WHOSE POWER PREVAILS IN DISCLOSURE PRACTICES

The Foreign Corrupt Practices Act of 1977 (FCPA) made it illegal for a public company to have an inadequate system of internal control. This study explores the eff ect of the FCPA on disclosure practices with regard to the issuance, content, and structure of management letters from 1975 to 1979. The purpose is to address the power balance between a company's management, which may wish to suppress management letter content, and its auditor's free disclosure. Based on this analysis, the study also hypothesizes the expected outcome of pending Securities and Exchange Commission and Congressional proposals for additional control-related disclosures. Using content analysis, a data base of 101 companies' management letters is analyzed. Interactions of the parties involved and their incentives to demand or supply various forms of management letters are described and then used to predict patterns in management letter disclosure practices. The evidence supports CPAs' resistance to reported pressures to eliminate formal management letters. Moreover, while the length, format, scope, and content of management letters have changed, the analyses show that CPAs have continued to cite pervasive control problems and to make reference to prior years' disclosure of control problems about which management has taken no action. This research clarifies the power of the CPA to act, even when generally accepted auditing standards do not require an action and such action may be contrary to the preferences of the client. The findings tend to support practitioners' claims that (1) opinion shopping will not be successful (see Serlin 1985; AICPA 1985), (2) auditors are not experiencing independence problems with respect to pressures by clients, including pressures from managers of large clients with whom the CPA has had a long-term association, and (3) auditors recognize their first responsibility is to the public and the stockholder. If a valid analogy can be drawn between the FCPA's consequences and those of proposed regulation, the results reported herein imply that the auditor's power will prevail in disclosure practices.