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

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


By



Prem Sikka
Department of Accounting and Financial Management
University of Essex, UK



Hugh Willmott
Judge Institute of Management
University of Cambridge, UK



A later version of this article appears in Accounting, Organizations and Society, 20, 6: 547-581
(1995)


For more information on published articles by Hugh Willmott please refer to
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The Power of ‘Independence’:
Defending and Extending the Jurisdiction of Accounting in the United Kingdom*

by




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





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

* Earlier versions of this paper were presented at the Conference ‘Juristes et Comptables en Europe’, Paris,
1992, the 1993 British Accounting Association Conference, University of Strathclyde, and the 1993 Critical
Perspectives on Accounting Conference, New York. We are grateful for comments received at these
meetings and for the constructive criticisms of two anonymous referees.




The Power of ‘Independence’:
Defending and Extending the Jurisdiction of Accounting in the United Kingdom


Abstract


Accountants are part of what Abbott (1988) describes as ’the system of professions’. Within this system, each
professional group strives to defend and expand its area of jurisdiction in competition with rival professions.
However, challenges to the accountancy profession do not necessarily come only from those who seek to occupy
its territory. Challenges also come from journalists, academics, politicians and others who have no desire to
occupy the territory of accountants but can nevertheless advance some competing discourses that may disrupt
and weaken the profession’s capacity to secure and expand its domain. The paper argues that in the process of
defining, defending and extending its jurisdiction, the accountancy profession attaches considerable importance
to its image of ’independence’. Drawing upon evidence provided from three case studies relating to the events in
the 1970s, 1980s and early 1990s, the profession is shown to have taken a number of initiatives to defend and
reinforce this ‘image’. In its efforts to neutralise and discredit challenges to its aura of independence, the
profession has developed and deployed a variety of tactics. These include revising its ethical guidelines, refining

its disciplinary arrangements, as well as by mobilising other agencies, including the state, politicians, media,
accounting academics, etc. in support of its claims. In a society marked by numerous social divisions, the
accountancy profession is not in a position to ward off all challengers. Nevertheless by the use of such tactics, it is
argued that it seeks to neutralise threats to self-regulation and to redefine the terrain on which it combats its
challengers.




1

A convenient way to introduce this paper is to consider the thesis developed by Abbott in his highly influential
book The System of Professions (1988). At the heart of this book is the claim that sociological research on
professions has been dominated by a concern with their organizational structure, and with processes of
professionalization that are studied as a medium and outcome of this structure. Abbott’s preference is to study
professional development by considering the link between a profession and its work - a link that he characterises
as its jurisdiction (ibid : 20). In turn, his focus upon jurisdictions draws attention to the ways in which the
boundaries of jurisdiction are negotiated - attacked and defended - as different professions compete over
emergent or vulnerable territories.

Abbott’s study of expert labour
1
usefully highlights the importance of interprofessional competition in the process
of professional formation and development
2
. Urging a close consideration of the interconnectedness and rivalry
between professional groups in shaping the conditions of their development, he champions the study of the
negotiation of jurisdictional boundaries between professions :

‘each profession has its activities under various kinds of jurisdiction Jurisdictional boundaries are
perpetually in dispute, both in local practice and in national claims an effective historical sociology of
professions must begin with case studies of jurisdictions and jurisdiction disputes’ (Abbott, 1988 : 2).


An attentiveness to disputes over jurisdiction is enlightening and timely in countering a tendency to study
professional groups in isolation from their competitive contexts. Not surprisingly, Abbott’s work is increasingly
cited by students of the accountancy profession
3
(e.g. Dezalay, 1989, 1991; Neu, 1991). However, his approach is
wanting in at least three important respects. First, by focusing upon systems of professions within different nation-
states, he takes little account of how
supranational
pressures increasingly condition both the local practice and
national standing of professional groups (see Montagna, 1986; Dezalay, 1989; Piccioto, 1989; Hanson, 1990)
4
. In the
‘business professions’ at least, interprofessional competition within and between professions is conditioned by
the expanding opportunities for exploiting and regulating the globalization of trade and the internationalisation of
markets for legal, financial and consultancy services. In this paper, we touch upon this point by reference to the
formulation and implementation of the Eighth EC Directive in the UK.

