The Power of “Independence”: Defending and Extending the Jurisdiction of Accounting in the UK By Prem Sikka Department of Accounting and Financial Management University of Essex, UK Hugh Willmott Judge Institute of Management University of Cambridge, UK A later version of this article appears in Accounting, Organizations and Society, 20, 6: 547-581 (1995) For more information on published articles http://dspace.dial.pipex.com/town/close/hr22/hcwhome by Hugh Willmott please refer to The Power of ‘ Independence’: Defending and E xtending the Jurisdiction of Accounting in the United Kingdom* by Prem Sikka E London Business School ast University of E London, UK ast Hugh Willmott Manchester School of Management University of Manchester Institute of Science and Technology, UK * E arlier versions of this paper were presented at the Conference ‘Juristes et Comptables en E urope’, Paris, 1992, the 1993 British Accounting Association Conference, University of Strathclyde, and the 1993 Critical Perspectives on Accounting Conference, New Y ork We are grateful for comments received at these meetings and for the constructive criticisms of two anonymous referees The Power of ‘ Independence’: Defending and E xtending the Jurisdiction of Accounting in the United Kingdom Abstract Accountants are part of what Abbott (1988) describes as ’the system of professions’ Within this system, each professional group strives to defend and expand its area of jurisdiction in competition with rival professions However, challenges to the accountancy profession not necessarily come only from those who seek to occupy its territory Challenges also come from journalists, academics, politicians and others who have no desire to occupy the territory of accountants but can nevertheless advance some competing discourses that may disrupt and weaken the profession’s capacity to secure and expand its domain The paper argues that in the process of defining, defending and extending its jurisdiction, the accountancy profession attaches considerable importance to its image of ’independence’ Drawing upon evidence provided from three case studies relating to the events in the 1970s, 1980s and early 1990s, the profession is shown to have taken a number of initiatives to defend and reinforce this ‘image’ In its efforts to neutralise and discredit challenges to its aura of independence, the profession has developed and deployed a variety of tactics These include revising its ethical guidelines, refining its disciplinary arrangements, as well as by mobilising other agencies, including the state, politicians, media, accounting academics, etc in support of its claims In a society marked by numerous social divisions, the accountancy profession is not in a position to ward off all challengers Nevertheless by the use of such tactics, it is argued that it seeks to neutralise threats to self-regulation and to redefine the terrain on which it combats its challengers A convenient way to introduce this paper is to consider the thesis developed by Abbott in his highly influential book The System of Professions (1988) At the heart of this book is the claim that sociological research on professions has been dominated by a concern with their organizational structure, and with processes of professionalization that are studied as a medium and outcome of this structure Abbott’s preference is to study professional development by considering the link between a profession and its work - a link that he characterises as its jurisdiction (ibid : 20) In turn, his focus upon jurisdictions draws attention to the ways in which the boundaries of jurisdiction are negotiated - attacked and defended - as different professions compete over emergent or vulnerable territories Abbott’s study of expert labour1 usefully highlights the importance of interprofessional competition in the process of professional formation and development2 Urging a close consideration of the interconnectedness and rivalry between professional groups in shaping the conditions of their development, he champions the study of the negotiation of jurisdictional boundaries between professions : ‘each profession has its activities under various kinds of jurisdiction Jurisdictional boundaries are perpetually in dispute, both in local practice and in national claims an effective historical sociology of professions must begin with case studies of jurisdictions and jurisdiction disputes’ (Abbott, 1988 : 2) An attentiveness to disputes over jurisdiction is enlightening and timely in countering a tendency to study professional groups in isolation from their competitive contexts Not surprisingly, Abbott’s work is increasingly cited by students of the accountancy profession3 (e.g Dezalay, 1989, 1991; Neu, 1991) However, his approach is wanting in at least three important respects F by focusing upon systems of professions within different nationirst, states, he takes little account of how supranational pressures increasingly condition both the local practice and national standing of professional groups (see Montagna, 1986; Dezalay, 1989; Piccioto, 1989; Hanson, 1990)4 In the ‘business professions’ at least, interprofessional competition within