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Assurance worlds: Consumers, experts and independence
Accounting, Organizations and Society 36 (2011) 324–326
Contents lists available at ScienceDirect
Accounting, Organizations and Society journal homepage: www.elsevier.com/locate/aos
Assurance worlds: Consumers, experts and independence Michael Power ⇑ Department of Accounting, London School of Economics and Political Science, United Kingdom
Since the financial crisis there has been a great deal of critical commentary on financial auditing and, with the exception of the United States, a number of public enquiries. In the United Kingdom both the Treasury Committee of the House of Commons and the Economics Affairs Committee of the House of Lords have focused specifically on the role of auditors (e.g. House of Lords Select Committee on Economic Affairs, 2011). At the European Union level, a wide ranging green paper on the role of audit has generated unprecedented debate and reaction (European Commission, 2010) and, at the time of writing, there seems to be considerable momentum for change. Critics argue variously that the audit market is too concentrated, that auditors are insufficiently challenging of business models, that they are insufficiently independent, that relations with banking regulators are too distant, and that the audit process remains opaque to the public. Despite this explosion of critical discourse about the role of financial auditors in the financial crisis, the debate is surprisingly closed. The fundamental nature of audit as a practice is more or less taken as a given, albeit as something in need of reform. Unsurprisingly perhaps, proposed reform vectors are structural rather than fundamental in nature – changes to the rule environment in which audits operate, rather than changes in audit itself. One can speculate about the reasons for this reform conservatism. One possible explanation is that most of the participants in the debate are themselves auditors and accountants or those, like regulators and investors, who are closely related to the world of professional services. Whatever the reason the outcome is clear: there is remarkably little diversity visible in the discussions that have taken place since 2008, whether at the policy or scholarly level. It is for this reason that the three papers published in this themed section of Accounting, Organizations and Society are greatly to be welcomed. They are individual contributions from beyond the world of financial auditing yet, ⇑ Tel.: +44 2079557228. E-mail address: [email protected] 0361-3682/$ - see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2011.07.002
unintentionally perhaps, they collectively speak to that world and challenge its operating assumptions. Miller (1998) reminds us that the margins of accounting are continually being drawn and redrawn, and that accounting itself is a temporary assembly of techniques and practices attached to rationales and ideas whose character may change. The idea applies equally to auditing and assurance practices; financial auditing is a relatively stable but historically contingent practice within a larger field of evaluation, inspection and assurance elements which are fluid at the margins. Indeed, as Jeacle and Carter (2011) note in their paper, professional services firms have at certain points in their history been active commercial agents in shifting the boundaries of what they do and in extending assurance models to new areas. Yet the expansion of the financial audit model is not the central concern of the three papers under discussion. More interestingly, they are studies of assurance in very different settings from those with which accounting scholars and practitioners are usually concerned. Jamal and Sunder (2011) provide an analysis of a market for collectable items – baseball cards in North America. This setting provides a valuable case study of how a market generates a demand for certification and grading services. Cards whose quality and authenticity is validated can command a higher prices from collectors. As confidence builds in these grading services so does the market become richer and deeper. Yet the authors also provide a puzzle for auditing scholars: the independence of baseball card certifiers seems to be much less highly valued than their expertise and apparent immersion in the field. Is this puzzle really a puzzle? Or does it simply show how we have become accustomed to think about independence in the auditing world? If we characterise independence as a separately identifiable, measurable-by-proxy, quality of an individual or a firm at a point in time, supported by professional qualifications and some form of oath of allegiance to the public interest, then it may be that we are always likely to be disappointed and to find that
Discussion / Accounting, Organizations and Society 36 (2011) 324–326
