How Misconduct Spreads: Auditors’ Role in the Diffusion of Stock-option Backdating

This paper explores the role of professional experts in the diffusion of innovative practices that subvert the interests of stakeholders. I do so by studying the role of external auditors in the diffusion of stock-option backdating in the United States. Practices that are eventually accepted as misconduct may emerge as liminal practices, not categorized as misconduct until social control agents notice, scrutinize, and react to them. I examine how the role of external auditors in the diffusion of stock-option backdating changed as the practice shifted from liminality to being illegal and illegitimate. The findings suggest that professional experts involvement in the diffusion of liminal practices is highly responsive to the institutional environment. Initially, professional experts diffuse these practices via local networks. However, when the legal environment becomes more stringent, implying that the practice will become illegitimate, these offices reverse their role and extinguish the practice. The larger network remains largely uninvolved in both the diffusion, and extinguishment, of the liminal practice