proprie-
tary information.
The most forceful expression of the IIA’s posi-
tion against the outsourcing of internal audit ser-
vices to the external auditor came on 19 January
1996 when the IIA boldly presented its views at
the open session of the Professional Ethics Execu-
tive Committee of the AICPA (this open session
was part of the protocol whereby the Committee
solicited input for its May, 1996 o?cial position,
Extended Audit Services). At this 19 January
meeting the IIA made its position clear:
The IIA is opposed to total outsourcing of
the internal audit function to a company’s
external auditor because it impairs the [CPA]
?rm’s independence. Internal auditing is a key
management function that con?icts with the
public accountants’ responsibilities to be
independent of management.
In this open hearing, the IIA also made strong
reference to the frustration that the SEC was hav-
ing over the lack of guidance from the AICPA
regarding the implications of outsourcing on
auditor independence. The IIA stressed that its
representative to the SEC was going to take the
o?cial position on behalf of the IIA that ‘‘mon-
itoring and control activities’’ could not be
assumed by external auditors without impairment
of independence.
The strong advocacy position which the IIA
took on behalf of the internal audit profession,
and against the public accounting ?rms, at the 19
January 1996 session with the AICPA Profes-
sional Ethics Executive Committee was followed
by an urgent request from the Big Five ?rms to
have a meeting with representatives of the IIA
leadership. As the minutes from the 31 January
1996 meeting indicate, the Big Five ?rms were able
to impress upon the IIA several critical points:
The Big Five are allies of the IIA—com-
prising 5 of top 10 member organizations.
The focus of discussions should more
properly be on enhancing internal audit
quality overall and best serving the client,
regardless of which component of the pro-
fession provides this service.
The greatest challenge to internal auditing
and external auditing lies in the accounting
profession’s becoming irrelevant to client
organizations, i.e. the greatest risk is failing
to provided ‘‘value added services’’ to the
enterprise.
The Big Five are major contributors to
quality improvement for all auditors.
It is important to be ‘‘outsourcing neutral,’’
i.e. outsourcing is not for all, but there is
some bene?t to outsourcing the internal
audit function in select settings, thus sug-
gesting there be no ‘‘one size ?ts all’’ out-
sourcing strategy. Furthermore, in some
organizations, external auditing e?ective-
ness may be enhanced through partial, or
even full outsourcing of internal audit ser-
vices deriving from the symbiosis of pro-
viding joint services.
The ultimate test should be determining
which component of the auditing profes-
sion audit provides maximum overall e?ec-
tiveness in achieving corporate strategic
objectives and protecting the public interest.
Perhaps most importantly, the Big Five are
the major ?nancial donors to the IIA.
The Big Five ?rms were e?ective in presenting
their case. Even before the IIA representatives
exited the meeting, the position of the IIA, as
espoused by its Chairman of the Board and the
IIA President, had become one of a dramaturgy of
conciliation:
Internal auditing is no longer the exclusive
domain of employees. Perhaps it hasn’t been
for along time. Our profession is our primary
linkage and our ?rst concern must be that the
managements, which invoke internal audit-
ing, receive quality, full scope auditing
results. Thus, it is time to begin a new era of
relationships. If the Berlin Wall can come
down, and the Union of Soviet Socialist
Republics can break apart, then internal
auditors and external auditors can begin to
336 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
build partnership arrangements at both the
national and local chapter levels.
The IIA (1996a) subsequently published its
March/April newsletter explaining its new con-
ciliatory position, largely using the rhetoric
deployed by the Big Five at the 31 January 1996
meeting. Here, re?ecting a dramaturgy of ‘‘due
diligence’’, no explicit reference was made to the
substance of the 19 or 31 January meetings, but
instead sought to indicate that preservation of the
IIA as an institution, not the location of internal
auditing, was of manifest importance:
During recent months, there has been con-
siderable activity at IIA regarding the out-
sourcing of internal auditing to third-party
providers. The IIA has written to the Secu-
rities and Exchange Commission’s Chief
Accountant, participated in a meeting of the
AICPA’s Professional Ethics Executive Com-
mittee, released the IIA’s views to the press,
and ?nally, initiated a meeting with repre-
sentatives of major accounting ?rms that
provide internal auditing services. As a result
of supporting analysis and associated dialo-
gue, the IIA’s leadership concluded that there
is a need to chart a new path for the future,
which is in line with the IIA’s goals and
objectives. The ?rst of these goals is for the
IIA to be the recognized authority on internal
auditing. The second goal is for The IIA to be
the acknowledged leader of the internal
auditing profession. The most important sin-
gle document in the achievement of these
goals is the Standards for the Professional
Practice of Internal Auditing (the Standards),
the basic guidelines for the profession. The
IIA believes that all internal auditing prac-
tices and procedures, regardless of who con-
ducts the auditing, should conform to the
Standards (IIA, 1996a, p. 3).
The newsletter opened up the possibility of
external auditors conducting an internal audit,
providing such audits conform to IIA standards.
Further, it went on to outline an ‘‘enlightened’’
view of future directions of the IIA:
The IIA and its membership must refocus
energy spent in challenging the outsourcing
issue to improving the quality of internal
audit functions. The answer to ‘‘who does it
best’’ should be determined in the competitive
market place . . . The door must be opened to
include internal audit professionals regardless
of employer. The path to this position has
been a very di?cult one. Even though we still
have independence concerns and preferences
for internal operations, the trend toward
greater e?ciencies and involvement by third-
party providers is very evident. In order to
maintain a position of leadership and
authority, the IIA must begin to adapt our
thinking and processes so that we can help all
practitioners and ensure that the profession
of internal auditing is well understood by its
clients. Thus, the IIA intends to recognize
internal auditors as potential members based
on what they do rather than who employs
them. The IIA will continue to make the case
for the protection of external auditor inde-
pendence, but will recognize the rulings of the
AICPA Committee, the SEC, and other reg-
ulatory agencies (IIA, 1996a, p. 4).
The newsletter even went on to criticize its dues-
paying members—internal auditors—by telling
them that the IIA is also aware that many internal
audit departments are not ‘‘world-class’’. It also
stated that many professionals who are now
employed by public accounting ?rms are often
experienced internal auditors, and by implication,
are ‘‘world-class’’ by being members of inter-
national ?rms. Thus, the IIA now argued, con-
tracting with this level of external provider may be
useful as management attempts to improve the
quality of its internal auditing services to become a
part of an organization’s arsenal to enter global
markets. In a fairly candid confession of its
acquiescence to the Big Five ?rms, the IIA (1996a,
p. 3) newsletter acknowledged that:
Outsourcing is increasingly used as part of re-
engineering and downsizing, and this trend is
much larger than the function of internal
auditing. All major public accounting ?rms
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 337
now seem to be pursuing these services with
some degree of enthusiasm. Given the growth
and possible success of these e?orts, the
question for the IIA is whether it is positions
to achieve its goals and objectives if it cannot
help increase the internal audit e?ciency and
e?ectiveness of the outsourced providers.
The IIA newsletter also conceded that:
It is important for the IIA to reassess our
bedrock mission and chart a course that
identi?es common ground on which future
activity can take place. As more and more
contract providers enter the public and pri-
vate sectors, the IIA must address their pro-
fessional needs. Otherwise we may end up
trying to achieve objectives of leadership and
authority, only to ignore a large segment of
internal audit practitioners. At a minimum
this calls for another look at who we consider
to be internal auditors and how the IIA
relates to major providers, e.g. public
accounting ?rms that provide internal audit
services (IIA, 1996a, p. 3).