Second, and of greater direct relevance for this paper, Abbott’s approach suffers from a
professions-centric

treatment of jurisdiction disputes. Despite an avowed attentiveness to ‘external forces’ (e.g. the state granting or
diluting auditors a monopoly of the external audit function) that open up or close down jurisdictions, Abbott largely
neglects the importance of challenges posed to the legitimacy of jurisdictions by groups
who do not themselves
seek to occupy their territory,

but whose activities nonetheless problematize and unsettle the capacity of a
profession to defend or extend its jurisdiction. In Abbott’s account of the system of professions, these two
limitations coincide in his very restricted appreciation of how any profession’s capacity to mobilise support for




2

their ‘local practice’ and ‘national claims’ is dependent
inter alia
upon their credibility with, and influence over,
‘third parties’ - such as politicians, journalists and academics, as well as regulators and clients. In Abbott’s model
of ‘ the system of professions’, and in his three detailed case studies, there is scant consideration of the
micropolitics of how professions actually organize to define, defend or enlarge their area(s) of jurisdiction
(Willmott et al., 1993), or of how the control of jurisdictional boundaries is challenged and loosened by the
activities of groups who have no direct ‘professional’ interest in occupying their territory but whose activities can
nevertheless generate and legitimise competing discourses (Willmott, 1991). In helpfully commending a focus
upon the work ‘ professionals’ do, as contrasted with how professions are organized (Abbott, 1988:112), Abbott
largely omits consideration of the role of associations in dealing with jurisdictional threats and opportunities
posed by such ‘external events’. This critique is elaborated in what follows through consideration of the history
and contemporary developments in the regulation of the accountancy profession
5
.

Third, the vagueness of Abbott’s concept of jurisdiction becomes particularly awkward when considering a
profession whose members work in industry (and elsewhere) as well as in ‘public practice’. He does recognise
that ‘professionals work in a variety of settings’ (ibid : 125) but is more concerned with drawing distinctions
between autonomous and heteronomous professionals than with exploring the significance of hybrid
membership for the defence of established jurisdictions. It is relevant to underscore the understanding that the

UK accountancy profession is not homogeneous (Willmott, 1986). Its members are employed in industry,
commerce, local government, central government, state industries, public practices and other organisations of
various sizes. In each of these arenas, accountants are agents of, and are subjected to, diverse and sometimes
contradictory priorities and pressures. Abbott’s (1988) tendency to conceptualise professions as if they are
fundamentally homogeneous (see especially ch. 4), albeit that they may incorporate distinctive specialisms, is
difficult to reconcile with the presence and significance of major differences of orientation as well as work
performed between members of the accountancy profession (Willmott et al, 1993). Not only are these differences
reflected in the existence of specialist associations but they are evident, for example, in the large and growing
proportion of members of the major UK accountancy body, the ICAEW, that work outside of public practice in
multifarious positions within the private, public and voluntary sectors
6
. Thus, when we refer to ‘the accountancy
profession’, we mean first and foremost, those representatives of the major bodies and/or spokespersons of big
accounting firms who take it upon themselves to assert and defend the authority and independence of
accountancy practices in general and the prevailing regulatory arrangements in particular. But, to repeat,
whenever reference is made to the accountancy profession in the UK,
it is necessary to be mindful of its highly
complex and fractured organization as well as the diverse kinds of work undertaken by qualified (professional?)
accountants.


The paper is organized as follows. We begin with an overview of the formation and development of the accounting
jurisdiction in the UK. We highlight the heterogeneity and extensiveness of this jurisdiction, its continuing