reality does not live up to expectations. But why should we think of independence like this? In the market for baseball cards it is clear that independence and expertise are deeply intertwined qualities, qualities which are iteratively revealed and validated in markets over successive transactions which generate trust in a service. In Jamal and Sunder’s analysis, independence is not reducible to a set of regulatory prohibitions or anything in the mind of the individual which exists before or outside of the market. It is a product of the market dynamic itself. Independence is not a feature of a single assurance agent – it is a function of their position in a self-reinforcing reputational nexus (Klein, 2001). Of course, baseball card market actors can always duped by the unscrupulous over the short term, and any assurance can fail at the single transaction level. But the market reacts to, and corrects for, this. There is an important difference between the audit market and baseball card market. Poor quality cards, and therefore poor assurance, are quickly visible. Furthermore, nothing much is at stake for the economy if a single purchaser of baseball cards is cheated by a single assuror. We cannot expect a congressional inquiry or calls for change that we have seen with auditing. After all, collecting baseball cards is just a hobby and the public interest is not at stake. And yet, Jamal and Sunder provide insights into a very different form of assurance practice, one which deepens market liquidity and confidence precisely because it is embedded in market relations. In this way, their paper shows, perhaps unintentionally, that the very meaning of independence as a presumed attribute of assurors is much more fluid than we might realise. Jeacle and Carter’s analysis of ‘TripAdvisor’, an online rating and feedback system for hotels, restaurants and other leisure activities, is the story of a very different kind of assurance practice. The analysis shows how the online world shifts the originating source of assurance from the certified professional expert to consumers, both individually and in aggregate. Crucially, as a system which reduces information assymmetries between purchasers and sellers of holiday services, TripAdvisor undermines one of the defining conditions of possibility for auditing (Flint, 1988, chap. 2). TripAdvisor is an ‘Internet mediated trust system’ which empowers consumers. The technology creates the conditions by which everyone is potentially an auditor on behalf of everyone else. This ‘reverse panopticon’, as Jeacle and Carter call it, whereby the many can now observe the few, essentially democratises audit. And it is this repositioning of power, rather than the specific analytics, indices and rankings which TripAdviser produces, which challenge the traditional audit model most. By appealing to the wisdom of the crowds TripAdviser supersedes a centuries-long institutionalisation of the wisdom of the professional expert. Criticisms of expertise are not new and run through science studies, regulation theory and many other areas. In many practical fields, closed cultures of expertise have been opened up to lay membership and representation which play an increasing role in governance. Yet TripAdviser cuts across these many structural efforts at governing experts in a very simple way; it places voice and power
325
firmly in the hands of the consumer. Indirectly, Jeacle and Carter are reminding us how professions are deeply antithetical to real markets and real users. Even though the algorithms supporting TripAdviser rankings and analytics are themselves contestable, and even though concerns are being expressed about their monopoly power and potential for misuse, the repositioning of authority places assurance in a very different world from that of the financial auditor. Jeacle and Carter accept that TripAdviser and similar online services may create new assurance markets for auditing experts. But here there is a paradox. As accountant–auditors sign off on the integrity and legitimacy of TripAdviser and the rankings it produces (see also Free, Salterio, & Shearer, 2009), they simultaneously threaten their expertise and entitlement to do so. Online technology empowers real rather than constructed users (Young, 2006). In this respect TripAdviser is not dissimilar in nature to the external social audits conducted by various groups in the 1970s. Indeed, whereas financial auditing largely produces comfort and reinforces organizational legitimacy of the auditee (Power, 2003), TripAdvise provides information from and to customers and thereby amplifies the reputational risk of the auditee, in this case hotels and leisure groups. Downer’s (2011) analysis is kinder to experts and their public face. He draws upon auditing scholarship to analyse regulatory practices which assure the reliability of complex technologies, such as aircraft design. The high reliability context is inherently challenging to audit by being necessarily based on ex ante assessments rather than a low level of negative ex post outcomes. Downer focuses on that part of the assurance process which assesses designs in terms of their ‘redundancy’, a