Risk and the construction of a European audit policy agenda: The case of auditor liability

Accounting, Organizations and Society xxx (2014) xxx–xxx

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Risk and the construction of a European audit policy agenda: The case of auditor liability Anna Samsonova-Taddei ⇑, Christopher Humphrey Manchester Accounting and Finance Group (MAFG), Manchester Business School, The University of Manchester, Crawford House, Oxford Road, M13 9PL Manchester, UK

a b s t r a c t In 2008, following a sustained policy campaign by the large international accounting firms, the European Commission issued a Recommendation that European Union (EU) Member States should limit civil liability for statutory auditors. The Recommendation, however, was far from the firms’ desired outcome because, as a non-binding policy document, it left it to individual Member States to decide whether (or not) and how to limit auditors’ liability exposure. This paper analyzes the European transnational audit policy-making processes by which such a decision was reached and what prevented the firms from securing a more definitive EU-wide policy solution with respect to auditor liability limitation. Drawing on Hilgartner’s concept of a ‘risk object’, the paper reveals how a search for a policy consensus on auditor liability was invariably frustrated by the competing conceptualizations of, and exposure to, risk attributed to particular proposed liability arrangements. As such, auditor liability emerges as a constantly shifting regulatory construct rather than a dilemma waiting to be resolved. The study also emphasizes the residing significance of the authority of the nation state in the European audit policy context, with policy preferences of individual EU Member States having a substantial influence on the outputs of European audit policy making. Ó 2014 Elsevier Ltd. All rights reserved.

Introduction The past decade has witnessed a substantial growth in accounting research concerned with issues of transnational regulation and the existence of an international financial architecture (Arnold, 2009; Humphrey, Loft, & Woods, 2009). There has been an active level of engagement, for example, with the work of various multinational agencies, including the World Trade Organization and the World Bank (Arnold, 2005; Neu, Ocampo Gomez, & Graham, 2006) as well the growing global significance of accounting and audit regulatory and standard setting initiatives (Bengtsson, 2011; Botzem, 2012; Richardson, 2009; ⇑ Corresponding author. Tel.: +44 161 2750118; fax: +44 161 2754023. E-mail address: (A. Samsonova-Taddei).

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Thornburg & Roberts, 2008). This literature has highlighted the influence of professional (accounting) actors on the transnational regulatory landscape (Arnold & Sikka, 2001; Barrett, Cooper, & Jamal, 2005; Cooper & Robson, 2006; Suddaby, Cooper, & Greenwood, 2007), supporting claims in other professional domains (Faulconbridge & Muzio, 2011) that elite professional services firms increasingly utilize relations with supranational institutions to resolve policy issues that had failed to gain sufficient support at the national level and, thereby, superimpose an additional layer of soft regulatory authority on the ‘‘traditional (i.e. coercive) power relations that exist between nation states and professional associations’’ (p. 356). Such regulatory tendencies have been identified, for example, in studies of the large international accounting firms’ representation on international standard setting and regulatory governance boards (Loft, Humphrey, & Turley, 2006) and their

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Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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interactions with, and even mutual dependency on, different national audit oversight institutions (Malsch & Gendron, 2011; Shapiro & Matson, 2008). Attention has also been given to the mobilizing capacity of the profession internationally to form a united policy front in the wake of the recent global financial crisis (Humphrey et al., 2009). One of the key implications of such literature is the substantial ability of the audit profession and its largest firms to shape global regulatory agendas and actions, with some authors emphasizing the success that the profession has had in securing desired outcomes or at least diverting attention away from a critical questioning of contemporary audit practice (Arnold, 2009; Sikka, 2009). Audit liability limitation has been flagged for many years by large accounting firms as one of their key concerns and pressing reform priorities (Gwilliam, 2004; Power, 1998). After a sustained policy campaign by the firms to prompt EU-wide policy action, the European Commission, in June 2008, issued a Recommendation (European Commission, 2008a) suggesting that ‘‘every Member State would be invited to introduce a liability limitation, taking into account their own systems and circumstances’’ (European Commission, 2008b, p. 32–33). The Recommendation, however, was a non-binding policy instrument and not the outcome that the firms had strived for. They had wanted an EU-wide binding limitation but the Commission chose to leave any decision on auditor liability limitation to the individual national governments of Member States (Ojo, 2009). Analytically, such developments provide a fascinating opportunity to study how and why the agendas of accounting firms, with their readily acknowledged capacity to engage with transnational policy processes, were frustrated in terms of the firms’ ability to secure a desired policy outcome. In examining the processes of policy development leading to the issuance of the Commission’s aforementioned Recommendation, the paper utilizes Hilgartner’s (1992) portrayal of a ‘risk object’ to show the highly polemical nature of the European auditor liability debate – with actors’ policy positions varying depending on their differing conceptualizations of, and exposure to, risk associated with particular auditor liability arrangements (Hilgartner, 1992). The resulting array of (often, conflicting) definitions of risk served to frustrate attempts at reaching a shared policy position on the subject of auditor liability and precipitated instead a policy outcome that was substantially less definitive and exacting than the large accounting firms had desired. Such analysis serves to highlight the residing significance of the authority of the nation state in the determination of EU policy. In the case of auditor liability limitation, the overall policy outcome was clearly influenced by national policy-making experiences and the respective standpoints of certain individual EU Member States, illustrating in the process the connectivity between national and transnational policy realms and the importance of viewing such realms as mutually dependent, rather than distinctive, fields of influence. The paper is structured as follows. The next section outlines the complexities associated with auditor liability as a regulatory object. The third section provides an overview of EU governance systems and the European audit

policy-making arena. The fourth section presents the methodological approach applied to studying auditor liability reform in the European context. The fifth section analyzes the policy processes that led to the issuance of the Commission’s aforementioned Recommendation. The final two sections explain the significance of the paper’s findings in terms of enhancing understanding of the dynamics of European audit policy making.

Risk and the complexities of auditor liability The term ‘auditor liability’ is not easy to define in a concise, all-encompassing manner. Beyond the basic premise that auditors need to be held liable for providing sub-standard services, the legal arrangements to support its functionality comprise multiple dimensions that can vary significantly. In this section, we draw on the work of Hilgartner (1992) and others, to show how this variability is linked to the differences in the manner in which various actors conceptualize liability as a source of risk. Hilgartner characterized risks not as static facts, independent of interpretation, but as contextually embedded entities whose meanings vary and are inherently unstable. According to Hilgartner (1992), differences in how we conceptualize risk stem from the way we define the object that poses risk and identify it as risky by constructing causal linkages between such an object and putative harm. In the case of auditor liability, key dimensions of variation in understandings of risks associated with auditor liability revolve around questions, such as: who, and under what conditions, should bear the consequences of a liability claim?; who are the harmed (endangered) parties that have the right to demand compensation for related damages?; and finally, what should be the size of any such compensation, including possible ways of limiting the amount claimed? The way in which the above dimensions have been incorporated within a particular auditor liability regime has been subject to change over time and across contexts as, borrowing from Lupton (1999), ‘‘[w]hat is deemed a ‘danger’ or ‘hazard’ in one historical or cultural context may not be so identified in another’’ (p. 31–32). A typical starting point in the audit literature for discussions on auditor liability involves reference to auditors’ assumed liability in relation to contractual parties, with the principle of privity of contract limiting liability to the corporate body being audited (Porter, Simon, & Hatherly, 2008). The 1970s and 1980s saw a substantial extension of liability to the point where it was asserted that virtually any party who could reasonably be considered to have relied on an audit opinion could claim damages against auditors arising from negligent misstatements (Porter et al., 2008). This was deemed an appropriate mode for disciplining auditors and also responding to public calls for fairer treatment of ‘innocent’ third parties such as potential investors, creditors, employees and other stakeholders (Chung, Farrar, Puri, & Thorne, 2010; Gwilliam, 2004; Siliciano, 1997). In subsequent years, however, these arrangements were reconsidered. In Britain, for example, the landmark decision by the House of Lords in the Caparo case (1990) signified a move back to a more narrow

Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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understanding of the notion of stewardship. It returned the focus to the company as a corporate body rather than a collection of interests of individual shareholders and laid down stricter conditions under which a duty of care could be said to be owed by auditors. That said, it has been argued that this period of relative calm was followed by gradual expansions of the notion of privity by the British courts (Napier, 1998). One can observe significant differences in auditor liability regimes across various national settings, such as within the EU (Directorate General for Internal Market and Services, 2006).1 In EU Member States that placed an emphasis on the role of auditors as public servants and the social meaning of audit practice (e.g. France), statute law tended to make auditors liable not merely to the client company’s officers but also to shareholders and other (third) parties. In other Member States (such as Germany and Spain), auditors were seen to owe a duty of care mainly to the client company, including its shareholders. With regards to the scope of auditor liability, most Member States followed the principle of joint-and-several liability which implies that any individual audit partner accused of wrongdoing can be required to pay for the whole amount of damages, regardless of the degree of responsibility of other parties. In Member States with a limited liability regime for auditors, the limitation mechanisms were either in the form of: a financial cap on the level of possible liability claims (as in the case of Austria, Belgium, Germany, Greece, and Slovenia)2; a system of proportionate liability whereby auditors are liable only for the damages caused directly as a result of their negligent behavior (as in Spain); or by allowing auditors to establish limited liability entities.3 Policy making has been said to involve the construction of a definition of what risk is and devising measures (policy instruments) to control it (for a pertinent discussion, see Hutter, 2010). The process of legal development on issues such as auditor liability, therefore, can be envisaged as a

1 The presented details of the national liability regimes relate to the time preceding the issuance of the 2008 Recommendation by the Commission. 2 The cap could be stipulated in the civil law or set out in the contract between the auditor and the client and take the form of an absolute monetary limit or a fixed percentage of the audit fee. For example, in Greece, the liability cap was linked to the salary of the President of the Supreme Court. In Belgium and Austria, the law stipulated the cap with respect to claims by third parties, whereas German commercial law only capped claims by the client (although, in certain cases, the courts could decide to extend liability, and consequently the cap, to third parties) (Gietzmann & Quick, 1998). 3 In Britain, for example, KPMG was the first accounting firm that, in 1995, chose to incorporate and form what became known as KPMG Audit Plc. During the same period, Price Waterhouse (which later became part of PricewaterhouseCoopers) and Ernst & Young launched a lobby campaign to push for legislation that would allow British auditors, like their colleagues in the U.S., to form Limited Liability Partnerships (LLPs), with the intent that it would offer a greater protection to the accounting firms’ individual partners and their personal assets (Sikka, 2008). In 2001, Ernst & Young was the first accounting firm to register as a LLP, after relevant provisions had been introduced by the British government in its LLP Act, 2000. More recently, changes to the Companies Act, 2006, allowed shareholders of the audited company to agree to limit auditor liability by contract to a level determined by the court in proportion to the extent of auditor’s responsibility for the damages incurred (Turley, 2008).

