IBIMA Publishing Journal of Accounting and Auditing: Research & Practice http://www.ibimapublishing.com/journals/JAARP/jaarp.html Vol. 2 !2 "2 !

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Public Accounting in the New Millenium: On the Edge of Chaos

John R. Kuhn
College of Business, University of South Florida, Tampa, FL, United States of America __________________________________________________________________________________________________________________ Abstract Change is a constant *eature o* organi+ational e,istence. -uccess*ully managing change re.uires an understanding o* the environment in #hich an organi+ation operates. The comple, and interconnected #orld in #hich public accounting operates presents many challenges to the traditional neo'classical vie# o* research and management. A#areness o* the constantly'changing" net#or$ed environment and the dynamics o* agent interactions o**ers distinct competitive advantages to the astute. The current paper strives to convey the appropriateness and necessity *or recogni+ing the public accounting pro*ession as a comple+ adapti,e s-stem /CA-0 that operates in an ever'changing" unpredictable environment impacted by local and global politico'economic entities" pro*essional organi+ations" clientele" internal organi+ational members" higher education institutions" technological advances" and others. 1ra#ing on comple,ity theory" the paper develops and presents testable propositions to e,amine the public accounting pro*ession as a CA- #ith the e,press purpose o* stimulating more holistic research e**orts in accounting. Keywords: Comple, adaptive system2 Comple,ity theory2 3ublic accounting pro*ession2 4et#or$s. 555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555555 Introduction The old adage 6nothing is certain but death and ta,es7 could reasonably be modi*ied to include change. Change is a constant *eature o* organi+ational e,istence2 those that can adapt survive" those that cannot #ither a#ay. -uccess*ully managing change *irst re.uires an understanding o* the environment or system in #hich an organi+ation operates. This paper argues the necessity *or and appropriateness o* recogni+ing the public accounting pro*ession as a comple+ adapti,e s-stem /CA-0 that operates in an ever' changing" unpredictable environment impacted by local and global politico' economic entities" pro*essional organi+ations" clientele" internal organi+ational members" higher education institutions" technological advances" and others. 8ie#ing public accounting in such light #ill hope*ully provide insight into possible methods to success*ully research the pro*ession in an ever'*lattening" continuously evolving #orld *ull o* competing interests and players #ith unpredictable events lur$ing around every corner. 9ainstream accounting research and literature operates under neo'classical economic assumptions utili+ing theories o* rational" utility'ma,imi+ing behavior such as that ingrained in the e**icient mar$ets hypothesis /&9:0 that states mar$et prices *ully re*lect all publicly available in*ormation /;ama 1<=00. The general reductionist approach o* this research attempts to reduce the comple, do#n to the simple by creating regression models o* phenomena to analy+e individual components. These theories *ail to incorporate or ac$no#ledge di**erences in individual behavior and the impact o* that

Copyright 2012 John R. Kuhn. This is an open access article distributed under the Creative Commons Attribution icense unported !.0" #hich permits unrestricted use" distribution" and reproduction in any medium" provided that original #or$ is properly cited. Contact author% John R. Kuhn &'mail% (r$uhn)us*.edu

Journal o* Accounting and Auditing% Research > 3ractice 2

behavior on capital mar$ets" (udgment and decision'ma$ing" as #ell as other areas o* accounting and" more broadly" *ail to account *or the interconnectedness o* the system the phenomenon *unctions in. 3ractitioners" regulators" and certain poc$ets o* academics appear disenchanted #ith &9: due to observed irrational mar$et behavior evidenced by under'reaction o* prices to large earnings changes" odd ratios o* prices to *undamentals" and other statistics derived *rom *undamental accounting analyses /?loom*ield 20020. Tim ?ell" a managing partner #ith K39@" .uestions the reductionist research approach% 6An our time" the con*idence" maturity and promise o* a science should be measured not by its po#er to reduce the comple, to the simple B but instead by its #illingness to study comple,ity #ith advanced methods under descriptions that respect the reality o* #hat is being studied.7 /?ell et al." 1<<=" p. 10. 9al$iel /200!0 concludes stoc$ mar$ets are more e**icient than some recent academic studies indicate but are *ar less predictable as #ell #hile Chambers /1<<!0 challenges the neo'classical assumption" in general" that earnings releases dominate stoc$ price changes% 6There are scores o* events" or bits o* in*ormation about events" that may in*luence the price o* a stoc$ at any point o* time B CinvestorD response is the outcome o* a comple, evaluative process" o* states and stimuli and needs and pre*erences" at a stated time.7 To date" ho#ever" no alternative theory o**ered to e,plain mar$et ine**iciency has been #idely embraced and there*ore" studies sho#ing mispricing are vie#ed as statistical *lu$es resulting *rom *ishing e,peditions /;ama" 1<<E2 Kothari" 20012 ?loom*ield" 20020. Reality may be more comple, than the neo'classical approach permits. 3erhaps this narro#ness accounts *or the inability to *ully e,plain long'standing phenomena such as the

post'announcement earnings dri*t and the scarcity o* alternate theories *acilitates continued acceptance o* imper*ect theories. :istorically" many non'believers o* the neo' classical approach have been intimidated by the 6scienti*ic7 blu** and bluster o* academic research" especially #hen the research includes highly abstract mathematical notations /9ouc$ 20000. The -anta ;e Anstitute /-;A0" a private research organi+ation *ounded in 1<EF" developed an alternative vie# o* reality /including economic and social conte,ts0 grounded in the natural sciences that *ocuses on an evolutionary model o* continual change" instability" and adaptation appropriately termed CA-. The group o* scientists that comprise -;A hail *rom many disciplines and bac$grounds including physics" biology" mathematics" economics" psychology" decision sciences" etc. Grgani+ational theorists have embraced the concepts o* CA- *or nearly 20 years as a viable lens to vie# organi+ational change" leadership" strategic management" and other organi+ational behavior *rom a holisticHconte,tual perspective2 early e,amples include Tushman et al. /1<EI0" Cart#right /1<<10" -tacey /1<<20" Jheatley /1<<20" Kimmerman /1<<!0" evy /1<<F0" > 9int+berg /1<<F0. CA- theory vie#s organi+ations as open" non'linear dynamical systems that adapt and evolve in the process o* interacting #ith their environments #here outcomes o* their actions are unpredictable" but not random. The $ey to success*ully managing a CA- is to $eep the organi+ation operating Lon the edge o* chaosM% too much stability results in stagnation and ultimate organi+ational death #hile too much chaos can cause an organi+ation to *lounder under the #eight o* e,cessive change. Recently" other business disciplines started to espouse the virtues o* comple,ity science and underta$e research activities *rom a CAperspective. ;or instance" Jacucci et al. /200I0 establishes the need *or the use o* comple,ity theory in a special issue o*

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%nformation .echnolog- & People dedicated to comple,ity theory and in*ormation systems research. An e,haustive literature revie# leading to this study revealed scant CA-' related research in accounting" regardless o* *ield specialty. A *e# management accounting articles /GM?rien et al." 1<<I2 Ahrens et al." 200F0 and a study o* changes in accounting /?urns" 20000 touch on aspects o* comple,ity but only in passing. 9ouc$ /1<<E2 20000 truly introduces CA- to the accounting literature by e,ploring -;A studies and their implications *or capital investment and budgeting theories and overall capital investment strategy that directly challenges neo'classical assumptions *or capital mar$ets. -utton et al. /200I0 presents comple,ity theory as an e,planation *or the impact o* enterprise resource planning /&R30 systems on organi+ations contending that &R3 systems represent the antithesis o* the model *or a best per*orming organi+ation by sti*ling innovation through a highly ordered structure that struggles to respond to competitive pressures. Continuing the ground#or$ laid by 9ouc$ /1<<E2 20000 and -utton et al. /200I0 this paper proposes CA- as a necessary and viable theoretical approach to study accounting in the ne# millennium. The paper e,amines the public accounting pro*ession in the conte,t o* the CA- *rame#or$ constructed by Choi et al. /20010 and continues as *ollo#s% *irst" an overvie# o* the CA- theoretical *oundation and the Choi et al. /20010 *rame#or$2 second" application o* CA- concepts and principles to the public accounting pro*ession and development o* testable propositions2 and lastly" discussion o* implications theory building and research. An O er iew #ystems of Com!le" Ada!ti e

the area" best depicts the general principles underlying CA-% 6A Comple, Adaptive -ystem /CA-0 is a dynamic net#or$ o* many agents /#hich may represent cells" species" individuals" *irms" nations0 acting in parallel" constantly acting and reacting to #hat the other agents are doing. The control o* a CA- tends to be highly dispersed and decentrali+ed. A* there is to be any coherent behavior in the system" it has to arise *rom competition and cooperation among the agents themselves. The overall behavior o* the system is the result o* a huge number o* decisions made every moment by many individual agents7 /Jaldrop" 1<<20. Although seemingly random" the chaotic nature o* the dynamic interactions among CA- agents actually contains a hidden order in #hich patterns o* behavior occur in irregular but similar *orms and can be modeled to simpli*y the comple,2 CAe,amples include economies" social systems" ecologies" cultures" politics" technologies" tra**ic" #eather" etc. /1ooley" 1<<=0. To e,amine a CA-" Choi et al. /20010 develop a comprehensive *rame#or$ comprised o* three interacting and intert#ined *oci% 10 internal mechanisms" 20 an environment" and !0 co'evolution. The remainder o* this section revie#s these *oundational concepts and principles in more depth. Internal Mechanisms Agents and Schema Agents represent the building bloc$s o* a CAand are semi'autonomous units #hich see$ to ma,imi+e some measure o* goodness" or *itness" by evolving over time #here *itness corresponds to the general #ell'being o* the system /1ooley" 1<<=0. @iddens /1<EF0 de*ines agency as the ability to intervene meaning*ully in the course o* events. There*ore" by de*inition" a system must include agents that can impact the state o* the system by their actions in order to be considered a CA-. &,amples o* agents in a social CA- include individuals inside *irms"

