Auditor Self Regulation
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Audit: Self-Regulation
“They complain of having to conform to large doses of red tape all because of a few bad apples bringing business and finance into disrepute” Patricia Barker (2006).
Barker succinctly sums up the quandary the audit profession finds itself in today. The preceding two decades have opened up a veritable Pandoras Box of audit failure. A profession which once cosily dictated to itself how to conduct its business has found itself under a barrage of attack from commentators, authorities and most pertinently; the public. Hell hath no fury like a man after seeing his pension kitty of Enron or Anglo Irish shares vanish in a blaze corporate fraud and illegality, with much of the ire directed at the audit firms of these companies.
But is it correct to say that self-regulation has been exposed as a house of order built on sand? Or as Barker alludes to, is it just a case of a select few ingredients spoiling what was otherwise an acceptable broth? By retracing our steps from the birth of the profession to the behemoth that is Chartered Accountancy today, the current state of affairs does not seem that surprising with the benefit of the 20/20 vision of hindsight!
Self-regulation was born out of the need for legitimate accounting firms to distinguish themselves from the many cowboy accountants of the time. Wilmott et al (1993) extensively detail the inception of self-regulation beginning with the acquisition of the Royal Charter. The Charter, from which the official name is derived today, was attained by a group of accountants in England and Wales to enforce higher standards upon the profession and increase the barriers to entry – ultimately the process of commodification of labour as Wilmott et al refer to. From this the ICAEW was effectively born. Fundamentally the Institute exists to enhance the reputation of the profession and promote the interests of its members in addition to having due regard to the public interest requirement that attaches itself to Royal Charters.
The profession enjoyed a rather tranquil and harmonious near first century of its life until the late 70s and early 80s caused the spotlight to be shone upon its self-regulating practices. Ultimately the commercialisation and dawn of the corporate entity had left auditing practices trailing in their wake. Wilmott et el (1993) examine in considerable detail two reports commissioned by the Institute in reaction to the tumultuous period. Prior to the first report [Tricker] there was a widespread belief that internal and external pressures on the institute were exerting potentially disabling effects on its governance. The Tricker report found that the membership had segmented to the point where there was disaffection by a significant percentage of members. He proposed a set of Subject Conferences to represent all sectors of the membership remarking that there was a “need to reaffirm the essential community of interest”
The Institute commissioned an internal committee to review the report and formulate their own set of recommendations. The Worsely Report considered the problem of how a professional body reconciles leadership in terms of PR and lobbying with the need for the involvement of high calibre members in the process of setting and applying entry standards. It also noted the lack of identification with the younger members of the institute to its public responsibilities. Essentially those coming through the system were not developing professionally and had come to see the exams as a mere obstacle to be traversed and not an acute professional requirement. Ultimately the report found that the fundamental challenge “is for the institute to maintain its public standing and its self-regulating status”. The seriousness with which the Institute took the need to emphasise its public duties in order to retain self-regulation can be seen clearly – “A professional association cannot be concerned with the short term interests of its members. To justify self-regulatory status it has to show that collectively its members can take a longer term view and reconcile self-interest with public interest.
In examining both reports Wilmott et al drew two intriguing conclusions; firstly that the younger members had come to see the Institute as a means to an end and as such the public interest duty obligated upon them had somewhat slipped into abeyance, and secondly; that the expansionist policies of the Institute had decidedly contributed to the dilemma it faced at that particular point in time in relation to self-regulation.
Baker (1993) in the same year as Wilmott et al published a paper examining the self-regulating nature of the large firms in the US. In a similar vein to the UK the profession had come under criticism with Byington and Sutton (1991) quoted in the paper as remarking: “Monopoly power in the hands of the self-regulated public accounting profession has produced welfare losses on the part of third party consumers of audited financial statements”. Baker further found evidence that the large firms had influenced GAAP in order to alleviate the threat of increased external regulation of accounting. In addition he held that the set-up of the firms themselves created significant issues in terms of self-regulation; namely that individuals who assume the top positions in the firms become assimilated in the ethos and thinking of the firms such that it was “virtually inseparable from their own consciousness”. Ultimately this manifested itself in catering to clients needs to the detriment of the public interest.
Baker further established that self-regulation was being maintained through a 3 fold process of doing (maintain client relationships), representing (maintain relationships with the business community and authorities) and being (creating the image and maintaining outward integrity). Significant efforts were