3

reliance upon audit, and the cultural and historical conditions that have contributed to the size and comparative

strength of the accountancy profession. In addition to arguments rehearsed within the sociology of the
professions - such as the growth of corporate capitalism, the favourable terms of the Companies Acts, the
closeness of accountants to their clients and the business organization of accounting firms - we argue that
greater attention should be given to the development and defence of accountants’ claims to ‘independence’. We
concentrate in this paper upon audit because we believe it to be most critical for securing and expanding the
accounting jurisdiction - whether this be defined comparatively narrowly, in terms of the work that ‘in practice’
accountants do, including consultancy services as well as auditing, or whether it is extended to include the work
performed by those employed in industry and elsewhere. For this reason, we have comparatively little to say about
accounting and accountants in industry, for example, although their credibility in this area has implications for
their reputation and power, as recent debates about the relevance of management accounting have indicated
7
. We
then present three case studies that illustrate how the UK accounting profession has responded to recent major
challenges to its aura of independence - challenges which threaten to damage their credibility and imperil their
control of lucrative jurisdictions. First, we consider responses to corporate collapses in the mid-1970’s which cast
doubt upon accountants’ claims to be objective constructors of reality. Second, we consider responses of the UK
accountancy profession to questions about auditor independence raised by the requirements of the Eighth EC
Directive, a requirement that also posed a potential threat to accounting firms’ operation within, and continued
expansion into, EU markets for non-audit services. Third, we examine current responses by the UK profession to
questions currently being raised about the reliability of audits and, relatedly, the adequacy of self-regulation. In
each case, we note how doubts about accountants’ claims to independence are routinely appeased by introducing
some reforms and refinements into their self-regulatory arrangements, by updating ethical and disciplinary
arrangements and/or by seeking to redefine public understandings and expectations about accounting expertise.
We also strive to show how issues relating to ‘ independence’ do not arise singly, and are not necessarily
articulated explicitly. Rather, concerns about independence form an integral part of discourses and practices that
are manifestly concerned with professional ethics, disciplinary arrangements, self-regulation and other symbols
of professionalism.

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

The development of the accountancy profession in the UK
8
cannot sensibly be detached from the existence and
organization of other groups that compete to define and occupy particular jurisdictions. In establishing, extending
and defending their terrain, accountants have formed associations and have enjoyed the patronage of the state
and corporations (Johnson, 1972). They have also drawn inspiration from, and sought to displace, the claims of
other groups, principally lawyers but also engineers, who have been competitors in the market place for their
services
9
. In this section, we sketch the historical background to contemporary developments that have posed a
threat to the boundaries of the accounting jurisdiction.




4


Forging the Jurisdiction of Accounting in the UK

In the UK, the emergence of sellers of specialist labour who described themselves as ‘accountants’ (amongst
other things) was initially stimulated by a buoyant demand for services in the area of bankruptcy, liquidation and
trusteeship (Brown, 1905; Stacey 1954; Loft 1986). However, accountants’ occupation of this emergent jurisdiction
was vulnerable to competition from other groups. In principle, lawyers were well placed to expand their
jurisdiction into the expanding market for business services; and, indeed, some of them did, especially in Scotland
where a number of the leading members of the Solicitors society practised as accountants (Brown, 1968)
10
.
However, in England and Wales, where the status of accountants (or ‘accomptants’) was less well differentiated
from that of other ‘trades’ - such as ‘turf accountant’, ‘auctioneer’ and ‘ rent-collector’ - the relationship between

accounting and the law had a different trajectory of development
11
. For lawyers working in England and Wales, the
undertaking of accounting work was considered demeaning, the price exacted for such professional prostitution
being social ostracism from the elite of the legal profession. Sorting out company failures, for example, was
deemed to be a peripheral, and not entirely respectable, line of work for upright, bona fide lawyers. Although
doubtless extreme, the regard in which accountants were held by lawyers is indicated in the colourful reaction of
Justice Quaine to the Bankruptcy Act of 1831:


"The whole affairs in bankruptcy have been handed over to an ignorant set of men called accountants,
which is one of the greatest abuses brought into law" (quoted in Stacey, 1954 : 24).


The jurisdiction of accounting practice is thus rooted in, and parasitical upon, the growth and instability of
capitalism and is closely aligned to the allocation and husbandry of finance capital. Early accountants forged
close contacts with financiers (Scott, 1985). Such connections presented opportunities for securing patronage,
support and clientele (Johnson, 1972). According to Donnachie (1977 : 275), it was a common practice for many early
accountants


"to seek the local agency of one of the chartered banks, or to become secretary or treasurer of a
private or a country bank. This gave them position of unparalleled powers in the community over
the disbursement of loans and the discounting of bills for local farmers, merchants and
businessmen".