The theory o* CA- arose *rom the comple,ity theories spa#ned in the natural sciences to develop mathematical models o* systems in nature. 9any variations o* the de*inition and $ey premises o* CA- e,ist. A .uote *rom John :. :olland" one o* the original researchers in

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*irms comprising a pro*ession" or even a pro*ession operating in a global mar$etplace. The latter t#o illustrate a net#or$ o* multiple CA-s *unctioning in concert. 1e*ining agents and CA-s thus depends entirely upon the perspective o* the onloo$er. CA- agents interact #ith other agents" both #ithin their o#n CA- as #ell as #ith the environment #hich may include other CA-s and their respective agents" commonly re*erred to as meta'agents /?enbya > 9cKelvey" 200I0. The e,change o* in*ormation and resources bet#een agents *acilitate the generation o* schema that -chein /1<<=0 de*ines as the norms" values" belie*s" and assumptions shared among the collective that dictate the manner in #hich agents interpret in*ormation and per*orm actions. Grgani+ational leaders o*ten declare *ormali+ed mission statements" create codes o* conduct" ethic statements" etc. that represent core values and guide the behavior o* agents" in particular" the interaction bet#een agents and other sta$eholders /e.g. employees" customers" vendors" and other related parties0. Jithin the bounds o* these 6rules o* behavior7 and shared values" agents strive to increase the *itness o* their system" both locally and globally /Choi et al." 20010. The actions o* agents can result in non'linear impacts to the local system and net#or$ o* systems depending upon the interconnectedness o* the system/s02 a more connected system #ill generally e,perience larger ripple e**ects throughout as agents interact in a dynamic *ashion. Comple, system behavior" there*ore" can occur #hen multiple non'linear processes interact /Choi et al." 20010. Self-Organization and Emergence

200=0. The sel*'organi+ation process occurs *rom the bottom up through the interactions and inter'relationships o* agents creating ne# structures or behaviors unintentionally. These emergent phenomena seem to have a li*e o* their o#n #ith their o#n rules" la#s" and possibilities /@oldstein" 1<<F2 Kimmerman et al." 1<<E2 Choi et al." 20010. Choi et al. /20010 present the phenomenon o* *loc$ing birds as an illustration *rom nature o* the sel*'organi+ation process. The *loc$ing pattern /i.e. the ne# structure0 neither occurs because o* a predetermined plan or unilateral control by the lead bird. The pattern emerges *rom the actions o* individual birds acting upon simple rules based on local in*ormation. &ach bird determines the speed and direction by *lying to#ard the center o* the *loc$" mimic$ing the velocity o* the neighboring birds" and staying a sa*e distance a#ay. ;rom an organi+ational perspective" individual managers cannot predict or plan long'term outcomes /Jil$inson > Noung" 1<<E2 ;rederic$" 1<<E2 Kelly" 1<<<2 9ason" 200=0" but can adapt the simple rules to manage movement o* the aggregate /i.e. the CA-0 bet#een stability and chaos / e#in" 1<<!2 9ason" 200=0. The a*orementioned e,amples o* mission statements" codes o* conduct" and ethic statements embody the underlying principles o* simple rules that guide agent behavior" rather than directly controlling the eventual outcome o* dynamic agent interaction. &,amples o* sel*' organi+ation and emergence in the business setting include development o* ne# strategies /Conner" 1<<E0" development o* mar$eting tactics /;orrest > 9i+ers$i" 1<<I0" sel*'directed teams /@ault > Jaccaci" 1<<I0" and gro#th o* strategic alliances /Jil$inson > Noung" 1<<E0. Connectivity

-el*'organi+ation re*ers to the emergence o* a pattern o* order *rom a simple set o* rules in an interconnected net#or$ #ithout the intervention o* a central controller /Anderson" 1<<<2 uoma" 200I2 9ason"

A $ey premise o* CA- revolves around the concept o* connectivity% the lin$ages o* agents inside the system #ith each other and to neighboring systems. 1i**erent elements

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/agents" meta'agents" other CA-s0 continuously interact producing intert#ined reactions nearly impossible to anticipate or trace a*ter#ards / uoma" 200I0. As the number o* agents increase" the volume and layers o* relationships" both direct and indirect" gro# e,ponentially to such a comple, state that di**erentiating bet#een cause and e**ect becomes too onerous. The theory o* reductionism asserts that comple, data and phenomena can be e,plained by a process o* reducing to simpler terms and analy+ing the components independently to gain insight into the #hole. ?ettis > 3rahalad /1<<O0 and 1ent /1<<<0 argue the reductionist approach *ails to e**ectively provide $no#ledge o* the #hole #hen studying organi+ations due to their comple, nature. 8ie#ing organi+ations as a CA- re.uires a holistic *ocus on the system in aggregate" not individual agents or poc$ets o* agents. The per*ormance o* the #hole cannot be enhanced by optimi+ing the per*ormance o* each individual agent nor should the problem #ith one agent be e,amined in isolation *rom the system / uoma" 200I0. A #ider conte,t must al#ays be at the *ore*ront promoting e,amination o* the unit in the broader perspective o* agent relationships" dependencies" and do#nstream e**ects. Analysis o* these interconnected relationships in a CA- o**ers a distinct opportunity to ma$e the most o* the agent diversity inherent in the system *acilitating richer interpretations o* the environment and *ostering creative solutions. imensionality 1ooley > 8an de 8en /1<<<0 de*ine the dimensionality o* a CA- as the degrees o* *reedom that individual agents #ithin the system have to enact behavior in a some#hat autonomous *ashion. Controls such as rules and regulations" budgets" limits o* authority" etc. constrain agent behavior and thus reduce dimensionality and change the comple,ity o* the systemMs aggregate behavior /-tacey" 1<<O2 Thietart > ;orgues" 1<<O2 @lass" 1<<I2 Choi et al." 20010. The CA- becomes

predictable" stable" and less *le,ible. CAresearchers re*er to these constraints as negative *eedbac$ in the sense the system #or$s to maintain some stable condition #here deviations lead to corrective action. Jhen agents are allo#ed more autonomy to ma$e decisions locally" outcomes then have the ability to emerge and cascade throughout the system possibly leading to the generation o* more creative solutions and competitive advantage. This emergence re*lects the concept o* positive *eedbac$ #here the system #or$s to rein*orce the phenomena increasing the overall e**ect. As an e,ample" t#o scientists #or$ing together potentially can advance more rapidly than i* in isolation due to the opportunity to leverage the uni.ue perspectives" bac$ground" and $no#ledge each individual o**ers. Ancreased dimensionality thrives on positive *eedbac$. Environment The environment in relation to a CAdepends entirely upon the scale o* analysis chosen. ;or a CA- de*ined as the supply chain *unction o* a manu*acturing company" internal agents may consist o* the employees in the production planning" inventory management" and #arehouse departments that interact #ith other potential internal CA-s such as the purchasing and accounting departments and even e,ecutive management. &,ternally" meta'agents may include customers" suppliers" and transportation vendors. An e,panded scale might consider the manu*acturing company" in aggregate" as the CA- #hich interacts #ith numerous other meta'agents in addition to the ones that inter*ace #ith the supply *unction such as regulatory agencies" corporate shareholders" ta,ing authorities" etc. Regardless o* scale chosen" Choi et al. /20010 characteri+e environments as dynamic and rugged.