The closing comments in the IIA newsletter
provide a realistic perspective of: the needs of the
IIA taking precedence over those of internal audi-
tors; the economic imperative of ‘‘clients’’; and
trends of public accounting ?rms, now reclassi?ed
from being ‘‘a?liates’’ to ‘‘fellow’’—not compet-
ing—practitioners, being in the relatively lucrative
domain of internal auditing:
A large segment of IIA members feel threa-
tened by the growth of outsourcing, and the
IIA believes it has a responsibility to provide
them with some guidance in dealing with this
practice. The IIA is positioned to work with
public accounting ?rms in all aspects of the
profession and will not oppose the develop-
ment of this market. The door is open to
cooperation across the full range of IIA
activities. . . . The greatest risk to both exter-
nal and internal auditors is to be considered
irrelevant to the successful attainment of cor-
porate objectives (IIA, 1996a, p. 6).
A signi?cant shift in the dramaturgy of
exchange relations in the Spring of 1996 came to
be more formally embodied in the Fall with the
IIA’s (1996b) o?cial position being expressed in a
Exposure Draft of a Professional Issues Pamphlet
on Internal Auditing and Outsourcing:
Quality is the key ingredient of internal
auditing, irrespective of it being performed
by internal or external auditors.
We have now come to a position, which
recognizes the reality of outsourcing and
should serve to challenge internal auditors
to objectively assess their contribution to
their organization.
The IIA recognizes that internal auditing is
no longer the exclusive domain of employ-
ees. The ?rst concern is that management
receives quality, full scope auditing
results—that is, in accord with the Stan-
dards of the Professional Practice of Inter-
nal Auditing. The AICPA presented new
professional guidance to establish more
speci?c guidelines for extended audit ser-
vice for existing attest clients. These ser-
vices would not impair independence,
provided the auditor does not act or appear
to act in a capacity equivalent to a member
of client management or as an employee.
Outsourcing of internal auditing services is
neutral—neither necessarily good or bad.
. . . The ultimate test of this determination
will always be what arrangement provides
maximum overall e?ectiveness in achieving
strategic objectives.
The developments in 1996 had not gone un-
noticed by the SEC, which is charged with exercis-
ing regulatory oversight, as voiced by its Chairman.
I’m deeply concerned that ‘‘independence’’
and ‘‘objectivity’’ are increasingly regarded
by some as quaint notions. . . . There are
those who say that increasing competition
puts pressure on accountants to branch out
and try new ways to generating pro?ts. I
caution the industry, if I may borrow a
338 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Biblical phrase, not to ‘‘gain the whole world,
and lose [its] own soul.’’ (Levitt, 1996).
This sentiment was ampli?ed by SEC Commis-
sioner Norman Johnson who observed that:
I fear that many of these independence pro-
blems are rooted in the dramatic organi-
zational changes that have taken place in the
accounting profession over the last several
years. Accounting ?rms have found that the
audit business that has been their bread and
butter just does not allow for maximum
business and ?nancial growth. So accounting
?rms have looked for new sources of income
and have ventured into services well beyond
their traditional businesses, which may con-
?ict with their established roles as auditors.
. . . The con?icts of interest, or at the least, the
appearance of con?icts of interest arising
from these developments, are troubling. It
hardly seems accidental that ?nancial fraud
has rapidly increased at the same time non-
audit services performed by accounting ?rms
have proliferated and become more pro?table
. . . However, you can expect, in turn, that the
Commission will carefully scrutinize all its
regulatory and enforcement alternatives in
order to redress the problems posed by the
lack of auditor independence (1999, p. 3).
Extending this view, SEC Chief Accountant,
Michael Sutton (1996), reasoned that:
At what point does the auditor become so
involved in the success of the company and its
management—as a consultant or an advisor
to a provider of a variety of newer services—
that there is a risk that private interests might
be placed ahead of those investors, or that the
public will perceive it that way? . . . Internal
auditing traditionally has been a management
responsibility that, in critical ways, has been
integral to the system of internal control. In
that context, the question becomes, ‘‘Can the
independent auditor perform the internal
auditing function and also provide a truly
independent second look at the system of
internal control?’’ . . . The external auditor
would, in part, be attesting to the quality of
his or her own work. Clearly, in the view of
some, the auditor could not be viewed as a
‘‘disinterested party.’’
Thus, while the external audit profession is
making signi?cant gains in claiming the jurisdic-
tion of internal auditors, it is not a fete de accom-
pli. Remaining is the task of successfully
negotiating a transformation of its abstract system
of knowledge.
4.3. Moment III: Transforming an abstract system
of knowledge
It is not enough to merely advocate for a change
in jurisdiction and then perform the professional
services; this advocacy must be accompanied by a
modi?cation of a code of ethics and an abstract
system of knowledge (Abbott, 1983, 1988; Reed,
1996), as well as attaining tacit agreement as to
this modi?cation among various vested interests
(Czarniawska, 1997; DiMaggio, 1988; Zucker,
1988). As noted in Moment II, the Executive
Committee of the Professional Ethics Division had
already issued interpretation (101–113), ‘‘Exten-
ded Audit Services,’’ of the AICPA’s widely pro-
claimed ‘‘hallmark’’ ethics ruling 101—
Independence, partially in response to an SEC
request for a clari?cation on the outsourcing issue
(Barker, 1996). This interpretation speci?cally
concluded that internal audit outsourcing to
external auditors does not impair independence as
long as the external auditor does not serve as a
manager or employee of the client, and manage-
ment retains internal audit responsibility (AICPA,
1996).
The interpretation of the AICPA’s Executive
Committee appeared to comply with the SEC’s
call for guidance in this matter, constrained by the
provision that CPAs not act as members of man-
agement or as employees of the client:
The purpose of the (SEC) sta?’s considera-
tion of the issues surrounding the outsourcing
of internal audit functions is not to preclude
auditors from providing such services.
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 339
Rather, if auditors provide these services to
their audit clients, the sta? believes that the
impact of those arrangements on auditors’
independence should be considered carefully
in each situation. The SEC sta? supports the
e?orts of the Professional Ethics Executive
Committee and looks for the Committee to
complete its project and issue guidance in the
near future (Barker, 1996, p. 3).
Indeed, the IIA, in its 1996 newsletter examined
in Moment II, also acquiesced to and used to jus-
tify its own new position, the AICPA ethics inter-
pretation. Thus, it appears that the AICPA not
only modi?ed its ethics code to support a new
jurisdiction, but also gained the support of two
key constituents—the SEC and the IIA.