Accountants’ occupancy of areas of corporate regulation was consolidated by the Companies Act of 1862 which
established the position of official liquidator to oversee the winding up of insolvent companies, a preserve
reserved for an elite of accountants who were acceptable to the authorities. In effect, this Act, which was to

become known as "the accountants’ friend", lent statutory authority to the differentiation of ‘ respectable’
accountants from others who were simultaneously engaged in less reputable forms of ‘trade’. And, as if this




5

source of status and support were not enough, the 1862 Companies Act also required that dividends to
shareholders be paid exclusively from income, a requirement that further boosted the demand for ‘respectable’
accountants
12
.

This legislation, which was so supportive of the growth of specialist accounting labour, was enacted prior to the
development of a state register of accountants or even the establishment of an association that could lobby
government. As we have already suggested, the emergent jurisdiction of accounting was secured by an elite of
‘reputable’ accountants, a number of whom were invited to give evidence to Parliamentary Committees (Jones,
1981, pages 48-49). Prominent accountants also made speeches and wrote articles in which they sought to place
competitors in a negative space as they rehearsed the virtues of the professional accountant, as contrasted with
those who lacked their skills and took on many other kinds of work (Cooper, 1886, 1921)
13
.

Prior to the formation of accountancy associations, where examinations eventually became the formal means of
education and qualification, ‘reputation’ and ‘connections’ were all-important. Those who established the most
prestigious of the accountancy bodies were drawn from a self-defining elite of ‘gentleman accountants’, the
Society of Accountants of London being the largest and most influential. Subsequently, a number of the major
societies cooperated to form a national body - the Institute of Chartered Accountants in England and Wales
(ICAEW) - whose elite status was assured, if by nothing else, by an entrance fee of 50 guineas to become a Fellow

(ICAEW, 1966). Through the activities of this body, including the publication of its journal, the members of the
Institute assiduously nurtured and promoted their elite status. Symptomatic of this elitism was the opprobrium
heaped upon members of a rival body which had been formed to cater for those excluded from the ICAEW. They
were described in the Institute’s journal as


‘a formidable array of clerks of all kinds shop-keepers, valuers, collectors of taxes, bailiffs pawn-
brokers and manure merchants’ (quoted by Stacey, 1954 : 28)


However, it was neither the state-carved niche of insolvency business, nor the formation of a professional body,
but the steady increase in audit work that was to be the making of the modern UK accountancy profession.
Although formally a requirement of the Joint Stock Companies Acts of 1844, this requirement was not effectively
applied until the beginning of this century (Edey, 1979; Gilmore and Willmott, 1992)
14
. Nonetheless, its influence was
vital for the economic, social and political rise of the profession. As Cooper noted,


‘under the patronage of the state, auditors began to increase in numbers. In 1836, out of 107 banks, only
nine had auditors whilst 14 had power to appoint auditors but chose not to exercise it. But after the
Companies Act 1879, out of 159 banks 128 appointed auditors. Of these 99 were professional auditors The
real boon for auditors was the large increase in limited liability companies which rose from 1864 figure
of 891 to 14,445 in 1880’ (Cooper, 1886, 1921).





6

Accountants’ occupation of the audit niche was further consolidated in the Companies Act of 1900; and a statutory
monopoly was fully secured in the Companies Act of 1948.

To sum up: that specialist accountants emerged as a distinctive group, rather than as a branch of legal practice, is
attributable to a combination of state sponsorship and the disdain of lawyers for accounting work. Capitalising
upon the opportunities presented by the passing of the 1862 and 1879 Companies Acts, as well as their
connections with financiers, leading accountants formed firms and associations through which they secured the
accounting jurisdiction. Most importantly, they successfully argued that only individuals trained and regulated by
their own associations were fit to act as ‘independent’ auditors. State patronage, institutionalised in the bestowal
of Chartered status upon the elite associations, has subsequently empowered accountants to defend and expand
the accounting jurisdiction. As Abbott (1988) has persuasively observed,


"What really determined the history of the (accountancy) profession was the development and shift of its
jurisdiction - from bankruptcy to auditing, with gradual expansion into cost accounting and now into
"management services" (Abbott, 1988 : 26)


Since the First World War, when the state moderated its laissez-faire approach to economic management (Loft,
1986), to the present day, the auditing niche has provided the accountancy profession with a base for the
expansion of its the core jurisdictions of ‘accountants in practice’ into a number of other areas, most notably
those of taxation and consultancy, and to be employed in ever greater numbers in industry and the public sector.