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search for constructed meanings of risk and harms associated with proposed auditor liability arrangements that are capable of garnering the agreement of key policy decision makers. Hofmann (2010, p. 66) provides a useful characterization of such a search process as one that ‘‘does not centre on one specific danger or harm but rather disperses into bundles of conflicting expectations, forebodings and conclusions, all of which are competing for hegemony’’. What fuels such competition, as explained by Hilgartner (1992), is the fact that harm can be linked to more than one risk object as ‘‘one can always construct many potential branches to the chains of causation that lead to disaster’’ (p. 42). Constructing, redefining and promoting such linkages is a rhetorical struggle aimed at emplacing risks (i.e., turning them into something to be reckoned with) as well as displacing particular risks (i.e., stripping them of their significance) through what Hilgartner termed the conceptual ‘network’ used by regulatory decision-makers as their key reference in policy deliberations. Such struggles, most often localized within the communities of professionals, political elites and technical experts, ‘‘have important political implications’’ as they can ‘‘redistribute responsibility for risks, change the locus of decision making, and determine who has the right – and who has the obligation – to do something’’ (p. 47). In other words, they ‘‘question the rationality of regulatory arrangements’’ (Hofmann, 2010, p. 48) in a way which can either halt or give momentum to particular policy initiatives. In the following sections, we will draw on the above conceptual framing to analyze the struggles between the competing definitions of risks and harms attributed to particular auditor liability arrangements and related policy proposals and their impact on European debate over auditor liability limitation. In so doing, definitions of risk and associated dynamics of policy deliberation emerge as a product of social construction by the policy actors concerned but also capable of being shaped by dramatic environmental developments and scandals, such as the Enron collapse, which are used as powerful reference points in the rhetorical repertoire of both proponents and opponents of auditor liability limitation.

Policy making in the EU Apart from being a confederation of 27 Member States, the EU is also a vibrant example of a transnational regulatory field (Andersen & Eliassen, 1996; Coen, 2007; Greenwood, 2007). Djelic and Sahlin (2006, 2010) provide a view of such a field as a multi-level dynamic policy arena emergent ‘‘from complex and multi-nodal processes, where competition combines with collaboration’’ (Djelic & Sahlin, 2010, p. 179) and which is able to ‘‘generate and reproduce order behind an appearance of complexity and competition’’ (p. 195). This governance mode virtually diffuses the decision-making authority and places an increased emphasis on the need for policy actors to rationalize their policy choices and justify the processes by which they were determined. Reliance on the inputs and inferences of experts has been viewed as an increasingly important rationalizing instrument in this regard, with

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the meaning of expertise having evolved to emphasize private interests and market dynamics (Djelic & Sahlin, 2010). Since its foundation under the Treaty of Rome, the EU has held the creation of the European Single Market as one of its key policy priorities. Inter alia, this has involved the development of common law to create a uniform infrastructure for the functioning of the European capital market for corporate financing, including harmonized rules for financial accounting and audit practice (Dewing & Russell, 2002, 2008; Haller, 2002; Maijoor, Buijink, Meuwissen, & Witteloostuijn, 1998). Such a system of law is constituted of different forms of legal acts, both binding and non-binding, depending on specific policy objectives. Among the three binding forms of legislation are (1) Regulations – which represent the most direct form of EU law as they are applied in their entirety across all EU Member States in the same way as national law would be; (2) Directives – which set out the policy objectives to be achieved by all Member States but leave it to the national governments to decide on the specific ways to implement them; and (3) Decisions – legislative acts targeting specific issues or directly applicable to a specified party (such as an EU Member State or an individual business entity). In contrast, non-binding legislative acts, such as Recommendations, allow ‘‘the [EU] institutions to make their views known and to suggest a line of action without imposing any legal obligation on those to whom it is addressed’’.4 The setting of the EU’s policy agendas, as well as the development of new and revised legislation, is in the hands of the so-called ‘decision making triangle’, i.e. the three key legislative bodies, including the European Commission, the European Parliament and the Council of Ministers. The Commission, which in matters relating to the European Single Market is led by the Internal Market and Services Directorate General, has the right to legislative initiative and hence is responsible for the preparation of draft law as well as the general coordination of processes of policy development. The remit to consider proposed legislation rests with the Council which is effectively a collective body representing governments of European Member States. While the Council’s decisions on many European policies are reached by a ‘qualified majority’ vote (where each Member State is allocated a set number of votes depending on the size of its population), other policy proposals, such as on issues relating to company law directives, usually require unanimous approval. Moreover, the Council shares its legislative power with the European Parliament under the so-called ‘co-decision’ procedure. It means that a legislative proposal is first discussed in Parliament and, if the resulting wording of the draft law is subsequently approved by the Council, becomes formal law or, otherwise, is passed back for further Parliament readings and discussions with the Council. Consideration of policy proposals in Parliament is administered by a lead Committee, with a MEP (Member of European Parliament) acting as a Rapporteur. The Committee on Economic and Monetary Affairs (ECON), for example, is Parliament’s key committee

4 See http://europa.eu/about-eu/basic-information/decision-making/ legal-acts/index_en.htm.

in the area of accounting and audit regulation; also, it is often assisted by other committees, such as the JURI (Legal Affairs) Committee (Peterson, 1995; Slaughter & May, 2013). One of the claimed traits of transnational policy making is that law-makers seek means to ensure that the norms they produce are seen as the ‘right’ solutions to the problems at hand and, ultimately, to facilitate less problematic compliance (Nölke, 2003; Risse-Kappen, 1995). This is achieved by demonstrating that the processes of policy formulation (and by association, their outcomes) are procedurally fair and representative of the interests of various policy stakeholders. Such a trend toward a more participatory approach to policymaking, or so called ‘deliberative’ democracy, is at the core of European policy making being seen as the EU’s response to long-held concerns over the deficit of democratic legitimacy stemming from EU senior politicians’ posts not being democratically elected positions (Greenwood, 2007). ‘‘The thorny issue of integrating expertise and democracy’’ (Radaelli, 1999, p. 770) has meant that, besides representatives of the national governments, private actors (such as, professional entities, corporates, industry unions, and other market participants) are routinely invited to provide ‘expert’ input into EU policy formulation which is administered by the Commission. The opportunity for experts to influence policy is significant, with it being argued that processes of policy formulation are ‘‘a critical determinant of eventual policy outputs’’ (Peterson (1995, p. 8) quoting Hull (1993, p. 83)). It is, therefore, unsurprising that, over the years, the Commission is said to have experienced an ‘‘explosive growth of direct interest representation’’ (Andersen & Eliassen, 1996, p. 45) and become a ‘‘hothouse’’ (Peterson, 1995, p. 69) for different groups of transnational policy actors converging around various issues of importance (Coen, 2007; Coen & Richardson, 2009). Eberlein and Grande (2005), for example, explain that such external interest groups: [. . .] are composed of experts and representatives of national regulatory bodies, who come to agreement among themselves, guided or supported by European bodies. If necessary, they are joined by economic actors or the regulatory addressees concerned [. . .] [in order to] develop common ‘best practice’ rules and procedures for regulation in their sector. (p. 100). One can also observe the institutionalization of independent commercial consultancies as significant actors in EU governance, operating as intermediaries between the EU’s bureaucratic machinery and the world of academic research. This represents a continuing shift in the nature of European interest representation towards professionalism and competitiveness (see Lahusen, 2002), with the Commission being intent on demonstrating that its approach to policy-making is both competent and based on independently verified analytical assumptions. In this regard, research findings produced by commercial consultancies have arguably served not just to inform European public policy arena but also to de-politicize polemical policy deliberations (Andersen & Eliassen, 1996).