In addition to the speci?c ethics interpretation
of outsourcing, the SEC requested the formation
of a new body whose purpose would be to estab-
lish independence standards for the auditors of
public companies. The AICPA complied with this
coercive pressure by forming the Independence
Standards Board (ISB) in 1997 (Deloitte &
Touche, 1997), to be overseen by the SEC, which
would provide enforcement actions where neces-
sary. The ISB’s purpose is to provide indepen-
dence guidance to CPAs that have entered into
new service areas, or merged and restructured
operations. Initially, the ISB gained the drama-
turgical support of the SEC, with SEC Chairman
Levitt commending ‘‘the AICPA for its commit-
ment to professionalism,’’ while the AICPA Pre-
sident ‘‘hailed the ISB as an extension of an
ongoing commitment to protect and serve the
public interest, and maintain the strength of our
profession’s hallmark—independence’’ (Deloitte &
Touche, 1997, p. 1). This support quickly faded as
the ISB found out upon issuing a major docu-
ment, ‘‘Serving the Public Interest: A New Con-
ceptual Framework for Auditor Independence’’
(ISB, 1998):
The Independence Standards Board con-
cluded not to circulate a white paper sub-
mitted on behalf of the AICPA on the topic
of auditor independence, after the SEC criti-
cized the document for lacking neutrality and
balance. . . . According to the SEC, another
problem in the white paper was the conclu-
sion that individual ?rms are best positioned
to recognize threats to auditor independence
and, therefore, should police themselves, with
the ISB providing core principles of indepen-
dence. Adapting such a regulatory framework
could undermine investor con?dence, the
SEC maintains. Furthermore, the SEC hinted
at reinstating a requirement that auditors
must disclose speci?c nonaudit services pro-
vided to the public client on the registrant’s
?nancial statements (PAR, 1998a, p. 3).
In addition to modifying the ethics code and
forming the ISB, the Big Five ?rms sought to
modify their own structure to demonstrate their
commitment to maintaining independence by seg-
regating auditing from other services—a modi?-
cation that did not prove wholly successful:
Accounting industry advocates point to
internal controls used by the Big Five—so
called Chinese Walls designed to insulate
auditors from the other services o?ered by
their company. Sarah Teslik runs the Council
of Institutional Investors [CII], whose mem-
bers include mutual, pension, and trust funds.
Together, CII represents investors with a
combined $1.5 trillion under management.
‘‘Chinese Walls are a bunch of garbage. We
are human beings and human nature is
everywhere and always the same,’’ she said.
‘‘And the notion that you will within a ?rm
create an invisible wall and say to some
human beings, ‘You will not talk to these
other human beings, when everyone knows
how the money is coming in,’ is ridiculous.
We know better. We know that secrets
don’t get kept. We know that everyone
knows everything in an o?ce’’ (MSNBC,
1999, p. 5).
Faced with a lack of acquiescence toward, if not
support of, such speci?c actions, the AICPA
ascended to a more abstract level by seeking to
enhance the image of certi?ed public accountants
being ‘‘knowledge professionals’’ (Reed, 1996).
340 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
For example, the AICPA presented its ‘‘Vision
Project’’ whose purpose is to reposition the CPA
for the new millennium. Recipient of the Gold
Quill Award from the International Association of
Business Communicators, the Crystal Award of
Excellence in the Organizational/Corporate Image
Category of the Communicator Awards, and
Communication Award of Distinction for Excel-
lence in Writing, the AICPA’s ‘‘Vision Project’’
for the third millennium was launched in the Fall
of 1999 with the overt proclamation that:
The increasing complexities of the global
environment and the commodity character-
istics of traditional [audit] services mandate
that the profession migrate up the economic
value chain. Commodi?cation and technol-
ogy are challenging the economic viability of
the profession. Information-based products
and services are losing value in the mar-
ketplace and are rapidly being replaced
with knowledge-based products and services
that command higher fees (AICPA, 1999a,
p. 4).
On the CD featuring visuals scrolling the phra-
ses ‘‘internet economy’’, ‘‘global highway’’, ‘‘arti-
?cial intelligence’’, ‘‘convergence’’, ‘‘private space
exploration’’, and ‘‘Bottom Line: Financial Secur-
ity’’ (see also www.cpavision.org), which won a
Videographic Award of Excellence, CPAs were
encouraged to expand their own vision by:
Developing a deep understanding of the glo-
bal, national, and marketplace environment
and the impact of forces on various types of
organizations, including their own business.
CPAs will align with other areas of business
practice and other professionals to provide
value-added services in the marketplace.
CPAs will continuously expand their know-
ledge and competencies to meet a broader
range of market needs and enhance the role
of the profession in the business world.
Keeping abreast of technology is critical to
increased opportunities for CPAs to optimize
performance and expand services (AICPA,
1999a).
This ‘‘deep understanding’’ would culminate in
rendering less commodi?ed, more knowledge
based services:
The Economic Platforms model describes the
distribution of knowledge and e?ect along the
economic value chain. The most successful
future for the profession lies in moving from
information services on Platform 1–2 [exter-
nal audit of ?nancial statements] to services in
the emerging knowledge industry on Plat-
forms 3–5 [internal auditing, and implement
and manage audit control systems—the con-
trast with the IIA’s and SEC’s positions that
the management of internal auditing remain
internal and the organization is noteworthy]
and beyond. The more a product or service is
re?ned and de?ned, the less market value it
will have. Higher Platform services are, and
will increasingly be, the most valued services
and functions, and therefore will command
higher fees and salaries. Traditional services
are the foundation from which CPAs can
leverage to higher value services. If your work
falls lower on the economic value chain, rev-
enue will be lower. The higher your work is
on the economic value chain, the higher the
revenue. This is the imperative for the pro-
fession to thrive in the knowledge-based, glo-
bal economy (AICPA, 1999a).
Founded on ‘‘a history of public interest’’ and a
‘‘stringent code of professional conduct and
unquestionable ethics’’, the Vision statement
asserted that ‘‘new standards may be established
to further support the role of CPA’s as trusted
individuals in the competitive marketplace’’, who
nevertheless would continue to place ‘‘professional
responsibility above personal gain’’. Thus, the
external auditing profession is very deliberately
extending its abstract system of knowledge to
?rmly embrace the socially prized role of the
knowledge expert treading the information high-
way across the information bridge to a new infor-
mation age in a global economy. The ?rst stop on
this itinerary from Level 2, ?nancial audits, is
Level 3—performing outsourced internal audit
services.
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 341
Also at this time, in his opening speech as
incoming AICPA Chair, Bob Elliott (1999, 2000)
both supported the Vision Project and introduced
the new ‘‘XYZ credential’’ (with XYZ being a
place-holder term), de?ned as a professional cre-
dential of ‘‘one who helps people or organizations
achieve their objective through the strategic use of
information and creation of new knowledge’’
(Elliott, 2000). Elliott stated that the CPA creden-
tial basically ‘‘doesn’t cover the work we do’’ and
has the inherent problem that it is regulated at the
state level through licensing procedures, rather
than being global in nature and directly controlled
by an as yet to be formed international profession
(Elliott, 2000). Thus, XYZ ‘‘should be rooted in
intellectual property rights, not government, so
that it can be changed nimbly’’ (AICPA, 2000). In
turn, because the ‘‘technology threat is chewing up
lower level chain links,’’ CPAs must leverage their
knowledge of clients and move up the value added
chain from data and information services to
knowledge and decision services. Stating that the
‘‘CPA is not just a license’’ but also a ‘‘brand’’, he
described the AICPA’ use of a brand consultant
who advised that the CPA brand could not be
‘‘stretched’’ far enough to incorporate the global
knowledge expert. Hence the development of the
XYZ credential for a name being market-tested
across the professional associations of 11 coun-
tries expressing an interest in it; the budget neces-
sary to bring the credential to market is $347
million (AICPA, 2000, p. 46). Asking the rheto-
rical question ‘‘Why now?’’ Elliott answered say-
ing that: (1) the knowledge economy demands a
knowledge leveraging credential; (2) the emer-
gence of a global economy a global credential; and
(3) the internet (the AICPA is developing a new
internet portal—CPA2Business.Org) provides the
platform for a global credential (Elliott, 2000).
