CHANGES IN THE INTERNATIONAL REGULATION OF AUDITORS: (IN)STALLING THE EIGHTH DIRECTIVE IN THE UK

Critical Perspectives on Accounting (1996) 7 , 589 – 613

CHANGES IN THE INTERNATIONAL REGULATION OF AUDITORS: (IN)STALLING THE EIGHTH DIRECTIVE IN THE UK DAVID COOPER,* TONY PUXTY,† KEITH ROBSON‡ HUGH WILLMOTT‡

AND

* University of Alberta , † (deceased , formerly of University of Strathclyde) ‡ University of Manchester Institute of Science and Technology In 1984 the European Commission issued the Eighth Company Law Directive requiring each member State to ensure that its national rules met common standards for the education, training and qualification of statutory auditors (84 / 253 / EEC; OJ 1984 L126 / 20). The Directive insisted that national governments take responsibility for the regulation of auditors, a requirement that clashed with the autonomy which many professional bodies believed they possessed. In this article we explore the processes through which the Eighth Directive on the regulation of auditors has been implemented in the UK. We argue that the Eighth Directive illuminates the effects of political and economic discourses on the development of accounting and auditing regulations and the protocols involved in installing such regulations into particular national contexts. The Eighth Directive represents a revealing moment in the shifts in political discourse (towards neoliberalism) in the UK and the problems of reconciling new modes of economic and political thinking with international regulatory programmes and institutions. Moreover, the implementation of the Eighth Directive in the UK cannot be comprehended outside of (i) an analysis of the problems the British Government has had in ‘‘managing’’ the accountancy profession in the UK and (ii), understanding the powerful image of the auditing industry as a key contributor to the UK economy. ÷ 1996 Academic Press Limited

Introduction In 1984 the European Commission issued the Eighth Company Law Directive (henceforth Directive) requiring each member State to ensure that its national rules met common standards for the education, training and qualification of statutory auditors (84 / 253 / EEC; OJ 1984 L126 / 20). It further sought common minimum European standards on auditor independence, scope of services and the ownership of audit firms. The Directive insisted that national governments take responsibility for the regulation of auditors, a requirement that clashed with the autonomy which many professional bodies believed they possessed. In this article we explore the processes through which the Directive on the regulation of auditors has been implemented in the UK. Why is this process of interest to anyone other than those concerned with Address for Correspondence : Dr. Keith Robson, Manchester School of Management, UMIST, P.O. Box 88, Manchester M60 1QD, UK. Received 10 October 1990; revised 5 June 1996; accepted 18 June 1996. 589 1045 – 2354 / 96 / 060589 1 25 $25.00 / 0

÷ 1996 Academic Press Limited

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the micropolitics of the audit profession and the pressure for international harmonization of standards and practices? While the process of installing audit regulations and the attempts to stall the process hold a certain fascination, we offer two interrelated general rationales for our in-depth examination of the implementation of the Directive in the UK: (1) The Directive illuminates the effects of political and economic discourses on the development of accounting and auditing regulations and the protocols involved in installing such regulations within particular national contexts. It represents a revealing moment in the shifts in political discourse (towards neo-liberalism) in the UK and the problems of reconciling new modes of economic and political thinking with, in this case, international regulatory programmes and institutions. Problems of reconciling different modes of regulation reflect the influence of other ideas of economic management, different national influences, and, indeed, the politics and ideals of earlier governments. (2) Studying the progress of the Directive in the UK illuminates the interrelations and tensions that operate between the State and the profession. The Directive is particularly appropriate since, unlike most transnational regulations in accounting and auditing, it focuses on the audit industry itself, not on its accounting and auditing practices. Although our analysis focuses on the UK government and profession, we argue that the problem of the management of accountancy and its contribution to the national economy offer important insights into the analysis of accounting and auditing ‘‘regulation’’ in advanced capitalism (Puxty et al., 1987; Robson et al. , 1994). Accounting and auditing issues are debated within particular legal and institutional settings and follow particular historical backgrounds that condition and structure the debates over specific accounting and auditing issues. In this case we argue that the implementation of the Directive in the UK cannot be comprehended outside of (1) an analysis of the problems the British Government has had in ‘‘managing’’ the accountancy profession in the UK and (2), understanding the powerful image of the auditing industry as a key contributor to the UK economy. We develop these rationales in more specific terms in the following two sections but it is critical to recognize that these two rationales have not operated independently: for example, the emergence of the neo-liberal discourse of government has raised issues for the British State in reinterpreting its role in relation to the UK accounting profession and, perhaps more fundamentally, has contributed towards a questioning of the institution of the ‘‘profession’’ and its privileges. We observe these interrelations and tensions in the detailed case below. Political Discourse and Accounting Regulation The development and implementation of the Directive is a revealing example of the process whereby the audit profession is caught up in cross-national political and economic changes. The Single Market has been taking shape in

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Europe and the audit profession is implicated both in this and the associated global multilateral trading system. As Hegarty, the secretary general of the Fe´ de´ ration des Experts Compatables Europe´ ens (FEE)1 has pointed out (1990), the Uruguay Round of the General Agreement of Tariffs and Trade (GATT) examined the EC’s experiences in liberalizing trade in services, including audit services, in relation to its own attempts to liberalize trade in services world-wide. Hegarty has characterized the European Union’s attempts as ‘’switching away from a policy based on harmonization and regulation to one based on liberalization and deregulation’’ (1990, p. 25). Thus the study of the Directive enables us to explore the process through which the globalization of services takes place, insofar as such movements and their rationales inform the regulatory process. The first draft of the Directive appeared in 1978 as part of the program of harmonization of company law within the European Union. Harmonizing company law was intended to facilitate a strong European internal market from which European based transnationals could effectively compete with similar enterprises based in North America and the Pacific Rim. Following the development of the EU Common Industrial Policy (1970), the attuning of company laws between member states was expected to promote the coordination of the international division of labour (who produces what and where) by making it easier to create (and also close down) cross border companies. Reliable audited financial information was expected to aid an ‘‘efficient’’ flow of capital to its most profitable international use. Regulations specifying common formats and bases for financial reports (e.g. the Fourth Directive; 78 / 660 / EEC; OJ 1978 L222 / 11) and insisting on minimum qualifications and regulations of auditors were assumed to assist international capital markets by providing comparable and reliable financial reports. Yet at the time that the Directive was taking shape, doubts were increasing about the manner by which advanced capitalist societies were organized. There were debates about ‘crises’ in the British (Hall, 1988; Gough, 1979), European (Offe, 1984) and North American (O’Connor, 1973) states and the possibilities of managing the economy and society. Many of the guiding rationales of government up until the late 1970s presumed the capacity of State agencies to ‘‘govern’’ the economy, and to engineer economic and social conditions through regulatory controls and economic management. An interventionist orientation by State agencies included Keynesian mechanisms of demand stimulation, public provision of health, education and welfare to ensure a productive, satisfied and consuming workforce, and State regulation to control the excesses of firms. The European Communities programme of harmonization can be viewed as part of what has been termed the ‘‘Fordist’’ model with members states encouraged to develop rules to regulate business and manage the national economies of European member states (Aglietta, 1979). The emergence of neo-liberalism challenged this model for the management of capitalism (Keat & Abercrombie, 1990; Heelas & Morris, 1992). Through political ‘‘think tanks’’ and business associations there surfaced demands for a ‘‘post-Fordist’’ model (Aglietta, 1979) which emphasized inter alia market modes of social organization, flexible production, segmentation