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Table 1 A timeline of key events. Year

Key events

1996

Two studies – Buijink et al. (1996) and FEE (1996) – draw attention to the diversity of European countries’ liability regimes as an area of concern. The European Commission’s Green Paper (European Commission, 1996) on the position and liability of auditors in Europe is followed by an official consultation and a conference. These acknowledge the negative effects of unlimited liability but reject the need for an action at an EU level In May, the European Commission publishes a Communication (European Commission, 1998b) which leads to the establishment of the Committee on Auditing composed of external experts, including the audit profession’s representatives In March, the European Commission publishes a comparative study on 15 European Member States (Thieffry & Associates, 2001) which acknowledges the variation in national liability regimes but claims it has no significant impact on the development of a European Single Market. In October, Enron scandal starts unfolding In April, the European Commission issues a paper ‘‘A first response to Enron related policy issues’’ (European Commission, 2002a) which outlines a series of preventive measures in Europe; but makes no mention of the need for a reform of auditor liability In May, the European Commission issues a Communication ‘‘Reinforcing the statutory audit in the EU’’ (European Commission, 2003) setting a new regulatory framework for the statutory audit. This is thought to signal a start of a new ‘‘hands-on’’ approach to audit regulation in Europe; the issue of auditor liability is still not addressed The European Forum on Auditors’ Liability is set up comprising 20 experts (i.e. members of the European regulatory, audit professional, academic, investment, banking, insurance, and corporate communities) to assess potential solutions for moderating auditors’ litigation risk The EU publishes the revised Eighth Company Law Directive (2006/43/EC) on Statutory Audits of Annual Accounts and Consolidated Accounts. Article 31 of the Directive requires that the European Commission examines the effects of Member States’ liability regimes on the European capital market. As a result, the Commission appoints the commercial consultancy firm, London Economics, to carry out a study into the issue. The study report (London Economics, 2006) is published in October In January, the European Commission launches a public consultation on the issue of auditor liability involving a broad range of policy stakeholders. A summary of responses to the consultation are published in June (Directorate General for Internal Market, 2007b) In June, the European Commission publishes the Recommendation Concerning the Limitation of the Civil Liability of Statutory Auditors and Audit Firms (2008/473/EC) which suggests that the Member States should take action to limit auditor liability using any of the several methods proposed

1998 2001

2002 2003

2005 2006

2007 2008

In addition to the above ‘technocratic’ rationality (constructed by reference to expert knowledge provided by private actors), the Commission’s general approach to policy making also comprises an ‘administrative’ rationality, which stems directly from the need to ensure that there is sufficient administrative power to implement the policy proposals at the national level (see Peterson, 1995, p. 73). In this sense, the administrative rationality serves a restraining role, in that it motivates the search for a consensus between policy technocrats in order to ‘‘legitimize the choices offered to political decision-makers [Council of Ministers and Parliament] as workable policy solutions’’ (Peterson, 1995, p. 74). In such a policy-making arena, the power asymmetries between transnational policy institutions of the EU and national policymakers can be significant. As Halliday and Caruthers (2007, p. 1148) have argued, transnational policymakers (such as the EU) can more strongly influence development of transnational rules (what they call ‘law on the books’), while the source of power for national policymakers is that they effectively control translation of such rules into national law (‘law in action’). Further, national policymaking experiences and perspectives are assimilated within the design of transnational policy ‘‘through the participation of national lawmakers on the committees and panels of international organizations’’ (Halliday & Caruthers, 2007, p. 1148). In this regard, national policymakers are not merely the recipients of the outputs of transitional policy making (the premise that has attracted most attention in prior research) but represent significant forces capable of influencing and even determining the nature of such outputs. As noted earlier, in the context of the EU, it is the Council of Ministers where ‘‘most of the ‘national interest’ is defined and decided’’ (Spence, 1993, p. 50) and where the Commission’s policy proposals are scrutinized by responsible national government officials

and voted on. In addition, representatives of the national governments are also frequent members of various discussion groups and committees set up under the Commission’s remit with the purpose of facilitating the debating of a particular policy issue. There is often limited or no public record of what goes on in such meetings, but they provide a vital stage for intermediation between the national and transnational policymaking arenas, and subsequently revealing significant differences of opinion, conflicts and even instances of national resistance. Studying auditor liability reform in a European context In order to analyze the development of European policy debate on auditor liability limitation and the influence of different interest groups and related agendas, we first constructed a summary of key events and identified a number of apparently influential players (see Table 1 for the audit liability events timeline and Fig. 1 for a diagrammatic representation of the associated transnational policy actors). In outline terms, the large accounting firms5 played a major part in advocating the profession’s case for liability limitation, with supporting coordination work being undertaken by the European Contact Group (ECG), a body set up to represent the firms in their dealings with European governance institutions, particularly the Commission and the Parliament. Established in 1993 in Brussels, the ECG was classified at the time as a rare case of cooperation 5 The largest international accounting firms include the ‘Big Four’ firms (PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu, Ernst & Young) plus two leading mid-tier firms (Grant Thornton and BDO). These firms carry out the vast majority of audits of listed companies worldwide and have long maintained the position of the global audit market leaders. More recently, all these firms have been commonly referred to as the ‘Big Six’. In this paper, when we use the term ‘large accounting firms’, we are generally referring to the ‘Big Six’.

Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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Large accounting firms

ICAEW

Representatives of the Member States

Private professional interests FEE

ECG

European Union Principal legislators agenda setting and policy endorsement

European Parliament (JURI and ECON Committees) Insurers

Council of Ministers Investors IAASB

Executive body policy drafting

International standardsetting and regulatory bodies IFAC Key Title:

Other policy stakeholders

European Commission

Corporations

Directorate General Banks

Audit Unit

Discussion forums and advisors London Economics

Academics

Forum On Auditor Liability

Fig. 1. Key transnational interests participating in the European debate on auditor liability.

between the large accounting firms on a transnational policy stage (see Kelly, 1996). It is an organization with limited public visibility, having no official website. Initially, the Group had eight members, one representative (a senior partner) for each of the then eight largest accounting firms (Manardo, 1996). Subsequently, the number of members rose and now amounts to nineteen individuals representing the six largest accounting firms and also covering eleven EU member states – a membership profile which has been said to enable the ECG to survey policy sentiment not only within the firms themselves but also within different national environments (Jennings, 2010).6 Other actors actively represented in the European debate on auditor liability limitation included professional accountancy associations (such as the Fédération des Experts Comptables Européens – FEE), various regulatory agencies, users of audit reports (including members of the investment, banking and corporate sectors), and representatives of European Member States, with dis6 Globally, the large accounting firms established the Global Public Policy Committee (GPPC), a coordinatory body consisting of two working groups – the ‘Standards Working Group’ and the ‘Regulatory Working Group’ focused on public policy, regulatory and professional matters. The GPPC has worked closely with international regulatory agencies, such as the International Accounting Standards Board, Financial Stability Forum (now Board), International Organization of Securities Commissions, and others on issues relating to various aspects of public policy (Humphrey & Loft, 2011). In Europe, however, the firms’ joint efforts at influencing the EU’s regulatory arena have been coordinated largely by the ECG.

cussion fora such as the European Committee on Auditing and European Auditor Liability Forum playing an important liaison role in terms of attempting to resolve conflicting positions across key players. A commercial consultancy, London Economics, was also commissioned to provide ‘evidence-based’ inputs into European policy deliberations. In documenting the pursuit of auditor liability limitation reform, we reviewed an extensive set of publications in the professional auditing and business press covering the issue of audit regulation in general and auditor liability in particular. We also consulted documents prepared by EU institutions and officials, such as policy drafts, studies, communications, public consultation reports and stakeholder responses, conference proceedings, meeting minutes, and public pronouncements. Relevant web resources, including the web-pages of the EU’s key bodies (the European Commission, the Parliament, and the Council of Ministers), were analyzed to assist in the mapping of a dynamically evolving gathering of policy actors involved in the liability debate. We also benefited from access to a range of internal documents made available by members of the large accounting firms who, at various points in time, had represented the audit profession at the European level. These included minutes from meetings with the European Commission officials, presentations made during those meetings, relevant correspondence, internal notes, and various other materials detailing their interactions at the EU level. Also, some valuable additional insights into

Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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the audit community’s representation in the EU governance institutions were sourced from the archives of IFAC and a number of European professional accountancy bodies/organizations, including FEE and the Institute of Chartered Accountants in England and Wales (ICAEW). The robustness of findings derived from such documentary analysis was enhanced by cross-checking against evidence and opinions obtained from a series of interviews that we subsequently conducted, in 2009–2010, with nine high-profile individuals – all of whom held senior positions of engagement and influence in the EU policy arena with respect to the auditor liability limitation debate, including representatives of the large accounting firms, professional accountancy organizations (such as ICAEW and FEE), the European Commission, and the commercial consultancy firm London Economics. For the purpose of the historical analysis presented here, the interviews were used primarily to verify factual data collected from documentary reviews and to assist in our assessments of substantive policy standpoints taken by different interest groups.

