Beruflich Dokumente
Kultur Dokumente
Introduction
The recent, and seemingly endless, stream of publicized financial scandals
and collapses has served to highlight the problematic nature of the audit
function and placed the audit profession under increasing pressure to account
for itself. Concerns over the role, practices and regulation of auditors have
been voiced by a range of commentators, including academics, practitioners,
politicians, journalists and company executives both in the US and in the UK
(Fogar-ty et a/., 1991; Sikka et al., 1989; Willmott, 1991). Such problems are not
seen to be confined to issues of the technical superiority of one audit
technique over another or the ability of the audit function to respond to
changes in the business environment in a timely manner. Rather, challenges
are being made to the very bases upon which the audit profession has
claimed its powers and privileges and the knowledge structures underlying
their practices (Hopwood, 1990). These bases are founded upon a schema of
the trustworthy auditor which emphasizes the attributes of independence,
expertise, morality and fitness to act in the public interest (e.g. see Neu, 1991;
Willmott, 1986). It is a questioning of these fundamental attributes of the
auditor which has led some to suggest that public accounting has become “a
Address for correspondence: Professor Linda Kirkham, University of Manchester, Department
of Accounting, Roscoe Building, Manchester Ml3 9PL, UK.
Received 15 July 1990; revised 13 October 1991; accepted 8 February 1992.
291
1045-2354/92/030291 + 24 $08.00/O 0 1992 Academic Press Limited
292 L. M. Kirkham
profession under siege” (Fogarty ef a/., 1991, p. 220) and to question whether
“a profession so besieged (can) survive?” (Somner, 1990).
Such a debate is not, however, new. Similar debates have frequently arisen
in the wake of corporate scandals (Briloff, 1990; Tinker et a/., 1991; Tricker,
1982; Willmott, 1991), only to disappear again as public attention is either
diverted or reassured (Humphrey & Moizer, 1990). This disappearing trick has
been facilitated, in part, by the absence of any serious and sustained
challenges to many of the central concerns raised in the wake of perceived
audit failures. Thus, too often, critics have viewed such failures as aberrations
or exceptions to the rule rather than pursuing the problem as a critical, unitary
matter (Briloff, 1991) and have dwelt upon the symptoms of such failures
whilst neglecting to scrutinize their root cause (Tinker et a/., 1991). General
concerns over auditor independence or expertise have been submerged
within attempts to identify detailed inadequacies or failures in specific audits.
This auditor or that audit practice are scrutinized and judged and characteris-
tic solutions are proffered. Invariably, such analyses have resulted in press-
ures for change which are aimed at improving control of. the extant audit
process whilst leaving unchallenged its underlying meaning and functioning.
Thus, despite two decades of periodic crises in the auditing profession, the
underlying concepts of the trustworthy auditor (Neu, 1991, Sikka et al., 1989)
and the idealistic audit (Fogar-ty et al., 1991) have escaped any sustained and
serious challenges.
Current concerns regarding the audit function have centred upon a series of
major scandals both in the UK, the US and internationally [e.g. Maxwell
Communications Corporation (MCC), savings and loan associations (S&Is),
Bank of Credit and Commerce International (BCCI)]. These scandals have
revived a questioning of the independence, integrity and expertise of auditors
(Treadway Commission, 1987) in relation to a number of aspects of the audit
function, including the absence of qualified audit opinions despite apparent
evidence of problems and the adequacy of the collection and evaluation of
audit evidence’. The collapse of MCC, the latest scandal to erupt into the UK
public domain merely underscores these concerns:
And the role of the firm, the UK’s largest accountancy practice, who have
audited Maxwell companies over the last 20 years without ever qualifying a
report, has already led to renewed calls for far-reaching reform of auditor
relationships with clients (Accountancy Age (AA), 12 December 1991, p. 1).
Such issues lay at the heart of the research questions posed in the paper by
Arnold Wright which attempts to explore the impact of key environmental
factors (defined as characteristics of the client), selected because of their
potential significance in “affecting the objectivity of auditors”‘, on audit
disclosure judgements.