and between professions is conditioned by the expanding opportunities for exploiting and regulating the globalization of trade and the internationalisation of markets for legal, financial and consultancy services In this paper, we touch upon this point by reference to the formulation and implementation of the E ighth E Directive in the UK C Second, and of greater direct relevance for this paper, Abbott’s approach suffers from a professions-centric treatment of jurisdiction disputes Despite an avowed attentiveness to ‘external forces’ (e.g the state granting or diluting auditors a monopoly of the external audit function) that open up or close down jurisdictions, Abbott largely neglects the importance of challenges posed to the legitimacy of jurisdictions by groups who not themselves seek to occupy their territory, but whose activities nonetheless problematize and unsettle the capacity of a profession to defend or extend its jurisdiction In Abbott’s account of the system of professions, these two limitations coincide in his very restricted appreciation of how any profession’s capacity to mobilise support for their ‘local practice’ and ‘ national claims’ is dependent inter alia upon their credibility with, and influence over, ‘third parties’ - such as politicians, journalists and academics, as well as regulators and clients In Abbott’s model of ‘ the system of professions’, and in his three detailed case studies, there is scant consideration of the micropolitics of how professions actually organize to define, defend or enlarge their area(s) of jurisdiction (Willmott et al., 1993), or of how the control of jurisdictional boundaries is challenged and loosened by the activities of groups who have no direct ‘professional’ interest in occupying their territory but whose activities can nevertheless generate and legitimise competing discourses (Willmott, 1991) In helpfully commending a focus upon the work ‘ professionals’ do, as contrasted with how professions are organized (Abbott, 1988:112), Abbott largely omits consideration of the role of associations in dealing with jurisdictional threats and opportunities posed by such ‘external events’ This critique is elaborated in what follows through consideration of the history and contemporary developments in the regulation of the accountancy profession5 Third, the vagueness of Abbott’s concept of jurisdiction becomes particularly awkward when considering a profession whose members work in industry (and elsewhere) as well as in ‘public practice’ He does recognise that ‘professionals work in a variety of settings’ (ibid : 125) but is more concerned with drawing distinctions between autonomous and heteronomous professionals than with exploring the significance of hybrid membership for the defence of established jurisdictions It is relevant to underscore the understanding that the UK accountancy profession is not homogeneous (Willmott, 1986) Its members are employed in industry, commerce, local government, central government, state industries, public practices and other organisations of various sizes In each of these arenas, accountants are agents of, and are subjected to, diverse and sometimes contradictory priorities and pressures Abbott’s (1988) tendency to conceptualise professions as if they are fundamentally homogeneous (see especially ch 4), albeit that they may incorporate distinctive specialisms, is difficult to reconcile with the presence and significance of major differences of orientation as well as work performed between members of the accountancy profession (Willmott et al, 1993) Not only are these differences reflected in the existence of specialist associations but they are evident, for example, in the large and growing proportion of members of the major UK accountancy body, the ICAE that work outside of public practice in W, multifarious positions within the private, public and voluntary sectors6 Thus, when we refer to ‘the accountancy profession’, we mean first and foremost, those representatives of the major bodies and/ or spokespersons of big accounting firms who take it upon themselves to assert and defend the authority and independence of accountancy practices in general and the prevailing regulatory arrangements in particular But, to repeat, whenever reference is made to the accountancy profession in the UK, it is necessary to be mindful of its highly complex and fractured organization as well as the diverse kinds of work undertaken by qualified (professional?) accountants The paper is organized as follows We begin with an overview of the formation and development of the accounting jurisdiction in the UK We highlight the heterogeneity and extensiveness of this jurisdiction, its continuing reliance upon audit, and the cultural and historical conditions that have contributed to the size and comparative strength of the accountancy profession In addition to arguments rehearsed within the sociology of the professions - such as the growth of corporate capitalism, the favourable terms of the Companies Acts, the closeness of accountants to their clients and the business organization of accounting firms - we argue that greater attention should be given to the