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ynamism The 9erriam'Jebster Gnline 1ictionary de*ines dynamism as 6a theory that all phenomena can be e,plained as mani*estations o* *orce7 /9erriam'Jebster" 200=0. CA-s e,perience many sources o* *orce" internally and e,ternally. Jhile a CAattempts to emerge through agent interaction and proactively in*luence other neighboring CA-s" the e,ternal environment simultaneously e,erts pressure on the CAcausing a reaction that" in turn" a**ects the environment. Comple,ity theory posits that a CA- both reacts to and creates its environment through e,periences o* positive and negative *eedbac$ /Choi et al." 20010. The constantly changing relationships among agents" bet#een CA-s" and #ith the environment result in changes to the schema organi+ations incorporate into their day'to' day interpretations o* reality and behavior. The emergence o* the Anternet o**ers an e,cellent e,ample o* a dynamic change in the environment. The Anternet delivered broad' based changes to the organi+ation o* economic activity so pro*ound to #arrant the title o* a revolution2 the declining cost o* in*ormation led to increased business tra**ic" greater in*ormation access" personal autonomy in local decisions" and ultimately" greater dispersion o* economic activity /;eldman" 20020. A number o* simultaneous developments resulted in positive *eedbac$ that rein*orced and strengthened the Anternet movement% e,panding personal computer use" technological advances in hard#are and so*t#are" increased a#areness by users" improvements in telecommunications" *alling technology prices" etc. / uoma" 200I0. As the Anternet *ever began to ta$e hold" ne# competitors emerged *or traditional bric$ and mortar companies. ?arnes and 4oble operates the largest chain o* boo$stores in the P.-. An 1<<=" the company surpassed the Q2 billion revenue mar$ yet encountered a ne# competitive threat in Ama+on.com" a t#o'year old online boo$seller #ith 1<<=

revenues o* Q1FE million" an increase o* EF0R over the previous year" and #hich subse.uently reported 1<<E revenues o* QI10 million. ?arnes and 4oble sa# the #riting on the #all% the Anternet #ould upend the traditional boo$selling business model. An response to the changing environment" ?arnes and 4oble launched an online plat*orm to sell boo$s and eventually developed an in'stoc$ inventory o* over =O0"000 titles ready *or immediate delivery and eight million ne#" out'o*'print" and rare boo$sS both o* #hich the company claimed #ere the largest in the industry /Ans#ers.com" 200=0. The e,periences o* ?arnes and 4oble and many others during the early years o* the Anternet demonstrate the interaction o* numerous CA-s and the broader e**ects o* agent actions in a dynamic environment. !ugged "andsca#e ?y nature" the eventual outcomes o* agent interaction in CA-s are un$no#n and unpredictable. CA- researchers represent the potential states that a CA- can attain in a dynamic environment as a rugged landscape #ith many hills and valleys /Kau**man" 1<<O2 Choi et al." 20010. The highest point in the landscape symboli+es the optimal state o* the system. :o#ever" many system components /agents0 operate in a tightly" coupled manner each contributing to the overall direction o* the system. The optimal state becomes di**icult to locate as many local optima e,ist *or the individual components. ;urther e,asperating the comple,ity o* a CA-" environmental pressures *orce the landscape to change eliciting system members to e,ploit e,isting $no#ledge and e,plore ne# $no#ledge /9arch" 1<<F0 necessary to overcome the uncertainty imposed by the environment and ensure survivability /Choi et al." 20010. Choi et al. /20010 discuss the inter' dependencies o* agents and the overall state o* a CA- in the conte,t o* a supply chain net#or$. The authors e,plain that incorporating modular design in the

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automotive supply chain process reduced the number o* pea$s in the rugged landscape creating a condition more conducive to overall system optimi+ation. As opposed to the manu*acture o* individual parts" the automotive industry reorgani+ed the entire supply chain process to a point #here *irst' tier suppliers produce entire modules or subsystems /e.g. complete engines" steering systems" etc.0 minimi+ing the cost o* coordination across the entire supply net#or$. Co-Evolution Co'evolution directly relates to the concept o* connectivity in that multiple systems andHor sub'systems emerge together because 6there is *eedbac$ among the systems in terms o* competition or co'operation and utili+ation o* the same limited resources7 /@oldstein" in Kimmerman et al." 1<<E" p. 2I!0. -ymbiotic relationships e,ist as di**erent parties /agents and neighboring CA-s0 depend upon and interact #ith each other. The environment imposes changes on its members #ho react thus changing themselves and conse.uently changing the environment. There*ore" co'evolution occurs #hen system members are *orced to adapt continually to the changing conte,t #rought by othersM strategies in order to remain relatively *it /van 8alen" 1<=!2 Kim > Kaplan" 200I0. An a business conte,t" the increasing prevalence o* partnerships and alliances in a traditionally competitive environment indicates a general shi*t o* practice and strategy to#ards co'evolution / uoma" 200I0. 9any organi+ations see$ to e,pand operations into *oreign mar$ets not through ac.uisitions and mergers but through mutual agreements in order to leverage the $no#ledge and resources o* each party. @rant > ?aden';uller /200F0 present a theory o* strategic alliances that *ocuses on alliances as a strategic tool to access $no#ledge resources o* other *irms rather than ac.uire. Alliances contribute to the e**iciency in the application o* $no#ledge by

improving the integration o* $no#ledge into the production o* comple, goods and services and increasing the e**iciency o* $no#ledge utili+ation. The e**iciency advantages o* alliances are enhanced #hen uncertainty e,ists in the environment. $uasi-E%uilibrium and State Change Pnli$e chaos theory that *ocuses on the discovery o* unpredictable behavior" comple,ity science strives to e,plain ho# order emerges *rom sel*'organi+ing agent interaction /Kau**man" 1<<!2 :olland" 1<<O0. Jithin the apparent randomness o* a CA-" order can be unmas$ed to predict broad behavior" not at the individual agent level but in the aggregate. 9ain+er /1<<F0 > 9cKelvey /200F0 re*er to comple,ity as an order' creation science. -ystems under comple,ity science can e,ist or vacillate bet#een any o* three statesS stable" chaotic" and one in bet#een / e#in" 1<<20. 9any comple,ity researchers label the middle state as the 6edge o* chaos7 / e#in" 1<<22 Kau**man" 1<<O0. A CAmaintains this .uasi'e.uilibrium state" balancing bet#een complete order and incomplete disorder /@oldstein" 1<<F0. :ighly ordered systems e,hibit too much rigidity to e**ectively respond to environmental changes #hile highly chaotic systems cannot maintain any semblance o* consistency and eventually collapse *rom e,cessive disruption. The 6poised7 systems that lie in the middle 6may have special relevance to evolution because they seem to have the optimal capacity *or evolving7 /Kau**man" 1<<1" p. E20. These systems adhere to the principle o* ma,imum entropy production #here the system moves to#ards the brin$ o* complete disorder /entropy0 but never .uite *alls over the edge as ne# energy *lo#s into the system *orcing redirection bac$ to a .uasi'e.uilibrium state2 the order lies not at the individual level" but in the aggregate / uoma" 200I0. The uoma /200I0 discussion o* comple,ity and management development asserts

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dise.uilibrium and disorder should not be seen as negative organi+ational attributes. Attempts to entirely eliminate disorder suppress the systemMs ability to sel*'organi+e /-tump*" 1<<O0. uoma /200I0 recommends that management e,ert some control but supports the approach o* allo#ing an organi+ation to e,ploit the innate ability to spontaneously develop behavior that most e**ectively moves the #hole in a given direction. Jeic$ /1<=<0 notes managers tend to get in the #ay o* activities that have their o#n sel*'regulation" *orm" and sel*'correcting tendencies. &on-"inear Changes The level o* sensitive dependence on initial conditions delineates a CA- *rom a stable system /?riggs > 3eat" 1<<<2 3hillips > Kim" 1<<I0. @enerally" small changes in a stable system result in small e**ects #hile large changes produce large e**ects. Changes in a CA- generate unpredictable e**ects2 small changes can gro# e,ponentially #ith each interaction through the system and large changes may languish or disintegrate altogether through agent inattention. @ibson /1<<I0 > Jheatley /1<<I0 advocate management application o* small 6nudges7 to guide an event or process rather than dramatic actions intended to control. As in many instances in business" timing is everything. The right $ind o* nudge at the correct time can lead" through positive *eedbac$" to ma(or change /4ilson" 1<<O0. 9ason /200=0 presents the *irst'mover advantage as an illustration o* non'linear change in a business conte,t. -ensitive dependence on initial conditions and positive *eedbac$ create a 6*ly#heel a**ect7 that rein*orces early success" providing a signi*icant advantage over the long term. A number o* studies discount *irst'mover advantage as a myth /-uare+ > an+olla" 200O2 3*e**er > -utton" 200I0 yet others contend the opposite% 6To gain advantage" *irst movers must capitali+e on the opportunities that come

#ith being a pioneer #hile at the same time manage the threats that arise. The bottom line% ?eing *irst in a mar$et is only an advantage #hen you do something #ith it7 /;in$elstein" 200=" p. !0. The di**ering opinions on the validity o* *irst' mover advantage epitomi+e core concepts o* CA- theory. ;irst'mover advantage occurs as a result o* non'linear relationships and positive *eedbac$ yet the interaction bet#een agents /pioneers" competitors" and the environment0 results in unpredictable outcomes" i.e. #hether or not a pioneer can maintain the advantage through proactive and reactive action. Traditional *orecasting and prediction models ine,orably *ail to ade.uately account *or the dynamic nature o* CA-s due to the e,ponential gro#th o* speci*ication errors as the *uture un*olds /3eitgen et al." 1<<20. &on-!andom 'uture Although the nature o* CA-s prevents e,act prediction o* *uture actions and outcomes" distinct patterns o* behavior e,ist underneath apparent randomness allo#ing e,amination and general predictive ability. -mall changes may lead to drastically di**erent *uture paths2 ho#ever" the same characteristic pattern o* behavior emerges despite the change /Choi et al." 20010. Recent #or$ in *inancial economics highlights patterns o* non'random behavior that result in varied outcomes. ?a$er et al. /20020 attempt to solve the 6dividend pu++le7 by e,amining ho# managers determine dividend policy. Calling upon earlier #or$ on habitual behavior /Jaller" 1<E<2 ;ran$*urter > ane" 1<EF0" the authors conclude that various mar$et imper*ections and *rictions a**ect *irms di**erently2 there*ore" dividend policy di**ers *irm to *irm and models should consider competing *rictions on a *irm'speci*ic basis. Pnderlying this #or$" Jaller /1<E<0 suggests the concept o* habit /nonre*lective behavior0 may be a use*ul tool *or institutional policy analysis and can 6be a *atal blo# to #or$ that