The Contemporary Scene : Diversification, Commercialization and Defamation

As Abbott (1988 : 62) notes, but does not elaborate, processes of establishing and defending boundaries of
jurisdiction are mediated by available forms of discourse about jurisdiction. For us, ‘independence’ is a powerful
signifier in such discourse. To develop and sustain a position of power, status and high remuneration, members of

professions, such as auditors, are obliged to articulate and defend a discourse and set of regulatory practices that
reassures the public that they (can be trusted to) act independently. Any weakening of
the aura of independence
15

renders professionals (more) vulnerable to the claims of predatory groups that may seek to occupy their
jurisdiction (Dezalay, 1989 : 33). When comparing and contrasting the work of lawyers and accountants, Dezalay
observes that:


"a lawyer is
by definition
an advocate defending his (sic) client’s interests whereas the auditor
claims
to
be a neutral expert providing a technical and objective point of view" (emphases added).


However, it is pertinent to question whether the definitional identity between the work of advocates and the




7

defence of their clients’ interests is as unproblematical as Dezalay suggests - not least because advocates are
engaged in constituting the interests of clients, and not simply defending them. It is equally relevant to
underscore the understanding that the claim of the auditor to be a neutral, independent expert
is indeed a claim
,

and that such a claim can be unsettled and discredited. For the meaning of social practices, such as the
importance and credibility of audit, is contingent upon sociopolitical developments, developments that can fan
doubts about the accuracy
16
and value, if not the very purpose, of audit. Meanings are irremediably precarious and
cannot in any final sense be fixed. Thus, the aura of independence is inescapably
contestable
. Unless challenges
are circumvented or effectively parried, the claim to independence, and the status and power that it bestows, may
become discredited and devalued, with consequences for the reputation of accountants and their capacity to
secure and extend their jurisdiction.

In contrast to other major European countries (e.g. Germany), the leading UK accountancy bodies comprise
members drawn from both ‘industry’ and ‘practice’
17
. Prior to the development of business degrees in higher
education, becoming a chartered accountant was widely regarded as the passport to a high-flying career in
industry and commerce
18
. Consequently, today, many of the big purchasers of accounting and related corporate
services - such as financial directors and chief executives- are themselves members of the same profession, and
often the same association, as their major providers, such as their auditors. Moreover, whilst the movement of
accountants from industry to public practice is controlled (e.g. practising certificates are required), there are no
restrictions to on chartered accountants moving from public practice to industry. This freedom of movement, in
addition to other factors such as the central role of capital markets in the UK economy and the weak competition
from other professions (e.g. engineers) for business training, goes a long way to explain why the UK has spawned
and supported vast numbers of qualified accountants in comparison to other countries. These numbers, it is worth
stressing, are not inconsequential in terms of lobbying governments. Nor are they unimportant in developing an
extensive network of members, including many members of Parliament
19

, whose training and connections make it
more difficult for them to question the wisdom or impede the progress of accounting into new areas of operation -
such as the recent state-sponsored diffusion of private sector business ideologies and practices into the public
sector (Humphrey, Miller and Scapens, 1993).