core value in high reliability settings. The auditable and calculative dimension of redundancy seems simple enough: the joint failure of two independent but highly reliable components is ceteris paribus necessarily a much lower probability than each individual component. Hence, simple compounding of probabilities can demonstrate the reliability-increasing properties of redundancy. Downer shows how the purity of this reasoning is easily challenged. Systems organized for redundancy, such as aircraft engines which operate independently of one another, may be mediated by non-redundantly structured information systems, themselves a different kind of audit object. In addition, events such as those which engulfed the nuclear reactors in Japan show how the assumptions of independence can be violated, and that there are unanticipated connections between the failure of apparently redundant components, not to mention human error. So the audit of design reliability, far from being a process which simply ‘reveals’ mechanical objectivity, in fact depends on the subjectivity of many key reliability variables which are ‘ritually verified’ by regulators. Indeed, the redundancy imperative can be source of instability because its status as an unquestioned regulatory norm inhibits other design options. Despite these challenges to the image of high reliability assurance, Downer argues that a high level assurance is indeed produced by these practices. This is because it is not
326
Discussion / Accounting, Organizations and Society 36 (2011) 324–326
really the ritualised ‘front stage’ which produces the assurance. Rather, it is the historical accumulation of tacit knowledge built up from precedent which informs judgements of reliability. In short he suggest that the real audit is not a purely calculative and probabilistic practice but is fundamentally judgemental. Downer’s analysis draws on thinking in science and technology studies (STS) but there are also echoes of the structure-judgement debate in financial auditing (Power, 2003, pp. 380–382). However, he suggests that while efforts to bolster image and front-stage by appealing to mechanical objectivity are always present in the face of accidents, it may be that every truth also needs a formalised front stage. Overall Downer’s analysis indicates some of the specific challenges of providing assurance in high reliability technology environments. But many of his points are also relevant to financial auditing scholarship which might benefit from greater engagement with STS. For example, it makes sense to think of capital as the financial equivalent of technological redundancy. Yet, the crisis shows that the financial system was not sufficiently imagined as a ‘high reliability’ system (Power, 2011). From this point of view, financial auditors of banks could learn much from practices of assurance for aircraft design safety. In summary, these three papers provide a refreshing counterpoint to financial auditing studies. Taken together they challenge the way both so-called ‘traditional’ and ‘critical’ scholars of auditing think about independence, auditees and expertise. They force us to imagine a number of different worlds of assurance: one where independence is a function of relational reputation, one where the expert
audit is no longer necessary and one where the auditor must take the reliability and safety of financial statements, and the organizations which produce them, much more seriously than ever before. They also force auditors to ask: who is assurance really for? References Downer, J. (2011). On audits and airplanes: Redundancy and reliabilityassessment in high technologies. Accounting, Organizations and Society, 36(4–5), 269–283. European Commission (2010). Audit policy: Lessons from the crisis. Brussels: European Commission. Flint, D. (1988). Philosophy and principles of auditing: An introduction. London: Macmillan. Free, C., Salterio, S., & Shearer, T. (2009). The construction of auditability: MBA rankings and assurance in practice. Accounting, Organizations and Society, 34(1), 119–140. House of Lords Select Committee on Economic Affairs (2011). Auditors: Market concentration and their role (Vol. 1). London: The Stationery Office Ltd.. Jamal, K., & Sunder, S. (2011). Is mandated independence necessary for audit quality. Accounting, Organizations and Society, 36(4–5), 284–292. Jeacle, I., & Carter, C. (2011). In TripAdvisor we trust: Rankings, calculative regimes and abstract systems. Accounting, Organizations and Society, 36(4–5), 293–309. Klein, D. (2001). The demand for and supply of assurance. Economic Affairs, 21(1), 4–11. Miller, P. (1998). The margins of accounting. European Accounting Review, 7(4), 605–621. Power, M. (2003). Auditing and the production of legitimacy. Accounting, Organizations and Society, 28(4), 379–394. Power, M. (2011). Preparing for financial surprise. Journal of Crisis and Contingencies Management, 19(1), 28–31. Young, J. (2006). Making up users. Accounting, Organizations and Society, 31(6), 579–600.