As Wright points out, there is a lack of empirical evidence addressing
whether auditors rely on environmental factors in practice; how these factors
impact upon audit judgements and whether reliance on these factors is
beneficial or harmful (the “value” of reliance). The importance of such issues
is underscored by those academics arguing for a more contextual approach to
understanding audit practice whereby recognition is given to how audit
Putting auditing practices in context 293
Wright’s Study
In order to explore whether auditor judgements are affected by environmental
cues, Wright draws upon a theoretical framework which “depicts an input,
process, output sequence”. Environmental factors enter the framework in-
directly in terms of information accumulated as part of the evidence-gathering
process. Using this framework as a model, Wright employs a laboratory
experiment as a means of examining “the impact of selected environmental
cues on audit disclosure judgements” and evaluating the posited theoretical
framework of the audit decision process. However, as with other laboratory
studies, Wright’s choice of research tool can be seen to labour under a major
handicap in that it cannot observe the phenomenon of interest-the influence
of environmental cues on auditor judgement processes (Hogarth, 1991) or
behaviour (Johnson et a/., 1989). In laboratory studies, processes and
influences can only be inferred and evaluated by observing inputs and
outputs in relation to the model specified. Consequently, such an approach
must rely upon a theoretically well-specified model in order to support any
claims for a relationship between the observed experimental phenomena and
the theoretical framework utilized. Wright’s model would seem to be only
loosely specified and little theoretical explanation is offered for either the
choice of variables studied (which is rationalized in terms of citations in the
294 L. M. Kirkham
auditing research (e.g. see Fogarty et al., 1991; Humphrey & Moizer, 1990;
Willmott, 1991). Its nature, boundaries and interrelationships with the audit
function have proved a contested terrain between competing theoretical
paradigms. At one extreme, cognitive researchers in auditing, employing a
variety of perspectives such as the lens model (e.g. Ashton, 1974) and the
literature on heuristics and biases (Joyce & Biddle, 1981), have viewed the
environment in terms of a restricted set of information about an enterprise
which can be meaningfully reproduced in laboratory settings. At the other
extreme, critical researchers argue for an appreciation of the wide array of
economic, political and social factors and influences which serve to create the
environment in which audit decisions take place. This perspective not only
involves a consideration of such factors at the societal and/or organizational
levels, but demands an appreciation of how such factors may be conflictual
and contradictory. From this perspective, auditing is viewed as a social
practice to be understood in relation to other social practices (Tinker et al.,
1991).
In cognitive research studies, the environment is frequently viewed as
exogeneous to the auditor and her/his human information processing capabi-
lities such that judgements are seen to be influenced by data in the
“environment” and data retrieved from memory (e.g. Ashton, 1991; Frederick,
1991). Auditor decisions are viewed as the outcomes of applying purely
procedural techniques, constrained only by the limits of human information
processing. In contrast, critical researchers view the auditor as part of the
environment of the audit such that their decisions are both a product
(reflection) of the environment and may also serve to constitute it
(Hines, 1989).
Wright describes environmental factors as “characteristics of the client”
which “deal with the setting in which the audit takes place”. However, such a
definition is ambiguous and demands further elaboration. From an examina-
tion of the theoretical framework adopted in the paper, the environment
emerges as an independent set of discrete variables which constitute
information which the auditor may or may not draw upon to make audit
decisions. What is not clear however, is the theoretical basis for the
identification of the set of environmental variables and their relationship to
each other and the framework articulated.
In order to test the objectivity of the auditor, Wright selects three client
characteristics as “key” environmental variables-client size, length of audit
engagement and the growth pattern of the client. The choice of variables is
justified in terms of a priori assertions made in the literature. However, the
audit literature also contains assertions and evidence regarding the potential
importance of the organizational setting of the auditor (i.e. the professional
accounting firm environment) in influencing auditor decisions and objectivity.
In particular, an increasing number of researchers have identified the
increasingly commercialized and competitive environment of audit firms as
potentially influencing the nature and outcome of the audit process at a
variety of levels. On a general level, these developments have led some critics
to question auditors’ continuing claims to professionalism (e.g. see Briloff,
1990; Zeff, 1987; Tinker, 1985; Willmott, 1986). More specifically, researchers
296 L. M. Kirkham
Hopwood (1990) suggests, “the micro politics of audit negotiations now take
place in an arena shaped, not just by financial pressures on (client) manage-
ment, but also by a much more commercial orientation in the auditing firms
themselves“ (p. 83). Essentially, Wright’s concept of the environment is
constrained to considerations of the client company with little, if any,
recognition of the environment of the auditor and its interdependencies with
the environment of the client and the client-auditor relationship. Such a
concept is not only partial, it may be misleading since the meaning and
significance of client characteristics (such as client size, growth pattern and
length of engagement) to audit decisions in practice must be viewed in
relation to characteristics of the audit market, auditors and audit firms.
The concept of the environment can be expanded even further to include a
consideration of the broader societal context within which the audit function
takes place (e.g. see Hines, 1989; Tinker et al,, 1991). From such a perspective,
audit decisions are viewed in relation to a wide set of constituents and factors
including professional bodies, government, the regulatory process, auditors’
relationship with the state and economic and political conditions (Tinker,
1985; Sikka et a/., 1989; Willmott, 1991). These aspects of the audit environ-
ment are viewed as an interacting whole rather than as a set of discrete,
independent influences. Thus, the meaning and significance of factors such as
client size and growth patterns for audit decisions are understood in relation
to political and economic pressures and changing professional standards
which, inter alia, may influence auditor attitudes to, and assessments of, risk,
pay-offs, professionalism, etc.
Auditing firms and individual auditors face a number of potential costs,
including loss of reputation, lawsuits and sanctions, if the audit is sub-
sequently shown to be defective. The risk of an audit being exposed as a failure
and the incumbent costs may depend upon the politico-economic environ-
ment prevailing. For example, the risk of exposure may increase in the wake
of a period of publicized audit failures, legal actions and heightened govern-
ment attention to the regulation and organization of the audit function.