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of and removal of restrictions within the labour market. Post-Fordism also involved a rolling back of the productive activities of the State through mechanism such as privatization and down-sizing, limiting the power of unions (through increased unemployment and anti-union legislation) and reductions in the welfare state. In this discourse, the State should get out of the regulation business, and set industry and commerce ‘‘free’’ (Thompson, 1984). In this regard, the history of the implementation of the Directive in the UK illustrates the manner in which shifts in the approach to the management of society, and particularly the perceived role of the state, interact with the debates on the regulation of auditors. As Lash and Urry (1987) show, the discourses and practices of the neo-liberalist programme have varied significantly between one country and another. The shift from ‘‘organized’’ approaches to economic management and capital accumulation to post-Fordist and ‘‘disorganized’’ modes of regulation (Offe, 1985) has been a variable one, and in our account of the implementation of the Directive we are sensitive to the historical conditions and institutional arrangements of the UK. It is against this discursive background of neo-liberalism, government crises and the attempts to shift from Fordism to post Fordism that the Directive was given specific shape in each country. In this sense the politics and ideology of ‘‘Thatcherism’’ are important elements in understanding the way in which the Directive has been installed in the UK. The Directive was constructed in the context of specific professional concerns. Thus, as well as articulating the nature of the political philosophy of neo-liberalism and how it has been cast in the UK, it is important to identify how these concerns have impacted upon the auditing profession in the UK between 1978 and 1989. Any directive from the EC becomes bound up in other debates and activities taking place in Britain: the relationships which united the Directive with these processes are those from which it derived its meaning and roles. As has been argued elsewhere (Robson et al., 1994; Davison, 1987), the UK audit profession has been involved in a considerable variety of interactions with the State during the 1980s. Together, the globalization of services, national politics and ideology, and the specific conditions facing auditing in the UK in the 1980s, all served to shape the installation of the Directive in the UK. In the next section we consider these issues and the institutional dynamics in which they were located. Interdependencies and Tension in the State-Profession Relationship As well as a concern to understand how accounting and audit are implicated in processes of general social change, there is a second, but related, reason for studying the Eight Directive. Although professional accounting bodies are predisposed to underplay their relationship with the state, seeing it as a negative force that poses a challenge to their self-regulation (Robson & Cooper, 1990), our analysis is firmly within the practice of examining the relationship between the modern State and professional bodies. Considerable attention has been focused in recent years on the relationship between the State and the accounting profession (e.g. Hopwood, 1985, 1988; Tinker, 1984;

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Puxty et al., 1987; Cooper et al., 1989; Robson & Cooper, 1990; Miller, 1990; Arnold, 1991; Robson et al. , 1994; Sikka & Willmott, 1995a, 1995b). The use of abstract categories, such as ‘‘state’’, runs the risk of ignoring significant cross-national variation in institutional forms: Skocpol (1979; 1985) argues that cross national variation can be attended to be recognizing that the State has a ‘‘dual anchorage in class divided socio-economic structures and an international system of states‘‘ (1979, p. 32). For Skocpol, each State has its own distinctive structure and agencies with specific histories and directions of movement. This theory of the State thus acknowledges the way that ‘’social struggle is inscribed into the organization, administration and policies of the state’’, yet ‘‘it is indeed important to examine the corporate identity of State organizations and the interests that State personnel develop’’ (Held, 1983, p. 43). The value of this approach is that it is attentive to the institutional forms of State and professional organizations. These forms are significant in explaining the particular manner in which the Directive is installed in the UK as compared to, for example, other nation states in the EC. The interrelations between accounting and the State have been articulated by Hopwood as follows: ‘‘Much of the subsequent activity of the profession has been engendered by the growing activities of the State . . . one requires a view of the State as being quite centrally implicated in the construction of today’s conception of the accountancy profession and its powers, privileges and no doubt perquisites . . . [I]n turn, the State as we know it is at least partially dependent on the profession’’ (1988, pp. 559 – 560).

Hopwood emphasizes the shifting, symbiotic relationship between the State and the accountancy profession and points to the historical emergence of specific practices both within a particular State form and the particular, national character of an accounting profession. Yet, he adds: ‘‘At any particular moment in time the axis of relationship between the two can be subject to a great deal of tension and conflict. Questions can arise as to the appropriate locus of control over significant components of professional practice. The State can make . . . interventionist acts vis-a-vis the conduct and regulation of the task activities of a professionalised accountancy. And because of this, strategies of professional resistance can be formulated and implemented, some of which can give rise to substantial organizational innovations in the professional accountancy institutional context’’ (1988, p. 562).

The theoretical concern of this article is to elaborate the connections between political discourses and institutional structures in the shaping of the qualifications, training and control of auditors in the context of the UK state. We indicate how the process in Britain in the 1980s is punctuated by shifts in the specific relationship between the State and the accountancy profession. With this perspective, the paper proceeds to detail the characteristics and emerging features of the British government in the 1980s. In particular, it focuses on the discursive changes within which debates were taking place about the role of the State and the nature of the audit function. The paper then outlines the first draft of the Directive and British reactions to it, including attempts to stall or

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ameliorate its proposals. This outline is followed by a discussion of the final version of the Directive and the proposals for its implementation by the Department of Trade and Industry (DTI). The largely negative reaction of the UK audit profession to this document is analysed in the context of other debates about independence, education and incorporation. The final element of the analysis of the implementation of the Directive in the UK is the introduction of a new Companies Act in 1989.

The Accounting Profession and Neo-liberalist Government in the UK There is a considerable debate in the UK about the specific causes, nature and effects of British neo-liberalism (or ‘‘Thatcherism’’: Bosanquet, 1983; Krieger, 1986; Hall & Jacques, 1983; Jessop et al. , 1984, 1985; King, 1987). Hall has defined it as follows: ‘‘[Thatcherism] combines the resonant themes of organic Toryism—nation, family, duty, authority, standards, traditionalism—with the aggressive themes of a revived liberalism—self-interest, competitive individualism, anti-statism’’ (Hall, 1983, p. 29).

By the late 1970s, liberal economic theory—a belief in the effectiveness and disciplinary effect of free markets, and in the value of a retreat from Keynesianism to monetarism where the State was not to intervene in the real economy—was affecting not just economic policy but also social policy in the UK2. The neo-liberalist manifesto began to structure Conservative government policy in significant ways. Unions were charged with restraining industry. The labour market was increasingly segmented into a core of labour which tended to have high skills, high earnings, and considerable job security and a group of peripheral workers who had temporary, part time and generally insecure jobs. The size of government was criticized as wasteful and local government was cut back, partly through the use of value for money audits and contracting-out of services to the private sector. Such developments had a significant impact upon the market for accountants’ labour (Robson et al., 1984). For example, audit firms were allowed to conduct local authority audits under the Local Government Finance Act 1982 (Sikka & Willmott, 1995a, p. 562) and offered a range of consulting services to down-sizing and re-invented government. The audit firms also benefited from the programme of privatization of public utilities in their role as consultants. Moreover, the discourse of neo-liberal de-regulation allowed the professional bodies to remove restrictions on accounting firms advertising and other anticompetitive rules. The audit profession has been an active player in this political process, stimulated to grow and expand amidst calls for greater quality assurance, value for money and economic re-regulation3. The tensions and contradictions involved in a shift to liberal economic theory from a more interventionist and protectionist State policy have been particularly prominent in the area of British financial services, an area in which accounting and audit firms are increasingly significant. This sector has