development and defence of accountants’ claims to ‘ independence’ We concentrate in this paper upon audit because we believe it to be most critical for securing and expanding the accounting jurisdiction - whether this be defined comparatively narrowly, in terms of the work that ‘ in practice’ accountants do, including consultancy services as well as auditing, or whether it is extended to include the work performed by those employed in industry and elsewhere F this reason, we have comparatively little to say about or accounting and accountants in industry, for example, although their credibility in this area has implications for their reputation and power, as recent debates about the relevance of management accounting have indicated7 We then present three case studies that illustrate how the UK accounting profession has responded to recent major challenges to its aura of independence - challenges which threaten to damage their credibility and imperil their control of lucrative jurisdictions F we consider responses to corporate collapses in the mid-1970’s which cast irst, doubt upon accountants’ claims to be objective constructors of reality Second, we consider responses of the UK accountancy profession to questions about auditor independence raised by the requirements of the E ighth E C Directive, a requirement that also posed a potential threat to accounting firms’ operation within, and continued expansion into, E markets for non-audit services Third, we examine current responses by the UK profession to U questions currently being raised about the reliability of audits and, relatedly, the adequacy of self-regulation In each case, we note how doubts about accountants’ claims to independence are routinely appeased by introducing some reforms and refinements into their self-regulatory arrangements, by updating ethical and disciplinary arrangements and/ or by seeking to redefine public understandings and expectations about accounting expertise We also strive to show how issues relating to ‘ independence’ not arise singly, and are not necessarily articulated explicitly Rather, concerns about independence form an integral part of discourses and practices that are manifestly concerned with professional ethics, disciplinary arrangements, self-regulation and other symbols of professionalism THEACCO UNTANCYPRO E F SSIO INTHEUK : F RMATIO CO TITIO ANDCO NIZ N O N, MPE N LO ATIO N The development of the accountancy profession in the UK8 cannot sensibly be detached from the existence and organization of other groups that compete to define and occupy particular jurisdictions In establishing, extending and defending their terrain, accountants have formed associations and have enjoyed the patronage of the state and corporations (Johnson, 1972) They have also drawn inspiration from, and sought to displace, the claims of other groups, principally lawyers but also engineers, who have been competitors in the market place for their services9 In this section, we sketch the historical background to contemporary developments that have posed a threat to the boundaries of the accounting jurisdiction F orging the Jurisdiction of Accounting in the UK In the UK, the emergence of sellers of specialist labour who described themselves as ‘accountants’ (amongst other things) was initially stimulated by a buoyant demand for services in the area of bankruptcy, liquidation and trusteeship (Brown, 1905; Stacey 1954; Loft 1986) However, accountants’ occupation of this emergent jurisdiction was vulnerable to competition from other groups In principle, lawyers were well placed to expand their jurisdiction into the expanding market for business services; and, indeed, some of them did, especially in Scotland where a number of the leading members of the Solicitors society practised as accountants (Brown, 1968)10 However, in E ngland and Wales, where the status of accountants (or ‘ accomptants’) was less well differentiated from that of other ‘trades’ - such as ‘turf accountant’, ‘auctioneer’ and ‘rent-collector’ - the relationship between accounting and the law had a different trajectory of development11 F lawyers working in E or ngland and Wales, the undertaking of accounting work was considered demeaning, the price exacted for such professional prostitution being social ostracism from the elite of the legal profession Sorting out company failures, for example, was deemed to be a peripheral, and not entirely respectable, line of work for upright, bona fide lawyers Although doubtless extreme, the regard in which accountants were held by lawyers is indicated in the colourful reaction of Justice Q uaine to the Bankruptcy Act of 1831: "The whole affairs in bankruptcy have been handed over to an ignorant set of men called accountants, which is one of the greatest abuses brought into law" (quoted in Stacey, 1954 : 24) The jurisdiction of accounting practice is thus rooted in, and parasitical upon, the growth and instability of capitalism and is closely aligned to the allocation and husbandry of finance capital E arly accountants forged close contacts with financiers (Scott, 1985) Such connections presented opportunities for securing patronage, support and clientele (Johnson, 1972) According to Donnachie (1977: 275), it was a common practice for many early accountants "to seek the local agency of one of the chartered banks, or to become secretary or treasurer of a private or a country bank This gave them position of unparalleled powers in the community over the disbursement of loans and the discounting of bills for local farmers, merchants and businessmen" Accountants’ occupancy of areas of corporate regulation was consolidated by the Companies Act of 1862 which established the position of official liquidator to oversee the winding up of insolvent companies, a preserve reserved for an elite of accountants who were acceptable to the authorities In effect, this Act, which was to become known as "the accountants’ friend", lent statutory authority to the differentiation of ‘ respectable’ accountants from others who were simultaneously engaged in less reputable forms of ‘ trade’ And, as if this source of status and support were not enough, the 1862 Companies Act also required that dividends to shareholders be paid exclusively from income, a requirement that further boosted the demand for ‘ respectable’ accountants12 This legislation, which was so supportive of the growth of specialist accounting labour, was enacted prior to the development of a state register of accountants or even the establishment of an association that could lobby government As we have already suggested, the emergent jurisdiction of accounting was secured by an elite of ‘reputable’ accountants, a number of whom were invited to give evidence to Parliamentary Committees (Jones, 1981, pages 48-49) Prominent accountants also made speeches and wrote articles in which they sought to place competitors in a negative space as they rehearsed the virtues of the professional accountant, as contrasted with those who lacked their skills and took on many other kinds of work (Cooper, 1886, 1921)13 Prior to the formation of accountancy associations, where examinations eventually became the formal means of education and qualification, ‘reputation’ and ‘ connections’ were all-important Those who established the most prestigious of the accountancy bodies were drawn from a self-defining elite of ‘ gentleman accountants’, the Society of Accountants of London being the largest and most influential Subsequently, a number of the major societies cooperated to form a national body - the Institute of Chartered Accountants in E ngland and Wales (ICAE - whose elite status was assured, if by nothing else, by an entrance fee of 50 guineas to become a F W) ellow (ICAE 1966) Through the activities of this body, including the publication of its journal, the members of the W, Institute assiduously nurtured and promoted their elite status Symptomatic of this elitism was the opprobrium heaped upon members of a rival body which had been formed to cater for those excluded from the ICAE They W were described in the Institute’s journal as ‘a formidable array of clerks of all kinds shop-keepers, valuers, collectors of taxes, bailiffs pawnbrokers and manure merchants’ (quoted by Stacey, 1954 : 28) However, it was neither the state-carved niche of insolvency business, nor the formation of a professional body, but the steady increase in audit work that was to be the making of the modern UK accountancy profession Although formally a requirement of the Joint Stock Companies Acts of 1844, this requirement was not effectively applied until the beginning of this century (E 1979; G dey, ilmore and Willmott, 1992)14 Nonetheless, its influence was vital for the economic, social and political rise of the profession As Cooper noted, ‘under the patronage of the state, auditors began to increase in numbers In 1836, out of 107 banks, only nine had auditors whilst 14 had power to appoint auditors but chose not to exercise it But after the Companies Act 1879, out of 159 banks 128 appointed auditors O these 99 were professional auditors The f real boon for auditors was the large increase in limited liability companies which rose from 1864 figure of 891to 14,445 in 1880’ (Cooper, 1886, 1921) Accountants’ occupation of the audit niche was further consolidated in the Companies Act of 1900; and a statutory monopoly was fully secured in the Companies Act of 1948 To sum up: that specialist accountants emerged as a distinctive group, rather than as a branch of legal practice, is attributable to a combination of state sponsorship and the disdain of lawyers for accounting work Capitalising upon the opportunities presented by the passing of the 1862 and 1879 Companies Acts, as well as their connections with financiers, leading accountants formed firms and associations through which they secured the accounting jurisdiction Most importantly, they successfully argued that only individuals trained and regulated by their own associations were fit to act as ‘independent’ auditors State patronage, institutionalised in the bestowal of Chartered status upon the elite associations, has subsequently empowered accountants to defend and expand the accounting jurisdiction As Abbott (1988) has persuasively observed, "What really determined the history of the (accountancy) profession was the