< Journal o* Accounting and Auditing% Research > 3ractice

is based on rational behavior7 /?a$er et al." 20020. :abits re*lect cultural and societal norms and standards that may contradict rational economic behavior. ;urther" ;ran$*urter > ane /1<EF0 assert habitual behavior causes problems *or models attempting to e,plain dividend policy assuming rational behavior and claim socioeconomic conse.uences o* modern corporate evolution best e,plain dividend behavior. This stream o* research" although not e,plicitly stated" e,hibits core CAprinciples. This section presented the elements o* the CA- theoretical *oundation developed by Choi et al. /20010 and provided e,amples *rom academic research" the business environment" and natural systems in order to e,plain the *undamentals underlying comple,ity science and to demonstrate application outside the realm o* accounting. The subse.uent section e,amines the public accounting pro*ession as a CA- and develops testable propositions *or *uture consideration. $iewing Public Accounting as a Com!le" Ada!ti e #ystem ;or the purpose o* this discussion" the term Lpublic accounting pro*essionM relates to *irms that provide accounting and auditing" ta," and consulting services to publicly'held entities #ith an emphasis on auditing. The remainder o* this section e,plores several aspects o* the pro*ession under the Choi et al. /20010 CA- *rame#or$ to establish an alternative #ay o* vie#ing and researching the pro*ession that o**ers a more holistic" richer perspective than the traditional neo' classical approach allo#s. Internal Mechanisms Agents and Schema Agents" by de*inition" represent the core o* a CA- and must possess the ability to in*luence the direction o* the system in order *or the system to be classi*ied as a CA-. At the lo#est

level o* the public accounting CA-" auditors constitute the agents. Auditors employed by a public accounting *irm per*orm *inancial statement attestation" #or$ing in locali+ed audit teams #ith a de*ined hierarchical structure. -ta** auditors #or$ under the direct supervision o* managers that report to an engagement partner #ho simultaneously reports to the local o**ice managing partner /G930 and a .uality assurance audit partner" typically located in a di**erent o**ice *or increased ob(ectivity. The G93 leads and coordinates all activity o* a particular o**ice and is accountable to a regional partner that *unctions under the overall direction o* a national o**ice. The various national o**ices located around the #orld each represent a member *irm o* a global group o* *irms. ;or e,ample" &rnst and Noung @lobal imited /&N@0" a PK private company limited by guarantee" is the principal governance entity o* the global &N organi+ation comprised o* legally separate member *irms that have no liability *or the actions o* each other /&rnst > Noung" 200=a0. As such" the individual &N auditors e,ecuting *ield#or$ embody a corporeal organi+ation comprised o* agents" meta'agents" and interconnected CA-s that collectively *orm the &N@ public accounting *irm. Arguably" accounting can be traced bac$ to the da#n o* intelligence among human beings #here primitive man began the process o* numbering /?ro#n" 1<0O0. Gver time" numeration evolved *rom ancient *orms o* accounting *or transactions to the double' entry boo$$eeping *ormat o* today. Jidely re*erred to as 6the language o* business7 /1avidson et al." 1<E=0 accounting consists o* speciali+ed phrases and terminology that collectively create a common body o* socially'constructed schema to interpret the practice o* accounting. Jithin the pro*ession" individual *irms e,tend the general accounting schema by developing *irm'speci*ic policies and procedures that guide the behavior o* internal agents. &ach o* the ?ig ;our public accounting *irms created and published

Journal o* Accounting and Auditing% Research > 3ractice 10

in*ormation about the core values o* the *irm and related codes o* conduct on their global #ebsite. 1eloitte and Touche established the *ollo#ing set o* *irm'#ide core values% 6The shared values o* 1TT and its member *irms bind the people o* 1TTMs member *irms together and promote trust among partners and pro*essionals B These values (oin together all employees across di**erent cultures" customs and languages and are the *oundation *or collective successes. Care*ully identi*ied through a global consultation process" these values are all'encompassing and embrace the cultures in #hich 1TTMs member *irms operate. This thorough process resulted in universal shared values that *orm a basis *or a consistent approach to service delivery #orld#ide. The shared values are% Antegrity" Gutstanding value to mar$ets and clients" Commitment to each other" -trength *rom cultural diversity7 /1eloitte > Touche" 200=a0. The &rnst and Noung #ebsite includes the *ollo#ing statement about their *irmMs code o* conduct% 6The &rnst and Noung @lobal Code o* Conduct sets out a comprehensive ethical and behavioral *rame#or$ that guides the decisions #e ma$e every day. The @lobal Code re*lects our commitment to delivering Tuality in &verything Je 1o" underscored by the strength o* our 8alues -tatement. The @lobal Code o* Conduct provides a series o* guiding principles grouped into *ive categories that cover the breadth o* our activities. They are% 10 Jor$ing #ith Gne Another 20 Jor$ing #ith Clients and Gthers !0 Acting #ith 3ro*essional Antegrity F0 9aintaining our Gb(ectivity and Andependence O0 Respecting Antellectual Capital7 /&rnst > Noung" 200=b0. The guidance developed by these t#o *irms illustrates schema created to generate consistent agent behavior across the *irm that lays the *oundation *or overall *irm culture and image thus increasing the 6*itness7 o* the *irm. The AuditAnal-tics

database lists IF= public accounting *irms that issued an audit opinion in 200O *or a -ecurities and &,change Commission /-&C0 registrant. The number o* *irms invariably leads to a variety o* business approaches" organi+ational in*rastructures" management styles" values" cultures" and agent behavior operating in the pro*ession simultaneously. Pro!osition %& .he greater the le,el of shared schema within a public accounting firm$ the higher the le,el of fitness achie,ed "e.g. performance$ sur,i,abilit-#. Self-Organization and Emergence The activities o* the public accounting pro*ession prior to the passage o* the -arbanes'G,ley Act o* 2002 /-GU0 demonstrate e,amples o* sel*'organi+ation and emergent behavior. Jith the advent o* technological advances and the Anternet ?oom in the latter part o* the 20th century" the accounting pro*ession *elt compelled to alter the structure and perception o* the pro*ession to $eep pace #ith changes in business. The American Anstitute o* Certi*ied 3ublic Accountants /AAC3A0 8ision 3ro(ect" Canadian Anstitute o* Chartered Accountants /CACA0 8ision -tatement" and Anstitute o* Chartered Accountants in &ngland and Jales 20H20 8ision 3ro(ect initiatives represent attempts by the accounting pro*essional bodies to rede*ine themselves and their practices under the rubric o* 6vision7 /;ogarty et al." 200I0. The AAC3A sought to broaden the services o* the traditional accounting and audit'oriented *ocus to a point #here accountants could be vie#ed as trusted business advisors. The AAC3A heralded the vision statement as 6the basis *or e,panding the value o* the C3A to tomorro#Ms mar$etplace7 /AAC3A" 20000 and stated the pro*essionMs core purpose as 6ma$ing sense o* a changing and comple, #orld7. Te,t *rom the vision statement o**ers evidence o* the desired shi*t% 6C3As are the trusted pro*essionals #ho enable people and organi+ations to shape their *uture. Combining insight #ith integrity"

11 Journal o* Accounting and Auditing% Research > 3ractice

C3As deliver value by% Communicating the total picture" Translating comple, in*ormation into critical $no#ledge" Anticipating and creating opportunities" and 1esigning path#ays that trans*orm vision into reality7 /AAC3A" 20000. The *irms .uic$ly latched on to this movement to e,pand the array o* services delivered. Jhen the AAC3A championed a global consulting credential" many in the accounting pro*ession voci*erously ob(ected. Kliegman /2001" p. F<0 complained that 6hundreds o* thousands o* people #ho lac$ the rules" regulations and ethics o* C3As V#illW be admitted to compete #ith the pro*essional C3A as consultants.7 ?1G -eidman (oined the debate as$ing% 6Jhy #ould the pro*ession #ant to dilute its invaluable 6trusted advisor7 reputation by sharing it #ith others #ho are not similarly grounded in ethics and ob(ectivityX7 /Klein" 2001" p. F0. The pro*essional accounting bodies led the charge to adapt to the changing business environment and public accountants" particularly the larger *irms" sel*'organi+ed and embraced the emergence *rom the role as merely a provider o* accounting and audit services to one o* a valued business consultant. Pro!osition '& Public accounting firms that adjust ,ision$ strateg-$ and infrastructure /uic0l- in response to en,ironmental changes "e.g. legal$ mar0etplace# will perform better and sur,i,e longer. Connectivity -avage /1<<F0 asserts that pro*essions are neither occupations nor *irms" but instead represent an e,ample o* the net#or$ *orm o* organi+ation that has evolved and continues to survive because they represent comparatively e**icient and adaptable solutions to certain $inds o* dynamic production problems. Collectively" the public accounting pro*ession consists o* many