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been a major component of the British economy yet there has been increasing concern about its international competitive position (Ingham, 1984; Hanscher & Moran, 1989; Radcliffe et al., 1994). Along with the rest of the financial services sector, the British audit ‘‘industry’’ was seen as an important potential contributor to a resurgence of British economic preformance (Robson et al., 1994). As Moran (1987) has shown, the British State became drawn into the regulation of this sector whilst at the same time espousing the virtues of liberalization and self-regulation. For example, the Department of Trade and Industry’s White Paper on Financial Services (DTI, 1985) appealed to the creation of a ‘‘climate for enterprise’’ at the same time as arguing the positivity of a detailed system of self-regulation. Aspects of both liberalization and regulation have proceeded together. The Interrelationships between the State and Auditors Whilst the above discussion of the Thatcherite version of neo-liberalism signals the changing political context in which the audit profession found itself, at the same time the axis in the relationship between the profession and the State (Hopwood, 1988) had become both more elaborated in terms of the issues which appeared on the axis and more ambiguous, in terms of the expectations each party had for each other. Indeed, a former senior partner of Arthur Andersen, referring to the challenges posed for accounting and auditing practice and the professional institutes by the UK state, has branded the mid 1980s as the ‘‘Twilight of the Profession’’ (Davison, 1987). Particular concerns related to fraud, standard setting and the segmentation and multiplicity of professional bodies which mitigated against coherent professional advice and action. Indeed, in interviews we have conducted in the sponsoring ministry for the audit profession, the Department of Trade and Industry (DTI), there was considerable frustration at the perceived inefficiency of the audit profession on these issues4. The concern with fraud, and the auditor’s role in detecting and reporting on it, had been an issue for many years in government circles (Power, 1993; Sikka & Wilmott, 1995b). During the 1980s, concern had focused on fraud in the City of London and the mis-use of State funds by private companies (Clarke, 1986). At the same time as the Directive was issued, the concern with fraud had been reflected in discussions concerning the Financial Services Act and Insolvency Act: in an era of ‘‘investor protection’’, the role of the auditor in the prevention, detection and reporting of fraud was debated (Radcliffe et al., 1994). Questions of auditor independence and enthusiasm for taking on a public service role had arisen, and the profession was seen to be unwilling to embrace a more aggressive role of reporting corporate wrongdoing to regulators (Sikka & Willmott, 1995a). The profession’s response was to focus on improving the quality of the auditor’s existing role and to stress the alleged value of good relations with management5. A second frustration of the DTI (and the British State more generally) concerned the effectiveness and efficiency of the standard setting process. Whilst misgivings over the standard of audit had been expressed (Sikka & Willmott, 1995a, pp. 557 – 559), the principal focus has been on accounting

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standards. Moreover, the profession was unable to force compliance with standards (Hadden & Boyd, 1992) and questions of standards overload, and the over-regulation of business, became significant issues. The profession’s own Accounting Standards Committee (ASC), was disbanded in 1990 and a somewhat more independent and hopefully more effective body was created, the Accounting Standards Board (ASB) with joint funding from profession, government and industry (Turley, 1992). Over the 1980s civil servants in the DTI who liaised with and monitored the accountancy profession considered that their work was hindered by the existence of several accounting voices owing to the number of professional bodies. As the Directive episode also illustrates (see below), the often contradictory views emerging from the six professional institutes, the large international accounting firms and the smaller practitioners caused bafflement in government circles. The DTI had informally but forcibly argued over an extended period for amalgamations between professional bodies. During the time when the Directive was debated, a number of merger attempts were made all of which proved abortive, despite support from the ‘‘leaders’’ of the professional bodies6. These ‘‘problems’’ occurred at the same time as the accounting ‘‘industry’’ experienced remarkable growth and commercial success. This was particularly true of the large international auditing firms, but membership of all the professional bodies grew significantly so that by 1984 there were over 160 000 qualified accountants in the UK. Non audit work had been the major area of expansion such that about half the fee income of the large firms in the UK derived from audit work (Economist, 1988; Moizer & Turley, 1989). The early 1980s saw also a significant increase in insolvency business. And a survey of senior executives in companies found that 120 out of 122 had used their firm’s auditors for other, related work in the last three years (notably taxation and investigation and acquisition work). Forty-four percent of companies also used their main audit firm for management consultancy work in the same period (Price Waterhouse, 1987, p. 12). In summary, the institutional relationships between the profession and the UK State during the 1980s harboured numerous interdependencies and tensions. Emphases upon the success of the UK financial services industry and the programme of returning public utilities to private ownership and markets provided significant arenas for the growth of the major accounting and audit firms. The UK government was keen to support the success of the accounting and audit industry. Yet some of the same arenas which contributed to professional success also provided the sites for tension between government and profession. The spectacle of company frauds and financial scandals raised doubts as to the effectiveness of the regulation of audit firms (Sikka & Willmott, 1995a). The European Commission’s attempt to harmonize the education and training of auditors was enacted within this complex economic and political environment. We now turn to our account of the development of the Directive and the process of its implementation in the UK. We present our analysis chronologically because the passage of time was important in the shift towards neo-liberal (or ‘‘New Right’’) ideals and in tracing the stalling and installation of the Directive into UK law.

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Drafting the Directive The first draft of the Directive was published in April 1978. It attempted to address there major issues: the education requirements of auditors, practice rights in the European market and controls to ensure the independence of auditors. From 1978 to when the final version of the Directive was approved by the European Commission in 1984, the representatives of the UK government and audit profession sought to ensure that the final draft would not require changes to extant practices. For the British representatives, regulation and harmonization were to be based on UK practices. For example, the earliest draft of the Directive focused on the educational attainments required for a qualified auditor of the financial statements of a public company. Almost without exception the UK profession concluded from its reading of that draft that it already complied with this part. Yet, far from being satisfied that little change was needed7, opposition in the ICAEW’s own professional journal, Accountancy, was trenchant, as the following editorial indicates: ‘‘ . . . the CCAB [Consultative Committee of Accountancy Bodies] is doing battle on our behalf . . . [of the process of negotiating a directive] . . . a long, weary process . . . much of it [the Directive] is well thought out and, indeed, useful; but parts are likely to stick in British gullets. . . . It leans heavily on French ideas, tends to follow a legalistic and prescriptive approach . . . it is an approach which is totally alien to our way of doing things’’ (Accountancy, 1979, p. 4).

Yet only two features of this draft in relation to training were identified as potential causes of difficulty to the UK accountancy profession8. One was a possible difficulty for students who have gained experience in commerce rather than public practice. The other was that education exclusively prior to auditing experience appeared to be precluded by the draft. This, the UK bodies stated, is unduly restrictive: the Law Society in the UK and the AICPA use a system where education precedes practice, and UK auditors might want this in the future. Yet this ‘‘possibility’’ hardly explains the tone of the editorial, which seemed more concerned with the process and origins of the proposed Directive than its content. This hostile and tone is clearer when we consider a second feature of the first draft of the directive: on mutual recognition of auditing qualifications among member states. The Accountancy editorial acknowledged that the ‘’proposed Directive is not designed to facilitate freedom of establishment in member states by providing mutual recognition of qualifications’’; but ‘‘Nevertheless, Article 10 does propose that, when a member State wishes to accord recognition to the qualifications of another member state, it must accept those qualifications if they have already been accepted in the other member State as conforming with the proposed Directive’’.