development and shift of its jurisdiction - from bankruptcy to auditing, with gradual expansion into cost accounting and now into "management services" (Abbott, 1988 : 26) Since the F World War, when the state moderated its laissez-faire approach to economic management (Loft, irst 1986), to the present day, the auditing niche has provided the accountancy profession with a base for the expansion of its the core jurisdictions of ‘ accountants in practice’ into a number of other areas, most notably those of taxation and consultancy, and to be employed in ever greater numbers in industry and the public sector The Contemporary Scene : Diversification, Commercialization and Defamation As Abbott (1988 : 62) notes, but does not elaborate, processes of establishing and defending boundaries of jurisdiction are mediated by available forms of discourse about jurisdiction F us, ‘independence’ is a powerful or signifier in such discourse To develop and sustain a position of power, status and high remuneration, members of professions, such as auditors, are obliged to articulate and defend a discourse and set of regulatory practices that reassures the public that they (can be trusted to) act independently Any weakening of the aura of independence15 renders professionals (more) vulnerable to the claims of predatory groups that may seek to occupy their jurisdiction (Dezalay, 1989 : 33) When comparing and contrasting the work of lawyers and accountants, Dezalay observes that: "a lawyer is by definition an advocate defending his (sic) client’s interests whereas the auditor claims to be a neutral expert providing a technical and objective point of view" (emphases added) However, it is pertinent to question whether the definitional identity between the work of advocates and the defence of their clients’ interests is as unproblematical as Dezalay suggests - not least because advocates are engaged in constituting the interests of clients, and not simply defending them It is equally relevant to underscore the understanding that the claim of the auditor to be a neutral, independent expert is indeed a claim, and that such a claim can be unsettled and discredited F the meaning of social practices, such as the or importance and credibility of audit, is contingent upon sociopolitical developments, developments that can fan doubts about the accuracy16 and value, if not the very purpose, of audit Meanings are irremediably precarious and cannot in any final sense be fixed Thus, the aura of independence is inescapably contestable Unless challenges are circumvented or effectively parried, the claim to independence, and the status and power that it bestows, may become discredited and devalued, with consequences for the reputation of accountants and their capacity to secure and extend their jurisdiction In contrast to other major E uropean countries (e.g G ermany), the leading UK accountancy bodies comprise members drawn from both ‘industry’ and ‘practice’17 Prior to the development of business degrees in higher education, becoming a chartered accountant was widely regarded as the passport to a high-flying career in industry and commerce18 Consequently, today, many of the big purchasers of accounting and related corporate services - such as financial directors and chief executives- are themselves members of the same profession, and often the same association, as their major providers, such as their auditors Moreover, whilst the movement of accountants from industry to public practice is controlled (e.g practising certificates are required), there are no restrictions to on chartered accountants moving from public practice to industry This freedom of movement, in addition to other factors such as the central role of capital markets in the UK economy and the weak competition from other professions (e.g engineers) for business training, goes a long way to explain why the UK has spawned and supported vast numbers of qualified accountants in comparison to other countries These numbers, it is worth stressing, are not inconsequential in terms of lobbying governments Nor are they unimportant in developing an extensive network of members, including many members of Parliament19, whose training and connections make it more difficult for them to question the wisdom or impede the progress of accounting into new areas of operation such as the recent state-sponsored diffusion of private sector business ideologies and practices into the public sector (Humphrey, Miller and Scapens, 1993) However, accompanying the expansion and diversification of accounting firms into new markets is the risk of jeopardising, diluting or discolouring the pristine claims of independence upon which the assumed reputation of the accountancy profession is established Accountants become vulnerable to accusations, well founded or otherwise, that they have neglected or distorted their responsibilities to the public interest (Willmott, 1990) by becoming too closely associated with industry or by diversifying into activities deemed to be incompatible with their role as independent professionals O the numerous faces of the UK accounting profession, auditing is most f critical for its credibility, economic