Subsequently, after an aborted attempt to name it
the ‘‘Cognitor’’, the credential came to be refer-
red to as the Interdisciplinary Global credential
to be administered by a newly formed Institute
of Strategic Business Professionals (IISBP;
AICPA, 2001). Elliott (1999, pp. 4–6) speci?cally
saw the need to re-generate the professions’
abstract systems of knowledge through the XYZ
credential and what he called ‘‘knowledge
science’’, seemingly taking as script from Abbott’s
(1988) line of reasoning:
I foresee that these e?orts, together with the
work of our members in the academic
world, will re-de?ne the body of knowledge
that is the de facto stamp of an accounting
professional. Every profession is de?ned by
the body of knowledge that di?erentiates it
from non-professionals and from other
professions. There has always been some
jostling at the boundaries between profes-
sions. Where is the boundary between law
and a CPA’s tax work? Where does attes-
tation end and product testing begin? So a
little fuzziness at the boundaries of a pro-
fession’s body of knowledge is in no way
troubling. What is important is that the
body of knowledge successfully establishes a
claim to expertise deserving recognition as a
profession.
Countering critics holding that professionalism
must be protected against commercialism and a
‘‘watering down’’ of the CPA credential (AICPA,
2002a), Elliott (1999, p. 6) concluded that:
Our ethical rules, however, are not ends, they
are means. The end we seek as a profession is
to equip decision makers with high quality
information . . . We must do nothing that
obstructs us from our obligation to provide
high quality information, that is information
that is relevant, reliable, and timely. To
repeat, our ethical rules are only means to
achieve that end and are not sacrosanct on
their own account . . . For our profession to
realize the great opportunities within its
reach, we must have a clear goal, su?cient
resources, and e?ective leadership. Let me
restate that more precisely: we need the
vision, the power, and the courage. We cer-
tainly have the vision: our members have
provided a powerful, forward-looking vision.
And, as a profession we have the power,
because the half million CPAs in America
produce nearly one percent of total value
added in our economy.
342 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
Consistent with Elliott’s (1999) position and
also the risk of the ‘‘risk society’’ (Beck, 1992), the
Independence Standards Board (2000, p. 10) has
begun to speak in terms of ‘‘independence risk’’ in
its revised independence conceptual framework
which can and should set at di?erent levels of risk
tolerance, rather than as an immutable standard
of ethical conduct (for general discussion of ‘‘risk’’
in auditing, see Power, 2000).
Meanwhile, the internal auditing profession
sought to likewise modify its own code of ethics
and abstract system of knowledge. At ?rst it may
seem paradoxical that the IIA should seek to
modify its code of ethics given that the question of
independence was raised pertaining to the role of
external auditors. However, if external auditors
performing internal auditing services were to be
governed by the IIA’s standards (IIA, 1996b), its
code also had to be modi?ed. The old code
squarely stated in its Standard 100 (IIA, 1978, p. 16)
‘‘Independence—Internal auditors should be
independent of the activities they audit.’’ The code
(IIA, 1978, pp. 18–19) went on to elaborate at
length that independence is ensured by internal
audit’s organizational status (e.g. if its director
reports to a su?ciently high member of manage-
ment or the board, independence is enhanced) and
objectivity. Concerning the latter, the code states:
120.01 Objectivity is an independent mental
attitude, which internal auditors should
maintain in performing audits. Internal audi-
tors are not to subordinate their judgment on
audit matters to that of others.
However, in its 1999 Code of Ethics Exposure
Draft, the IIA pointed to the problematic exis-
tence of the terms ‘‘independent’’ and ‘‘objective’’:
While in common usage the terms ‘‘indepen-
dent’’ and ‘‘objective’’ are more or less
synonymous, the profession has attempted to
make an important distinction between these
terms by de?ning ‘‘independence’’ in the con-
text of the internal auditing function itself
and ‘‘objective’’ as an attribute of the indivi-
dual auditor. In short, the function must
remain independent by not being under the
in?uence of the organizational component
being audited. The individual auditor, on the
other hand, must remain objective by having
an independent mental attitude and the
requisite competence such that his or her
judgment is not subordinated to others who
may have a vested interest in the audit out-
come. The Task Force concluded that this
distinction was not clear in the existing de?-
nition and that this lack of clarity may have
contributed to some ambiguity in the Stan-
dards. The proposed de?nition attempts to
pull these two concepts apart by linking the
personal attribute of ‘‘objectivity’’ with the
individual performance process (i.e. assurance
and consulting activity) and connecting
‘‘independence’’ with the organizational posi-
tioning of the activity (i.e. independently
managed). We believe such a partitioning of
these related, but distinct, concepts not only
incorporates the spirit of the dialogue within
the IIA but also leads to a conceptually
superior framework for standards-setting
(IIA, 1999, p. 5).
Thus, the auditor performing the work need
only be concerned with being objective, while the
issue of being independent could be satisfactorily
addressed by reporting directly to the board of
directors, be it by an internal auditor or an exter-
nal auditor performing internal audit services. The
Exposure Draft went on to discuss the ‘‘funda-
mental principles’’ individual internal auditors are
to uphold that included integrity, objectivity, con-
?dentiality, professionalism and competency—but
excluded independence for the ?rst time since 1947
(IIA, 1999, p. 3).
While the Exposure Draft recognized that the
internal audit function should remain ‘‘managed
within’’ the company (IIA, 1999, p. 3, but recall
Arthur Andersen’s (1997) pledge to help manage-
ment plan and execute the internal audit function),
it went on to recognize that a ‘‘paradigm like shift
seems to be occurring’’ by acknowledging the
possibility that the ‘‘value added proposition’’
may ‘‘replace independence as a traditional value
governing internal auditing work in organi-
zations’’ (IIA, 1999, p. 3).
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 343
‘‘Internal auditing’’ also needed to be rede?ned
from the traditional stance that it
. . . is an independent appraisal function
established within an organization to examine
and evaluate its activities as a service to the
organization. The objective of internal audit-
ing is to assist members of the organization in
the e?ective discharge of their responsibilities.
To this end, internal auditing furnishes them
with analyses, appraisals, recommendations,
counsel, and information concerning the
activities reviewed. The audit objective
includes promoting e?ective control at rea-
sonable cost (IIA, 1978, p. 16).
As such, it was an internal organizational activ-
ity designed to be information-oriented appraisal
function (Krogstad, Rutley, & Rittenberg, 1999).
According to the Exposure Draft this de?nition
was to be modi?ed:
Internal auditing is an independent, objective
assurance and consulting activity designed to
add value and improve an organization’s
operations. It helps an organization accom-
plish its objectives by bringing a systematic,
disciplined approach to evaluate and improve
the e?ectiveness of risk management, control,
and governance processes (IIA, 1999, p. 2).
Internal auditing was to become an objective
assurance and consulting, knowledge-based ser-
vice designed to ‘‘add value’’ to the company from
the perspective of its entire value chain ‘‘regardless
of who performs the work’’ (Krogstad et al., 1999,
p. 29)—the already claimed jurisdiction of external
auditors.
