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The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street by Jonathan R. Macey

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6. The New, Post-Reputation Wall Street: Accounting Firms

Historically, the accounting industry, which produces information about clients through audits, functioned on the basis of the traditional economic theory of reputation. Hiring a reputable accounting firm was a way of renting the accounting firm’s reputation, which, in turn, lowered that client’s cost of borrowing and raising new capital. Both the client and the accounting firm/reputational intermediary benefited: the client from lower borrowing costs and the accounting firm from fees it charged up to—but not greater than—the client’s savings.

For accounting firms to charge for their audit services, they had to maintain and invest in their reputations, which would be damaged if they approved ...

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