Evidence cited by Fogarty et al. (1991) leads them to conclude that “(i)n sum,
research supports the intuition that, at the margin, qualification has been a
reaction to the worsening malpractice exposure of accountants” (p. 218).
Thus, audit decisions need to be understood in relation to changing regula-
tory and professional pressures.
The economic climate may impose significant pressures both on the client
and on the auditor and may alter the meaning and significance of client
variables in auditor judgement decisions. In a recession, client firms may seek
to minimize cash outflows in the form of audit and related fees whilst facing
increased pressure not to jeopardize market confidence through either poor
reported results or an audit qualification. The potential power of client firms to
exert control over the auditor’s ability to earn fees (Knapp, 1985) may be
exacerbated during a recession since the increasing commercialization of
auditing firms has placed them under similar economic pressures as other
businesses. Thus, they may be less able to withstand client pressures whilst
facing a heightened threat of losing the audit fee annuity and any related fee
income in a shrinking market for their services. From this perspective, the
2% L. M. Kirkham
meaning of client characteristics such as size and growth pattern, for audit
decisions, can be assumed to vary in relation to altered economic conditions.
Changes in domestic and international capital markets and the market for
audit and management advisory services may serve to influence the assess-
ments of risks and pay-offs associated with audit decisions.
The audit environment can be seen to be much larger and more complex
than a narrow set of client characteristics. It constitutes an array of factors and
influences which may be conflicting and contradictory. Understanding the
nature and significance of this enlarged concept of the environment is an
important issue in auditing research and is discussed in more detail in the
final sections of this paper.
Although Wright acknowledges an array of potential environmental cues as
“others” in his framework, these are not theoretically specified. Consequently,
there is little theoretical justification and, as he himself acknowledges, scant
empirical research, to support his choice of cues. Whilst on a pragmatic level
it may be acceptable to adopt an incremental approach to understanding the
impact of the environment on audit judgement decisions, it is nevertheless
necessary to specify the theoretical basis on which selected cues are identified
for empirical testing. Otherwise, it is difficult to accept the validity of his
empirical transformation of the research question posed. The audit setting is
questioned but its nature and characteristics are left unexplored. Without
some theorization of “the environment”, questions relating to the nature,
significance or impact of environmental factors or cues will remain
unanswered.
Whilst the theoretical and empirical debate over the meaning of the environ-
ment in the audit function is unresolved, it is nevertheless possible to
question the methodology which might be employed to explore the concept,
however it is construed. As noted earlier, Wright employs a laboratory
experiment to explore the impact of environmental cues on audit judgements.
Laboratory experimentation research is characterized by “(a) manipulation by
the researcher, of one or more independent variables, and observation of the
impact on one or more dependent variables; and (b) isolation of the research
in a physical situation apart from the routine of ordinary living” and has been
increasingly employed to examine human judgements or decisions in ac-
counting or auditing research (Snowball, 1986, p. 48).
The problems associated with such a choice of research tool have been
discussed in relation to accounting (Swieringa & Weick, 1982) and auditing
(Hogarth, 1991) and studies employing laboratory experiments have been
shown to suffer from a number of limitations, some of which are acknow-
ledged in the Wright paper. In particular, auditors are presented with relatively
isolated experimental stimuli (in the Wright study, a description of the firm
and the audit issues, a set of summarized financial statements and key
statistics) and are asked to make judgements (about audit adjustments and
opinions) concerning hypothetical clients. The issue is essentially whether
such a research design can inform our understandings of how and which
Putting auditing practices in context 299
audit decisions are made in practice; can it further our understandings of the
impact of environmental cues on audit judgement decisions made in
practice?.
The demands of the audit environment are highly complex and ambiguous
(Humphrey & Moizer, 1990) and audit judgements involve a great deal of
discretion and choice. Nevertheless, audit researchers continue to explore
questions about audit practice in abstracted, partial contexts. Claims are made
for progress in understanding what individual auditors can achieve in specific
tasks whilst relatively little attention is given by such researchers to how
auditors make decisions, and what they do (or do not) achieve in practice.
Whilst attempts are made to employ “realistic tasks” and introduce com-
plexity into experimental stimuli (see Hogat-th, 1991; Johnson et al., 19891,
audit research studies employing laboratory experimentation have continued
to neglect the myriad of (non-technical) pressures and conflicts which
characterize the multi-faceted nature of auditing.