However, accompanying the expansion and diversification of accounting firms into new markets is the risk of
jeopardising, diluting or discolouring the pristine claims of independence upon which the assumed reputation of
the accountancy profession is established. Accountants become vulnerable to accusations, well founded or
otherwise, that they have neglected or distorted their responsibilities to the public interest (Willmott, 1990) by
becoming too closely associated with industry or by diversifying into activities deemed to be incompatible with
their role as independent professionals. Of the numerous faces of the UK accounting profession, auditing is most
critical for its credibility, economic well-being, status and power. Misgivings about the independence of audit are
doubly damaging to the profession because they threaten to devalue not only the material and symbolic value of a




8

core area of expertise but jeopardise accountants’ capacity to defend and expand other lucrative (and growth)
areas (e.g. other business services). In the words of the President of the Institute of Chartered Accountants in
England and Wales (ICAEW) :


‘because of audit’s high public profile, it is on the performance of auditors that our profession will often
be judged" (Plaistowe, 1992b).

Consider the contemporary situation. To the extent that accountancy practice has become transformed from (the
ideal of) a bespoke relationship between ‘professional’ and ‘client’ into (the material reality of) a self-interested
industry, where the cash nexus appears to be the principal arbiter of conduct, there arise strong prima facie

grounds for doubting the independence of accounting expertise and increased difficulties in defending its
objectivity. Associated with accusations of (excessive) commercialization is the complaint that auditors are
selected and paid for by company directors (and that he who pays the piper plays the tune); and that, if
accountants want repeat business or continued opportunities to on-sell lucrative services (e.g. tax and
consultancy advice), there is considerable commercial pressure to issue a clean (unqualified) audit report.
Relatedly, there is the suspicion that accountants’ self-regulating methods of developing and enforcing standards
are designed to be sufficiently flexible to accommodate this pressure whilst ensuring that litigation and liability is
minimised when audits ‘fail’.

Whether or not such accusations are justifiable, the reputation of accountants, and ultimately their capacity to
secure and further expand their markets, depends upon their collective ability to avoid or rebut such potentially
damaging criticisms. Failure to justify and defend claims to independence in the face of hostile challenges puts at
risk their self-regulating status, their monopoly of audit business and, by association, their capacity to penetrate
and defend new and highly lucrative areas of jurisdiction. The remainder of the paper examines some of the
stratagems deployed by members of the UK accountancy profession to deflect and neutralise criticisms that have
threatened to unsettle or weaken its capacity to secure and/or expand its jurisdiction.

SECURING THE ACCOUNTING JURISDICTION : 1. RESPONSE TO THE MID-1970s ECONOMIC CRISIS

The mid-1970s were a time of considerable economic instability and turbulence in the UK. The accountancy
profession was directly implicated in this turbulence, and it came under pressure to reform the regulation of audit.
In this section, we sketch the background to the economic crisis of the mid-1970’s before indicating how the
profession sought to restore its credibility, and thereby secure its jurisdiction.

Background to the Crisis

9

In 1960, the average rate of return (before tax and interest) on UK businesses was around 13% per annum. By 1975 it
had declined to an average of around 4% (British Business, September 1988: 32) and in 1980 hit a low of 2% (Bank
of England Quarterly Bulletin, June 1981: 161). Fierce international competition and low investment in British
industry resulted in double-digit inflation and unemployment began to rise (Wilson, 1978; Lisle-Williams, 1986).

As manufacturing declined, Britain faced a balance of payment crisis. In a bid to avert this crisis, the government
encouraged expansion of the services sector, especially the financial sector (Clarke, 1986). For example, foreign
banks were offered incentives to locate in London as a "less formal system of regulation" was introduced (Reid,
1982, page 4). In this environment, qualifications to company audits were intended to act as the principal means of
alerting the regulators to fraud. But, at the same time, auditors insisted that fraud detection and reporting was not
their principal function or responsibility.

In the ‘relaxed’ environment of the early 1970s, the banks began to lend money in novel ways. Returns on the
property and financial sectors looked particularly attractive compared to manufacturing. Much speculative
activity occurred, especially in the property sector where the borrowing trebled between 1971 and 1973 (Coakley
and Harris, 1983), with the new, secondary banks being key players in this process. Easy credit assisted in the
trebling of property prices between 1970 and 1973 which, in turn, fuelled speculative activity. In 1973, oil prices
quadrupled. This added some $4-4.5 billion to the British import bill and increased industrial costs by 2%-3%
(Bank of England Quarterly Bulletin, March 1974: 3). As these costs worked their way through the economy, demand
for property slumped and prices fell. Borrowers struggled to keep up with their loan payments; and, secondary
banks had difficulty in honouring their pledges to their depositors. The speculative bubble was about to burst.

