The Failure of Professional Networks to Detect and Expose Corporate Corruption

Friday, 3 July 2015: 8:30 AM-10:00 AM
TW1.1.02 (Tower One)
Claudia Gabbioneta, Newcastle University, Newcastle upon Tyne, United Kingdom
The last two decades have witnessed some of the most dramatic cases of corporate fraud in history. Cases such as Enron, WorldCom and Parmalat, just to name a few, have left millions of people unemployed, blown away their life savings, and destroyed their confidence in financial markets. Hundreds of firms - which supplied goods and services to the firms involved - have gone bankrupt and entire communities have been forced to re-allocate. In the United States alone, the estimated cost of corporate fraud ranges from $200 billion to $600 billion per year (Schnatterly, 2003).

One of the most striking features of these cases of fraud was the failure of professional organizations – Coffee’s (2006) gatekeepers – to perceive and expose corporate corruption despite the magnitude of its scale and the lengthy duration of its occurrence. The ability (or willingness) of the professional network of institutional intermediaries, whose collective function is to ensure the probity of financial markets, was seriously deficient (Sikka, 2009). Moreover, the ethical probity of individuals within particular professional firms - e.g., Arthur Andersen in the Enron case and Grant Thornton in the Parmalat case - was inadequate (Grey, 2003; Chabrak & Daidj, 2007).

Not surprisingly, research on the role of professionals in cases of corporate corruption has gained momentum in academic research. Moving away from the theorization of professional firms as nurturing and advancing the practice of professional values (Sorenson & Sorenson, 1974), this research has acknowledged the role of professional firms in hiding - and, sometime, even enabling - corporate corruption. Most of the explanations offered for professional involvement in cases of corporate corruption, however, tend to focus on a single professional (or, on a single professional firm) at a time. Most of the cases of corporate corruption occurred in the last years, however, saw the participation – albeit to different extents – of a multiplicity of professionals and professional firms, each of which contributed to their concealment. These cases represent egregious examples of field-level regulatory failure, in which a network of professionals failed to recognize and expose corporate corruption.

In this paper, we build upon the idea of institutional ascription (Gabbioneta et al., 2013) to propose the mechanisms and circumstances that increase the likelihood of field-level regulatory failure. Our interest is not in the motivation and behavior of individual actors. Instead, it is the professional network at the field level. We suggest, at the outset, that institutional ascription occurs when actors assume that other professionals are behaving ‘professionally’. Ascription matters because it mitigates the perceived need for more probing critical inquiry. Thus, if any link in a professional network is weak, the entire network is at risk of ‘contagion’ and thus vulnerable to collective blindness. Then, we investigate the conditions and mechanisms that facilitate – or impede – institutional ascription within professional networks and that may, therefore, be conducive to corporate corruption.