Wright’s study may be seen to be typical in this respect. Although he
attempts to introduce realism, complexity and conflict through his choice of
“real” audit cases, these dimensions of auditing tasks are construed in a
static, uni-directional way. Subjects were presented with a highly structured
task in terms of being “asked to make a disclosure/materiality judgement” on
the basis of information provided by the researcher. In practice, however,
decision tasks are poorly structured (Einhorn, 1974) and in most situations
auditors will adopt an active role in searching for information to evaluate. The
nature and extent of the information sought and evaluated will depend on a
number of factors and pressures and the auditor cannot be assumed to
retrieve sufficient information for each audit task. Research in the US related
to audit quality reduction acts, such as premature sign-offs, has identified a
number of contributory factors, including budget time pressure and type of
CPA firm (see Kelley & Margheim, 1990, for a summary). The report of the
Treadway Commission (1987) suggested that, in addition to budget pressure,
fee pressure and reporting deadlines may adversely affect audit quality and
recommended that public accounting firms need to recognize and control for
such organizational pressures.
In view of these organizational pressures on the completion of audit tasks,
the responses of subjects presented with structured tasks in the laboratory
setting cannot be easily generalized to the setting of audit practice. Moreover,
the focus on specific aspects of audit procedures ignores or renders difficult
the assessment of how these fit into the overall design and process of the
audit and the pressures and conflicts therein. An audit constitutes more than
the sum of its constituent parts and the non-interactive, static nature of
laboratory studies poses fundamental concerns regarding their suitability to
provide insights into question of audit practice. In practice, the general and
specific context of the audit and the auditor may influence not only the
evaluation of information (including environmental cues) but also its
constitution.
The ability to re-create the pressures and conflicts inherent in the audit
setting may be crucial to the validity of any research findings. In their
absence, subjects’ responses may be distorted, or simply inaccurate, reflec-
300 L. M. Kirkham
realms and are only seen to overlap infrequently, for example when a
violation of the concept of “expertise” is viewed to have taken place which
coincides with or results in the disclosure of company fraud. Even then,
Fogarty et al. (1991) suggest that public accounting has demonstrated an
ability to survive, if not prosper, through an “ever increasing decoupling of
espousals and actions” and “a systematic manipulation of a concept of an
idealistic audit” (p. 222)
In the Wright study the relationship of concepts to practice is left unques-
tioned and the interpretation of the findings and recommendations for change
are premised on the assumption of a close relationship between the two.
Despite the ambiguity in the performance of auditors of differing levels of
“professional experience” and the inconsistent responses to different en-
vironmental cues (i.e. subjects were viewed as getting the length of client
association cue “right” and the size and growth patterns cues “wrong”), the
underlying concepts of objectivity and professionalism are left unquestioned.
Rather, these findings are discussed in relation to the technical training and
knowledge of auditors which, it is suggested, might require improving in order
“to draw attention to these potentially important clues”. Once the auditors’
attention has been drawn to such clues, it would seem we are to assume they
will act upon them in practice in a disinterested, professional manner such
that they will be better equipped to “take a global view of the client in its
environmental setting to consider fully the risks of material errors present”.
Without such an assumption, such prescriptions lose their validity since we
can no longer take for granted the process by which auditors make judge-
ments, nor the basis on which they do so. In the absence of any serious
questioning of the nature of auditor expertise, independence and profes-
sionalism, it is difficult to know how to interpret Wright’s findings. We are
offered potential solutions but, it would seem, in the absence of any
acknowledgement of the problem.
Whole chunks of BCCl’s balance sheet were rotten: many loans were bad,
even fictitious, and deposits had been plundered to conceal enormous
losses (FT, 9/10 November 1991, p. I).
size of the problem? Wright’s model offers client and engagement charac-
teristics as environmental factors. BCCI was a large international bank doing
business across numerous national borders. The auditors had already been
involved with BCCI as joint auditors before being appointed as sole auditors in
1986 (The Observer, 1 September 1991, p. 1) and are alleged to have earned
f6m in fees from BCCI in 1990 (AA, 31 October 1991, p. 3).
Where in Wright’s model is any provision for the significance of the client
characteristics as outlined by a senior partner of the auditors, Price Water-
house (PW), who protested “(y)ou can’t qualify a bank’s accounts unless the
regulator has been preparing the ground” (quoted in AA, 18 July 1991, p. 1 l)?.
What is the meaning of such rationales for the traditional concept of auditor
independence and how does it reconcile to the auditors accountability
responsibilities to society? Moreover, it has been suggested that “it is better
not to think of BCCI as a bank in the traditional sense” since it originated from
a different culture where “banks traditionally involve themselves closely with
their customers and play an important part in the political power game” (FT,
9/10 November 1991, p. I). Where in Wright’s model is any recognition of the
need for auditors to understand the different cultural and political meanings of
business institutions and practices? The FT goes on to suggest that BCCI was
misunderstood by the Western authorities; it would seem it was also
misunderstood by their auditors.
The audit setting of BCCI was an international one with the client’s dealings
extending across the globe. In coming to the defence of PW, a number of
prominent representatives of the accounting profession in the UK have
pointed out that “PW would have been hampered by the Cayman Island’s
secretive banking laws“ (AA, 31 October 1991, p. 3) and have pointed to the
problems of tracking down the “devious offshore tangle” that “was BCCI”
(AA, 18 July 1991, p. 11). Where in Wright’s model is any recognition of the
relatively unregulated markets which allow capital to flow freely from country
to country, largely escaping the regulatory apparatuses of nation states? And
where, in his model, is any provision for the economic downturn in the world
economy which would serve to exacerbate liquidity problems of international
financial institutions and which helped expose the financial weakness of
BCCI?