entities ranging *rom sole practitioners to the ?ig ;our international *irms and various national and international pro*essional bodies. The pro*ession interacts e,ternally #ith regulatory agencies" governments" higher education institutions" *inancial mar$ets" e,isting and potential clients" and *uture employees. The communication bet#een these parties creates a myriad o* intert#ining" dynamic relationshipsS each party #ith their o#n goals and agendas. The structure and international *ocus o* the larger public accounting *irms re*lect the global connectivity o* the pro*ession. 3riceJaterhouseCoopers /3JC0 and its international member *irms" *or instance" conduct business in 1F< countries #ith more than 1F0"000 employees and state on the corporate #ebsite% 63eople B across our net#or$ share their thin$ing" e,perience and solutions to develop *resh perspectives and practical advice. An this @lobal Annual Revie# #e describe our per*ormance B in helping clients address the challenges o* the global mar$etplace7 /3riceJaterhouseCoopers" 200=0. The interplay o* the international public accounting *irms #ith international regulatory bodies o**ers another e,ample o* the global connectivity o* the pro*ession. The Jorld Trade Grgani+ation /JTG0 develops the ground'rules *or international commerce and mediates trade disputes. Arnold /200O0 e,amines ho# transnational accounting *irms in &urope and the P.-. use international trade agreements such as the 1eneral Agreement on .rade in 2er,ices and &isciplines on &omestic Regulation in the Accountanc- 2ector developed and en*orced by the JTG to create a global mar$et *or accounting and auditing services by eliminating domestic regulation vie#ed as barriers to trade and investment. Caramanis /20020 e,plores the interconnectedness o* national politics #ith global *orces and the rami*ication o* this interaction *or accounting regulation and the relationship bet#een the state and the pro*ession. A*ter analy+ing

Journal o* Accounting and Auditing% Research > 3ractice 12

historical documents o* the liberali+ation o* the @ree$ auditing pro*ession in the 1<<0Ms and the pressure e,erted on the @ree$ government by intergovernmental politico' economic organi+ations at the behest o* the public accounting pro*ession" Caramanis /20020 asserts% 6The politics o* international accounting pro*essionalism in the Lglobali+ationM era are becoming more polycentric #ith /lesser0 nation'states as merely one level /o* diminishing importance0 in a comple, system o* superimposed" overlapping and o*ten competing national and international agencies o* governance.7 The author concludes by stating" 6The paper has sho#n ho# intert#ined accountancy and the broader socio'economic and political domain are" not only at the local" but also at the international level.7 The accounting pro*ession clearly *unctions in an interconnected" ever'evolving #orld comprised o* many distinct agents and CA-s #hose actions a**ect others in the system. Pro!osition (& Public accounting firms aware of the interconnectedness of the agents$ meta3 agents$ and 4A2s the- interact with directland indirectl- will be more effecti,e at e+panding operations$ achie,ing objecti,es$ and managing resources. imensionality Although the bread and butter line level #or$ o* auditing public companies occurs in a small team'based environment" these individual silos need certain controls to uphold a high level o* pro*essional .uality across the *irm and reduce liability. As evidenced by the &nron scandal" actual or perceived *ailure in only a single audit can devastate a *irm. An order to maintain a consistent level o* per*ormance and minimi+e ris$" public accounting *irms implement a #ide variety o* institutional

controls that reduce the dimensionality o* agents and sub'CA-s. &,amples include structured training *or each pro*essional level" client acceptance procedures" internal .uality revie#s" *irm guidance /i.e. auditing standardsS e.g. materiality (udgments0" .uality assurance partners" national technical partners" mentoring" *ormali+ed compensation and evaluation structure" etc. -everal academic studies e,amined various aspects o* public accounting institutional control mechanisms. 1irsmith et al. /200O0 deconstructed the structure o* international public accounting *irms identi*ying t#o general modes o* governance rhetoric" the ob(ective bureaucracy managed by administrative partners and the sub(ective e,pertise o* practice partners that e,ercise pro*essional (udgment in the *ield. The authors conclude the distinction bet#een ob(ectivity and sub(ectivity compete yet supplement the shortcomings o* the other creating an intert#ined relationship. The administrative controls reduce the dimensionality o* the practitioners preventing the collective *irm *rom entering a state o* complete chaos. Covales$i et al. /1<<E0 e,amine the mentoring structure in public accounting *irms and determine that the mentoring process shapes the identities o* organi+ational participants but the discourse o* pro*essional autonomy" in contrast" generates resistance to total con*ormity. 9entoring accomplishes the goals o* both creating and ingraining shared schema throughout the organi+ation #hile simultaneously reducing the dimensionality o* agents. Pro!osition )& %mplementation of institutional control mechanisms in public accounting firms leads to consistent performance /ualit- but ma-$ in turn$ reduce the professional autonom- of practitioners leading to less organi5ational commitment$ job satisfaction$ inno,ati,eness$ and ultimatelperformance.

1! Journal o* Accounting and Auditing% Research > 3ractice

Environment ynamism As a direct result o* -GU legislation re.uirements in the P.-." particularly -ection F0F that re.uires assessment o* internal controls over *inancial reporting" public accounting *irms are hiring more accountants than ever be*ore in an environment already short o* supply. According to the managing partner o* the 1eloitte and Touche 3ittsburgh o**ice" 6All our young people #anted to be dot.commers" investment ban$ers and consultants"7 /?oselovic" 200F0. An 200F alone" the &rnst and Noung 3ittsburgh o**ice increased sta**ing by over 2OR /?oselovic" 200F0. An discussing the hiring outloo$ *or 200= 9onster.com" one o* the largest online employment #ebsites" e,pects continued e**ects o* -GU on the accounting pro*ession% 6-arbanes'G,ley #ill have a pro*ound e**ect *or years to come. There #asnYt the talent to bac$*ill slots emptied by accounts pulled onto -GU compliance pro(ects. ThereYs a huge demand *or auditors" C3As and people in internal controls. The ?ig ;our accounting and consulting *irms continue to hire aggressively as they *ace competition *rom smaller competitors and corporate employers. 6JeYve seen a *airly robust increase in business across all three o* our practices% audit" ta, and advisory"Z says 9anny ;ernande+" national managing partner *or campus recruiting at K39@. Z4o# that #eYve stabili+ed the turnover in the #a$e o* -arbanes'G,ley" #eYre trying to come bac$ to a sense o* balance in terms o* peopleYs #or$loads7 /Rossheim" 200=0. An the *ace o* a sta**ing strain propagated by the e,isting shortage o* accountants and the most signi*icant legislation since the -&C Acts o* 1<!! and 1<!F driving ever more demand" public accounting *irms reacted aggressively by implementing creative approaches to hiring and retention practices. An 200F" &N established an internal net#or$ called b&Nond *or gay and lesbians employees to

interact and *eel connected to the *irm. The company #ebsite provides the *ollo#ing in*ormation about b&Nond% 6&rnst and Noung is committed to providing a #or$ environment that is" and *eels" inclusive *or all our people. Through 3eople Resource 4et#or$s /3R4s0" various a**inity groups #ithin our *irm can net#or$ and e,change in*ormation as #ell as advise senior leadership about inclusiveness issues. b&Nond" a net#or$ *or lesbian" gay" bise,ual" and transgender people and their allies / @?TA0" #as the *irst 3R4 established by the *irm" and it #or$ed to add the inclusion o* 6gender identityHe,pression7 as a covered category #ithin the *irmMs antidiscrimination policy7 /&rnst > Noung" 200=c0. &N reportedly needs more than O"O00 college recruits *or internships and entry'level (obs in 4orth America in 200= /Jhite" 200=0. An an attempt to reach this demographic in their natural habitat /the Anternet0" &N became the very *irst employer to create a #ebpage on ;aceboo$" a social net#or$ing #ebsite that caters to college and university students" dedicated solely to recruiting /Rothberg" 200=0. The &N ;aceboo$ page contains in*ormation and discussion boards targeted speci*ically at the internet'savvy audience. The b&Nond 3R4 and ;aceboo$ recruiting e**orts e,empli*y the concept o* dynamism2 the dynamic e,ternal environment e,erted pressure on the *irm resulting in a sta**ing crisis and the *irm .uic$ly and ingeniously adapted to address the threat. Pro!osition *& Public accounting firms that respond /uic0l- to threats from a d-namic e+ternal en,ironment will gain competiti,e ad,antage o,er those that either fail to respond or react slower. !ugged landsca#e &ach public accounting *irm may consist o* many groups internally that collectively comprise the *irm. These groups can be delineated by *unction /e.g. audit" ta,"