The Accountancy editorial was happy to support this Article on behalf of the UK profession because the ‘‘accounting bodies see this as providing at least a foundation for the

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Problems, however, might be anticipated because: ‘‘without obligation to do so, it could give rise to difficulties for the UK profession without balancing advantages . . . [because] qualifications obtained in another member State are considered equivalent. Accordingly, it seems that a host State would be required to accept all other Community qualifications or none’’.

As a result, the Directive is to be resisted because: ‘‘The UK profession fears that some other states—believing in the superiority of their own standards, and disturbed by what they believe to be the lesser standards in places like Italy—would prefer to accept none, rather than all, thus excluding the UK qualifications which would otherwise have been accepted’’.

The Directive would affirm the rights of UK auditors to practise elsewhere in the community. The fact that it would reciprocally permit non-UK auditors to practise in the UK was not considered any kind of threat9. The mention of Italy by name is also interesting, hedged around as it is with qualifications—the UK does not say that Italian standards are inferior, merely that some other states might believe they are10. The third issue that arose from the Directive, the possibility that there might be requirement to split off audit practice from other functions such as tax and management consulting, was mentioned at this early state, although the wording of the draft did not directly imply that such a split might be desirable. There was considerable lobbying by the UK representatives pertaining to the independence requirements of the Directive, described by a Price Waterhouse partner as its ‘’sting in the tail’’ (Clayton, 1989, p. 16). The DTI argued a position similar to that expressed by the profession— independence is a ‘‘state of mind’’ best maintained by ethical rules developed and enforced by the professional bodies. For them, no amount of legal rules could ensure an ‘‘attitude of mind characterised by integrity and an objective approach to professional work’’ (Rutteman, 1987a, p. 5). Moreover, the UK audit industry argued that the professional bodies and auditing firms provided elaborate guides and codes to communicate and reinforce these ‘‘attitudes of mind’’. During the drafting of the Directive, the British representatives resisted any specific independence requirements on provision of non-audit services. Auditors suggested that the strength, success and effectiveness of auditing is enhanced by an audit firm being involved in a range of services beyond auditing for a client and reinforced the argument by a survey of companies11. Of course, this is not common practice in some member states of the Community, but the British position was sustained in the final draft. The European Commission, on receiving the Directive from the Council, noted in its minutes that: ‘‘The Commission notes with regret that the rules concerning the

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independence of persons responsible for carrying out statutory audits have not been sufficiently harmonized by this Directive. It intends to submit further proposals in this area at a later date’’.

By adopting a position to maintain the status quo, the UK government could be seen to favour the international firms in their competition with less diversified and smaller audit firms in the rest of Europe. The self-interest of the multinational accounting and audit firms is here conveniently consistent with a neo-liberal philoslophy of leaving regulation to ‘‘free markets’’: an unfettered market in audit services would allow individual companies and their shareholders to choose their auditors according to their varied attributes. Values attributes might include the independence, integrity, name recognition and reputation of a multinational audit firm and these attributes typically command a premium price (Moizier & Turley, 1989). As the draft of the Directive went through successive stages during the early 1980s, the discourse of neo-liberalism became more salient. New Right thinking in the UK had an influence in the UK in economic, if not in all social matters. Whilst this thinking had been ‘‘convenient’’ when resisting pressures for international harmonization, it also implied challenging the privileges of the professions, since they were seen to constitute restrictive practices. That this potential threat to the UK accounting profession’s monopoly control of audit has not (yet) been realized owes much to the role of the DTI. The modern DTI was a fusion of two previous government ministries. One part of the Department was previously concerned with the promotion of British industry. The second was concerned with (inter alia ) the regulation of industry. The first is promotional, the second is regulatory. As neo-liberal thinking became increasingly articulated, so the dominance of the promotional role, associated with economic liberalism, became greater. Regulation of the audit industry was increasingly seen as important only so far as it aided the expansion of the audit (and other) industry. By the early 1980s, the DTI recognized that audit and accountancy in the UK was a significant industry. It employed more than, for example, the steel industry and was part of the relatively successful UK financial services sector, which was growing as manufacturing industry declined. This was important for the DTI, which saw continental Europe as a fertile market for British accounting and audit firms. Their services had the potential to become an even more signficant export industry, contributing to the UK balance of payments. As the Directive passed through successive drafts at Brussels, the accounting institutes and the DTI jointly promoted the UK auditing industry, as they defined it. Yet the draft directive was seen as an economic threat through its educational provisions12, the proposal to split audit from other functions in the name of independence, and also the abandonment, in later drafts, of attempts to require mutual recognition of qualifications. At this stage there was an apparent identity of view between the accountancy institutes and the state: both wished to promote the audit industry and wished to counter outside regulatory interference that restricted ‘‘entrepreneurial’’ activity. This alliance between the State and the audit profession apparently ignored the problems that the profession had been facing in the 1980s,

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problems which might have signalled a need for caution and strengthened State regulation, such as, for example, the many audit scandals of the period (Mitchell & Sikka, 1993; Sikka & Willmott, 1995a)13. In the next section we explore the changing relationship between the State and the profession in the context of the implementation of the Directive. The Implementation of the Directive In the second half of 1986 the UK government produced its response to the requirements of the Directive (Regulation of Auditors: Implementation of the EC Eighth Company Law Directive: A Consultative Document )14. The document (henceforth, ROA) acknowledged that ‘‘Compliance with these minimum rules and requirements will not in itself involve any significant changes in existing arrangements in the United Kingdom’’ (ROA, 1986, p. 1), yet the DTI document ran to an exceptional 77 pages15. In this section we consider why such an elaborate response was produced in relation to the discourse of neo-liberalism and the state’s difficulties in ‘‘managing’’ UK accountancy institutions. Above we suggested that the DTI’s attitude to the accountancy and audit profession was often supportive, although this support was tempered by frustration about the ‘‘efficiency’’ and governance of the profession. The neo-liberalist philosophy of the Conservative government welcomed the expansionism of the accounting industry but it was also mistrusting of ‘‘corporatist bargains’’ arrangement which had existed between the government and the audit profession, where the State delegated to the accounting industry the power to govern itself in terms of ethical standards and accounting standards (Puxty et al., 1987). In return, the State provided professional bodies with monopoly power over the audit function and a relatively free hand to set and police the resulting standards. Tensions and difficulties arose when the institutionally-fragmented profession of accounting seemed incapable of ‘‘delivering’’ its members on issues judged important by the state. We consider several of the proposals of the ROA, their relationship to the Directive, and the challenge they presented for the accountancy institutes in the UK. The Incorporation of Professional Firms There is nothing in ROA that suggests that British law or practice needed to be changed as a result of Section I of the Directive, save for minor modifications to laws regulating public bodies (e.g. National Health Service, Charities, Banking, Local Government). The ROA, however, raised the possibility of allowing some form of incorporation for audit firms. Although it had no direct counterpart in the Directive, which merely stated that firms of auditors ‘‘may be legal persons or other types of company, firms or partnership’’ (Eighth Direction, 1984, Introduction), much is made of this possibility in the ROA. Three times as much space was devoted to arguments in favour of the incorporation of professional firms, compared with those against incorporation. Notably, the value of incorporation for capital raising and competing

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with other firms in Continental Europe, which are incorporated, is emphasized in the ROA, arguments which centre upon facilitating UK audit firms to compete effectively in international arenas.