Similar to the AICPA’s Vision Project, the IIA
sought to modify its abstract system of knowledge
to ensure its future. In the IIA’s pamphlet The
IIA’s Perspective on Outsourcing Internal Auditing
(1994; see also IIA, 1996b, p. 4), the IIA advocated
that internal auditors take a long-term perspective,
once more using the rhetoric of external auditors:
By marketing professionalism and demon-
strating value-added qualities to management,
internal auditing can further increase its sta-
ture within the environment of corporate
governance and reduce its vulnerability to
outside contractors.
The pamphlet further stated that they should
evaluate their mission and customer-oriented stra-
tegies, as well as prepare and implement a ‘‘vision
statement’’ that speaks to the ‘‘core values’’ of
being ‘‘proactive, innovative, focused, integrated
and motivated’’. This thrust was more recently
rea?rmed with the June 1999 issue of Internal
Auditor whose cover proclaimed the importance of
the knowledge worker ‘‘Managing Intellectual
Capital: Audit’s New and More Urgent Chal-
lenge’’ (noteworthy is absence of the word ‘‘Inter-
nal’’ before ‘‘Audit’s’’). Introducing the IIA’s
Consulting/Advisory Services area, the feature
article (Collins, 1999, p. 26) entitled ‘‘Auditing in
the Knowledge Era’’ (noteworthy once more is
absence of the word ‘‘Internal’’), proclaimed
‘‘Internal auditing’s relevance will be inextricably
linked to our capacity to co-op organizational
knowledge and our willingness to exchange com-
pliance for commitment, and control for empow-
erment.’’ Apparently internal auditors are also to
be knowledge workers treading the information
highway across the information bridge to the new
information age.
This transformation of both external and inter-
nal auditing, meanwhile, and as expected, had
been monitored by the SEC. Following a few
widely reported violations of SEC and AICPA
?nancial independence rules, with one ?rm found
to have committed over 8000 violations, largely
for ‘‘dot-com’’ clients, and SEC amnesty relat-
ing thereto (PAR, 2000a, for criticism of this
amnesty, see Hood, 2000; Journal of Accoun-
tancy, 2000a), SEC Chairman Levitt (2000a, pp.
2–3) lamented the ‘‘monetization’’ of the pro-
fession and how partners had become client
‘‘relationship managers’’ protecting their ‘‘repu-
tational capital,’’ and how ‘‘too many auditors
are being judged not just by how well they
manage the audit, but by how well they cross-
market their ?rm’s non audit services.’’ He con-
cluded ‘‘it’s no wonder that the Big 5 now posi-
tion themselves globally as ‘multi-disciplinary
344 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
professional service’ organizations rather than
accounting ?rms.
1
On 27 June 2000 the SEC proposed extensive
new regulations (SEC, 2000a, 2000b) that would
‘‘force a restructuring of the accounting profession
and radically alter independence requirements for
accounting ?rms the audit SEC registrants’’
(AICPA, 2001). Among the various provisions the
regulation would prohibit ?rms from simulta-
neously performing audit services and ten cate-
gories of non-external audit services, including
internal auditing. It would also bar contingent fees
or ‘‘value-added billing.’’ The AICPA responded
that the ‘‘new rule would cripple the ability of the
accounting ?rms to operate in the new economy.’’
It encouraged its 330,000 members to write Con-
gress strongly opposing the proposed regulation,
and o?ered guidance on the content of letters
(AICPA, 2001). Anticipating the SEC’s proposal,
two letters signed by seven mostly Republican
members of Congress, as well as one from the US
House Commerce Committee that oversees the
SEC—all recipients of signi?cant campaign con-
tributions from the Big Five during an election
year—were sent to the SEC ‘‘demanding the SEC
Chairman Arthur Levitt defend his aggressive
stance on auditor independence’’ and to ‘‘provide
Congress with empirical evidence that would
prove accounting ?rms have non-external audit
relationships with audit clients are less indepen-
dent than those ?rms that have no such relation-
ships’’ (PAR, 2000d).
The business press picked up on the frontal
assault on external auditor independence, with the
editor-in-chief of Accounting Today, for example,
commenting that:
The SEC calls this ‘‘the Year of the Accoun-
tant,’’ for its focus on earnings management
and independence issues. And chairman
Arthur Levitt and [new] chief accountant
Lynn Turner are convincingly outraged by
the arrogance that they see in Corporate
America and the Big Five. But if the SEC
cannot stop or restrict [various ?nancial-rela-
ted independence issues], the regulators will
have proved to be toothless watchdogs. If so,
then the profession’s entire system and philo-
sophy of independence will need re-thinking.
In fact, we are probably past the time when
independence mattered. CPAs, who once
valued fairness and truthfulness in ?nancial
reporting, would then promise little more
than nods and winks, all beyond the reach of
meaningful oversight. If the profession won’t
defend it’s own principles, then who will?
(Telberg, 1999, p. 6; see also Journal of
Accountancy, 1999; WSJ, 1999a, 1999b,
1999c, 1999d).
The SEC subsequently held four days of public
hearings on the proposed set of independence
standards in September 2000 and heard testimony
from almost 100 witnesses (SEC, 2000c, p. 4).
Predictably, the testimony of those representing
the external audit profession, such as the AICPA
President Barry Melancos (SEC, 2000c: /testi-
mony/melanc/.htm) and Chairman Bob Elliott
(SEC, 2000c: /testimony/elliott/.htm) used an
assuaging dramaturgy of commending the Com-
mission for initiatives to enhance the profession,
but then voiced their strong opposition to the
proposed standards. It deployed a dramaturgy of
undermining ‘‘market forces’’ and limiting the
ability of the profession to become knowledge
experts in the information age and thereby serve
the global economic community, reasoning that
perfect independence is not the ‘‘Holy Grail’’ with
governmental power threatening to transform
‘‘aspirational goals’’ into ‘‘coercive rules.’’ The
risk of approving the proposed rules, it asserted,
would be to ‘‘ruin a crown jewel of the American
Economy—its public accounting profession.’’
In the meantime, the IIA leadership had di?-
culty mobilizing the support of its membership
1
Another e?ort directed at becoming multi-discipline ser-
vice ?rms and o?ering of ‘‘one stop shopping’’ to clients
involves e?orts by the Big Five to o?er legal services. Already
having extensive tax practices (Abbott, 1998) and legal services
in Europe, they supported e?orts by a special commission of
the American Bar Association to recommend a modi?cation to
the guidelines enabling lawyers to ‘‘partner’’ with CPA’s
(AICPA Guidelines already allow non-accountants to own a
minority share of CPA ?rms, PAR, 1999d). However, the
ABA’s House of Delegates voted in July 2000 to disallow law-
yers from forming MDPs—multi-disciplinary practices (Journal
of Accountancy, 2000b)—and thus the Big Five cannot o?er
legal service to clients in the USA, yet.
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 345
around its pro-Big Five position on outsourcing.
Not all practitioners’s agreed with this ‘‘new’’
direction; according to one IIA member in speech
addressing fellow members:
Why has the IIA [Institute of Internal Audi-
tors] abandoned its original constituents and
aided and abetted those who would a?ect the
demise of the internal auditing profession? . . .
t appears that the IIA’s decision to embrace
our competition as fellow internal auditors
had nothing to do with internal auditors—
those who created the organization. Rather, it
was based on a belief that such an approach
is the best way to save the IIA. I’m not sure
that this is a real cause; this just might be
about money. . . . I suggest that we stop acting
like sheep, that we recognize that there’s a
war being waged against our profession, and
that we take back the IIA and put it into
battle on our side (Speech at an IIA meeting).