Journal o* Accounting and Auditing% Research > 3ractice 1F

consulting" etc.0 or nationality" each striving to#ards an optimal level o* *itness locally yet e,periencing inter'dependencies that may over#helm the local contribution to the direction o* the collective. -imilar to the modular design o* the automobile industry in Choi et al. /20010" the architecture o* public accounting *irms can be optimi+ed independently to allo# the emergence o* high dimensionality reducing coordination costs across the entire *irm. Arthur Andersen #as the last true globally' organi+ed public accounting *irm. The P.-.' led audit team on the &nron engagement essentially brought do#n the entire *irm. Today" the larger *irms operate autonomous groups as separate legal entities" both nationally and *unctionally. 1eloitte and Touche Tohmatsu /1TT0" similar to &N@" acts as an alliance o* legally'separate member *irms. Jithin the P.-." the national member *irm o* 1TT *urther decomposes into legal subsidiaries on a *unctional basis #ith subsidiaries *or audit and assurance" consulting" *inancial advisory" and ta, services /1eloitte > Touche" 200=b0 providing some level o* legal protection in the event an incident occurs reminiscent o* the ta, shelter *raud e,posed in 200! #hich nearly ruined the K39@ P.-. member *irm. Pro!osition +& 6odulari5ation of structure "nationall- and functionall-# will decrease o,erall inter3dependencies within a public accounting firm allowing greater efficienc- of operations while simultaneousl- mitigating ris0. Co-Evolution $uasi-E%uilibrium and State Change Changes and actions by the public accounting pro*ession during the mid'1<<0Ms to today embody the .uasi'e.uilibrium and state change elements o* the CA- *rame#or$. An the period prior to the passage o* -GU the pro*ession attempted to broaden the services provided by C3As /evidenced by the actions o* the AAC3A during the 8ision 3ro(ect0 to

e,pand the (urisdictional domain o* the pro*ession. 9ost *irms bolstered and gre# their consulting service lines to 6grab a bigger piece o* the pie7 until the rash o* *inancial reporting scandals /&nron" JorldCom" and :ealth-outh" etc.0 roc$ed the *inancial mar$ets resulting in a loss o* con*idence in the auditing *irms and compelling P.-. legislators to intervene. &N" 3JC" and K39@ each either sold or spun'o** their larger consulting groups in order to re' *ocus on the core competency and tradition o* ob(ective" independent *inancial statement attestation. 1uring this era" the pro*ession crept eerily close to the Ledge o* chaosM. Concern *or the lac$ o* independence in the pro*ession led to structural changes /e.g. peer revie# discontinued in lieu o* 3CAG? oversight0 bringing the pro*ession bac$ into a .uasi'e.uilibrium state. Pro!osition ,& 2tructural changes in line with traditional ,alues of objecti,it- and independence will sur,i,e longer and be more successful than those in conflict. &on-"inear Changes As 9ason /200=0 and ;in$elstein /200=0 note" positive *eedbac$ rein*orces early success creating a long'term advantage *or *irst'movers as long as the organi+ation does something #ith the advantage. The ?ig ;our public accounting *irms can arguably be vie#ed as having secured a *irst'mover advantage in the audits o* P.-. public companies. The roots o* each *irm can be traced bac$ #ell over a 100 years and some o* the auditor'client relationships span many years2 1avis et al. /20000 *ind that OEO /I<R0 o* their sample companies retained the same auditor over the entire 1E year period o* 1<E1'1<<E. Canada et al. /200=0 re*er to the *ormulation o* -GU as the 6per*ect storm7 #here the set o* events leading to the legislation individually #ould have *ar less impact than the synergistic e**ect *rom combination /i.e. non' linear impact0. The Act continues to change the landscape o* the public accounting

1O Journal o* Accounting and Auditing% Research > 3ractice

pro*ession *ive years a*ter passage. The cost o* compliance *or -GU -ection F0F resulted in and continues to o**er opportunities *or smaller *irms to obtain an increasing number o* public company audits. The ?ig ;our resigned *rom many audits due to the inability to sta** all the e,isting engagements and opted to $eep only the most pro*itable and least ris$y clients and on the reverse side" clients dismissed ?ig ;our *irms due to increased audit *ees /?oselovic" 200F0. The AuditAnal-tics database sho#s that the ?ig ;our issued I=R o* the 200! opinions on *inancial statements o* -&C registrants" dropping to I2R in 200F and O<R in 200O. 1ata thus suggests collective changes in a dynamic" interconnected environment may have resulted in an unpredictable outcomeS the ?ig ;our losing their stranglehold on the audits o* public companies. The slippage possibly could have been .uic$er and even more severe i* smaller accounting *irms had placed themselves in proper position to leverage the structural change in the landscape. Pro!osition -& Public accounting firms cogni5ant of non3linear effects and positi,e reinforcement are more li0el- to be prepared for$ less li0el- to be affected b-$ and more prepared to ta0e ad,antage of unforeseen changes in the en,ironment. &on-!andom 'uture The audit *ailures early in this century" subse.uent legislation" and impact on the public accounting pro*ession reasonably could not have been predicted #ith any precision due to the many participants involved and the Lbuilding upM e**ect o* their actions that culminated in a drastic structural change to the manner in #hich P.-. companies conduct business and are audited. :o#ever" general agent and CA- behavior can be recogni+ed to reduce the surprise and *acilitate proactive behavior. ;or instance" client management that e,hibits habitual

earnings management behavior" even to a small degree" may be inclined to commit *raudulent behavior #hen conditions or events occur (eopardi+ing their position o* po#er. &ven though -cott -ullivan" the e,' C;G o* JorldCom" probably reali+ed treating operating e,penses as capital e,penditures #as not a Lhealthy businessM that could be sustained inde*initely /eventually a #rite' do#n #ould need to occur0 he e,hibited irrational behavior by continuing to authori+e reclassi*ication entries period a*ter period *or over three years /Jharton -chool" 20020. Pro!osition .& Auditors aware of past agent and 4A2 beha,ior ha,e a higher li0elihood of predicting the general direction a 4A2 maproceed "gi,en similar circumstances# than those anticipating consistent rational beha,ior. /iscussion and Conclusion 3ractitioners" regulators" and academics increasingly vie# the traditional neo' classical vie# as too myopic and simplistic *or the increasing comple,ity and interconnectedness o* todayMs business #orld. Academic disciplines outside and #ithin the business area have recently embraced comple,ity theory and CA-s as a manner to conduct research. This paper e,tends the #or$ o* 9ouc$ /1<<E" 20000 and -utton et al. /200I0 in the accounting literature by introducing the CA- *rame#or$ developed by Choi et al. /200=0 as an alternative lens to e,amine the public accounting pro*ession. The paper presents a set o* research propositions associated #ith each concept and principle contained in the *rame#or$ based upon e,tant literature and $no#ledge o* practice. The ultimate goal o* this paper is to broaden the perspective o* accounting academicians to consider the comple, nature o* the #orld #e live in and conduct research re*lective o* that reality.

Journal o* Accounting and Auditing% Research > 3ractice 1I

0eferences Ahrens" T. > Chapman" C. -. /200F0. ZAccounting *or ;le,ibility and &**iciency% A ;ield -tudy o* 9anagement Control -ystems in a Restaurant Chain"Z 4ontemporarAccounting Research$ 8ol. 21" 4o. 2" pp. 2=1' !01. American Anstitute o* Certi*ied 3ublic Accountants. C3A 8ision% 2011 and beyond /3amphlet0 /4e# Nor$% American Anstitute o* Certi*ied 3ublic Accountants" 20000. American Anstitute o* Certi*ied 3ublic Accountants. 1i**erent is good /and pro*itable0 at Cali*ornia C3A *irm /The C3A etter" April" 1<<<" pp. 11'120. Anderson" 3. /1<<<0. ZComple,ity Theory and Grgani+ation -cience"Z )rgani5ation 2cience$ 8ol. 10" 4o. !" pp. 21I'2!2. Ans#ers.com. /200=0. Z?arnes and 4oble"Z Retrieved 9arch 2E" *rom the Ans#ers.com #eb site% http%HH###.ans#ers.comHtopicHbarnes' noble'inc Arnold" 3. J. /200O0. Z1isciplining 1omestic Regulation% The Jorld Trade Grgani+ation and the 9ar$et *or 3ro*essional -ervices"Z Accounting$ )rgani5ations and 2ociet-$ 8ol. !0" pp. 2<<'!!0. ?a$er" :. K." 3o#ell" @. &. > 8eit" &. T. /20020. ZRevisiting the 1ividend 3u++le% 1o All o* the 3ieces 4o# ;itX"Z Re,iew of 7inancial 8conomics$ 8ol. 11" 4o. F" pp. 2F1'2I1. ?ell" T. ?." 9arrs" ;. G." -olomon" A. > Thomas" A. /1<<=0. Auditing Grgani+ations through a -trategic -ystems ens% The K39@ ?usiness 9easurement 3rocess /9ontvale% K39@ 30. ?enbya" :. > 9cKelvey" ?. /200I0. ZTo#ard a Comple,ity o* An*ormation -ystems 1evelopment"Z %nformation .echnolog- & People$ 8ol. 1<" 4o. 1" pp. 12'!F.