Contents lists available at ScienceDirect
Accounting, Organizations and Society journal homepage: www.elsevier.com/locate/aos
Assurance worlds: Consumers, experts and independence Michael Power ⇑ Department of Accounting, London School of Economics and Political Science, United Kingdom
Since the financial crisis there has been a great deal of critical commentary on financial auditing and, with the exception of the United States, a number of public enquiries. In the United Kingdom both the Treasury Committee of the House of Commons and the Economics Affairs Committee of the House of Lords have focused specifically on the role of auditors (e.g. House of Lords Select Committee on Economic Affairs, 2011). At the European Union level, a wide ranging green paper on the role of audit has generated unprecedented debate and reaction (European Commission, 2010) and, at the time of writing, there seems to be considerable momentum for change. Critics argue variously that the audit market is too concentrated, that auditors are insufficiently challenging of business models, that they are insufficiently independent, that relations with banking regulators are too distant, and that the audit process remains opaque to the public. Despite this explosion of critical discourse about the role of financial auditors in the financial crisis, the debate is surprisingly closed. The fundamental nature of audit as a practice is more or less taken as a given, albeit as something in need of reform. Unsurprisingly perhaps, proposed reform vectors are structural rather than fundamental in nature – changes to the rule environment in which audits operate, rather than changes in audit itself. One can speculate about the reasons for this reform conservatism. One possible explanation is that most of the participants in the debate are themselves auditors and accountants or those, like regulators and investors, who are closely related to the world of professional services. Whatever the reason the outcome is clear: there is remarkably little diversity visible in the discussions that have taken place since 2008, whether at the policy or scholarly level. It is for this reason that the three papers published in this themed section of Accounting, Organizations and Society are greatly to be welcomed. They are individual contributions from beyond the world of financial auditing yet, ⇑ Tel.: +44 2079557228. E-mail address: [email protected] 0361-3682/$ - see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2011.07.002
unintentionally perhaps, they collectively speak to that world and challenge its operating assumptions. Miller (1998) reminds us that the margins of accounting are continually being drawn and redrawn, and that accounting itself is a temporary assembly of techniques and practices attached to rationales and ideas whose character may change. The idea applies equally to auditing and assurance practices; financial auditing is a relatively stable but historically contingent practice within a larger field of evaluation, inspection and assurance elements which are fluid at the margins. Indeed, as Jeacle and Carter (2011) note in their paper, professional services firms have at certain points in their history been active commercial agents in shifting the boundaries of what they do and in extending assurance models to new areas. Yet the expansion of the financial audit model is not the central concern of the three papers under discussion. More interestingly, they are studies of assurance in very different settings from those with which accounting scholars and practitioners are usually concerned. Jamal and Sunder (2011) provide an analysis of a market for collectable items – baseball cards in North America. This setting provides a valuable case study of how a market generates a demand for certification and grading services. Cards whose quality and authenticity is validated can command a higher prices from collectors. As confidence builds in these grading services so does the market become richer and deeper. Yet the authors also provide a puzzle for auditing scholars: the independence of baseball card certifiers seems to be much less highly valued than their expertise and apparent immersion in the field. Is this puzzle really a puzzle? Or does it simply show how we have become accustomed to think about independence in the auditing world? If we characterise independence as a separately identifiable, measurable-by-proxy, quality of an individual or a firm at a point in time, supported by professional qualifications and some form of oath of allegiance to the public interest, then it may be that we are always likely to be disappointed and to find that
Discussion / Accounting, Organizations and Society 36 (2011) 324–326