The making of a case for reform: shifting regulatory sentiment through professional interest representation Viewing risk as a conceptually fluid, socially constituted category readily invites analysis of the dynamics of rhetorical struggles that underlie the development of audit policy agendas and are concerned with constructing (deconstructing) ‘‘networks of causal attributions’’ linking risk objects to harm. Hilgartner (1992, p. 41) notes, in this regard, that objects are not ‘‘simply waiting in the world to be perceived or defined as risky [. . .] [nor do] linkages among objects simply exist ‘‘out there’’ in reality’’. Rather, constructing risk objects that require regulatory attention ‘‘as things that pose hazards, the sources of danger, the entities to which harmful consequences are conceptually attached’’ (p. 41) necessitates collective sense-making by people and organizations. Viewed from this perspective, auditor liability risk is not a ready-made policy issue waiting to be resolved; it is something that is being continuously defined and redefined through processes of rhetorical attribution involving a variety of actors operating, in our chosen case, within the European public policy arena. Further, as Hilgartner (1992, p. 42) emphasizes, ‘‘the world does not present itself prepackaged into unambiguous and clearly-differentiated objects’’, and hence, such processes of constructing risk objects and the related frames of reference are ‘‘fundamentally ambiguous’’. This ambiguity, among other things, manifests itself in the differences between early conceptualizations of auditor liability by the EU’s political establishment more concerned with a broad-based assessment of the risks it poses and by the large accounting firms and professional bodies focusing on the risks specifically associated with unlimited (i.e. joint-and-several) liability. The EU’s Eighth Company Law Directive on statutory audit (84/253/EEC) issued in 1984 did not specifically refer to auditors’ legal responsibilities or to the circumstances under which auditors could be held liable; merely stating that it was up to individual Member States to determine

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appropriate liability arrangements. In subsequent years, the topic of auditor liability started to be raised in EU regulatory circles as an issue linked to the effective functioning of the European single market, itself being a central focus of European policy. In 1994, for example, John Mogg, then Head of the Directorate General for Internal Market and Financial Services, asserted in his speech at FEE General Assembly that differences in the national liability systems ‘‘might prevent the creation of a level playing field’’ and that ‘‘the issue is sufficiently important to warrant our attention’’ (European Commission, 1994). Such pronouncements by senior EU officials came amidst publicly expressed concerns by representatives of the accountancy profession about the absence of a uniform European policy with respect to auditor liability. Specifically, FEE (1992) in its representative role for the European accountancy profession, noted that significant differences in EU countries’ liability regimes were unacceptable and recommended the replacement of the joint-and-several liability principle with a system of proportionate liability. These assumptions were echoed three years later by IFAC in a report presenting the results of an opinion survey of its member bodies (IFAC, 1995). The large accounting firms were also collectively pointing to the adverse consequences of an ‘‘epidemic of litigation’’ and a need for auditor liability limitation (Arthur Andersen & Co., Coopers & Lybrand, Deloitte & Touche, Ernst & Young, & KPMG Peat Marwick & Price Waterhouse, 1992, p. 1). They argued that stakeholders were increasingly relying on auditors’ ‘deep pockets’, regardless of the relative degree of their culpability, and that claims against them were disproportionate both to their wealth and the audit fees received from their clients (Lochner, 1993). There were a number of important events which, collectively, signified the start of an EU-wide debate on the development of a European audit market and the nature of auditors’ responsibilities, with auditor liability being seen as one of the pertinent issues for discussion. Such events included the publication of an independent study (Buijink, Maijoor, Meuwissen, & Van Witteloostuijn, 1996) initiated by the Commission which concluded that differences in EU Member States’ liability arrangements could have an adverse effect on the European audit market7 and, shortly after, the issuing of the Commission’s Green Paper ‘‘On the Role, Position and Liability of the Statutory Auditor within the European Union’’ (European Commission, 1996a). The Commission’s position on auditor liability limitation in the Green Paper acknowledged that ‘‘the liability of the auditor should be limited to amounts which reflect his degree of negligence’’ (European Commission, 1996a, art. 5.6), while, at the same time, making it clear that the capacity for any policy action should rest with Member States and not with the EU institutions:

7 The United Nations Conference on Trade and Development (UNCTAD), through the framework of the annual meeting of its Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) also held, in March 1996, a one-day Forum on the Responsibilities and Liabilities of Accountants and Auditors. See http:// www.unctad.org/templates/webflyer.asp?docid=3644&intItemID=2298& lang=1

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Action at EU level in this field is likely to be difficult. The audit profession is not the only profession which is struggling with problems of liability. Furthermore, the legal traditions in Member States in the area of civil liability are quite different. [(European Commission 1996a, art. 5.7)] Following a consultation period on the Green Paper, the Commission arranged, in December 1996, a conference which provided a platform for a wide variety of transnational interest groups to express and discuss their views on the issue of auditor liability limitation. In Hilgartner’s (1992) terms of reference, such interest groups may be referred to as ‘‘an eclectic lot, linked together by complex and shifting alliances and struggles’’ (p. 45), serving key roles as constructors of networks of causal attribution linking risk to harm in ways that serve to inform and shape processes of European audit policy development. In the case of European auditor liability debate, such heterogeneous groups included the Members States’ audit regulatory bodies, users of audit reports (such as the corporate sector, investment organizations, banks, and insurance companies), the academic community, national and regional professional accountancy associations, and large accounting firms themselves (European Commission, 1996b). Rather than acting individually, the firms came to an agreement that ‘‘their arguments will be strengthened by the manner in which they reply’’, and therefore, produced a joint response to the Green Paper (Accountancy Age, 1996). This response was coordinated, on behalf of the firms’ European offices, by the ECG who, subsequently, gave two presentations at the Conference. The conference speech by the ECG’s Chairman at the time, Jacques Manardo (a founding partner of the French practice of Deloitte Touche Tohmatsu) outlined the key points of the firms’ response (Manardo, 1996) presented in the form of an Action Plan (European Contact Group, 1996). Interestingly, although the ECG had been working on the Plan since 1993, it released the final version a day before the Conference effectively as a way to set the agenda for subsequent debate and discussions at the Conference (Kelly, 1996). The Plan was intended to provide the basis for change in EU Member States to support moving towards a single market in auditing, free of government intervention, and a self-regulated audit profession in Europe. With regards to the issue of auditor liability, the Plan pointed to significant differences across national auditor liability regimes in Europe and recommended that in order to moderate the rapid increase in litigation exposure ‘‘an auditor’s liability should be restricted to levels which reflect the auditor’s real share of fault’ by moving ‘from the concept of joint and several liability to that of proportionate liability’’ (European Contact Group, 1996, p. 14). The other ECG contribution was from Ian Brindle (the then UK Chairman of Price Waterhouse) who participated in a panel session on auditor liability. Drawing on his experience of auditing in the UK, Brindle pointed to what he saw as inconsistencies in national auditor liability regimes, not only in the UK but also in countries, such as Germany, ‘‘where there is a statutory cap on audit liability [. . .] [but] it is unclear whether the auditor could still be exposed to

civil liability claims from third parties under general contract and tort law’’ (European Commission, 1996b, p. 204). Overall, the conference reiterated the divergence in opinion on the subject of auditor liability between players such as large accounting firms and other stakeholder groups, which was concisely captured by Karel Van Hulle (at that time, Head of the Commission’s Financial Information Unit) when providing an overview of the collected comments on the Green Paper’s coverage of this issue: The commentators from the accounting profession regret the absence of a clear message in the Green Paper that a limitation of liability should be organised at EU level. Most other respondents think that there is no justification for reducing the professional liability of auditors as opposed to other professionals. [(European Commission, 1996b, p. 30).] The Green Paper, however, was indicative of the growing significance of auditing regulation as an EU policy priority and the Commission duly established, in 1998, a Committee on Auditing (European Commission, 1998, paragraph 3.2) – with the intent of providing a platform for systematic interactive exchanges between representatives of the European and international regulatory communities (such as the Commission’s officials, the Member States’ audit regulatory bodies and international audit standard setters), professional bodies and institutes representing the accountancy profession (including FEE, the European Federation of Accountants and Auditors for Small and Medium-sized Enterprises, European Confederation of Institutes of Internal Auditors), and the ECG.8 The Commission committed to the investigation of extant national auditor liability practices (European Commission, 1998: paragraphs 3.14–3.15), leading to the publication, in January 2001, of a comparative study of fifteen Member States (Thieffry & Associates, 2001). Although acknowledging significant differences between countries, the study chose not to endorse the views of the profession and aforementioned reports by FEE (1992) and IFAC (1995) – and, instead, lent support to the Commission’s argument that national complexity was an overwhelming obstacle to convergence. Policy intransigence amidst an audit crisis The dynamics of struggles over the construction of risk may change dramatically as ‘‘unpredictable developments in these struggles propel objects back and forth along a continuum of emplacement and displacement’’ (Hilgartner, 1992, p. 49). In the case of auditor liability limitation in the EU, one such significant incident was the demise, in 2001, of the US energy giant, Enron, and its auditor, Arthur Andersen, one of the then Big Five accounting firms. The collapse of Enron set the scene for the revisiting of extant definitions of risk attributed to the auditor liability issue

8 The Committee continued its work until 2005 when it was replaced by a newly formed European Group of Auditors’ Oversight Bodies (EGAOB), a coordinating agency representing national audit regulators of EU Member States.