Rights of Establishment Section II of the Directive identified little that demanded changes by the UK profession and the ROA’s response was to conserve the existing structures as far as possible. The requirement to nominate responsible authorities for overseeing that auditors are ‘‘fit and proper persons’’ was met by designating professional associations as the authorities answerable for ensuring that this stipulation was observed. The condition set by the Directive in relation to approval of persons, educational requirements and examinations, and training arrangements were regarded by the DTI as compatible with current UK practices. The DTI suggested that minor changes would be required, as per Article 9 of the Directive, for the approval of experienced and mature persons not otherwise meeting the educational requirements. Other more substantive issues for the UK profession were raised by ROA, even though it was not obvious that the Directive was responsible for the emergence of one issue. The first concerned the authorization of foreign nationals.

Authorizing Foreign Nationals Coupled with the concerns to enhance the international competitiveness of UK audit firms, the authorization of foreign nationals was an issue of State and professional interest. There had been some concern with rights of establishment, for example, whether UK auditors could practise in other member countries. The final version of the Directive had avoided dealing with this issue—member states were not required to accept foreign qualifications, although such authorization would be permitted under the conditions of Article 11. The apprehension expressed in the ROA was that if Britain required of foreign nationals a test of British law and taxation, then other states might reciprocate and make it difficult for UK accountants to obtain overseas practice rights. The DTI’s consultative document proposed that authorized professional bodies be allowed to set such tests as were currently applied by the ICAEW as part of its reciprocal membership arrangements. Again, a concern to ensure the competitive position of UK auditors in an expanded European market had emerged, although the Directive did not provide explicitly for rights of establishment.

The Recognition of Professional Bodies and Professional Authorization The second substantive issue concerned the role of the State in the regulatory structure for recognition of professional bodies and authorization of individuals. This was one item that the DTI regarded as necessitating a

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change in British company law since the Directive required that the regulation of auditors should be legally enforceable under the state; Article 2.2 of the Directive required that: ‘‘For the purpose of this directive, the authorities of the Member states may be professional associations provided that they are authorised by national law to grant approval as defined in this Directive’’.

This implied that if professional associations were so designated their actions would have the force of law, and be public rather than private acts. This required an alteration in the legal status of the professional bodies which would then permit them to be challenged in the courts. Three possible alternative courses of action were proposed in the ROA: (1) To provide the professional bodies with statutory powers similar to those granted to the Law Society; (2) For the Secretary of State to approve professional bodies where he or she was satisfied they would only sanction audit functions for those persons who met the standards required, and could withdraw this approval if the standards were not met; (3) To set up a new body similar to the General Medical Council (for doctors) which would have representatives both of the State and the profession and would act as an intermediary between the government and the profession. The ROA quickly dismissed proposition (1): though this was ‘‘the most clear-cut in terms of Community obligations’’, it was ‘‘the least desirable in all other respects’’ (ROA, 1986, pp. 50 – 51). Why option 1 was seen as so undesirable was not elaborated, but from interviews and discussions between the authors and DTI civil servants it appears the reasons were twofold: (1) the fragmented structure of the profession (meaning that statutory powers would have to be granted to each auditing institute); (2) the historical inability of the profession to institute appropriate change, and respond to the state. A telling example of this fragmentation is the difference in the responses to the DTI’s options. The Institute of Chartered Accountants of Scotland (ICAS) favoured option (1) above; the Institute of Chartered Accountants in England & Wales (ICAEW) supported option (2); the Chartered Association of Certified Accountants (ACCA) endorsed option (3). The lack of co-ordination indicated by the public disagreement between the bodies only confirmed the DTI’s view of the audit profession as unreliable when compared to the older established and more cohesive professions.

Auditor Independence The points raised in the ROA in relation to Article 24 of the Directive concerning independence cannot be attributed solely to the requirements identified by the Directive. Article 24 merely stated that member states should not allow persons to carry out statutory audits ‘‘if such persons are not

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independent in accordance with the law of the member state which requires the audit’’; that is, no new measures to ensure independence were required by the Directive, simply that the regulations in existence within the member State should be enforced. The additional points raised by the ROA make sense only in terms of the changing political context in the UK, particularly the significance of New Right philosophies that stressed free markets and the concern of the State with the efficiency of the adult profession. The concerns were given further shape by other legislative issues that were important within the DTI in the mid 1980s, notable the Financial Services Act (Radcliffe et al., 1994). Despite a history in which the DTI had supported the view that independence is a ‘‘state of mind’’ not requiring specific legal guidelines (Sikka & Willmott, 1995a, p. 560), the ROA proposed the compulsory rotation of auditors and the separation of the audit function from other activities of accounting firms. The propositions were raised in a most tentative way, with more space given to the difficulties of their introduction, as compared to their virtues. For example, paragraph 2.24.5 of ROA suggested that a blanket prohibition on providing other services was ‘’a cure that might be thought worse than the disease’’ (p. 31). What was advanced was a limited prohibition, as adopted in some other member states of the EC and practised in the public sector of the UK: ‘‘there may be services other than those mentioned specifically in professional guidance which would be regarded as incompatible with audit work’’ (ROA, p. 32).

Suggestions for a 5 year rotation period were raised along with other possible solutions to problems of client pressure (e.g. the existing requirement for a statement from the auditors when they resign or are removed from office should be extended to where the auditor does not seek re-appointment). The offering of reduced rates to gain new business (lowballing) was also questioned and whether disqualification from carrying out a particular audit should apply to a firm and not just one member. Such issues went far beyond what the Eighth directive required; that such proposals were raised at all again startled and alarmed the professional accounting and audit bodies16. The Registration of Auditors The Directive did not require that Auditors be registered with individual member states, although Article 28 did request that an up-to-date list of approved auditors be maintained. The DTI acknowledged that although the accountancy bodies annually publish such a list, the DTI’s records were incomplete in relation to special approvals they have made. The ROA proposed that this special category of ‘‘individually approved auditors’’ would be obliged to re-register. Yet, in addition, the DTI proposed that it might wish to introduce a professional designation for all auditors, such as ‘‘registered auditors’’, and invited comments on the idea (ROA, 1986, p. 40). This suggestion could be seen to reduce the distinctions between the various professional bodies constituting the UK auditing profession (Accountancy, September, 1986, p. 49); accounts would no longer be signed

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with the designation of ’‘chartered’’ or ‘‘certified’’ accountant and referring to both as ‘‘registered auditors’’ would help to deal with concerns about the segmentation of the profession. Indeed, the ROA document concluded with a section discussing the possibilities of requiring all accounting work to be so registered. This suggestion, extending beyond audit, had been put forward by the certified accountants (ACCA). The certified accountants have been generally regarded as of lower status than the other ‘‘chartered accountancy’’ bodies recognized by law for statutory audit work, and it is thus understandable that the proposal to de-emphasize affiliations to specific professional bodies should come from them. The ROA concluded, however, that ‘‘the Government is committed to reducing, rather than adding to, regulatory burdens . . . the onus must be on those who favour it [registration] to make a case for the major extension of statutory regulation’’ (ROA, 1986, p. 77).

Discussion: Consulting the ‘‘Profession’’ According to Rutteman (1987b): ‘‘[W]hen the Eighth Directive was formally adopted in Brussels in 1984, after several years of negotiation, there was a sigh of relief in Moorgate Place [the headquarters of the ICAEW]. The Institute, so it appeared, would be able to get on with things unfettered by restrictions imposed in Brussels. . . . It came, therefore, as something of a surprise when the consultative document [ROA] . . . put forward a number of controversial suggestions on independence and proposed a completely new regulatory framework for the profession’’ (1987b, p. 19).