And in a more dramatic move, a petition was
initiated by the grassroots membership to remove
the IIA leadership:
We the undersigned are aware that internal
auditing departments are being displaced by
public accounting ?rms and that the IIA,
rather than defending the profession, has
chosen to welcome the public accounting
?rms as fellow internal audit practitioners
and has taken various steps to accommodate
the public accountants, with the most well-
known being the revision of the de?nition of
internal auditing. . . . We are not pleased with
the IIA’s actions to date nor with the IIA’s
current course in response to the challenge of
our profession presented by the Big 5 public
accounting ?rms. . . . [W]e do not wish to see
any of the current [IIA Board] members re-
elected (Petition amongst IIA members, 4
January 2000).
Following the petition, the IIA leadership
reversed its previously supportive position con-
cerning outsourcing to the Big Five ?rms (which, of
course, was itself a reversal of a an earlier position
opposing outsourcing to the Big Five ?rms) to
that of cautious opposition. IIA President William
Bishop in o?ering testimony at the SEC hearings
(SEC, 2000c, /testimony/bishop/,htm), agreed
with ‘‘the SEC that now is the time to address
independence issues’’. Speci?cally, Bishop stated
that:
The IIA believes that total outsourcing of the
internal audit function by the organization’s
external auditing ?rm impairs that ?rm’s
independence, [and that] there is a con?ict
with: (a) provisions regarding acting as man-
agement or as employee of the audit cli-
ent. . .[and] (b) provisions regarding auditing
the accountant’s own work. . .[because] inter-
nal auditing is moving even closer to integra-
tion with the organization’s risk management
control processes [i.e. Platform 3 of 4 of the
AICPA’s Vision].
Bishop did, however, concede, ‘‘Outsourcing
individual audit projects or a well-de?ned portion
of the internal audit function, under the manage-
ment and direction of the chief internal audit
executive, does not necessarily impair indepen-
dence,’’ although operational audits should
remain within the province of internal auditors.
Following the hearings, as well as CPA ?nan-
cially backed challenges from Congress, SEC
Chairman Levitt (2000b) adopted a more con-
ciliatory dramaturgy, apparently absolving the
profession of losing its soul:
As one of the professions’ greatest admirers,
I’m here to celebrate the importance of a
profession that has grown in stature along
side the great American economy. . . . The
auditing profession is, in my mind, one of the
most noble in our marketplace. At the very
core of the auditors’ mandate is preserving
the sanctity and purity of the numbers. In
that sense, its also one of the most elegant.
But its elegance does not overshadow what is
a hard, and sometimes thankless, job. . . . You
can expect the Commission to help you
address the di?culties that arise in serving the
interests of the large ?rms and the small
346 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
practices alike; to be active in those areas
where you strive to bring even greater luster
to the auditor’s franchise and the public
interest. More speci?cally, you can expect the
Commission to be responsive to the changing
nature of business, the emerging information
age, and how these impact our ?nancial
reporting framework. . . .
One generation of accountants passes on the
light of independence to the next. That light
sustains the profession’s life through a culture
of integrity, a mission of objectivity and an
ethic of responsibility. You have been handed
a precious legacy. What you do with it will
determine the future of this profession. It is a
heavy burden and an awesome privilege. Lift
the light far and wide for the next generation
of accountants to see. Lift the light far and
for America’s investors to see. And, lift the
light far and wide not just as a profession—
but as individuals—committed, passionate
and resolute to a ?delity that is a much about
the profession’s past as it is about the profes-
sion’s future.
The SEC (2000c) unanimously passed a sub-
stantially revised set of rules, for the most part
a?rming prior SEC and AICPA independence
standards (including not prohibiting the value-
added fee, p. 48). Concerning the outsourcing
issue, the new rules adopted a compromise, stating
‘‘an auditors’ independence is impaired by per-
forming more than 40% of the [external] audit
client’s internal audit work related to the internal
accounting controls, ?nancial systems, or ?nancial
statements, unless the audit client has $200 million
or less in assets’’ (SEC, 2000c, p. 43). Operational
audits are permitted if they are properly overseen
by management (SEC, 2000c, p. 89). In addition,
the rule requires disclosure of ‘‘all other fees’’ to
include internal auditing services in proxy state-
ments (SEC, 2000c, p. 54), as well as disclosure
that the client’s audit committee has considered
whether this category of services is ‘‘compatible
with maintaining the principal accountant’s inde-
pendence’’ (SEC, 2000c, p. 55). Still, rendering
40% or less of restricted internal auditing services,
and properly overseen operational audits, in addi-
tion to internal auditing services o?ered in the
international, non-SEC regulated arenas, repre-
sents a huge potential market.
The business press (e.g. PAR, 2000f, p. 1) saw
the new rules as clearly signaling that the Big Five
won the independence war:
In a startling victory for the profession, the
SEC’s independence rule does almost nothing
to stop the increasing ?ow of consulting work
from CPA ?rms to their audit clients. . . .
[T]he ?nal product is a remarkably weak rule
that does little more than stick the SEC’s seal
on existing prohibitions. Limited restrictions
on internal audit outsourcing and disclosure
requirements for IT [information technology]
work were the only new twists approved by
the SEC. Neither provision stands to sig-
ni?cantly cut into the Big Five in revenue
streams (see also PAR, 2000g, 2000h, 2000i).
The business press also predicted that based
upon $8.2 million of campaign contributions from
the AICPA an Big Five to key, predominantly
Republican politicians (each of the Big Five
ranked in the top 20 of Bush’s contributors; PAR,
2001), which excludes contributions from indivi-
dual partners, that there would arise a turnover of
key SEC personnel:
The battle between Levitt’s SEC and ‘‘the
accounting establishment’’ runs parallel to
the electoral battle between Vice President
Gore and Governor W. Bush [who received
over three times the contributions from the
Big Five as Gore, PAR, 2000g] since a Bush
victory would mean an end to Levitt’s reign.
Champaign parties would prevail at 1211
Avenue of the Americas, where the AICPA
resides, and each of the Big Five headquarters
as well (Mason, 2000, p. 45)
Immediately following Bush’s victory, Arthur
Levitt did indeed announce his resignation (WSJ,
2000) as did Lynn Turner the following July (Dow
Jones News Service, 2001). Also during this per-
iod, the Independence Standards Board
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 347
announced its closing with the issuance of its con-
ceptual framework (www.cpaindependence.org/
generalinformation), despite outgoing SEC chief
accountant Turner’s observation it ‘‘does not pro-
vide the type of de?nitive guidance or transparency
that enhances investor con?dence . . . Resulting in a
fox guarding a henhouse. . . . because accounting
?rms become the sole and ?nal arbiter of whether
the accounting ?rm’s independence has been
impaired’’ (ISB, 2001).