A whole array of potential conflicts of interest in the auditors’ role in the
BCCI affair have been alleged. These have ranged from the auditing firm’s
own dealings with the bank as a customer, through their position as advisors
on the restructing of the group, to their role as paid agents of the regulators
(the Bank of England) to investigate the bank whilst continuing to accept BCCI
as a client. BCCl’s top management has been described as obsessed with
power and secrecy (FT, 8/10 November 1991, p. I), but where in Wright’s
model is recognition of the negotiation processes between auditors and top
management and the potential for coercive and powerful interchanges? How
can we begin to appreciate the influence and significance of the relationships,
not just between BCCI management and the auditors, but also between the
auditors and the Bank of England?
The issues raised by the collapse of BCCI underscore the naivete of
traditional discussions of auditor independence in the accounting literature,
308 L. M. Kirkham
wherein the concept is analysed within models which abstract the technical
requirements and standards of professional pronouncements from the social
context in which they are developed, enforced and given meaning. As clearly
indicated in the BCCI case-“you can’t qualify a bank’s accounts unless . . . . .‘I,
the economic and political significance of the client may have a potentially
important bearing upon audit decisions in practice. The argument advanced in
the BCCI case appears to subscribe to a thesis whereby an audit qualification
of a large bank is viewed as a provocation to a banking crisis which will result
in misery and ire for many depositors and may even jeopardize a nations
economic structure (AA, 18 July 1991, p. 11). Such arguments surrounded the
S&L crises in the US. There, as in the UK, audit partners rationalized their audit
judgements, in part, as necessary to avert a crisis in customer confidence
which may have resulted in a panic “run on the bank”.
The concern that governments and auditors might act together to conceal
the failure of some large business institutions in the belief that exposure
might seriously jeopardize a nation’s economic structure and the fear of the
consequences of such actions is a current concern amongst Washington
analysts. The “too-big-to-fall” thesis is illustrated by the rumoured f4.3m
bail-out of Chase Manhattan Bank by the US Treasury in December 1990’. If
such a thesis has any validity, and the growing number of revelations both in
the UK and the US suggest it might, then it serves to reinforce the complexity
and significance of the wider political and economic context in which audit
decisions take place. Such decisions cannot be understood in terms of models
which ignore the web of social, political and economic relations which engulf
the audit process; the problems of “independence” and the pressures and
influences faced by auditors are shown to be much more complex and
significant than is ever alluded to in Wright’s model.
The social context of audit failures needs to be viewed as part of the context
of auditing more generally (Briloff, 1991) and vice versa. Analyses of the
emergence and nature of auditing discourses and practice require an ap-
preciation of how they might reflect and, in part, help constitute wider social
concerns about the accountability of both auditors and corporations (Tinker et
a/., 1991). The case of BCCI demonstrates the need to examine the influence of
state and other regulatory bodies in determining how and whether the public
interest is served through current auditing arrangements. It is illustrative of
the range of social relations, not just market relationships which constitute the
“audit setting”.
The above discussion suggests that there is a serious disjuncture between
the circumstances surrounding audit practice, as illustrated by cases of
alleged audit failures, and Wright’s methodology for grasping them. In
particular, his modelling of the environment cannot accommodate many of
the issues and concerns which characterize audit practices. As with the genre
of auditing research which has construed the audit context as a set of
economic relations and portrayed managers and auditors as atomistic
individuals unfettered by social relations (Neu, 1991), Wright’s modelling
displays no cognizance of the structure of the wider social environment or of
the social conflicts and antagonisms which characterize it. The role of conflict
is collapsed to a narrow set of economic variables which are assumed to
represent the pressures inherent in the client-auditor relationship.
Putting auditing practices in context -3o!l
The challenge facing audit researchers essentially parallels that outlined for
management accounting researchers nearly a decade ago and is essentially
one of understanding auditing in its social and organizational context
(Burchell et a/., 1980). Explicit appeals for such an agenda have been made in
the extant auditing literature (e.g. see Humphrey & Moizer, 1990) and a small
but growing body of researchers has begun to respond to the challenges
posed. Studies are beginning to emerge which recognize the need to
appreciate the wider historical and institutional context in which auditing as a
discourse and a practice is established and regulated (Willmott, 1991). These
studies have sought to further our understandings of the audit function
through historical analyses of the emergence of audits (e.g. Mills, 1990;
Merino et al., 1991) and audit practices (e.g. Power, 19921, empirical analyses
of auditing regulatory activities (e.g. Bremser et a/., 1991), the historical
constitution of the auditing profession (e.g. Sikka et a/., 1989; Tinker, 1985;
Tinker et a/., 1991; Willmott, 1986; 1991; Walker, 1991) and analyses of its
professional claims and social practices (e.g. Boland, 1982; Fogarty et al.,
1991; Humphrey et al., 1991; Power, 1992) and ethnographic-based studies of
auditors and specific audit tasks (e.g. Humphrey & Moizer, 1990; Power,
1991).