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and the construction of new linkages between risk and putative harm. It was used by the large accounting firms as a powerful reference point with which to strengthen their rhetoric in favour of limiting auditor liability, specifically by arguing that the case represented a clear practical demonstration of the real possibility of other large accounting firms exiting the market (Talley, 2006). By emphasizing their roles as the primary suppliers of audit expertise and recipients of audit regulation, the large accounting firms sought to gain greater access to, and influence over, the key institutions of the EU’s system of transnational governance (Andersen & Eliassen, 1996; Djelic & Sahlin, 2010). The ECG took part in the aforementioned European Committee on Auditing, and two of its meetings, in 2001 and 2002, were particularly instrumental in placing the auditor liability issue firmly on the Committee’s agenda. At the Committee’s meeting in Paris in 2001, an invited presentation by Richard Murray (the then, UK-based, Global Director of Legal and Regulatory Affairs for Deloitte Touche Tohmatsu) pointed out that excessive auditor liability was unhealthy and that capital markets would suffer as a result because auditors were made to bear most of the risk while a company’s management enjoyed significant entrepreneurial rewards with low risk attached. Alongside Murray, a second presentation at that meeting, by Richard Fleck,9 of the UK-based law practice Herbert Smith, reviewed the developments in company law in Britain to make a case for the need to limit existing levels of auditors’ liability exposure. In a subsequent presentation at the Committee’s meeting in 2002, amidst the final stages of Arthur Andersen’s collapse, Fleck forcefully argued that the unfolding events were vivid reminders of how ‘‘theory [. . .] [could] become a reality’’. The minutes from the Committee meeting (European Commission, 2002b) provide clear evidence of the differing official positions taken by European Member States on the issue of liability limitation. The German representative, for example, agreed that the Commission needed to address the liability issue, but at the same time an argument was made that there was little hope in any calls for a European liability reform actually succeeding because ‘‘it would be difficult to find a common legal ground to achieve harmonization’’ (European Commission, 2002b). The French representative remained more cautious, arguing that Fleck’s analysis omitted ‘‘a necessary element of self-criticism of the profession by the profession’’ and adding that ‘‘if the large firms want to convince EU regulators that there is a problem, they should put all the facts on the table’’. The meeting’s key outcome was a decision to include a reference to auditor liability in the Commission’s then forthcoming Communication on the statutory audit priorities in Europe in the post-Enron era. Despite this commitment, the personal views of some senior Commission officials were still quite sceptical over the possibility of regulatory intervention. Frits Bolkestein (at that time a European Commissioner for the Internal Market and Taxation), for

9 Richard Fleck subsequently became the Chair of the UK’s Auditing Practices Board (APB).

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instance, asserted at a conference at the London Underwriting Centre in March 2003: [...] in the current economic climate, I think there would be little support for a regulatory intervention which would generally limit auditor liability. After so many major financial reporting scandals and potential audit failures, regulators need to act to restore investor confidence. An intervention limiting liability, to my mind, would not serve to revive the trust of investors. [(Bolkestein, 2003)] In his speech, Bolkestein provided what he saw as four reasons for not limiting liability. First, he reiterated the Commission’s longstanding stance that unlimited liability is a driver of audit quality, adding that liability systems exist for the protection of those who suffered damage (claimants) and not for the convenience of those who may be at fault. Secondly, he saw the aforementioned ‘deep pocket’ approach as being principally sound as it meant that the claimants ‘should not have to shoulder the burden of suing separately all parties which have a partial responsibility for proper financial statements’, noting that the concept of joint-and-several liability was adequate. Thirdly, he saw increased auditor liability as being a self-created problem for the audit profession, in that the (global) expansion of accounting firm networks had significantly increased the risk that an audit failure of one local member may damage the whole network. Finally, Bolkestein reasoned that audit, by its very nature, is a function carried out in the public interest and that third parties should be in a position to claim damages in cases of fraudulent financial reporting. He demanded greater clarity on the scale of claims against auditors, asserting that many cases had been too easily settled out of court. Crucially, though, Bolkestein admitted that a change in the negative market sentiment towards auditors could potentially revive the liability debate, and that, in principle, the Commission could consider updating existing EU law, such as the EU’s Eighth Company Law Directive on auditing (Bolkestein, 2003). The above discussion demonstrates how the consequences of the Enron collapse were used to justify two opposite policy positions on the need for auditor liability limitation. On the one hand, the proponents of limited liability, specifically the large accounting firms, used the Enron disaster, in Hilgartner’s (1992) terminology, to emplace more forcefully in the ‘conceptual web’ of European policy making the notion of unlimited auditor liability systems as a source of significant risk. Specifically, the firms employed forceful rhetoric to build strong causal linkages between unlimited liability regimes and what was presented as the ‘catastrophic’ harms of ‘excessive’ liability exposure, namely: ‘a large accounting firm failure’ and an ‘irreparable’ damage that such an event would cause to the audit profession as a whole. Furthermore, the firms also made attempts to ‘‘redistribute responsibility for risks’’ arising from existing liability arrangements as well as promoting a policy obligation ‘‘to do something’’ (Hilgartner, 1992, p. 47) by contrasting their position against that of company management who supposedly

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carried the lowest risk while enjoying significant financial reward. The arguments advanced by the opponents of limiting auditor liability, on the other hand, chose to emphasize different issues and risks. Bolkestein’s argumentation shifted the emphasis from the large accounting firms’ focus on how responsibility to compensate liability claimants should be allocated to the rights of claimants and how best to protect their rights. By disregarding the linkage between unlimited auditor liability and the ‘deep pockets’ syndrome and emphasizing instead auditors’ social obligations and extended rights of third parties, such argumentation was designed effectively to displace (i.e. to remove the capacity to influence – Hilgartner, 1992) the definitions of risk constructed by the large accounting firms. The rhetorical linkages advanced by Bolkestein were by no means unambiguous or neutral reflections of reality. Rather, they were used selectively to support and justify particular policy stances. Indeed, Bolkestein’s comments on auditor liability contrasted quite markedly with his own views on another harmonization agenda promoted as part of the single European market, i.e. that of international accounting standardization, and what he saw as a long-awaited decision by the EU to introduce a requirement that, by 2005, consolidated accounts of listed companies needed to comply with International Accounting Standards (European Commission, 2001). He asserted at the time that corporate scandals, like Enron, serve to demonstrate the importance of such harmonizing reform ‘‘even more strongly’’ (Bolkestein’s 2002 public address, quoted in European Commission, 2004). Continuing direct representation of professional interests In May 2003, the Commission issued a Communication (European Commission, 2003) identifying a number of targets for a European reform of audit legislation in the post-Enron era, including a planned revision of the Eighth Company Law Directive and the formation of an Audit Regulatory Committee to oversee its implementation. With respect to the issue of audit liability, the Communication, despite calls for reform from the proponents of liability limitation, stated that neither harmonization nor the limiting of auditor liability were necessary. However, it did acknowledge that there was a need ‘‘to examine the broader economic impact of present liability regimes’’ (European Commission, 2003, paragraph 3.10). In 2004–2005, the ECG, led by its new chair, Jeremy Jennings (an Ernst & Young partner based in Brussels), held talks with several senior MEPs (Chapman, 2004a). The primary focus of the discussions, also pushed forward in relevant pronouncements by FEE (2004), was on the ECG’s proposal that the revised Eighth Directive should contain a requirement that Member States introduce a form of limitation of auditor liability – to counterbalance what was seen as a suggested substantial expansion of auditors’ duties in the new text of the Directive. Documents obtained from the ECG indicate that, in addition to interacting with the European Parliament, it was also, through its network of national contacts, holding discussions ‘behind the scenes’ with national lawmakers of individual

Member States. Such informal talks were duly demonstrating that national differences in viewpoints on the need for liability reform remained strong. Countries with existing regimes of limited liability or those contemplating it, such as Austria, Greece, and Spain, reacted favorably to the ECG’s concerns. Furthermore, the notes of a meeting with a representative from Germany, where a cap on liability had been in place for a number of years, showed that the German government’s position had remained unchanged from that expressed at the aforementioned meeting of the EU Committee on Auditing in 2002 – where, in principle, it had not opposed the idea of pan-European action to limit liability but was skeptical about such an action being achievable due to significant differences in the existing liability regimes of Member States (see European Commission, 2002b). According to the ECG’s notes, a number of other countries, including Belgium, Denmark, Luxembourg and the Netherlands, felt that it was neither appropriate nor achievable for audit liability reform to be addressed in the revised Eighth Directive, but still supported further debate and the undertaking of a European study on the issue. The UK and Ireland both called for further investigation of the impact of existing liability regimes on the audit profession. Finally, the ECG noted that some Member States, particularly France, were still strongly opposed in principle to the idea of liability reform. Meetings between the ECG and MEPs revealed a generally more sympathetic response to the large accounting firms’ concerns. A German MEP, Wolf Klinz (a Draftsman for the Eighth Directive), advocated a €25 million cap on liability as a way to avoid ‘‘a situation where a liability case could ruin whole firms’’ (Chapman, 2004b). Another advocate of liability limitation was a Dutch MEP, Bert Doorn, who was leading the issue in the JURI Committee (Chapman, 2004b), and also, acting as a Rapporteur for the Eighth Directive. In the course of these meetings, the ECG presented its desired amendment to the Eighth Directive regarding the issue of auditor liability for consideration by the European Parliament. The amendment read as follows: 1. The Member States shall ensure that the effect of prevailing law does not place an unlimited financial liability burden on statutory auditors and audit firms. 2. The Member States may opt to address this by one or a combination of the following: (a) require any liability to be allocated between the responsible parties on a basis proportionate to their culpability, (b) permit statutory auditors and audit firms to limit their liability on a contractual basis (c) limit by law the amount of compensation for financial loss for which statutory auditors and audit firms may be liable. In July 2005, the final report on the new text of the revised Eighth Directive (JURI, 2005) was presented by Bert Doorn to the European Parliament, together with the opinions of the relevant Parliamentary Committees, such as ECON (European Parliament, 2005a). In this report, the final text of the amendment regarding auditor liability read as follows:

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The Commission shall before the end of 2006 present a report on the impact of the current national liability rules for carrying out statutory audits on the European capital markets and on the insurance conditions for statutory auditors and audit firms, including an analysis of the limitations of financial liability. The Commission shall, where appropriate, carry out public consultation. In the light of that report, the Commission shall, if it considers it appropriate, submit recommendations to the Member States. [(JURI, 2005, p. 47)] This amendment was notably different from that initially proposed by the ECG in that it did not contain any requirement for Member States to limit auditors’ liability. However, it did mean that the Commission was now statutorily committed to conducting a study on the impact of the Members States’ liability practices. Importantly, the JURI Committee’s report also stated that the final text of the amendment was a result of ‘the compromise as agreed during the informal trilogue’ [between the European Parliament, the Commission and the Council of Ministers]. The ECG’s proposed amendment had failed to achieve a position which could be agreed upon and shared within the European ‘decision making triangle’. Nevertheless, the fact that the final version of the amendment referred to the possibility of a recommendation by the Commission on the subject of liability was evidence of some form of political compromise between involved parties and an expectation of further policy debate. Such expectations were duly heightened with the appointment, in November 2004, of Charlie McCreevy as the European Commissioner for Internal Market and Services (replacing Frits Bolkestein). McCreevy’s personal professional experience as a Chartered Accountant in Ireland arguably contributed to him being more sympathetic to the large accounting firms’ claim that the Member States’ existing liability regimes were unfair. McCreevy asserted, fairly early on during his period of office, that ‘‘(P)ersonally I make no secret I have been in favour of having some cap on auditor liability for as long as I’ve been a Chartered Accountant’’ (McGinley, 2005). The revised Eighth Company Law Directive on Statutory Audits of Annual Accounts and Consolidated Accounts (2006/ 43/EC) was officially issued in May 2006 (European Commission, 2006). In response to article 30a of the Directive, which stated that the Commission should ‘‘present a report on the impact of the current national liability’’, the Commission duly appointed a UK consultancy firm London Economics10 to study the issue. Furthermore, as noted earlier in the paper, the Commission’s standardized approach 10 London Economics is a London-based consultancy firm established in 1986 by a British economist John Kay who at the time also held a Chair at London Business School. Over the years, the firm’s clients have included private and public sector organizations (such as the British government) as well as independent regulators (e.g. Ofcom, – an independent competition authority in the UK). London Economics has been involved in carrying out a wide variety of projects for EU institutions (such as the Commission and the Parliament) which, apart from its study on auditor liability, have included topics such as human resource mobility, European e-communications and European market studies.

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to policy formulation has been to encourage various discussion groups to develop a shared view on the policy issues at hand, and also, to justify resulting policy outcomes (Andersen & Burns, 1996; Andersen & Eliassen, 1996; Greenwood, 2007; Nugent, 2001). One example of such groupings was the European Auditor Liability Forum, set up by the Commission in 2005 and which continued working until summer 2006. Involved in the European Auditor Liability Forum were twenty audit market experts, representing regulatory agencies, professional accountancy bodies (ICAEW and FEE), large accounting firms (as represented by the ECG’s Chairman), associations of large businesses from France and Italy, the insurance industry, the banking sector, investment organizations, and academia. In Hilgartner’s (1992) terms, meetings of the Forum constituted instances of ‘heterogeneous engineering’ whereby participants, through claims of relevant expertise, became directly involved in the identification and justification of risks associated with auditor liability. The London Economics study played a vital role here in that it supplied new, previously undisclosed data on the consequences of litigation for the large accounting firms – data that was capable of being used to justify more aggressively the risks of unlimited liability. Much of the evidence presented by London Economics was sourced from documentary/literature reviews as well as surveys of accounting firms, client companies, institutional investors, and other stakeholders from the EU Member States. The Forum was committed to understanding ‘‘the background of litigation risks affecting firms and networks as a whole’’ (European Forum on Auditor Liability, 2005, p. 2). This involved the collection of evidence of the economic impact of auditor liability and gaining (unprecedented) access to the confidential data on the legal claims against accounting firms in the EU and United States, including details of how these cases had been resolved. The ECG played a key part in facilitating access to this information. The findings of the London Economics study and the confidential details of litigation against auditors put the large accounting firms, and specifically the ECG, in a powerful position for continuing to raise the significance of unlimited auditor liability as a risk object that needed to be brought under control through a form of regulatory action (Hilgartner, 1992). Strategically designed to underscore certain types of harms and threats, the data presented was to lay the ground for the large accounting firms’ further offensive directed at the sceptics of unlimited liability. The project report by London Economics (2006) concluded that the market for international audits was highly concentrated and effectively controlled by the large accounting firms. Such concentration was said to be linked to a growing gap between the value of legal claims against auditors and available insurance cover, with smaller accounting firms unable to cover the remaining amount claimed from their personal wealth. It was also claimed that unlimited auditor liability combined with only limited availability of liability insurance posed a serious risk to auditors, as they were left unprotected against the ‘catastrophic’ consequences of growing litigation, including the increasing likelihood of another large accounting firm failure (similar to that of Arthur Andersen), and

Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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endangering the effective functioning of the broader economy if ‘‘auditors were to decide that auditing is a too risky activity and therefore shift to other business lines’’ (London Economics, 2006, p. 134) In concluding, the London Economics report claimed that limiting auditor liability would tackle the adverse effects of auditors’ extensive litigation exposure by, inter alia, reducing concentration in the audit market, helping to ease staffing pressure on accounting firms, and ultimately, preventing another major accounting firm failure (London Economics, 2006, p. 177). That said, a ‘one-sizefit-all’ approach (i.e. the imposition of a single liability arrangement) was deemed unhelpful in terms of adequately catering for the variety of legal environments and accounting firm characteristics in the Member States (p. 188).

From competing conceptualizations of risk to the making of a Recommendation The publication of the London Economics report was soon followed by the launch, in January 2007, of a public consultation on the need for a European reform of auditor liability, including introducing a form of limited liability (Directorate General for Internal Market & Services, 2007a). The consultation allowed a wide range of transnational interests concerned with the liability issue a further opportunity to voice their opinions. Analysis of responses to the consultation (85 in total) (Directorate General for Internal Market & Services, 2007b) demonstrated, yet again, significant differences of opinion as to the best way to approach the liability issue, with such differences stemming from divergent conceptualizations of risk that various transnational policy actors attributed to particular auditor liability arrangements (Hilgartner, 1992). Indeed, the range of reactions revealed just how the pursuit of control over the construction of the meaning of risk represented a continuing struggle with environmental developments yielding differing opportunities for actors to influence the direction of regulatory debate by emplacing and displacing particular risk objects and redefining linkages between them. Strong reform proponents, such as the large accounting firms, attacked the claim that limited liability would lead to inferior audit quality. They drew a connection between the issue of liability limitation and the viability of the audit market, arguing that public oversight of the audit profession was a potentially more discriminating tool for enhancing audit quality than unlimited liability. With respect to the methods of limitation, the large accounting firms unanimously supported introducing a liability cap (Directorate General for Internal Market, 2007b). However, despite this apparent solidarity of opinion on the need for auditor liability limitation and a cooperative tone in previously provided agreed policy positions, differences did begin to appear in the views of the large accounting firms. For example, BDO and Grant Thornton, alternatively described as the two leading ‘mid-tier’ firms, disputed vigorously the position taken by the ‘largest’ (Big Four) firms as to what size of liability cap was most

appropriate. Jeremy Newman, at that time the BDO managing partner in the UK, publicly argued in a journal interview that the Big Four firms would be the main beneficiaries of a high liability cap and that the ‘mid-tier’ firms would be ‘‘crushed by the Big [Four] firms’’ (Hawkes, 2008). Further, the 2007 consultation revealed how opponents of liability limitation, such as users of audit reports, had started more aggressively to challenge the conceptualizations of risk (Hilgartner, 1992) attributed to unlimited auditor liability constructed by the large accounting firms. Such opposition was designed to undermine the chain of causal linkages that the accounting firms had sought to establish between unlimited liability regimes and what the firms claimed were the adverse consequences of litigation such as another accounting firm failure. Instead, users of audit reports rationalized audit failure as something that was far more strongly related to the loss of reputation that follows from major exposés of poor audit quality. Representatives of the insurance and investment communities, for example, stood in particularly strong opposition to the prospect of liability limitation (Directorate General for Internal Market, 2007b, p. 13). The essence of their concerns was the possibility that a fixed cap on auditor liability would lead to situations where litigants could not be fully compensated for their damages by auditors and would, therefore, pursue damages’ claims against directors and officers of the audited company, with a subsequent pressure on insurance costs. They argued it was far more important to place emphasis on the pursuit of better auditing standards and corporate governance. The Comité Européen des Assurances (CEA – the European Insurance and Reinsurance Federation) stated in its comment letter that ‘‘the risk of failure of a network, which could lead to a reduction in the audit offer, is mainly linked to a loss of reputation [emphasis added in the original document] and simply limiting the liability for auditors in the EU does not solve the problems of reputation’’ (CEA, 2007, p. 2). Also, Peter Montagnon, Director of Investment Affairs at the Association of British Insurers (ABI), asserted in an article in the Financial Times (6 June, 2008) that, while liability limitation would clearly offer auditors greater protection against litigation, the benefits of this to investors were somewhat less evident. In its formal response to the 2007 consultation, the ABI stressed that it had ‘‘worked in conjunction with the CEA to deliver the insurance industry’s key message that a cap will not change the underlying problem that insurers have no appetite to insure the liability of the Big Four auditors, following heavy losses in the 1990s’’.11 Banking sector regulators highlighted similar concerns with regards to the validity of assumptions made in the London Economics report. One of their key worries was the potential impact of changes in auditor liability arrangements on the roles that external auditors play with regards to banking regulation and supervision in some jurisdictions, such as with respect to collecting information on regulated entities and validating their assessments of key

11

See http://old.abi.org.uk/Newsletter/Attachments/19.pdf.