well-being, status and power Misgivings about the independence of audit are doubly damaging to the profession because they threaten to devalue not only the material and symbolic value of a core area of expertise but jeopardise accountants’ capacity to defend and expand other lucrative (and growth) areas (e.g other business services) In the words of the President of the Institute of Chartered Accountants in E ngland and Wales (ICAE : W) ‘because of audit’s high public profile, it is on the performance of auditors that our profession will often be judged" (Plaistowe, 1992b) Consider the contemporary situation To the extent that accountancy practice has become transformed from (the ideal of) a bespoke relationship between ‘professional’ and ‘client’ into (the material reality of) a self-interested industry, where the cash nexus appears to be the principal arbiter of conduct, there arise strong prima facie grounds for doubting the independence of accounting expertise and increased difficulties in defending its objectivity Associated with accusations of (excessive) commercialization is the complaint that auditors are selected and paid for by company directors (and that he who pays the piper plays the tune); and that, if accountants want repeat business or continued opportunities to on-sell lucrative services (e.g tax and consultancy advice), there is considerable commercial pressure to issue a clean (unqualified) audit report Relatedly, there is the suspicion that accountants’ self-regulating methods of developing and enforcing standards are designed to be sufficiently flexible to accommodate this pressure whilst ensuring that litigation and liability is minimised when audits ‘ fail’ Whether or not such accusations are justifiable, the reputation of accountants, and ultimately their capacity to secure and further expand their markets, depends upon their collective ability to avoid or rebut such potentially damaging criticisms F ailure to justify and defend claims to independence in the face of hostile challenges puts at risk their self-regulating status, their monopoly of audit business and, by association, their capacity to penetrate and defend new and highly lucrative areas of jurisdiction The remainder of the paper examines some of the stratagems deployed by members of the UK accountancy profession to deflect and neutralise criticisms that have threatened to unsettle or weaken its capacity to secure and/ or expand its jurisdiction SE CURINGTHEACCO UNTINGJURISDICTIO : RE NSETOTHEMID-1970s E NO CRISIS N SPO CO MIC The mid-1970s were a time of considerable economic instability and turbulence in the UK The accountancy profession was directly implicated in this turbulence, and it came under pressure to reform the regulation of audit In this section, we sketch the background to the economic crisis of the mid-1970’s before indicating how the profession sought to restore its credibility, and thereby secure its jurisdiction Background to the Crisis In 1960, the average rate of return (before tax and interest) on UK businesses was around 13%per annum By 1975 it had declined to an average of around 4%(British Business, September 1988: 32) and in 1980 hit a low of 2%(Bank of E ngland Q uarterly Bulletin, June 1981: 161) F ierce international competition and low investment in British industry resulted in double-digit inflation and unemployment began to rise (Wilson, 1978; Lisle-Williams, 1986) As manufacturing declined, Britain faced a balance of payment crisis In a bid to avert this crisis, the government encouraged expansion of the services sector, especially the financial sector (Clarke, 1986) F example, foreign or banks were offered incentives to locate in London as a "less formal system of regulation" was introduced (Reid, 1982, page 4) In this environment, qualifications to company audits were intended to act as the principal means of alerting the regulators to fraud But, at the same time, auditors insisted that fraud detection and reporting was not their principal function or responsibility In the ‘relaxed’ environment of the early 1970s, the banks began to lend money in novel ways Returns on the property and financial sectors looked particularly attractive compared to manufacturing Much speculative activity occurred, especially in the property sector where the borrowing trebled between 1971 and 1973 (Coakley and Harris, 1983), with the new, secondary banks being key players in this process E credit assisted in the asy trebling of property prices between 1970 and 1973 which, in turn, fuelled speculative activity In 1973, oil prices quadrupled This added some $4-4.5 billion to the British import bill and increased industrial costs by 2% -3% (Bank of E ngland Q uarterly Bulletin, March 1974: 3) As these costs worked their way through the economy, demand for property slumped and prices fell Borrowers struggled to keep up with their loan payments; and, secondary banks had difficulty in honouring their pledges to their depositors The speculative bubble was about to burst Pointing the F inger at the Audit O of the first British secondary banks to collapse was London and County Securities, a collapse which had a ne domino