reality does not live up to expectations. But why should we think of independence like this? In the market for baseball cards it is clear that independence and expertise are deeply intertwined qualities, qualities which are iteratively revealed and validated in markets over successive transactions which generate trust in a service. In Jamal and Sunder’s analysis, independence is not reducible to a set of regulatory prohibitions or anything in the mind of the individual which exists before or outside of the market. It is a product of the market dynamic itself. Independence is not a feature of a single assurance agent – it is a function of their position in a self-reinforcing reputational nexus (Klein, 2001). Of course, baseball card market actors can always duped by the unscrupulous over the short term, and any assurance can fail at the single transaction level. But the market reacts to, and corrects for, this. There is an important difference between the audit market and baseball card market. Poor quality cards, and therefore poor assurance, are quickly visible. Furthermore, nothing much is at stake for the economy if a single purchaser of baseball cards is cheated by a single assuror. We cannot expect a congressional inquiry or calls for change that we have seen with auditing. After all, collecting baseball cards is just a hobby and the public interest is not at stake. And yet, Jamal and Sunder provide insights into a very different form of assurance practice, one which deepens market liquidity and confidence precisely because it is embedded in market relations. In this way, their paper shows, perhaps unintentionally, that the very meaning of independence as a presumed attribute of assurors is much more fluid than we might realise. Jeacle and Carter’s analysis of ‘TripAdvisor’, an online rating and feedback system for hotels, restaurants and other leisure activities, is the story of a very different kind of assurance practice. The analysis shows how the online world shifts the originating source of assurance from the certified professional expert to consumers, both individually and in aggregate. Crucially, as a system which reduces information assymmetries between purchasers and sellers of holiday services, TripAdvisor undermines one of the defining conditions of possibility for auditing (Flint, 1988, chap. 2). TripAdvisor is an ‘Internet mediated trust system’ which empowers consumers. The technology creates the conditions by which everyone is potentially an auditor on behalf of everyone else. This ‘reverse panopticon’, as Jeacle and Carter call it, whereby the many can now observe the few, essentially democratises audit. And it is this repositioning of power, rather than the specific analytics, indices and rankings which TripAdviser produces, which challenge the traditional audit model most. By appealing to the wisdom of the crowds TripAdviser supersedes a centuries-long institutionalisation of the wisdom of the professional expert. Criticisms of expertise are not new and run through science studies, regulation theory and many other areas. In many practical fields, closed cultures of expertise have been opened up to lay membership and representation which play an increasing role in governance. Yet TripAdviser cuts across these many structural efforts at governing experts in a very simple way; it places voice and power
325
firmly in the hands of the consumer. Indirectly, Jeacle and Carter are reminding us how professions are deeply antithetical to real markets and real users. Even though the algorithms supporting TripAdviser rankings and analytics are themselves contestable, and even though concerns are being expressed about their monopoly power and potential for misuse, the repositioning of authority places assurance in a very different world from that of the financial auditor. Jeacle and Carter accept that TripAdviser and similar online services may create new assurance markets for auditing experts. But here there is a paradox. As accountant–auditors sign off on the integrity and legitimacy of TripAdviser and the rankings it produces (see also Free, Salterio, & Shearer, 2009), they simultaneously threaten their expertise and entitlement to do so. Online technology empowers real rather than constructed users (Young, 2006). In this respect TripAdviser is not dissimilar in nature to the external social audits conducted by various groups in the 1970s. Indeed, whereas financial auditing largely produces comfort and reinforces organizational legitimacy of the auditee (Power, 2003), TripAdvise provides information from and to customers and thereby amplifies the reputational risk of the auditee, in this case hotels and leisure groups. Downer’s (2011) analysis is kinder to experts and their public face. He draws upon auditing scholarship to analyse regulatory practices which assure the reliability of complex technologies, such as aircraft design. The high reliability context is inherently challenging to audit by being necessarily based on ex ante assessments rather than a low level of negative ex post outcomes. Downer focuses on that part of the assurance process which assesses designs in terms of their ‘redundancy’, a core value in high reliability settings. The