The DTI seemed no longer to be supporting unambiguously the auditing industry since the Consultative document raised issues that the profession had not expected from a Conservative administration. As we have argued, however, neo-liberalist political philosophy is characterized by a hostility to restrictive practices. Admittedly there are several plausible explanations that could be offered to make sense of what appeared, to the audit profession at least, to be a change in orientation in the DTI. Assuming greatest autonomy, the authors of ROA could be regarded as being engaged in a regulatory game, whereby they sought to demonstrate to other regulators, both within the DTI and in the US and Brussels, that they had carefully considered all options and were efficient in their own regulatory activity. A second explanation is that the DTI ‘‘knew’’ what was best for the audit industry and made suggestions for increased mechanisms to improve independence and oversight because these mechanisms would improve the audit industry as a whole (e.g. by widening the demand for its services), although individual audit firms might not support the imposition of these additional mechanisms. We have not been able to examine empirically either of these explanations to the extent that either could be discounted. Elements of both accounts could have been operating and, in the case of self-interest explanations, it is not clear what can be offered as counter-argument in any particular circumstance. Our argument, however, is that the philosophy of neo-liberalism became part

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of the taken-for-granted world of the regulators in the DTI, and assisted in defining their ‘‘interests’’. Consequently, even allowing for considerable autonomy, the authors of ROA believed that consideration of the proposals for increased mechanisms to ensure independence and the opportunity for UK audit firms to incorporate could not harm the competitive position of the UK audit industry. In addition, and significantly, the ROA was an important medium for reconsidering the problem of the state’s governance of the fragmented accountancy bodies in the context of a series of well publicized frauds involving UK companies17. Responses to ROA came principally from the audit industry. There was little press comment and those reactions received by the DTI from industry and financial institutions were viewed by the DTI officers as underdeveloped or heavily influenced by the organization’s own auditors. In accordance with some of the prior judgements of DTI officials as to the fragmented and confused State of the accounting profession, the responses received were looked upon as uncoordinated and somewhat contradictory. Almost all the replies received resisted the proposals for a blanket prohibition on other services being perfromed by audit firms. The ICAS wrote to one thousand company chairmen asking them to oppose the independence proposals (Sikka & Willmott, 1995a, p. 564). Several audit firms believed, however, that there were specific services that should be restricted, such as executive recruitment and computer software development. But the professional institutes discouraged the identification of specific services, fearing that any such concessions would provide the DTI with ammunition (Rutteman, 1987a). Further, some firms suggested alternative mechanisms for independence, such as disclosure of fees to auditors for non-audit work. Other suggestions included the compulsory creation of audit committees and the separation of independence requirements between large (public interest) and smaller clients, issues since taken up in the UK by the Cadbury Committee (1992). The ICAEW’s response was issued as a technical release to members (ICAEW, 1987). The response sought to explain why the ROA proposals on independence were regarded as unsatisfactory (to its members) while stressing the ICAEW’s role in providing ethical standards and enhancing audit quality. Following from the requirements introduced in relation to the Financial Services Act in 1986, the ICAEW proposed a system of active monitoring of the quality of audit work by audit firms. This role of a professional body, controlling and regulating its member firms, can be seen as a significant departure for the ICAEW (Willmott et al., 1993; Robson et al. , 1994). The ICAEW had traditionally acted as a spokesperson for its members and had responsibilities for education, training and examination, both of students and training offices. Its involvement in ethical matters had been largely passive, developing codes and responding to complaints, rather than active monitoring. The organization of this new role of active monitoring of quality reinforced concurrent tendencies toward greater coordination between the four audit bodies, tendencies which the DTI was keen to promote. The ICAEW had already developed a Joint Monitoring Unit (JMU) in relation to those of its

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members who provided investment advice and are registered under the Financial Services Act (Radcliffe et al., 1994). This Unit is used by the other professional bodies and, taken with its role in the monitoring of auditors stimulated by the Directive (see below), reinforced developments towards greater co-ordination within the UK audit profession. The DTI in turn responded to the comments on the ROA in its letter to accontancy bodies dated May 1987. The DTI accepted that supervision of the requirements for the authorization of auditors was the responsibility of the Secretary of State (DTI), but emphasized the concerns it had felt in the past: the ‘‘professional bodies would need to provide more explicit assurance than at present of effective co-ordination, monitoring and enforcement of professional standards by the profession’’. As well as explaining the role of approved bodies in developing and monitoring the activities of auditors (and identifying the power to withdraw recognition of bodies), the letter also stressed the DTI’s concern to consult collectively with the profession and the need for a co-ordinated education policy for all the UK bodies. The DTI underscored the need for active monitoring of competence as an important criterion for approving the professional bodies. Indeed, the criteria for approval of monitoring bodies was to be written into the subsequent legislation (Companies Act, 1989). It was also confirmed, much to the irritation of the higher status bodies, that all auditors should use a common professional designation, registered auditor, in signing audit reports. The May 1987 letter focused on the regulatory framework. It was followed in July by a letter outlining the DTI’s position in relation to independence, incorporation and the registration of accountants. In this letter the issue of registration was summarily dismissed on the grounds of being unnecessary and would not work to the consumer’s benefit. No explanation of this conclusion was offered but it would seem that the DTI did not wish to support further the lower status audit body, the ACCA, in reducing the status differences with the Chartered institutes. The letter of July 1987 also indicated that incorporation would be permitted for audit firms. The proposals for independence, however, were dropped in favour of ‘‘flexible professional guidance’’ and a note ‘‘of concern about potential conflicts of interest and a desire to see the professional bodies tighten up their guidance and play a more active and visible role in monitoring its effectiveness’’. The Incorporation of the Directive in UK Law After the correspondence and subsequent negotiations between the DTI and the professional bodies, the DTI issued a Companies Bill in December 1988 which was designed to implement these and the requirements of the EC Seventh Company Law Directive into the law, thus complying with the provision in the Eighth Directive requiring implementation by January 1990. One hundred amendments to the Bill were proposed, nearly all of which were rejected. The resulting legislation, the 1989 Companies Act, was, in contrast to some of the proposals that had preceded it, relatively unchallenging to the profession (Sikka & Willmott, 1995a, pp. 563 – 565). One commentator remarked on the Companies Bill:

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‘‘The Bill’s Eighth Directive provisions . . . require that only approved persons shall be permitted to undertake audits required by statute, and the Bill sets out the criteria for such approval. . . . There should be nothing awesome in all this, since the existing ethical rules and bye-laws of the professional bodies are, if anything, more stringent than the minimum conditions laid down under the Eighth Directive’’ (Woolf, 1989, p. 93).