Pointing the Finger at the Audit

One of the first British secondary banks to collapse was London and County Securities, a collapse which had a
domino effect. Before long the British banking and the property sector was engulfed in crisis
20
. Well established

companies such as Moorgate Mercantile, Cedar Holdings, Keyser Ullman, First National Finance Corporation, Slater
Walker, London and Capital Group, Cornhill Consolidated Group and others collapsed. Between December 1973 and
March 1974, the state rescued twenty-one institutions by spending some

400 million. With the collapse of the
Stern Property Group, Vehicle and General, Court Line, Scotia Investments and others, the crisis spread to other
sectors - such as shipping and insurance - and frequently exposed fraud at a massive scale. For one influential
commentator, the crisis was fuelled by the


"ease with which eminent firms of auditors turned a blind eye on the wholesale abuse by client
company directors of [legal] provisions. [The directors] operated these public companies for the
principal benefit of themselves and their families; and most regrettable of all, on the virtual
complicity of their auditors, whose efforts are seen to have amounted to a whitewash at best,
and a fatuous charade at worst" (Woolf, 1983 : 112)




10



The state sought to manage the crisis by spending an estimated

3,000 million to rescue ailing concerns (Reid,
1982, page 192) and itself had to seek help from the International Monetary Fund (IMF). As a part of its crisis
management mechanisms, the Department of Trade (DoT) authorised investigations into a number of collapsed
businesses, especially where fraud was suspected (this is discussed in Sikka and Willmott, 1991). The related
press speculation and the eventual DoT reports directly questioned the ability of auditors to act as independent

and objective constructors of economic reality. For example, the auditors of Roadships were criticised for failing
to check adequately the amounts for creditors, accruals, purchases and profit forecasts (DoT, 1976a). The
inspectors argued that


"Independence is essential to enable auditors to retain that objectivity which enables their
work to be relied upon by outsiders. It may be destroyed in many ways but significantly in three;
firstly, by the auditors having a financial interest in the company; secondly, by the auditors
being controlled in the broadest sense by the company; and thirdly, if the work which is being
audited is in fact work which has been done previously by the auditors themselves acting as
accountants" (para 243).


After examining the quality of audits performed by auditors who also provided non-auditing services, the
inspectors concluded,


"We do not accept that there can be the requisite degree of watchfulness where a man is
checking either his own figures or those of a colleague. for these reasons we do not believe
that [the auditors] ever achieved the standard of independence necessary for a wholly objective
audit" (paras 249 and 250).


A 300 page report on the collapse of Vehicle and General, which insured some 10% of Britain’s motorists, was
highly critical of the auditor’s failure to spot manipulation of accounts and gross errors and overstatements in its
financial statements. For instance, an investment of

82,040 was shown as

820,040, but was not spotted by the

auditors. Major audit deficiencies were also exposed by the report on London and County Securities (DoT, 1976c).
The company had entered into illegal share dealings and there were also suspect transactions between the
company, directors and their families. The report described the company’s accounts as "misleading to a material
extent" (ibid : 234).

In response to these and other revelations, the quality press expressed growing disquiet about the independence
and integrity of accountants. The Economist (14th February 1976) declared that


"Civil servants, politicians, and even City folk are beginning to wonder whether the accountancy
profession is capable of policing itself. unless the profession improves its auditing standards




11

someone else will" (ibid : 79-80).


The Investors Chronicle (13th February 1976, page 419) questioned the value of audited accounts and self-
regulation. The Financial Times (10th July 1976) doubted the profession’s ability "to exercise control over the
activities of large accountancy firms" (page 26). Even the ICAEW President was forced to acknowledge that


"public confidence in the standards of our performance has been badly shaken by a number of
well publicised cases" (Accountancy, November 1976 :4).


Questions relating to the reliability of auditing were raised in Parliament. On 9th February 1976, the Secretary of

State for Trade responded to an observation that one of the "worst features of the affair [London and County] is
the fact that the auditors passed the accounts of the organisation", by promising that he would


"certainly consider much more carefully the whole role of auditors in this matter" (Hansard, Vol.
904/905, cols. 10-11).