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measurements under the requirements issued by the Basel Committee on Banking Supervision (see Hüpkes (2006) for more discussion). The then Committee of European Banking Supervisors (since 2011, the European Banking Authority), for example, questioned the argument that ‘‘capping auditor liability across the EU will materially lessen the likelihood of the exit of a Big Four audit firm from the audit market or increase the choice of audit firm as no audit firm has so far failed within the EU due to a catastrophic liability claim against it’’ (Committee of European Banking Supervisors, 2007, p. 2). The above criticisms and other ‘inconvenient’ arguments resulting from the consultation process seemed to be largely ignored by the Commission’s officials, and instead the findings of the London Economics report (and the public comments made by proponents of liability limitation during the consultation) were used to justify the need for liability reform. While some responses had challenged the report’s arguments, it was still held out as demonstrating the post-Enron ‘reality’ of the large firms’ audit liability exposures. Arguably, of crucial importance here was the top-level institutional support that the issue of liability limitation had secured at the Commission. Commissioner McCreevy had already publicly confirmed his strong preference for limited liability reform well before the London Economics report was issued and so was always likely to be supportive of its findings. However, he used it to revive the causal linkages between the issue of auditor liability limitation and the concentrated nature of the audit market that, as was shown earlier in the paper, had been actively discussed within EU regulatory circles over a decade earlier (European Commission, 1994). In responding to the results of the London Economics study in an address at a FEE Conference in October 2006, McCreevy emphasized that ‘‘[the results] underline a concern I have had for some time: there is an increasing trend for litigation against auditors, while at the same time international audit networks are faced with a lack of available commercial insurance’’ and that there is a risk that one of the large accounting firms ‘‘might be faced with a claim that would threaten its existence [. . .] [in which case] capital markets at large could face very serious consequences’’ (cited in Lambe, 2007). Such argumentation attempted to define auditor liability not just as a risk that mainly threatens the survival of accounting firms but as something arguably more hazardous and significant; something that can harm the economy as a whole and the functioning of the European single market. According to Hilgartner (1992), such attempts at reconfiguring the existing causal linkages between risk and harm are designed to produce a tangible practical impact, for ‘‘[w]hen new definitions of risk objects get emplaced within the conceptual networks that people use to think about a [. . .] system, they act on that system’’ [original emphasis added] (p. 50). Effectively, by challenging or broadening established linkages between risk and harm, McCreevy and his supporters attempted to transform unlimited auditor liability from ‘a problem of one profession’ into a systemic risk and a threat to the system of European values grounded in the ideals of free, fair and efficient economy without borders.

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McCreevy’s arguments also drew support from the fact that a high level of concentration in the audit market had gained global significance as a policy issue. In September 2006, for example, the then Financial Stability Forum (now Board) held a meeting in Paris where its members ‘‘expressed concern’’ about the high level of concentration of audit services for large companies (Financial Stability Forum, 2006, p. 2).12 Furthermore, auditor liability and audit market concentration were among the topics discussed at a roundtable organized by IOSCO in 2007. The roundtable (for an official transcript, see IOSCO, 2007) yielded another opportunity for key participants in the transnational policy debate on the liability issue to air their respective views and concerns, although the outcome of the Roundtable was a press release that avoided making any strong policy statements or commitments.13 In McCreevy’s subsequent address to the European Parliament’s Committee on Legal Affairs, he positioned audit concentration and audit liability as key elements in a socalled ‘audit package’ of policy measures for implementing the revised Eighth Directive, and also the first priority for action (European Parliament, 2007). The issue of liability reform was made less controversial by not discussing liability limitation in isolation or representing it as a need in itself, but portraying it as a development that had clear resulting benefits for the audit market and the quality of auditing services: I believe that we should make every endeavour to encourage new entrants into the market for large audits and to create the conditions for them to invest in building stronger international networks. But how can we convince them to make the significant financial commitments needed to expand into the market for larger audits, if liability risks are high and insurance cover is not available? We cannot reasonably promote the objective of greater choice without first addressing the liability risks facing the audit profession. [(European Parliament, 2007, pp. 2-3)] However, McCreevy’s views and his overall package of reform both still generated challenge among interested stakeholders and were seen by some as misrepresenting the way in which discussions on auditor liability had proceeded. For instance, the International Corporate Governance Network (ICGN) issued a public letter heavily criticizing the stance taken by McCreevy and the assumptions being made as to the consequent market effects of auditor liability limitation – stating that limiting auditor liability was not ‘‘an effective or appropriate way to 12 Also, the Basel Committee on Banking Supervision (2008, p. 9) subsequently expressed its interest in monitoring developments in the area of auditor liability in terms of the potential effects of any future policy changes on audit quality. 13 For instance, with respect to liability, the press release noted: ‘‘The second panel explored the implications of auditor liability and possibilities for reform. The panelists focused in part on introducing liability caps for auditors and whether adherence to transparency and corporate governance principles by audit firms should be a prerequisite to liability reform. Panelists also discussed the unavailability of insurance for catastrophic claims and the implications for audit firm sustainability’’. See http:// www.iosco.org/news/pdf/IOSCONEWS105.pdf.

Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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increase high-quality audit firm choice’’ and that instead such an action ‘would reduce audit firm accountability, provide a significant market incentive to take audit shortcuts, and reduce overall audit quality to the detriment of investors’’ (ICGN, 2007). Certain regulatory groups were also starting to advocate that the policy reform imperative needed to shift from a direct emphasis on the need for liability reform, to a broader prioritization of audit quality and the multifaceted ways (including liability limitation) by which audit quality could be improved. For example, in the UK, a report by the Market Participants Group (2007), advising the Financial Reporting Council (the country’s regulator in the area of accounting and auditing) downplayed auditor liability as a threat to competition and the need for liability reform, noting that ‘‘[i]n developing and implementing policy on auditor liability arrangements, regulators and legislators should seek to promote audit choice, subject to the overriding need to protect audit quality’’ (p. 9). McCreevy’s intent was also questioned at the level of individual Member States, with the continuing spirit of opposition reflecting what Halliday and Carruthers (2009) described as the utilization of the weapons of the weak; namely, the tactics of reasoned resistance that supposedly ‘weak’ national policymakers use to ‘foil’ the policies produced by supposedly more powerful transnational bodies, such as the EU. For example, in highlighting ’’cultural incompatibilities’’ (Halliday & Carruthers, 2009, p. 344), the French government stressed that the Commission’s proposals for an EU-wide action to limit auditor liability contradicted their view of auditing as an inherently socially oriented function, particularly in the wake of the corporate scandals of the early 2000s when an auditor was, ‘‘more than ever, the guarantor of the credibility of corporate reporting’’ (Des Autorités Françaises, 2007, p. 1 – authors’ translation). They went on to argue that such a limitation would violate principles of social equality, a key constitutional right in France. They questioned findings of the London Economics report, arguing that the risk of disappearance of another large accounting firm network as a result of litigation was not supported by any convincing evidence, hinting that most legal cases were routinely resolved in (significantly smaller than the original claims) out-of-court settlements. They also treated with scepticism the argument that limited liability could tackle the problem of audit market concentration, stating that caps on liability would benefit mainly the larger firms, hence pushing the smaller auditors even further away from auditing large clients. The French government’s stance on the auditor liability issue was shared by other key stakeholder groups in the country. Specifically, while the French audit profession was in favour of liability limitation (arguing, in the words of Valerie Macaud, head of audit at Grant Thornton France, that the London Economics report showed that ‘‘there [. . .] [was] no evidence that unlimited liability promotes audit quality’’ – see The Accountant, 28.02.2007), other stakeholders, such as French banks and the Mouvement des Entreprises de France, an industry group that represents French companies, were strongly opposed to auditor liability reform (see The The Accountant, 28.02.2007;

Directorate General for Internal Market, 2007b). In Hilgartner’s (1992) terms of analysis, such competing arguments portray France as an environment where the risk associated with auditor liability (and any related reform) is conceptualized in terms of the social harms of audit failure and the consequent need to protect ‘injured’ parties.14 In June 2008, the Commission issued its formal Recommendation, entitled ‘‘The Recommendation Concerning the Limitation of the Civil Liability of Statutory Auditors and Audit Firms’’ (2008/473/EC). It duly classified unlimited liability as a serious impediment to audit market competition and the smooth functioning of capital markets, noting that ‘‘increasing volatility in market capitalisation of companies [. . .] [had] led to much higher liability risks, whilst access to insurance coverage against the risks associated with [. . .] audits [. . .] [had] become increasingly limited’’ (European Commission, 2008a, p. 1). The Recommendation, however, did not impose any binding restrictions upon the Member States to change their current position but only suggested that auditor liability ‘‘be limited except in cases of intentional breach of duties by the statutory auditor or the audit firm’’ (European Commission, 2008a, p. 1) by one of three methods: a cap on liability, proportionate liability, or limitation by contract (between the client and an auditor). Hence, the Recommendation did little to address the problem of diversity of auditor liability regimes across Europe, the aim that had been a primary motive for its initial interest in the auditor liability issue. It has been said that ‘‘the most forgiving rules are often on the most controversial topics’’ (Halliday & Carruthers, 2009, p. 411) and the difficulties of finding a shared policy position on a pan-European auditor liability arrangement ultimately led the Commission to produce a non-binding Recommendation offering multiple implementation options rather than any binding Directive.15 Conclusions This paper’s analysis of the determination of EU policy on the subject of auditor liability limitation has demonstrated how the large accounting firms’ efforts to mobilize pertinent EU governance institutions in their pursuit of change in Member States’ auditor liability arrangements failed to produce changes in governance outcomes that the firms had strived for. Instead of a binding policy that 14 Such a perception of risk did not only underlie the French authorities’ specific position on the Commission’s proposals but, more broadly, also reflected the general nature of the country’s legal treatment of auditor liability as a policy issue. France did introduce the principle of proportionate liability in the 1966 Companies Act (‘Loi sur les Societes Commercials no. 66-537’). However, while stating that auditors can be held liable only for their own fault and not that of management, the Act also explicitly provided for the auditor’s duty of care to third parties. The fact that such liability arrangements were defined in statute and not, for example, in contract law may be taken as testimony to the public policy orientation of auditing in France (Thieffry & Associates, 2001). 15 In particular, the strong opposition from countries, such as France, meant that a ‘one-size-fits-all’ approach to the auditor liability dilemma would have been unlikely to receive the required approval (by individual Member States voting) from the Council of Ministers, the EU’s principal legislator.

Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002

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would mandate a form of auditor liability limitation across Europe, the firms’ lobbying efforts only managed to secure a Recommendation that imposed no exacting obligations for action on the part of EU Member States. In viewing the pursuit of EU-wide auditor liability reform through Hilgartner’s (1992) analytical prism of a ‘risk object’, the paper has demonstrated how different interest representations constructed and levied competing views regarding proposed regulatory solutions, which ultimately did much to frustrate the accounting firms’ strategic intentions regarding EU-wide liability limitation. In terms of any possible resolution of the debate, the European Commission’s proposals to limit auditor liability proved capable of being simultaneously linked to different types of risks (Hilgartner, 1992). Accordingly, while the large accounting firms linked unlimited auditor liability with increased litigation against auditors, prospective major accounting firm failures and increased audit market concentration, opponents of auditor liability limitation were, in contrast, stressing the adverse effects of limited auditor liability on auditor independence and the quality of audits. Likewise, we have also seen how particular harms, such as the demise of a major accounting firm, were capable of being used by different interest groups to justify diametrically opposite policy positions – for example, with large accounting firms stressing the dangers of excessive liability exposure and users of audit reports reminding us of the importance of addressing the diminishing public trust in the quality of auditors’ work. Such risk construction processes (and related arrays of rhetorical associations designed to emplace/displace particular risks in the conceptual framing of European policy making on auditor liability limitation) prevented the establishment of any strong consensus as to an appropriate policy solution. In turn, these processes provide a vivid endorsement of Power’s (1998) claim that ‘‘the question of auditor liability would never be decisively solved, that pressures always exist to push the auditor in new directions, that auditors are constantly tempted to create expectations of what they can achieve, that new legal provisions are almost immediately out of date and some subject to pressures for reform and that classes of potential litigants can be created overnight just as others can disappear’’ (p. 79). It is also important to emphasize that such risk construction processes remain subject to temporal influences, wherein significant environmental developments and shifts in actor constellations can serve to create, reinforce or downplay the risks associated with particular policy agendas. Notably, in this regard, the aftermath of the 2007/08 financial crisis and the change in the top echelons of the EU’s political establishment (with the appointment of Commissioner Barnier in place of his predecessor McCreevy, a vocal advocate of audit liability limitation) saw the pursuit of auditor liability limitation lose much regulatory momentum. The Commission’s Green Paper on audit policy (European Commission, 2010) made no reference to the limitation of auditor liability and subsequent reform proposals (European Commission, 2011) even referred to the need to ‘‘increase the confidence in and the liability of the statutory auditors’’ (European Commission, 2011, p. 17).

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Beyond the specifics of auditor liability limitation, the paper’s analysis allows for the drawing of broader conclusions regarding the dynamics of modern regulatory governance systems. First, we have shown the involvement of private professional interests, particularly large accounting firms, in EU governance processes to be both substantial and active on a number of governance layers (including the European Commission, Parliament, and Council) and mechanisms (e.g. public consultation, committee membership, meetings with the representatives of individual Member States, direct engagement with the preparation of officially commissioned reports, direct lobbying and behind-the-scenes interactions). However, the paper emphasizes the potential dangers of treating such transnational policy engagement as something that automatically translates into an ability to dominate policy prescription and outcomes. Recent years have certainly witnessed the increasing prominence of studies of international accounting firms and accompanying claims as to their substantive status and influence in transnational governance (Barrett et al., 2005; Malsch & Gendron, 2011; Suddaby et al., 2007). Our findings, however, serve to question the firms’ scale of influence or at least impact on the determination of EU policy with respect to auditor liability limitation. With Fogarty and Rigsby (2010) generating similar results when highlighting the incapacity of the international accounting firms to secure regulatory support for desired innovations in audit practice, it is important not to assume that the interests of the large accounting firms are an inviolable force in the evolving transnational governance field. Moreover, such findings also highlight the importance of extending perspectives on the strategic policy endeavours of the accounting profession and its large firms so as to more fully capture how such endeavours are conditioned ‘‘by multiple actors, agendas, and strategies of influence’’ where firms are but one type of force with significant capacity to shift regulatory imperatives (SamsonovaTaddei & Humphrey, 2014, p. 907). Secondly, while confirming prior accounts of the rise of transnational regulation and the market demand for global policy solutions (Arnold, 2005, 2012; Büthe & Mattli, 2011; Cooper & Robson, 2006; Malsch & Gendron, 2011; Suddaby et al., 2007), the paper provides a timely reminder of the importance of not treating the transnational regulatory arena as it if it were a ‘‘single world stage’’ (Halliday & Carruthers, 2009, p. 6). Agendas of local implementation, and the possibilities as to what can and cannot be implemented at the national level, shape the core of what legislative and regulatory proposals the EU is willing to adopt in the first place. In this regard, our analysis reinforces prior accounts of the EU policy arena arguing that ‘‘[d]espite the independent influence of both EU institutions and sub- and trans-national actors, as well as the extensive transfer of competencies to supranational actors, sovereignty to date has not withered away to make way for a European sovereign state, nor for the disappearance of sovereign Member States’’ (Aalberts, 2004, p. 41). The substantial authority of the national political arenas is not unique to EU policy making but, increasingly, is part of a general trend towards the ‘repoliticalization’ (Bengtsson, 2011) of accounting regulation and the rebalancing of regulatory

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power in the wake of the global financial crisis where political bureaucrats look to be re-gaining considerable influence at the expense of other, such as private professional, actors. Finally, such observations and inferences about the nature of European (transnational) audit policy arena provide an inviting basis from which to refine extant scholarly approaches towards the study of accounting/auditing regulation. Specifically, they highlight the importance of research approaches that are capable of demonstrating and revealing empirically the complexity and multi-directional nature of the interactions between transnational policy stakeholders that constitute transnational governance processes in action. Methodologically, it places an emphasis on taking longer-term, longitudinal perspectives when studying and evaluating the development and associated consequences of (transnational) regulatory governance reforms. Understandings of the origin, meaning and consequences of regulatory initiatives and events can be enhanced by giving greater recognition to the cyclical nature of (accounting/auditing) regulation and the ways by which past policy outcomes feed into contemporary reform agendas (Humphrey, Moizer, & Turley, 1992). Furthermore, with a growing trend towards academic analysis of regulatory impact (Samsonova & Turley, 2012), it is important that research is not confined to testing the empirical ‘validity’ of new regulations and standards but is fully capable and committed to studying the social and political dimensions of regulatory reform (Humphrey, 2008) – exploring the processes by which regulation is produced and the ‘individual voices’ and contextually rooted sentiments that shape regulatory agendas. Cooper and Robson (2006), in this regard, pointed to the value of studying accounting regulation ‘in a comparative manner’, urging us to consider ‘how the specific location might affect regulatory outcomes’ (p. 428–29), including enhanced scrutiny of the influence of local political and social contexts and cross-national differences on global regulatory reform (also see Canning & O’Dwyer, 2013; Caramanis, Dedoulis, & Levebtis, 2010; Jeppesen & Loft, 2011; Malsch & Gendron, 2011). In this vein, it is important to study the development of international norm systems not as linear trajectories but rather as recursive processes wherein local policy-making experiences are visibly recognized as shaping the outputs of transnational policy making (Halliday & Carruthers, 2009, p. 409). We need to appreciate such outputs as products of contingent negotiation between national policy makers and institutions of transnational governance. In turn, this may well allow us to learn more of the relative regard held for regulated profession services, such as auditing, and the presumptions that govern assessments of auditor performance and expectations held for the function itself. Acknowledgements We would like to thank Stella Kokkali whose student dissertation project became a starting point for this paper. We also gratefully acknowledge the helpful comments on the earlier drafts of this paper from two anonymous reviewers, Mary Canning, Marie-Laure Djelic, Paul André,

Charles Cho, Jeremy Jennings, Anne Cazavan-Jeny, Andrei Filip, Karel Van Hulle, Robert Knechel, David Gwilliam, Cedric Lesage, Anne Loft, Martin Manuzi, Stephen Nye, Brendan O’Dwyer, Reiner Quick, Chrystelle Richard, Steven Walker and Peter Wyman, together with participants of the 5th European Auditing Research Network Symposium, the 6th Asia Pacific Interdisciplinary Research in Accounting (APIRA) Conference, and research seminars at ESSEC (Paris) and Exeter (UK) Business Schools.

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Please cite this article in press as: Samsonova-Taddei, A., & Humphrey, C. Risk and the construction of a European audit policy agenda: The case of auditor liability. Accounting, Organizations and Society (2014), http://dx.doi.org/10.1016/j.aos.2014.08.002