?loom*ield" R. J. /20020. ZThe Ancomplete Revelation :ypothesis and ;inancial Reporting"Z Accounting 9ori5ons$ 8ol. 1I" 4o. !" pp. 2!!'2F!. ?oselovic" . /200F0. Z4e# -GU Roc$s Accounting Andustry% a# Crac$ing 1o#n on Auditing 3rocedures -purs 9ore ?usiness *or Regional" ocal ;irms"Z Pittsburgh Post3 1a5ette$ 4ovember 2E. ?riggs" J. > 3eat" ;. 1. /1<<<0. -even i*e essons o* Chaos% Timeless Jisdom *rom the -cience o* Change /4e# Nor$% :arperCollins0. ?ro#n" R." 9ac$ay" J. -." ?oyd" &." ;ogo" J. R. > -loan" A. /1<0O0. A :istory o* Accounting and Accountants / ondon% ;ran$ Case0. ?urns" J. /20000. ZThe 1ynamics o* Accounting Change Anter'3lay bet#een 4e# 3ractices" Routines" Anstitutions" 3o#er and 3olitics"Z Accounting$ Auditing & Accountabilit- Journal$ 8ol. 1!" 4o. O" pp. OII' O<I. Canada" J." Kuhn" J. R. > -utton" -. @. /200=0. ZAccidentally in the 3ublic Anterest% The 3er*ect -torm that Nielded the -arbanes' G,ley Act"Z :or0ing paper$ ;ni,ersit- of 4entral 7lorida. Cart#right" T. J. /1<<10. Z3lanning and Chaos Theory"Z Journal of American Planning Association$ 8ol. O=" pp. FF'OI. Chambers" R. J. /1<<!0. Z3ositive Accounting Theory and the 3A Cult"Z Abacus$ 8ol. 2<" 4o. 1" pp. 1'2I. Choi" T. N." 1ooley" K. J. > Rungtusanatham" 9. /20010. Z-upply 4et#or$s and Comple, Adaptive -ystems% Control versus &mergence"Z Journal of )perations 6anagement$ 8ol. 1<" 2001" pp. !O1'!II. Conner" 1. R. /1<<E0. eading at the &dge o* Chaos% :o# to Create the 4imble Grgani+ation /<ew =or0: John :ile-0.

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Covales$i" 9. A." 1irsmith" 9. J. > -amuel" -. /1<<E0. ZThe Calculated and Avo#ed% Techni.ues o* 1iscipline and -truggles over Adentity in ?ig -i, 3ublic Accounting ;irms"Z Administrati,e 2cience >uarterl-$ 8ol. F!" 4o. 2" pp. 2<!'!2=. 1avidson" -." -tic$ney" C. > Jeil" R. /1<EI0. YAccounting% The anguage o* ?usiness"Y /2un ?a0es: .homas 9orton and &aughters0. 1avis" . R." -oo" ?. > Trompeter" @. /20000. ZAuditor Tenure" Auditor Andependence" and &arnings 9anagement"Z :or0ing paper$ @oston 4ollege. 1eloitte > Touche. YTa,% 1eloitte Ta, 3"Y Retrieved April 2I" 200=b" *rom the #eb site% http%HH###.deloitte.comHdttHsection5nodeH 0"10F2"sidR2O!121O2"00.html 1eloitte > Touche. YPniting Through -hared 8alues"Y Retrieved April 22" 200=a" *rom the #eb site% http%HH###.deloitte.comHdttHsection5nodeH 0"10F2"sidR2O!1=!!=<"00.html 1irsmith" 9. J." -amuel" -." Covales$i" 9. A. > :eian" J. ?. /200O0. ZA Thematic 1econstruction o* ;ormalist and &,pertise 8oices in ?ig ;ive /;our0 3ublic Accounting ;irms"Z 4ritical %n/uir- in ?anguage 2tudies$ 8ol. 2" 4o. 1" pp. 1!'!F. 1ooley" K. J. /1<<=0. ZA Comple, Adaptive -ystems 9odel o* Grgani+ation Change"Z <onlinear &-namics$ Ps-cholog-$ and ?ife 2ciences$ 8ol. 1" 4o. 1" pp. I<'<=. 1ooley" K. J. > 8an 1e 8en" A. :. /1<<<0. Z&,plaining Comple, Grgani+ational 1ynamics"Z )rgani5ational 2cience$ 8ol. 10" 4o. !" !OE'!=2. &rnst > Noung. YAbout &rnst and Noung"Y Retrieved April 20" 200=a" *rom the #eb site% http%HH###.ey.comHglobalHcontent.ns*HAnte rnationalHAbout5&N

&rnst > Noung. Y@lobal Code o* Conduct"Y Retrieved April 22" 200=b" *rom the #eb site% http%HH###.ey.comHglobalHcontent.ns*HAnte rnationalH@lobal5Code5o*5Conduct &rnst > Noung. Y@lobal Code o* Conduct"Y Retrieved April 2I" 200=c" *rom the #eb site% http%HH###.ey.comHglobalHcontent.ns*HJeb 3rintH;F&!21?0?A=<?0F!EO2O=2E!00=I? ==;Xopen1ocument> ;ama" &. ;. /1<<E0. Z9ar$et &**iciency" ong' Term Returns" and ?ehavioral ;inance"Z Journal of 7inancial 8conomics$ 8ol. F<" 4o. !" pp. 2E!'!0I. ;eldman" 9. 3. /20020. ZThe Anternet Revolution and the @eography o* Annovation"Z %nternational 2ocial 2cience Journal$ 8ol. OF" 4o. 1=1" pp. F='OI. ;in$elstein" -. /20020. Z;irst 9over Advantage *or Anternet -tartups% 9yth or RealityX"Z .uc0 2chool @usiness article adapted from 9andboo0 of @usiness 2trateg/4e# Nor$% &1 9edia @roup" 200=" pp. !<' FI0. ;ogarty" T. J." Radcli**e" 8. -. > Campbell" 1. R. /200I0. ZAccountancy be*ore the *all% The AAC3A 8ision 3ro(ect and Related 3ro*essional &nterprises"Z Accounting$ )rgani5ations and 2ociet-$ 8ol. !1" pp. 1'2O. ;orrest" &. > 9i+ers$i" R. /1<<I0. YAnteractive 9ar$eting% The ;uture 3resent"Y /?incolnwood: <.4 @oo0s0. ;ran$*urter" @. 9. > ane" R. J. /1<<20. ZThe Rationality o* 1ividends"Z %nternational Re,iew of 7inancial Anal-sis$ 8ol. 1" pp. 11O' 1!0. ;rederic$" J. C. /1<<E0. ZCreatures" Corporations" Communities" Chaos" Comple,ity% A 4aturalogical 8ie# o* the Corporate -ocial Role"Z @usiness and 2ociet-$ 8ol. !=" 4o. F" pp. !OE'!=I.

Journal o* Accounting and Auditing% Research > 3ractice 1E

@ault" -. ?. > Jaccaci" A. T. /1<<I0. ZComple,ity 9eets 3eriodicity"Z .he ?earning )rgani5ation$ 8ol. !" 4o. 2" pp. !!'!<. @ibson" R. /1<<I0. YRethin$ing the ;uture"Y /?ondon: <icholas @reale-0. @iddens" A. /1<EF0. YThe Constitution o* -ociety"Y /4ambridge: Polit- Press0. @lass" 4. /1<<I0. ZChaos" 4on' inear -ystems and 1ay'to'1ay 9anagement"Z 8uropean 6anagement Journal$ 8ol. 1F" 4o. 1" pp. <E' 10O. @oldstein" J. /1<<F0. The Pnshac$led Grgani+ation% ;acing the Challenge o* Pnpredictability through -pontaneous Reorgani+ation /Portland: Producti,it- Press0. @rant" R. 9. > ?aden';uller" C. /200F0. ZA Kno#ledge Accessing Theory o* -trategic Alliances"Z Journal of 6anagement 2tudies$ 8ol. F1" 4o. 1" pp. I1'EF. :olland" J. :. /1<<O0. :idden Grder /Reading: Addison3:esle-0. Jacucci" &." :anseth" G. > yytinen" K. /200I0. ZAntroduction% Ta$ing Comple,ity -eriously in A- Research"Z %nformation .echnolog- & People$ 8ol. 1<" 4o. 1" pp. O'11. Kau**man" -. A. /1<<10. ZAntichaos and Adaptation"Z 2cientific American$ 8ol. 2IO" 4o. 2" 1<<1" pp. =E'EF. Kau**man" -. A. /1<<!0. YThe Grigins o* Grder"Y /<ew =or0: )+ford ;ni,ersit- Press0. Kau**man" -. A. /1<<O0. At :ome in the Pniverse /<ew =or0: )+ford ;ni,ersit- Press0. Kelly" -. /1<<<0. The Comple,ity Advantage% :o# the -cience o* Comple,ity Can :elp Nour ?usiness Achieve 3ea$ 3er*ormance /<ew =or0: @usiness :ee0 @oo0s0.