The provisions relating to the Eighth Directive were finally published in Part II of the 1989 Act. As presaged in ROA, the Act provided for the creation of recognized supervisory bodies and the minimum approval requirements for auditors: only members of those bodies who are eligible for appointment and appropriately authorized by those bodies could be appointed as company auditors18. In effect, those who wish to be permitted to audit companies must submit to the control of such a body, which, however, may well not be the body of which they are currently a member19. The JMU carried the additional responsibilities for practice inspections under Section 24 of the 1989 Companies Act, with routine visits to audit firms to check that auditors are suitable qualified and supervised to maintain integrity and independence (Woolf, 1991). The Act also provided that accountants recognized in their own countries as competent to audit companies may be authorized to do so in the UK by the Secretary of State. On the issue of independence, only relationships to the audited company itself or an associated company—such as the auditor, or another partner in the auditor’s firm, being an officer of the company—are defined as leading to ineligibility (Anderson & Keenan, 1990). There is thus no provision, for instance, for a relationship through consultancy services to lead to ineligibility. However, ineligibility is not entirely ruled out since, following a recent trend for wide powers to be granted to the Secretary of State, the following sub-clause is contained in the Act: ‘‘A person is also ineligible for appointment as company auditor of acompany is there exists between him or any associate of his and the company or any associated undertaking a connection of any such description as may be specified by regulations made by the Secretary of State’’ (s27(2)).

This leaves the State with the power to define the provision of non-audit services as ‘‘a connection’’ if it so wishes in the future. The right is also reserved for the future (s390B) for the State to require auditors to disclose sums received for non-audit work from audited clients, and this has since tended to be disclosed in a note to the accounts (Woolf, 1991; Peel & Brinn, 1993). The rotation of auditors requirement did not make it to the 1989 act; indeed the origins of the issue seem obscure. However, Article 56 of an amended draft of the Fifth EC Company Law Directive on the structure of public limited companies issued in 1988 suggested the rotation of auditors after 12 years. It is possible that the DTI had decided to raise the issue in the ROA in anticipation of an amended future Fifth Directive. The DTI consulted on the amended Fifth Directive in 1990 (DTI, 1990). The requirement for rotation of auditors was opposed by the Law Society (Freedman, 1990). The Fifth

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Directive, with its controversial requirements (in the UK) for employee participation in corporate governance, has yet to be finalized (The Times, 14th September 1995). Following ROA, and the practice in some European countries, the 1989 Companies Act permitted incorporated firms to act as auditors, subject to certain requirements. As incorporation of audit firms would imply some form of public scrutiny in terms of accounting regulations, this may explain why there was no immediate take up of this option. However, with fears about audit liability, firms are likely to set up an incorporated entity for their audit services.

Conclusion Certain of the issues raised by the Eighth Directive are emerging once again in the 1990s. The independence of auditors and their relationships to the question of corporate governance have never been far away from the agenda of the State and the profession. In this paper we wish to emphasize the importance of the institutional patterning within which these issues are debated, and the significance of the prevailing (and shifting) political rationalities. The harmonization of company law in Europe has ranged across several decades and while it is customary to suggest that its guiding rationale is enshrined in the Treaty of Rome (1957), our analysis of the Directive is suggestive of a much more complex process. Contrasting models of ‘‘Europe’’ have emerged, the contours of which are now more visible than perhaps they were in the course of the passage of the Directive. Ideals of a centralizing European state, with supra-national regulations, reinforced rights and duties under international law and the removal of national boundaries operate beside or against other models which emphasize competitive dispersal and the benefits of market forms of organization through ‘‘liberalizing’’ legislation (‘‘de-regulation’’) aimed at removing the obstacles to free trade created by nation-states. The rationalities of European Directives are formed within a complex of ideals and objectives located in different national contexts. This complex contributes to the intricate path between ‘‘the unconditional idea of law and the concrete conditions of its implementation’’ (Derrida, 1992, p. 57, emphasis added; cf. McBarnet & Whelan, 1992). The development and implementation of the Directive exemplified a process of competing ideas of Europe. Ideas concerning the regulation of the training and education of auditors through international law encountered the discourse of neo-liberalism by which the Directive was constituted not merely as the foundation for regulating, in accordance with best practice, the quality of auditors and the services they can provide, but as a mechanism whereby the UK State could promote its auditing industry in the European market for auditors. In a small way the Directive has been situated as another element in the globalization of the markets for products and services. Over time, the experience and difficulties of ‘‘harmonizing’’ company laws among EU members during the 1970s and 1980s seem to have conditioned a shift in approach by the EU from harmonization through standardization towards a

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minimalist strategy of harmonization by mutual recognition (Freedman & Power, 1992, p. 6). Nevertheless, our analysis of the Directive indicates not only the salience of political-economic discourses in the development of accounting regulation: the implementation of the Directive into UK company law is, we contend, only interpretable when situated in the institutional relationships and current policy issues flowing between the State and the profession in the UK. Discussions between government and profession involving the details of proposals, consultations and responses concerning the Directive intersected with ongoing tensions in the state-profession axis. Questions of the incorporation of audit firms emerged, for example, not as responses to the requirements of the Directive but as means of promoting audit firms as successful players in the international market for audit services. Alternative means of regulating the auditing profession through State regulation were suggested as mechanisms for reinforcing the reputation of the UK as the major European financial services centre in the aftermath of a period of financial and corporate fraud, as well as possible means of tying the fragmented UK accountancy profession. In brief, the transformation of the Directive, via the ROA, into the 1989 Companies Act in the UK has the character of a game in which ‘‘rules’’ governing the exchanges between the DTI and the professional bodies are formed outside of the immediate sphere of the Directive itself: issues seemingly barely connected to the Directive were introduced against the background of tensions between promoting the audit industry and regulating (or ‘‘managing’’) six professional accounting bodies in the UK. Finally, the processes described in this paper are of direct relevance to the study of accounting harmonization in Europe (and associated topics of ‘‘international accounting’’ [Nobes & Parker, 1995]). What we have analysed in the case of the Directive is perhaps indicative of the difficulties faced by all supra-national regulatory agencies involved in the implementation process. The ‘‘politics’’ of accounting regulation have the character of a contest played out not only at an international level in terms of notions of competing national-professional ‘‘interests’’ but continuing through into the implementation of directives into national law in ways structured by the features of the institutional relationships between the State and the profession. It is too simplistic to assert that such international regulations are implemented merely so as to maintain current relationships (the ‘‘status quo’’): as we see with the Directive, international regulations become the site for negotiations and struggles between professions and nation states concerning issues that are sometimes as indirectly associated with their subject, as they are specific to national contexts. Acknowledgements We are grateful for the financial support of the Economics and Social Research Council (award EO4250007) and the Research Board of the ICAEW. The views expressed are those of the authors alone, but we would like to acknowledge the helpful comments of the anonymous reviewers for this journal, Mike Gibbins, Alistair Preston, Barbara Wheeling, Tony Tinker, Tony Lowe, Anne Loft and Prem Sikka.