Through these studies, audit practices and techniques are being revealed to
have their origins in social struggles (e.g. see Merino et al., 1991) and to be
based on questionable claims (e.g. Power, 1992). Fundamental concepts such
as expertise, independence, trust and professionalism, upon which the
profession relies for its power and privileges, and which are treated unprob-
lematically in conventional auditing research, have been exposed as socially
constructed schema which are historically constituted (Hines, 1989; Neu,
1991; Willmott, 1986, 1990). Such analyses have been important in estab-
lishing the need to appreciate the role of the profession itself in making and
interpreting the rules and norms by which it functions; the same rules and
norms which serve to legitimate and justify its practices and which help
constitute the audit process in society. In part, these analyses have under-
scored the importance of situating auditor judgements and decisions within
the broader audit process in society; not least in terms of emphasizing the
importance of exploring how auditors negotiate and mediate the web of social
relations which constitute the audit process.
310 L. M. Kirkham
Conclusion
down, rather than opens up, avenues for further understandings of audit
practices. A more informative approach needs to take account of the conflicts
and pressure both within the wider set of social relations from which auditors
derive and negotiate their roles and decisions as well as those which emerge
from limitations in human information processing, professional education and
training. Such an approach requires a more adequate theorization of the
“audit environment”.
Currently and historically, this “environment” has been characterized by a
growing number of audit failures which have served to expose and under-
score the problematic nature and functioning of auditing. Despite serving as a
rationale for many research studies, attempts to illuminate our understand-
ings of audit practices have too often ignored or discounted the insights
which such failures provide. The recent case of BCCI has highlighted the
potential importance of a much wider and more complex set of environmental
“cues” than can ever be accommodated within Wright’s model: the political,
as well as the economic, significance of the client: cultural understandings of
business practices, regulatory practices and pressures; processes of capital
accumulation and distribution; and political programmes, have all been
implicated in the audit setting of BCCI. To imply, as Wright’s model does, that
in practice auditors can free themselves from this complex set of social
relations when exercising judgement, sits uneasily with history. Audit re-
search needs to accommodate critical historical analyses of audit practices not
only as a rationale for identifying issues, but as a means through which we
can further our understandings of both the nature and “impact of environ-
mental factors on auditor disclosure judgements”. Critical studies in auditing
are emerging which might provide a framework for those audit researchers
who acknowledge the problematic nature of audit practice and desire to
examine its impact. It now behoves them to acknowledge its existence and
deal with the challenges it poses to conventional analyses of auditing.
Acknowledgement
The author would like to thank Tony Tinker for his helpful comments on an earlier draft
of this paper and for his informative and stimulating suggestions which resulted in an
extended version of the paper.
Notes
1. For example, the concerns of the ex-finance chief of the collapsed Bank of Credit and
Commerce International have been reported as including doubts over the independent
relationship between the auditors and top BCCI management, the reluctance of the auditors to
qualify the accounts of a bank “-even BCCI--“, and the adequacy of the audit collection
procedures governing third party confirmation of loans (The Observer, 1 September 1991, pp.
23 and 25). Similar concerns were identified in the US concerning savings and loan
associations. In 1989 the General Accounting Office reviewed the audits of 11 savings and loan
associations and concluded that six were inadequate (see Briloff, 1990, p. 8).
2. All unattributed citations are to Wright (1992).
3. The practice of low-balling recently made the headlines in the UK accountancy press when it
was disclosed that “Price Waterhouse, the most respected blue chip firm, offered financial
services giant Prudential Assurance a fZ900,OOO discount on the proposed f2.3m fee in order to
win the prestigous audit appointment” (Accountancy Age, 2 May 1991, p. 1). The article quoted
a tender document which stressed PW’s “commercial awareness” and “acknowledged track
312 L. M. Kirkham
record in constructive accounting solutions”. The auditors went on to suggest: “Our
experience and expertise in financial reporting will enable us to contribute to your discussions
on how best to present your results and balance sheet; demonstrating the strength of the
Prudential in an increasingly competitive international insurance market.
4. The failure of auditors to “blow the whistle” in terms of timely exposure of “misleading”
accounts has been noted in a number of celebrated audit failures in the US (see Briloff, 1990).
Even more recently, the increasing importance of such pressures has been acknowledged in
the UK by the chairman of the Accounting Standards Board (the UK equivalent of the FASB)
who “warned of the dangers facing auditors coming under undue pressure to sign-off
accounts or risk losing the audit” (Accountancy Age, 19 September 1991, p. 1).