Kim" R. 9. > Kaplan" -. 9. /200I0. ZAnterpreting -ocio'Technical Co'&volution% Apply Comple, Adaptive -ystems to A&ngagement"Z %nformation .echnolog- & People$ 8ol. 1<" 4o.1" pp. !O'OF. Klein" 9. /20010. Z4ebras$a -ociety" ?1G -eidman 8eto @lobal Credential"Z Accounting .oda-$ -eptember 2F'Gctober =" pp. !'F. Kliegman" &. J. /20010. YUNK is @ood 3R but bad *or 3ro*ession"Y Accounting .oda-$ Gctober 22'4ovember F" pp. F<'O0. Kothari" -. 3. /20010. ZCapital 9ar$ets Research in Accounting"Z Journal of Accounting and 8conomics$ 8ol. !1" pp. 10O' 2!1. evy" 1. /1<<F0. ZChaos Theory and -trategy% Theory" Application" and 9anagerial Amplications"Z 2trategic 6anagement Journal$ 8ol. 1O" pp. 1I='1=E. e#in" R. /1<<20. YComple,ity"Y /4hicago: ;ni,ersit- of 4hicago Press0. e#in" R. /1<<!0. YGrder *or ;ree"Y <ew 2cientist$ 8ol. 1!" pp. 10'11. uoma" 9. /200I0. ZA 3lay o* ;our Arenas% :o# Comple,ity Can -erve 9anagement 1evelopment"Z 6anagement ?earning$ 8ol. !=" 4o. 1" pp. 101'12!. 9ain+er" K. /1<<F0. Thin$ing in Comple,ity% The Comple, 1ynamics o* 9atter" 9ind" and 9an$ind /<ew =or0: 2pringer3Verlag0. 9al$iel" ?. @. > ;ama" &. ;. /1<=00. Z&**icient Capital 9ar$ets% A Revie# o* Theory and &mpirical Jor$"Z Journal of 7inance$ 8ol. 2O" 4o. 2" pp. !E!SF1=. 9arch" J. @. > :eath" C. /1<<F0. A 3rimer on 1ecision 9a$ing% :o# 1ecisions :appen /<ew =or0: 7ree Press0.

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9ason" R. ?. /200=0. ZThe &,ternal &nvironmentYs &**ect on 9anagement and -trategy% A Comple,ity Theory Approach"Z 6anagement &ecision$ 8ol. FO" 4o. 1" pp. 10' 2E. 9cKelvey" ?. /200F0. ZTo#ard a 0th a# o* Thermodynamics% Grder'Creation Comple,ity 1ynamics *rom 3hysics and ?iology to ?ioeconomics"Z Journal of @ioeconomics$ 8ol. I" 4o. 1" pp. IO'<I. 9erriam'Jebster. /200=0. Z9erriam' JebsterYs Gnline 1ictionary"Z Retrieved 9arch 1<" *rom the #eb site% http%HH###.m' #.comHdictionaryHdynamism 9int+berg" :. /1<<F0. YThe Rise and *all o* -trategic 3lanning% 3reconceiving Roles *or 3lanning" 3lans" 3lanners"Y /<ew =or0: 7ree Press0. 9ouc$" T. /1<<E0. ZCapital 9ar$ets Research and Real Jorld Comple,ity% The &merging Challenge o* Chaos Theory"Z Accounting$ )rgani5ations and 2ociet-$ 8ol. 2!" 4o. 2" pp. 2I1'2E!. 9ouc$" T. /20000. Z?eyond 3anglossian Theory% -trategic Capital Anvesting in a Comple, Adaptive Jorld"Z Accounting$ )rgani5ations and 2ociet-$ 8ol. 2O" pp. 2I1' 2E!. 4ilson" T. :. /1<<O0. Chaos 9ar$eting% :o# to Jin in a Turbulent Jorld /?ondon: 6c1raw39ill0. GY?rien" J. > -ivarama$rishnan" K. /1<<I0. YCoordinating Grder 3rocessing and 3roduction -cheduling in Grder Anitiated 3roduction &nvironments"Y Journal of 6anagement Accounting$ 8ol. E" pp. 1O1'1=0. 3eitgen" :. G." Jurgens" :. > -aupe" 1. /1<<20. Chaos and ;ractals% 4e# ;rontiers o* -cience /<ew =or0: 2pringer0. 3*e**er" J. > -utton" R. A. /200I0. ZThree 9yths o* 9anagement"Z 9@2 :or0ing Anowledge$ 9arch 2=.

3hillips" ;. > Kim" 4. /1<<I0. ZAmplications o* Chaos Research *or 4e# 3roduct ;orecasting"Z .echnological 7orecasting and 2ocial 4hange$ 8ol. O!" 4o. !" pp. 2!<'2I1. 3riceJaterhouseCoopers. Z200I @lobal Annual Revie#"Z Retrieved April 2F" 200=" *rom the #eb site% http%HH###.p#c.comHe,t#ebHhome.ns*Hdoc idHA<1!1A?!I&&<FFECEO2O=0<I00OE?2= 1 Rossheim" J. /200=0. Z:iring Gutloo$ 200="Z Retrieved April 2I" 200=" *rom the #eb site% http%HHcontent.monster.comHarticlesH!F=1H 1EO<EH1HindustryH=Hhome.asp, Rothberg" -. /200=0. Z&rnst and Noung ?ecomes ;irst &mployer to Pse ;aceboo$"Z 4ollegeRecruiter.com$ Retrieved April 2F" 200=" *rom the #eb site% http%HH###.collegerecruiter.comH#eblogHar chivesH200=H01Hernst5young5bec.php -avage" 1. A. /1<<F0. ZThe 3ro*essions in Theory and :istory% The Case o* 3harmacy"Z @usiness and 8conomic 9istor-$ 8ol. 2!" 4o. 2" pp. 1!0'1I0. -chein" &. :. /1<<=0. Grgani+ational Culture and eadership /2an 7rancisco: Josse-3@ass0. -chneider" 9. > -omers" 9. /200I0. ZGrgani+ations as Comple, Adaptive -ystems% Amplications o* Comple,ity Theory *or eadership Research"Z .he ?eadership >uarterl-$ 8ol. 1=" pp. !O1'!IO. -tacey" R. /1<<20. Y9anaging the Pn$no#able"Y /2an 7rancisco: Josse-3@ass0. -tump*" -. A. ZApplying 4e# -cience Theories in eadership 1evelopment Activities"Z Journal of 6anagement &e,elopment$ 8ol. 1F" 4o. O" 1<<O" pp. !<'F<. -uare+" ;. > an+olla" @. /200O0. ZThe :al*' Truth o* ;irst'9over Advantage"Z 9ar,ard @usiness Re,iew$ 8ol. E!" 4o. F" pp. 121'12<.

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-utton" -. @." Arnold" 8. > :unton" J. &. YGn the 1eath and 1ying o* Griginality in the Jor$place% A Critical 8ie# o* &nterprise Resource 3lanning -ystemsY Ampact on Jor$ers and the Jor$ &nvironment"Y :or0ing paper$ ;ni,ersit- of 4entral 7lorida$ 200I. Thietart" R. A. > ;orgues" ?. /1<<O0. ZChaos Theory and Grgani+ation"Z )rgani5ation 2cience$ 8ol. I" 4o. 1" pp. 1<'!1. Tushman" 9. ." 4e#man" J. > Romanelli" &. /1<EI0. ZConvergence and Ppheaval% 9anaging the Pnsteady 3ace o* Grgani+ational &volution"Z 4alifornia 6anagement Re,iew$ 8ol. 2<" 4o. 1" pp. 2<'FF. van 8alen" . /1<=!0. ZA 4e# &volutionary a#"Z 8,olutionar- .heor-$ 8ol. 1" 4o. 1" 1'!0. Jaldrop" 9. 9. > @leic$"J. /1<<20. Comple,ity% The &merging -cience at the &dge o* Grder and Chaos /<ew =or0: 2imon and 2huster0. Jaller Jr." J. T. /1<E<0. ZThe Concept o* :abit in &conomic Analysis"Z Journal of 8conomic %ssues$ 8ol. 22" pp. 11!'12I. Jeic$" K. &. /1<=<0. The -ocial 3sychology o* Grgani+ing /Reading: Addison3:esle-0. Jharton -chool. Z1ra#ing essons *rom JorldCom"Z 4<8. <ews.com$ July 1F" 2002" Retrieved April 2I" 200=" *rom the #eb site% http%HHne#s.com.comH1ra#ing[lessons[*ro m[JorldComH200<'10225!'<F!O1=.html Jheatley" 9. J. /1<<20. eadership and the 4e# -cience% earning about Grgani+ation *rom an Grderly Pniverse /2an 7rancisco: @errett3Aoehler0. Jheatley" 9. J. /1<<I0. YThe Pnplanned Grgani+ation"Y <oetic 2ciences Re,iew "2pring#$ pp. 1I'2!.

Jhite" &. /200=0. Z&mployers Reach Gut to Recruits Jith ;aceboo$"Z .he :all 2treet Journal )nline$ January 11" 200=" Retrieved April 2I" 200=" *rom the #eb site% http%HH###.career(ournal.comHcolumnistsHt heorypracticeH200=0111' theorypractice.html Jil$inson" A. > Noung" . /1<<E0. YGn Competing% ;irms" Relations and 4et#or$s"Y 3resented at Research Con*erence on Relationship 9ar$eting" &mory Pniversity /Gctober0. Kimmerman" ?. /1<<!0. ZThe Anherent 1rive to#ards Chaos"Z An 3. orange" ?. Cha$ravarthy" J. Roos and A. 8an de 8en /eds.0" Amplementing -trategic 3rocesses% Change" earning" and Cooperation" /)+ford: @asil @lac0well0. Kimmerman" ?." indberg" C. > 3lse$" 3. /1<<E0. Y&dge#are"Y /%r,ing: V9A0.