effect Before long the British banking and the property sector was engulfed in crisis20 Well established companies such as Moorgate Mercantile, Cedar Holdings, Keyser Ullman, F National F irst inance Corporation, Slater Walker, London and Capital G roup, Cornhill Consolidated G roup and others collapsed Between December 1973 and March 1974, the state rescued twenty-one institutions by spending some 400 million With the collapse of the Stern Property G roup, Vehicle and G eneral, Court Line, Scotia Investments and others, the crisis spread to other sectors - such as shipping and insurance - and frequently exposed fraud at a massive scale F one influential or commentator, the crisis was fuelled by the "ease with which eminent firms of auditors turned a blind eye on the wholesale abuse by client company directors of [legal] provisions [The directors] operated these public companies for the principal benefit of themselves and their families; and most regrettable of all, on the virtual complicity of their auditors, whose efforts are seen to have amounted to a whitewash at best, and a fatuous charade at worst" (Woolf, 1983 : 112) The state sought to manage the crisis by spending an estimated 3,000 million to rescue ailing concerns (Reid, 1982, page 192) and itself had to seek help from the International Monetary F und (IMF As a part of its crisis ) management mechanisms, the Department of Trade (DoT) authorised investigations into a number of collapsed businesses, especially where fraud was suspected (this is discussed in Sikka and Willmott, 1991) The related press speculation and the eventual DoT reports directly questioned the ability of auditors to act as independent and objective constructors of economic reality F example, the auditors of Roadships were criticised for failing or to check adequately the amounts for creditors, accruals, purchases and profit forecasts (DoT, 1976a) The inspectors argued that "Independence is essential to enable auditors to retain that objectivity which enables their work to be relied upon by outsiders It may be destroyed in many ways but significantly in three; firstly, by the auditors having a financial interest in the company; secondly, by the auditors being controlled in the broadest sense by the company; and thirdly, if the work which is being audited is in fact work which has been done previously by the auditors themselves acting as accountants" (para 243) After examining the quality of audits performed by auditors who also provided non-auditing services, the inspectors concluded, "We not accept that there can be the requisite degree of watchfulness where a man is checking either his own figures or those of a colleague for these reasons we not believe that [the auditors] ever achieved the standard of independence necessary for a wholly objective audit" (paras 249 and 250) A 300 page report on the collapse of Vehicle and G eneral, which insured some 10% of Britain’s motorists, was highly critical of the auditor’s failure to spot manipulation of accounts and gross errors and overstatements in its financial statements F instance, an investment of 82,040 was shown as 820,040, but was not spotted by the or auditors Major audit deficiencies were also exposed by the report on London and County Securities (DoT, 1976c) The company had entered into illegal share dealings and there were also suspect transactions between the company, directors and their families The report described the company’s accounts as "misleading to a material extent" (ibid : 234) In response to these and other revelations, the quality press expressed growing disquiet about the independence and integrity of accountants The E conomist (14th F ebruary 1976) declared that "Civil servants, politicians, and even City folk are beginning to wonder whether the accountancy profession is capable of policing itself unless the profession improves its auditing standards 10 someone else will" (ibid : 79-80) The Investors Chronicle (13th F ebruary 1976, page 419) questioned the value of audited accounts and selfregulation The F inancial Times (10th July 1976) doubted the profession’s ability "to exercise control over the activities of large accountancy firms" (page 26) E the ICAE President was forced to acknowledge that ven W "public confidence in the standards of our performance has been badly shaken by a number of well publicised cases" (Accountancy, November 1976 :4) Q uestions relating to the reliability of auditing were raised in Parliament O 9th F n ebruary 1976, the Secretary of State for Trade responded to an observation that one of the "worst features of the affair [London and County] is the fact that the auditors passed the accounts of the organisation", by promising that he would "certainly consider much more carefully the whole role of auditors in this matter" (Hansard, Vol 904/ 905, cols 10-11) It is worth recalling that, at this time, politicians and civil servants were wrestling with a full-blown economic crisis in which they sought to control inflation, prices and unemployment, to negotiate finance from the IMFand to rescue ailing companies Nevertheless, the Secretary of the State for Trade found the time to summon