The Power of “Independence”: Defending and Extending the Jurisdiction of Accounting in the UK pdf

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

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 by Hugh Willmott please refer to

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The Power of ‘Independence’:

Defending and Extending the Jurisdiction of Accounting in the United Kingdom*

by

Prem Sikka East London Business School University of East London, UK

Hugh Willmott Manchester School of Management University of Manchester Institute of Science and Technology, UK

* Earlier versions of this paper were presented at the Conference ‘Juristes et Comptables en Europe’, Paris,

1992, the 1993 British Accounting Association Conference, University of Strathclyde, and the 1993 Critical Perspectives on Accounting Conference, New York We are grateful for comments received at these meetings and for the constructive criticisms of two anonymous referees

The Power of ‘Independence’:

Defending and Extending 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 do 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 First, by focusing upon systems of professions within different nation-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 Eighth EC Directive in the UK

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 do 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

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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 ICAEW, that work outside of public practice in 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 For this reason, we have comparatively little to say about 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 First, we consider responses to corporate collapses in the mid-1970’s which cast 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 Eighth EC Directive, a requirement that also posed a potential threat to accounting firms’ operation within, and continued expansion into, EU markets for non-audit services Third, we examine current responses by the UK profession to 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’ do 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

THE ACCOUNTANCY PROFESSION IN THE UK : FORMATION, COMPETITION AND COLONIZATION

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

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Forging 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 England 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 For lawyers working in England 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 Quaine 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 Early 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 England and Wales (ICAEW) - whose elite status was assured, if by nothing else, by an entrance fee of 50 guineas to become a Fellow (ICAEW, 1966) Through the activities of this body, including the publication of its journal, the members of the 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 ICAEW They were described in the Institute’s journal as

‘a formidable array of clerks of all kinds shop-keepers, valuers, collectors of taxes, bailiffs pawn-brokers 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 (Edey, 1979; Gilmore 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 Of these 99 were professional auditors The real boon for auditors was the large increase in limited liability companies which rose from 1864 figure

of 891 to 14,445 in 1880’ (Cooper, 1886, 1921)

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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 First World War, when the state moderated its laissez-faire approach to economic management (Loft, 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 For us, ‘independence’ is a powerful 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 For the meaning of social practices, such as the 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 European countries (e.g Germany), 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 Of the numerous faces of the UK accounting profession, auditing is most 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