Say the word “Titanic,” and the first thing most people think of is the iceberg. Or Kate and Leo. But probably the iceberg. The thing about icebergs, though, is that around 90 percent of them sits below the surface. We remember the collision, but we don’t always think about the giant mass we couldn’t see. Big moments have a way of working like that. We remember the headline, but not always the story underneath it.
Accounting has a similar Titanic. It’s called Enron. When the energy giant collapsed in 2001 after one of the biggest corporate accounting scandals in American history, billions of dollars disappeared, trust in corporate America evaporated, and everyone started asking the same question: How did nobody catch this?
Congress responded with the Sarbanes-Oxley Act, a law designed to strengthen auditor independence and restore confidence in corporate financial reporting. By most measures, it succeeded. Markets regained trust, investors regained confidence, and auditors became more independent. End story, roll credits.
Except that, for Joshua White, who will become associate professor of the practice of finance at Vanderbilt Business on August 16th, this is exactly where a new and more complicated story begins—one whose biggest part sits below the surface.
In “Auditor Independence and Human Capital: Complements, Not Substitutes,” scheduled to be published later this year in the Journal of Accounting and Economics, White asks a seemingly simple question: What if a law designed to make auditors better also changed what it means to become one?
It’s an easy thing to overlook. Regulations, after all, are usually judged on their outcomes. Far fewer people ask what those rule changes did to the people working inside the profession. But it turns out that auditor independence isn’t the only thing that makes an audit valuable. Experience also matters.
Think about learning to drive. You can memorize every traffic law in the driver’s manual, and you can ace the written exam, but the first time you encounter someone who blows through a red light, you’re no longer relying on what you learned in the manual. You’re relying on experience and instinct.
White argues that auditing works much the same way. Rules can make auditors independent, but they can’t teach experience. Experience is earned the old-fashioned way—through wrestling with messy problems, learning from seasoned colleagues, and developing the instinct to notice when a spreadsheet tells one story while reality tells another.
If independence regulations unintentionally make those opportunities harder to come by, the profession risks weakening one of its greatest assets: the accountants themselves.
For White, auditor independence and expertise aren’t competing priorities. They’re partners. Independence gives investors confidence that an auditor is objective. Experience gives that auditor the judgment to know when something doesn’t add up. And the strongest audits require both.
More than 20 years after Enron, the accounting profession is still learning from its own Titanic. White’s research suggests regulations can build independence. But experience builds judgment. And, just as with the Titanic, the lesson is to account for the entire iceberg—not simply the part you can see.