auditable and calculative dimension of redundancy seems simple enough: the joint failure of two independent but highly reliable components is ceteris paribus necessarily a much lower probability than each individual component. Hence, simple compounding of probabilities can demonstrate the reliability-increasing properties of redundancy. Downer shows how the purity of this reasoning is easily challenged. Systems organized for redundancy, such as aircraft engines which operate independently of one another, may be mediated by non-redundantly structured information systems, themselves a different kind of audit object. In addition, events such as those which engulfed the nuclear reactors in Japan show how the assumptions of independence can be violated, and that there are unanticipated connections between the failure of apparently redundant components, not to mention human error. So the audit of design reliability, far from being a process which simply ‘reveals’ mechanical objectivity, in fact depends on the subjectivity of many key reliability variables which are ‘ritually verified’ by regulators. Indeed, the redundancy imperative can be source of instability because its status as an unquestioned regulatory norm inhibits other design options. Despite these challenges to the image of high reliability assurance, Downer argues that a high level assurance is indeed produced by these practices. This is because it is not
326
Discussion / Accounting, Organizations and Society 36 (2011) 324–326
really the ritualised ‘front stage’ which produces the assurance. Rather, it is the historical accumulation of tacit knowledge built up from precedent which informs judgements of reliability. In short he suggest that the real audit is not a purely calculative and probabilistic practice but is fundamentally judgemental. Downer’s analysis draws on thinking in science and technology studies (STS) but there are also echoes of the structure-judgement debate in financial auditing (Power, 2003, pp. 380–382). However, he suggests that while efforts to bolster image and front-stage by appealing to mechanical objectivity are always present in the face of accidents, it may be that every truth also needs a formalised front stage. Overall Downer’s analysis indicates some of the specific challenges of providing assurance in high reliability technology environments. But many of his points are also relevant to financial auditing scholarship which might benefit from greater engagement with STS. For example, it makes sense to think of capital as the financial equivalent of technological redundancy. Yet, the crisis shows that the financial system was not sufficiently imagined as a ‘high reliability’ system (Power, 2011). From this point of view, financial auditors of banks could learn much from practices of assurance for aircraft design safety. In summary, these three papers provide a refreshing counterpoint to financial auditing studies. Taken together they challenge the way both so-called ‘traditional’ and ‘critical’ scholars of auditing think about independence, auditees and expertise. They force us to imagine a number of different worlds of assurance: one where independence is a function of relational reputation, one where the expert
audit is no longer necessary and one where the auditor must take the reliability and safety of financial statements, and the organizations which produce them, much more seriously than ever before. They also force auditors to ask: who is assurance really for? References Downer, J. (2011). On audits and airplanes: Redundancy and reliabilityassessment in high technologies. Accounting, Organizations and Society, 36(4–5), 269–283. European Commission (2010). Audit policy: Lessons from the crisis. Brussels: European Commission. Flint, D. (1988). Philosophy and principles of auditing: An introduction. London: Macmillan. Free, C., Salterio, S., & Shearer, T. (2009). The construction of auditability: MBA rankings and assurance in practice. Accounting, Organizations and Society, 34(1), 119–140. House of Lords Select Committee on Economic Affairs (2011). Auditors: Market concentration and their role (Vol. 1). London: The Stationery Office Ltd.. Jamal, K., & Sunder, S. (2011). Is mandated independence necessary for audit quality. Accounting, Organizations and Society, 36(4–5), 284–292. Jeacle, I., & Carter, C. (2011). In TripAdvisor we trust: Rankings, calculative regimes and abstract systems. Accounting, Organizations and Society, 36(4–5), 293–309. Klein, D. (2001). The demand for and supply of assurance. Economic Affairs, 21(1), 4–11. Miller, P. (1998). The margins of accounting. European Accounting Review, 7(4), 605–621. Power, M. (2003). Auditing and the production of legitimacy. Accounting, Organizations and Society, 28(4), 379–394. Power, M. (2011). Preparing for financial surprise. Journal of Crisis and Contingencies Management, 19(1), 28–31. Young, J. (2006). Making up users. Accounting, Organizations and Society, 31(6), 579–600.