to his office the Presidents of those Institutes (ICAE ICAS, ICAI and ACCA) most directly responsible for accounting and W, auditing regulation At the meeting, he "told representatives of the profession that either they regulated themselves effectively or I would ask Parliament to it for them" (letter to one of the authors, dated 6th December 1989) The combination of critical DoT/ DTI reports, press comment and pressures from Ministers posed a significant threat to the credibility, and ultimately to the jurisdiction, of the accountancy profession O indicator of this ne threat was the introduction of a Private Members’ Bill that urged the government to introduce a public board for regulating auditors Although defeated by 35 votes (Hansard, 22nd March 1977, cols 1081-1088), this proposal reinforced and amplified earlier criticism and sent a clear message to the profession Concern about the independence and reliability of auditors was maintained by further frauds, scandals and state sponsored investigations The Department of Trade and Industry (DTI) inspectors’ report on Burnholme and F order (DTI, 1979a), for example, was critical of audit work and once again felt that auditor independence was compromised by the provision of non-auditing services to audit clients They concluded, "in our view the principle of the auditor first compiling and then reporting upon a profit forecast 11 is not considered to be a good practice for it may impair their ability to view the forecast objectively and must endanger the degree of independence essential to this work" (page 271) In 1978, the highly publicised collapse of the G rays Building Society once again reminded small investors of the assumed role of auditing in safeguarding their deposits The resulting investigation (Registry of F riendly Societies, 1979) found that the auditors had been unable to spot frauds of more than 7.1 million that had occurred during a period of more than forty years, and which had only come to light when the chairman committed suicide In common with a number of other reports21, the investigation was highly critical of the auditors In Defence of Self-Regulation and Jurisdiction: Auditing Standards, E thical G uidelines and Disciplinary Procedures In the UK, the major accountancy bodies are charged by the state with day-to-day responsibility for regulating auditing practice In discharging this responsibility, accounting regulation has been decoupled from auditing regulation Whereas pronouncements on general principles of sound accounting practice began in 194222, those relating to audit did not begin until 196123 Auditing and accounting came under critical scrutiny during the 1960s (Robson, 1991) but the professional bodies interpreted this almost exclusively as criticism of accounting.In 1969, separate machinery for setting accounting standards under the control of the profession was created The equivalent machinery for auditing standards - the Auditing Practices Committee (APC) - was not established until 1976 The timing of its formation coincided with public disquiet about the independence and reliability of auditing described in the previous section It was one element of the profession’s response to the actual and anticipated criticism from the DTI inspectors, politicians and the press24 The explicit purpose of this committee was "to satisfy our critics in political circles and outside" (APC, 1978 :50) By creating the APC, leading professional bodies signalled their willingness to tighten the standards of audits and, thereby, secure auditing as its jurisdiction25 At the very least, it enabled government to be persuaded that the accountancy profession was putting its house in order, and thereby reaffirm its distance from such matters The government was knowledgeable about, but seemingly indifferent to, the fact that most of the voting power on the APC rested in the hands of the major firms, the very firms that had been criticised in the DoT/ DTI reports Nor did government express any disquiet that qualified accountants, let alone members of the public, had no access to APC agenda papers or minutes, although such information was made available to the major firms, thus furnishing them with the information relevant to shape the parameters of decisions and non-decisions and to pursue their own agendas (Sikka, Willmott and Lowe, 1989) Nor, finally, did government question the absence of mechanisms to monitor and enforce firms’ compliance with auditing standards O bservations of this kind can be interpreted in a number of ways They may, for example, be viewed as confirmation 12 ... a threat to the boundaries of the accounting jurisdiction F orging the Jurisdiction of Accounting in the UK In the UK, the emergence of sellers of specialist labour who described themselves as... received at these meetings and for the constructive criticisms of two anonymous referees The Power of ‘ Independence’: Defending and E xtending the Jurisdiction of Accounting in the United Kingdom.. .The Power of ‘ Independence’: Defending and E xtending the Jurisdiction of Accounting in the United Kingdom* by Prem Sikka E London Business School ast University of E London, UK ast Hugh