Washington lawyer Harvey Pitt subsequently
replaced Arthur Levitt as SEC Chair: ‘‘Pitt, who
was nominated by President George W. Bush is
not expected to be sympathetic toward the indivi-
dual as was his predecessor. As a lawyer who
represented investment bankers during his career,
Pitt is widely regarded as a Wall Street advocate’’
(Industry Standard, 2001). This appointment was
praised by AICPA president Melancan as pre-
senting an opportunity to ‘‘create an open and
progressive dialogue with the Commission’’
(Klein, 2001, p. 1). Indeed, Pitt represented each
of the Big Five concerning the regulation of the
scope of services and ?rm structures, as well as the
AICPA in establishing the Independence Stan-
dards Board (Klein, 2001, p. 37). Speaking before
the AICPA, Pitt announced his intention to have
the SEC form a ‘‘partnership’’ with the profession:
In the past, the accounting profession was not
always willing to speak to the SEC and the SEC
was not always willing to speak to the profession.
I’m here to say that those days are over (Carlino,
2001, p. 1). In turn, Pitt named Robert Herdman
as SEC Chief Accountant, formerly Vice Chair for
Ernst & Young, to start this dialogue and form
this partnership.
Despite the apparent victory by the Big Five in
preserving their ability to perform outsourced
internal audit services for external audit clients in
the late summer of 2001, things quickly unraveled
with the collapse of Enron and questions as to the
e?cacy of its external auditors—Arthur Andersen.
Although detailed descriptions of the event sur-
rounding Enron are beyond the scope of the cur-
rent paper, questions arose as to Andersen’s
independence in view of the $27 million paid to the
?rm by Enron for non-external audit services, con-
trasted with the $25 million paid for its ?nancial
audit. In particular, attention was focused on
Andersen’s performance of the outsourced inter-
nal audit services for Enron, with challenges that
the ?rm was ‘‘auditing its own work’’ by rendering
such ‘‘double duty’’ services which could in turn
‘‘expose Andersen to greater liability for damages
in shareholder lawsuits (WSJ, 2001a, A4). More-
over, as revealed in court documents, Enron was
seen as a key building block for developing
Andersen’s internal audit service during the 1990s:
The cozy relationship between Enron Corp.
and its former auditor Arthur Andersen LLP
developed more than a decade ago as Ander-
sen came to view the energy company as a key
building block in its e?orts to expand a nas-
cent business of providing internal auditing
services along with its traditional external-
auditing function.
The Enron outsourcing business was a big
prize. Andersen’s original proposal included a
?ve-year guaranteed contract, $18 million in
net fees for Andersen and ‘‘value-building
opportunities’’ of as many as 44,400 guaran-
teed consulting hours, as well as potential
savings for Enron of $12 million over ?ve
years.
Once it won the contract, rather than physi-
cally separate internal and external auditors
working at Enron to prevent con?icts of
interest, Andersen encouraged a ‘‘culturiza-
tion’’ of the work teams, bringing the audi-
tors together on the same ?oor at Enron
(WSJ, 2002a, p. A4).
Subsequent to the press coverage accorded the
internal audit and fearing direct regulation, four
of the Big Five (the ?fth later capitulated)
announced they would no longer provide such
services to external audit clients:
Four of the ?ve biggest accounting ?rms
(Andersen, PWC, E&Y, and KPMG) said
yesterday that they would reject the industry
practices that have prompted extensive criti-
cism of Arthur Andersen, which audited
348 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
?nancial statements of the Enron
Corporation. . .
The scramble by most of the big ?rms to bol-
ster their image shows just how worried
accountants are about the prospect of new
regulations or legislation. By acting now, the
?rms’ executives’ hope to preempt such
moves and preserve as much business as pos-
sible (New York Times, 2002, p. A1).
This fear of regulation was not unfounded, as
evidenced by the Auditor Independence Act of
2002, SB 1896, introduced by Senator Boxer on 25
January 2002. This bill, modeled after former SEC
Chairman Levitt’s original June 2000 proposal,
would bar CPA ?rms from rendering non-external
audit services that would impair independence
(PAR, 2002). Meanwhile, in the House of Repre-
sentatives, a bill is being developed by its Finan-
cial Services Committee and supported by the
SEC that would bar internal audit services, estab-
lish a predominantly independent Public Reg-
ulatory Board that would set and enforce auditing
standards, and increase the SEC’s budget by 45%
to improve the oversight function (Rankin, 2002;
WSJ, 2002b). In response to the proposed Public
Regulatory Board, the existing, AICPA-sponsored
Public Oversight Board announced that it was
disbanding (Carlino, 2002).
Following a well-?nanced AICPA campaign to
support the Interdisciplinary Global/XYZ creden-
tial/IISBP Association, the proposal came up for a
vote by the AICPA membership on 28 December
2001 (AICPA, 2001). The proposal was voted
down with, with 62.7% of the members voting
against, and 37.3% of the members voting in favor
out of 134,000 members participating, with
approval by two-thirds majority being required
for passage (AICPA, 2002a, 2002b). Primary rea-
sons given for the defeat were that the new cre-
dential would ‘‘water down’’ the CPA credential
and that the larger ?rms were already providing
related services globally thus obviating the need
for a new credential (AICPA, 2002a). Thus, the
march of the accounting profession to follow the
information highway across the information
bridge to the new information age and become
global knowledge experts o?ering higher platform,
more powerful services higher up in the value chain
has become, temporarily perhaps, problematic.
5. Concluding remarks
The purpose of this analysis was to address our
central research question and thereby gain an
understanding of the dramaturgy of exchange
relations among the AICPA, international public
accounting ?rms, the IIA and the SEC concerning
the jurisdictional dispute over which component
of the accounting profession should perform
internal audit services. Rather than being a pro-
cess of institutionalization or de-institutionali-
zation (e.g. DiMaggio & Powell, 1983, 1991;
Meyer & Rowan, 1977; Scott, 1987), what we
found was a process of re-institutionalization
wherein the Big Five public accounting ?rms
actively sought to reconstitute their professional
?eld or jurisdictional domain so that they could
perform the internal audit services for their exter-
nal audit clients (Abbott, 1988; Reed, 1996). This
process of re-institutionalization proved to be rife
with con?ict and profoundly political (DiMaggio,
1988).
The dramaturgy of exchange relations of this
reconstitution proceeded by means of the Big Five
deploying a rhetorical velvet glove over an iron
hand of ?nancial force with unrelenting resolve.
The rhetoric was one fashioned around ‘‘knowl-
edge-speak,’’ and deployed such societally-prized,
though highly abstract, even mythical (Alvesson,
1993) terms as ‘‘market forces’’, ‘‘globalization’’,
‘‘world class’’, ‘‘client-driven’’, ‘‘core compe-
tencies’’, ‘‘value-added’’, ‘‘value chains’’, knowl-
edge professional’’ and ‘‘higher-order platforms of
service’’. At ?rst, the IIA resisted this rhetoric
using its own dramaturgy of ‘‘unique, local
knowledge’’, ‘‘con?dentiality arising from being
employees’’, and the charges that the ‘‘indepen-
dence’’, and hence value of external auditors
would be impaired if they were to perform internal
audits. Thus, the dramaturgy of exchange rela-
tions between external and internal auditors were:
global versus local expertise (Abbott, 1988; Meyer,
in preparation; Reed, 1996); and public versus
M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355 349
private information (Matusik & Hill, 1998). The
SEC likewise spoke to the issue of external audi-
tors ‘‘losing their souls’’ if they transgressed
beyond the ‘‘monopoly’’ granted them to perform
‘‘nontraditional services’’.