5. The use of audit games which incorporate many of the dynamic interdependent features of an
audit within a simulated business setting has been suggested as a way forward and have
begun to be developed (see e.g. McDaniel, 1990). However, the problems associated with such
models are considered daunting (Ashton, 1982). In particular, it is doubtful whether such an
approach can overcome the limitations associated with the use of hypothetical clients and the
distorted loss and reward functions which ensue.
6. I am grateful to Tony Tinker for suggesting this line of analysis.
7. I am grateful to Tony Tinker for suggesting this example.
References
Armstrong, M. B. & Vincent, J. I., “Public Accounting: A Profession at a Crossroads”, Accounting
Horizons, Vol. 2, No. 1, 1988, pp. 94-98.
Ashton, A. H., “Experience and Error Frequency Knowledge as Potential Determinants of Audit
Expertise”, The Accounting Review, Vol. 66, No. 2, 1991, pp. 218-239.
Ashton, R. H., “An Experimental Study of Internal Control Judgements”, Journal of Accounting
Research, Vol. 12, Spring, 1974, pp. 143-157.
Ashton, R. H., “Discussion of “An Assessment of Laboratory Experiments in Accounting”“,
Journal of Accounting Research, Vol. 20, (Supplement), 1982, pp. 102-107.
Bedard, J., “Expertise in Auditing: Myth or Reality. 7”, Accounting, Organizations and Society, Vol.
14, Nos l/2, 1989, pp. 113-131.
Boland, R., “Myth and Technology in the American Accounting Profession”, Journal of
Management Studies, 1982, pp. 109-127.
Bremser, W. G., Licata, M. P. & Rollins, T. P., “SEC Enforcement Activities: A Survey and Critical
Perspective”, Critical Perspectives on Accounting, Vol. 2, No. 2, 1991, pp. 185-199.
Briloff, A. J., “Accountancy and Society: a Covenant Desecrated”, Critical Perspectives on
Accounting, Vol. 1, No. 1, 1990, pp. 5-30.
Briloff, A. J., “Unaccountable Accounting Revisited”, paper presented at The 37th Annual
Graduate Accounting Conference, Penn State University, October, 1991.
Burchell, S., Clubb, C. Hopwood, A. G., Hughes, J. & Nahapiet, J., “The Roles of Accounting in
Organizations and Society”, Accounting, Organizations and Society, Vol. 5, 1980, pp. 5-27. -
Burchell, S., Clubb. C. & Hoowood, A. G., “Accountina in its Social Context: Towards a Historv of
Value Added in the Unitei Kingdom”, Accounting, grganizations and Society, Vol. 10, 1985,‘~~.
381-413.
Carmichael, D. R. & Swieringa, R. J., “The Compatibility of Auditing Independence and
Management Services-An Identification of Issues”, The Accounting Review, Vol. 43, No. 4,
1968, pp. 697-705.
Carpenter, V. L., & Feroz, E. H., “GAAP as a Symbol of Legitimacy: A Study of the Decision of the
State of New York to Adopt Generally Accepted Accounting Principles for External Financial
Reporting”, paper presented at the Third Interdisciplinary Perspectives on Accounting Con-
ference, Manchester, July, 1991.
Cushing, B. E. & Loebbecke, J. K., Comparison of Audit Methodologies of large Accounting firms
(Sarasota, Florida: American Accounting Association, 1986).
Dirsmith, M. W. & Haskins, M. E., “Inherent Risk Assessment and Audit Firm Technology: A
Contrast in World Theories”, Accounting, Organizations and Society, Vol. 16, No. 1, 1991, pp.
61-90.
Einhorn, H. J., “Expert Judgement: Some Necessary Conditions and an Example”, Journal of
Applied Psychology, October, 1974, pp. 562-571.
Fogarty, T. J., Heian, J. B. & Knutson, D. L., “The Rationality of Doing “Nothing”: Auditors’
Responses to Legal Liability in an Institutionalized Environment”, Critical Perspectives on
Accounting, Vol. 2, No. 3. 1991, pp. 201-226.
Frederick, D. M., “Auditors’ Representation and Retrieval of Internal Control Knowledge”, The
Accounting Review, Vol. 66. No. 2, 1991, pp. 240-258.
Putting auditing practices in context 313
Goetz, J. F. Jnr., Morrow, P. C. 81 McElroy, J. C., “The Effect of Accounting Firm Size and Member
Rank on Professionalism”, Accounting, Organizations and Society, Vol. 16, No. 2, 1991, pp.
159-165.
Goldman, A., “Epistemics: The Regulative Theory of Cognition”, Journal of Philosophy, Vol. 75,
No. IO, 1976, pp. 509-523.
Hines, R. D., “Financial Accounting: In Communicating Reality, we Construct Reality”,
Accounting, Organizations and Society, Vol. 13, 1988, pp. 251-262.
Hines, R. D., “Financial Accounting Knowledge, Conceptual Framework Projects and the Social
Construction of the Accounting Profession”, Accounting, Auditing and Accountabiliry Journal,
Vol. 2, No. 2, 1989, pp. 72-92.