It is worth recalling that, at this time, politicians and civil servants were wrestling with a full-blown economic
crisis in which they sought to control inflation, prices and unemployment, to negotiate finance from the IMF and to
rescue ailing companies. Nevertheless, the Secretary of the State for Trade found the time to summon to his office
the Presidents of those Institutes (ICAEW, ICAS, ICAI and ACCA) most directly responsible for accounting and
auditing regulation. At the meeting, he


"told representatives of the profession that either they regulated themselves effectively or I
would ask Parliament to do it for them" (letter to one of the authors, dated 6th December 1989).


The combination of critical DoT/DTI reports, press comment and pressures from Ministers posed a significant
threat to the credibility, and ultimately to the jurisdiction, of the accountancy profession. One indicator of this
threat was the introduction of a Private Members’ Bill that urged the government to introduce a public board for
regulating auditors. Although defeated by 35 votes (Hansard, 22nd March 1977, cols. 1081-1088), this proposal
reinforced and amplified earlier criticism and sent a clear message to the profession. Concern about the
independence and reliability of auditors was maintained by further frauds, scandals and state sponsored
investigations. The Department of Trade and Industry (DTI) inspectors’ report on Burnholme and Forder (DTI, 1979a),
for example, was critical of audit work and once again felt that auditor independence was compromised by the
provision of non-auditing services to audit clients. They concluded,

"in our view the principle of the auditor first compiling and then reporting upon a profit forecast




12

is not considered to be a good practice for it may impair their ability to view the forecast
objectively and must endanger the degree of independence essential to this work" (page 271).


In 1978, the highly publicised collapse of the Grays Building Society once again reminded small investors of the
assumed role of auditing in safeguarding their deposits. The resulting investigation (Registry of Friendly Societies,
1979) found that the auditors had been unable to spot frauds of more than

7.1 million that had occurred during a
period of more than forty years, and which had only come to light when the chairman committed suicide. In
common with a number of other reports
21
, the investigation was highly critical of the auditors.

In Defence of Self-Regulation and Jurisdiction: Auditing Standards, Ethical Guidelines and Disciplinary
Procedures

In the UK, the major accountancy bodies are charged by the state with day-to-day responsibility for regulating
auditing practice. In discharging this responsibility, accounting regulation has been decoupled from auditing
regulation. Whereas pronouncements on general principles of sound accounting practice began in 1942
22
, those
relating to audit did not begin until 1961

23
. Auditing and accounting came under critical scrutiny during the 1960s
(Robson, 1991) but the professional bodies interpreted this almost exclusively as criticism of accounting.In 1969,
separate machinery for setting accounting standards under the control of the profession was created. The
equivalent machinery for auditing standards - the Auditing Practices Committee (APC) - was not established until
1976. The timing of its formation coincided with public disquiet about the independence and reliability of auditing
described in the previous section. It was one element of the profession’s response to the actual and anticipated
criticism from the DTI inspectors, politicians and the press
24
. The explicit purpose of this committee was "to satisfy
our critics in political circles and outside" (APC, 1978 :50).

By creating the APC, leading professional bodies signalled their willingness to tighten the standards of audits and,
thereby, secure auditing as its jurisdiction
25
. At the very least, it enabled government to be persuaded that the
accountancy profession was putting its house in order, and thereby reaffirm its distance from such matters. The
government was knowledgeable about, but seemingly indifferent to, the fact that most of the voting power on the
APC rested in the hands of the major firms, the very firms that had been criticised in the DoT/DTI reports. Nor did
government express any disquiet that qualified accountants, let alone members of the public, had no access to
APC agenda papers or minutes, although such information was made available to the major firms, thus furnishing
them with the information relevant to shape the parameters of decisions and non-decisions and to pursue their
own agendas (Sikka, Willmott and Lowe, 1989). Nor, finally, did government question the absence of mechanisms to
monitor and enforce firms’ compliance with auditing standards.

Observations of this kind can be interpreted in a number of ways. They may, for example, be viewed as confirmation