Our results point to the ability of a prominent,
resolute component of a profession being able to
temporarily overcome the coercive force of gov-
ernment (DiMaggio & Powell, 1983), in part by
co-opting its professional adversary, the IIA, in
the jurisdictional dispute. Reminded by the Big
Five that they comprise ?ve of the ten major
members of the IIA and provided a very sig-
ni?cant portion of the IIA’s ?nancial support, the
rhetoric of resistance quickly became infected by
the rhetoric of ‘‘knowledge speak’’, as the coercive
force of the Big Five engendered mimetic iso-
morphism on the part of the IIA (DiMaggio &
Powell, 1983). The IIA, too, bespoke a concern
with internal audit services being ‘‘world class’’,
being subject the discipline of ‘‘market forces’’,
‘‘adding value to the client’’, being intimately
linked to the ‘‘client’s value chain’’, all the while
‘‘co-opting organizational knowledge’’, and being
re-de?ned as a ‘‘consulting activity’’, wherein
CPA’s are really ‘‘a?liates’’ of the internal audit-
ing profession rather than adversaries. But then,
faced with an IIA membership petition encoura-
ging membership to not re-elect the board mem-
bers, the IIA leadership once more reversed itself
to cautiously oppose outsourcing in SEC hearings.
Meanwhile, from the SEC’s perspective, given
an expanding set of issues to be addressed with a
dwindling resource base and Congressional philo-
sophical quandaries as to regulation in a know-
ledge era, as well as campaign contributions to
strategically important members of Congress by
the profession, external auditors went from a sta-
tus of potentially ‘‘losing their souls’’ to once more
become ‘‘the noblest of professions’’ guarding the
‘‘sanctity and purity of numbers’’ in the ‘‘emerging
information age’’. The rhetoric of confrontation
became replaced by rhetoric of appeasement
(Dacin, 1997; Oliver, 1991, 1997) as the jurisdic-
tional boundaries became redrawn to hopefully
become once more taken for granted. But then,
external events in the form of Enron’s bankruptcy
compelled reconsideration of barring internal
audit services and increasing the intensity with
which the SEC monitored the profession (New
York Times, 2002).
We also found the marketization or ‘‘moneti-
zation’’ (Levitt, 2000a) of the two codes of ethics
to be complicit in the transformation of profes-
sional endeavor (Abbott, 1988). The AICPA’s
Code of Ethics proved to be elastic enough to
merely need an interpretation to temporarily at
least grant CPAs the jurisdiction of performing
internal audit services for external audit clients,
subject to such provisos that the management of
such services would remain within the client; such
provisos, however, may also prove elastic as the
CPA as ‘‘knowledge professional’’ ascends the
‘‘value chain’’ to render new ‘‘platforms of ser-
vices’’ where they ‘‘implement and manage audit
control systems’’, and marketing brochures pro-
mise to ‘‘assist management in planning and
executing the internal audit process’’. Meanwhile,
the IIA’s code proved to be less elastic in that a
mere interpretation would be insu?cient, but still
malleable in that an exposure draft would, for
example, drop the concept of independence as not
applicable to human internal auditors. Thus,
independence appeared to have become at least
partially obsolete in legitimating the profession as
is traditionally held at least until the Enron deba-
cle when an apparent lack of independence caused
a major diminishment of the profession’s cred-
ibility. Instead, consistent with Abbott’s (1983)
position that crafts attain ‘‘professional heroism’’
not so much by having codes of ethics, but by
‘‘confronting the charismatic disorder of clients’’,
we found that ‘‘independence’’ may be ultimately
replaced by the concept-of ‘‘value-added’’, deemed
more relevant for the new ‘‘information age’’ by
both external and internal auditors.
Our results vibrantly corroborate the theorizing
found in the sociology of professions area
(Abbott, 1988; Freidson, 1994; Reed, 1996), that
the transformation of a jurisdiction should be
accompanied by not only con?ict, but by modi?-
cation of both codes of ethics, per above, and the
profession’s abstract system of knowledge. Indeed,
we found that the profession of knowledge work
was highly abstract and reliant on a series of
societally prized, though vaporous, even mythical
350 M.A. Covaleski et al. / Accounting, Organizations and Society 28 (2003) 323–355
(Alvesson, 1993) terms that have become institu-
tionalized in their own right as demonstrating
organizational/professional progressivism. Lack-
ing in the discussion of ‘‘value chains’’, ad nau-
seam, is substance. But that is the point. If the new
‘‘knowledge work’’ can be readily codi?ed and
communicated to the layperson, it is destined to
become quickly commodi?ed and ergo not the
work of professionals (AICPA, 1999b). But if it is
so arcane and is so suggestive of an endemic
‘‘charismatic disorder’’ (Abbott, 1983) and a low
‘‘technicality/ indeterminacy ratio’’ (Larson, 1990)
knowledge threshold, then surely a professional
must be engaged to assist the client survive in this
new era of global relations and rapidly changing
conditions. Thus, the knowledge worker was pro-
posed as having a higher status than the organi-
zation-based professional (Reed, 1996).
Implicit in the institutionalization of ‘‘know-
ledge-speak’’ and ‘‘outsourcing’’ is the complicity
of academic discourse. Here, the rhetoric used in
establishing the jurisdictional claims of Big Five
?rms as to internal auditing appeared to almost
draw on as script both the sociology of professions
(e.g. Abbott, 1988; Reed, 1996) and outsourcing
(e.g. Davis-Blake & Uzzi, 1993; Matusik & Hill,
1998) literatures in voicing, for example, their
attributes of being global knowledge professionals
having unparalleled access to public and global,
albeit arcane information. Likewise, the IIA
appeared to draw upon as script this same litera-
ture in voicing its unique local knowledge and
command of private information. Combined, both
professional groups appeared to compromise that
external auditors could, in essence, perform inter-
nal audit services of ‘‘component systems’’, but
that ‘‘architectural-level’’ work should remain
within the organization because of the strategic
sensitivity of such proprietary information
(Matusik & Hill, 1998)—a specious conclusion
given the pervasive access granted CPAs if they
were to perform internal let alone external audit
services.
At a more general level, our results suggest an
intersecting web of institutionalization vectors, as
the Big Five and AICPA sought to re-institu-
tionalize a new set of societal expectations as to
their proper jurisdictional domain. These e?orts
were interpenetrated with the IIA’s e?orts to re-
institutionalize its jurisdiction to transition from
an organization-based profession to knowledge
workers that include not only a hopefully
acquiescent group of internal auditors, but also
external audit ?rms who will see ?t to pledge alle-
giance to its professional standards of practice. In
turn, these battles against professional ?rms and
associations were impacted by the SEC’s e?orts to
remain legitimate with a profession-?nanced Con-
gress glacially groping to work out the role of
regulation in the knowledge era and providing the
SEC with limited resources until it worked out a
solution. Finally, this web of institutionalization
was interpenetrated with the e?orts by the client
companies themselves who employ external and
internal auditors, and register with the SEC, to
demonstrate their own commitment to entering
the knowledge era to an ever expanding set of
organizational constituents through such e?orts as
outsourcing professional services to highly XYZ-
credentialed, global experts; that is until these
experts became marked by a tarnished image in
rendering these double-duty services.
Acknowledgements
We wish to thank John Meyer, John Hepp, and
an anonymous reviewer for their useful suggestions.
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