Hogarth, R. M., “A Perspective on Cognitive Research in Accounting”, The Accounting Review,
Vol. 66, No. 2, 1991, pp. 277-290.
Hopwood, A., “Ambiguity, Knowledge and Territorial Claims: Some Observations on the Doctrine
of Substance Over Form: A Review Essay”, The British Accounting Review, Vol. 22, No. 1, 1990.
pp. 79-87.
Humphrey, C. & Moizer, P., “From Techniques to Ideologies: An Alternative Perspective on the
Audit Function”, Critical Perspectives on Accounting, Vol. 1, No. 3, 1990, pp. 217-238.
Humphrey, C.. Moizer, P. & Turley, W. S., “The Audit Expectations Gap in Britain-An Empirical
Investigation”, paper presented to the ElASM workshop on Auditing Regulation, Copenhagen,
September, 1991.
Johnson, P. E., Jamal, K. & Berryman, R. G., “Audit Judgement Research”, Accounting.
Organizations and Society, Vol. 14, Nos I/2, 1989, pp. 83-99.
Joyce, E. J. & Biddle, G. C. “Are Auditors’ Judgements Sufficiently Regressive?“, Journal ot
Accounting Research, Vol. 19, Autumn, 1981, pp. 323-349.
Kaplan, R., “Accountant Liability and Audit Failures: When the Umpire Strikes Out”, Journal of
Accounting and Public Policy, Vol. 6, 1987, pp. l-8.
Kelley, T. & Margheim, L., “The Impact of Time Budget Pressure, Personality, and Leadership
Variables on Dysfunctional Auditor Behaviour”, Auditing: A Journal of Practice & Theory, Vol.
9, No. 2, 1990, pp. 21-42.
Knapp, M. C., “Audit Conflict: An Empirical Study of the Perceived Ability of Auditors to Resist
Management Pressure”, The Accounting Review, Vol. 60, No. 2, 1985, pp. 202-211.
McDaniel, L., “The Effects of Time Pressure and Audit Program Structure on Audit Performance”.
Journal of Accounring Research, Vol. 28, Autumn, 1990, pp. 348-367.
McKee, A. J., Williams, P. F. 81 Frazier, K. B., “A Case Study of Accounting Firm Lobbying: Advice
or Consent”, Critical Perspectives on Accounting, Vol. 2, No. 3, 1991, pp. 273-294.
Merino, B. D., Mayper, A. G. & Sriram, R. S., “Audits in the United States in 1927: A Critical and
Historical Perspective”, paper presented at the Third Interdisciplinary Perspectives on Account-
1ng Conference, Manchester, July, 1991.
Mills, P. A., “Agency, Auditing and the Unregulated Environment: Some Further Historical
Evidence”, Accounting, Auditing & Accountability Journal, Vol. 3, No. I, 1990, pp. 54-66.
Neu, D., “Trust, Impression Management and the Public Accounting Profession”, Critical
Perspectives on Accounting, Vol. 2, No. 3. 1991, pp. 295-313.
Power, M. K., “Educating Accountants: Towards a Critical Ethnography”, Accounting,
Organizations and Society, Vol. 16, No. 4, 1991, pp. 333-353.
Power, M. K., “From Common Sense to Expertise: Reflections on the Prehistory of Audit
Sampling”, Accounting, Organizations and Society, Vol. 17, No. 1, 1992, pp. 37-62.
Robson, K., & Cooper, D. J., “Understanding the Development of the Accounting Profession in the
United Kingdom”, in D. J. Cooper and T. M. Hopper teds), Critical Accounts (London:
MacMillan, 1990).
Schein, E. H., Organizational Culture and Leadership: A Dynamic View (San Francisco: Jossev
Bass, 1985).
Serlin, J., “Opinion Shopping”, Journal of Accounting, Auditing and Finance, Vol. 9, 1985,
pp. 74-80.
Shockley, R. A., “Perceptions of Auditors’ Independence: An Empirical Analysis”, The Accounting
Review, Vol. 56, No. 4, 1981, pp. 785-800.
Sikka, P., Willmott, H. C. & Lowe, E. A., “Guardians of Knowledge and Public Interest: Evidence
and Issues of Accountability in the UK Accountancy Profession”, Accounting, Auditing and
Accountability Journal, Vol. 2, No. 2, 1989, pp. 47-71.
Simon, D. 81 Francis, J., “The Effects of Auditor Change on Audit Fees: Tests of Price Cutting and
Price Recovery”, The Accounting Review, Vol. 63, 1988, pp. 255-269.
Snowball, D., “Accounting Laboratory Experiments on Human Judgement: Some Characteristics
and Influences”, Accounting, Organizations and Society, Vol. 11, No. 1, 1986, pp. 47-69.
Somner, A. A., “Time For Another Commission”, Accounting Horizons, Vol. 4, No. 4, 1990, pp.
‘14-116.
314 L. M. Kirkham