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Notes 1. FEE is the co-ordinating body for the professional accounting bodies in Europe. Located in Brussels, it acts as a lobbying group to the European Union. 2. Why these developments occurred in Britain at this point in time is beyond the scope of this paper except to note that the post WWII period had been perceived as one of continuing economic decline after the break of ‘‘Empire’’: the British ‘‘problem’’. The key moment in the shift towards neo-liberal thinking is often associated with the conditions imposed by the International Monetary Fund on a loan to the Labour government in 1976. Chancellor Healey returned to Britain pledging to control public expenditure and inflation as the fundamental elements of a new monetarist economic policy. These commitments were then embraced more forcefully by the Conservative government of Margaret Thatcher elected in 1979. 3. Other strands of Thatcherism complicated the situation. The ideas of economic liberalism, when applied to professional groups, contributed towards criticisms of the perceived restrictive practices of a range of professions. Doctors, teachers and lawyers were in the forefront of this challenge by the Thatcher government, and auditors have not been immune from these pressures (Mitchell & Sikka, 1993). In addition to discourses concerning Britain’s perceived crises, there has been an elevation of what Krieger (1986) refers to as suburbanism: patriotism, xenophobia, narcissism of minor differences, ‘‘Victorian Values’’ and individualism. ‘‘Toryism was transformed as the [Conservative] party’s ethos shifted from the playing fields of Eton to the housing estates of Grantham’’ (Krieger, 1986, p. 63). Many of these themes, particularly xenophobia and nationalism, are atriculated by the U.K. audit profession when it is confronted both with the first draft of the Eighth Directive and with the DTI’s Consultative paper on the Directive (Cooper & Puxty, 1994). 4. It is the concerns of the British State in relation to the audit profession which we will deal within this paper. Analyses of the profession’s role in British society more generally can be found in Willmott (1986), Robson and Cooper (1990) and Cooper et al. (1994). These State concerns will be discussed in terms of fraud, standard setting and segmentation. All three are of course inter-connected and they all reflect a concern about the efficiency and value of the audit function and the control of the audit profession. 5. We see here how the profession is caught up in wider debates surrounding economic liberalism. For even the most rampant free marketeer recognizes the need for laws to protect property rights. Auditing can be seen as an essential part of such laws and the reduction of what has been referred to as informational asymmetry between market participants, (Ng, 1970). Fear of fraud can discourage market participation yet, as Lehman and Tinker (1987) argue, auditing and accounting are important in reassuring people and at least giving the impression that they were not going to be swindled. 6. This failure of the leadership to deliver their memberships’ support on matters concerning the British State has occurred on issues other than amalgamation. It reflects the divisions not just between the six professional bodies, but the diverse membership of the largest and most influential body, the ICAEW. Divisions between audit practitioners and members working in industry and those between small practitioners and auditors in international firms are particularly noticeable. During the 1980s the ICAEW has had two major initiatives to deal with these divisions. See Willmott, et al., (1993) for an analysis of the two major reports by Tricker and Worsley. 7. This is acknowledged in the passage under consideration: ‘‘So far as can be seen, all four U.K. bodies currently match up to these requirements’’ [although a minor exception is then discussed] (Accountancy, February 1979, p. 4). 8. In an article whose title is itself indicative of the tone: ‘‘Accountants say Eighth Directive on qualifications goes too far’’. 9. Much later in the debate, when the Companies Act was being drafted, the rights of other countries’ accountants to practise in the U.K. did become a visible political issue, especially at the point where it appeared that the DTI was understood to be suggesting that such accountants might be able to demand the automatic right to join one of the UK chartered bodies. 10. It is instructive to note that on the same page as the article reported here, Accountancy ran a cartoon that depicted an office with a learning tower visible through the window, and a man in dark glasses being introduced with the words ‘‘And this is Signor Machiavelli—Italy’s leading accountant and tax adviser’’. 11. The survey, conducted for Price Waterhouse (1987), interviewed 122 company preparers and 25 institutional investors, as users; 75% of these participants were qualified accountants, which would seem to reduce the independence of the findings! 12. The Institute of Chartered Accountants of Scotland, in particular, expressed concern at

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16.

17. 18. 19.

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provisions in a later draft that might have required three years’ training in addition to periods spent in day-release study. The Institute argued that these were part of professional practical training, even though they took place in the classroom. This provision would have proved costly because, through extending the training period, it would have deferred the stage at which the student could be said to be qualified and hence charged out at higher rates by the audit firm (The Accountant ’s Magazine, November 1982 pp. 396 – 397). This apparent neglect of domestic audit problems was only in abeyance as interest in fraud and audit failure surface after the final version of the Directive was issued. Bound in yellow covers, this became known in U.K. accounting circles as the ‘‘yellow peril’’, and allusion to Britain’s imperial past, when threats from Asia (notably China) were referred to this way. To avoid such racist allusions, we shall refer to it here as ROA. This fact was foreshadowed in a speech by the Secretary of State for Trade and Industry, when he said that ‘‘The implementation process provided the opportunity to take a long hard look at the structure and organization of the profession’’ (Mr Paul Channon, speaking to the annual conference of the ICAEW, reported in Accountancy August 1986). Debates about the Directive became enmeshed with concern about professional privileges and the general challenges to restrictive practices associated with New Right thinking. The ROA also briefly suggested other possibilities, including prohibitions on offering reduced rates for new business, tightening the rules on financial and family interests of auditors in clients and whether disqualifying one auditor should automatically extend to his or her firm. The ROA sought views about whether the new rules should be laid down by statute of through professional guidance, as hitherto. In addition, Evetts (1995) alerts us to the important role that international professional bodies, such as FEE seem to play in developing and implementing European regulations. Matters relating to the removal of auditors were also considered by the 1989 Companies Act (Anderson & Keenan, 1990). For example, a member of the Institute of Chartered Accountants of Scotland could be authorised by the Institute of Chartered Accountants in England and Wales if she wished. In view of the centralized tendencies in the location of power in the UK, this was perceived by the Scottish Institute as a frequent occurrence, and hence as a real threat to its community standing. This was seen as one reason for the abortive attempt at merger of the two bodies.

References Aglietta, M., Theory of Capitalist Regulation : The US Experience , translated by D. Fernbach (London: New Left Books, 1979). Anderson, J. & D. Keenan, ‘‘The Companies Act 1989: Auditing Aspects’’, Accountancy, March 1990. Arnold, P., ‘‘Accounting and the State: Consequences of Merger and Acquisition Accounting the UK Hospital Industry’’, Accounting Organizations and Society, 16, 2, 1991, pp. 121 – 140. Bosanquet, N., After the New Right (London: Heinemann, 1983). Clarke, M., Regulating the City: Competition , Scandal and Reform (Milton Keynes: Open University Press, 1986). Clayton, M., ‘‘Eighth Directive: The UK’s Successful Bargain’’, Accountancy, April 1989, pp. 16 – 17. Committee on the Financial Aspects of Corporate Governance, Report of the Committee on the Financial Aspects of Corporate Governance, Cadbury Report (London: Gee & Co, 1992). Cooper, C. & Puxty, A. G., ‘‘Reading Accounting Writing’’, Accounting Organizations and Society, 19, 2, 1994, pp. 127 – 146. Cooper, D. J., Puxty, A. G., Lowe, E. A. & Willmott, H. C., ‘‘The Accounting Profession, Corporatism and the State’’, in W. F. Chua, E. A. Lowe and A. G. Puxty (eds), Critical Perspectives in Management Control (London: Macmillan, 1989). Cooper, D. J., Puxty, A. G., Robson, K. & Willmott, H. C., ‘‘Episodes in Changing Relationship Between the State and the Profession’’, In A. G. Hopwood & P. B. Miller, Accounting as Social and Institutional Practice (Cambridge: Cambridge University Press, 1994). Davison, I. H., The Twilight of Self Regulation (London: Arthur Andersen and Co, 1987). Department of Trade and Industry, Financial Services in the UK (London: DTI, 1985). Department of Trade and Industry, Regulation of Auditors: Implementation of the EC Eighth Company Law Directive: A Consultative Document (London: DTI, 1987). Department of Trade and Industry, Amended Proposal for a Firth Directive on the Harmonisation of Company Law in the European Community (London: DTI, 1990). Derrida, J. The Other Heading: Reflections on Today ’s Europe (Bloomington & Indianapolis: Indiana University Press, 1992).

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