Description
Accountants are part of what Abbott 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.
Pergamon
Accounting, OqanlzaNons and Society, Vol. 20, No. 6, pp. 547-581, 1995
Ekvier Science Ltd
Printed in Great Britain.
0361-3682/95 $9.50+0.00
03613682(94)00027-1
THE POWER OF “INDEPENDENCE”:
DEFENDING AND EXTENDING THE JURISDICTION OF ACCOUNTING IN THE
UNITED KINGDOM*
PREM SIKKA
Unlverslty of East London
and
HUGH WILLMOTT
lJnivers@ of Manchester I nstitute of Science and Technology
Abstract
Accountants are part of what Abbott 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 defming, 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 197Os, 1980s and early
199Os, the profession is shown to have taken a number of initiatives to defend and reinforce this
“image”. In its efforts to neutralize 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 mobilizing 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 neutralize threats to self-regulation and to redefine the terrain on which
it combats its challengers.
A convenient way to introduce this paper is to
consider the thesis developed by Abbott in his
highly itiuential book Z&e System of Profes-
sions (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 med-
ium and outcome of this structure. Abbott’s
preference is to study professional develop
ment by considering the link between a profes-
sion and its work - a link that he characterizes
as its jurisdiction (ibid., p. 20). In turn, his
focus upon jurisdictions draws attention to
the ways in which the boundaries of jurisdic-
tion are negotiated - attacked and defended
l 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 Account-
ing Conference, New York. We are grateful for comments received at these meetings and for the constructive criticisms of
two anonymous referees.
547
548 P. SIKKA and H. WILLMO’IT
-
as different professions compete over emer-
gent or vulnerable territories.
Abbott’s study of expert labour’ usefully
highlights the importance of interprofessional
competition in the process of professional for-
mation and development.’ Urging a close con-
sideration of the interconnectedness and
rivalry between professional groups in shaping
the conditions of their development, he cham-
pions the study of the negotiation of jurisdi-
tional boundaries between professions:
each profession has its activities under various kinds of
jurisdiction Jurisdictional boundaries are perpe-
tually in dispute, both in local practice and in national
claims . an effective historical sociology of profes
sions must begin with case studies of jurisdictions and
jurisdiction disputes (Abbott, 1988, p. 2).
An attentiveness to disputes over jurisdiction is
enlightening and timely in countering a ten-
dency to study professional groups in isolation
from their competitive contexts. Not surpris-
ingly, Abbott’s work is increasingly cited by
students of the accountancy profession3 (e.g.
Dezalay, 1989, 1991; Neu, 1991). However,
his approach is wanting in at least three impor-
tant respects. First, by focusing upon systems
of professions within different nation-states, he
takes little account of how supranati onal pres-
sures increasingly condition both the local
practice and national standing of professional
groups (see Montagna, 1986; Dezalay, 1989;
Picciotto, 1989; Hanson, 1990).* In the “busi-
ness 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 internationalization of markets
for legal, financial and consultancy services. In
this paper, we touch upon this point by refer-
ence to the formulation and Implementation of
the Eighth EC Directive in the U.K.
Second, and of greater relevance for this
paper, Abbott’s approach suffers from aprofes-
si ons-centri c treatment of jurisdiction disputes.
Despite an avowed attentiveness to “external
forces” (e.g. the state granting or diluting audi-
tors a monopoly of the external audit function)
that open up or close down jurisdictions,
Abbott largely neglects the importance of chal-
lenges posed to the legitimacy of jurisdictions
by groups who do not themsel ves seek to
occupy thei r tewi toy, 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
i The term “expert labour” is used ln the subtitle of 7Zre @#em of Professfons. It is worth noting that Abbott expresses
little discomfort or reservation about giving academic legitimacy to the common-sense ascription of the soubriquet of
pmfessionallsm to an elite group of occupations, such as doctors, lawyers and accountants. Without deny@ that the term
is difficult to pm down because its meaning is contextually dependent and politically negotiated, we are unhappy with the
way that Abbott (ibid., pp. S-9) uncritically ascribes to some groups distinctive (i.e. “professionai” skills). Abbott’s “loose
definition” of pmfessions is that they are “exclusive occupational groups applying somewhat abstract knowledge to
particular cases” (Abbott, 1988, p. 8). In effect, the term “profession ” is unpmblematized. Our reservations about this
and other aspects of Abbott’s thesis are elaborated in the following paragraphs. More detailed criticisms are assigned to
footnotes. See especially footnote 10.
a In this regard, there is the remarkable omission of the highly influential work of Armstrong (e.g. Armstrong, 1984, 1985)
which appeared before other sources that Abbott cites.
3 When referring to “the accountancy profession”, we acknowledge that we court the danger of implicitly and usually
inadvertently legl ’ nmlalng cIaiis that deserve more critical scrutiny (see Willmott, 1990, and Sii, 1992b. for elaborations
of this). However, as a target of our study is the plausibility of professional claims, reference to the “profession” is difficult
to avoid. See also footnote 5.
4 A point that is belatedly conceded in the conclusion to the book when Abbott (1988) acknowledges that organizations
- for example, the big international firms of accountants which, with the exception of passing references on p. 25 and p.
152, are strangely absent in Abbott’s account - are “commodlfying”, and thereby destroying, claims of professionalism as
a distinctive form of institutionalization.
THE POWER OF
coincide in his very restricted appreciation of
how any profession’s capacity to mobilize sup
port for their “local practice” and “national
claims” is dependent i nter al i a upon their
credibility with, and influence over, “third par-
ties” - such as politicians, journalists and aca-
demics, as well as regulators and clients. In
Abbott’s model of “the system of profes-
sions’ ’ , and in his three detailed case studies,
there is scant consideration of the micropoli-
tics of how professions actually organize to
define, defend or enlarge their area(s) of juris-
diction (Willmott et al ., 1993), or of how the
control of jurisdictional boundaries is chal-
lenged and loosened by the activities of groups
who have no direct “professional” interest in
occupying their territory but whose activities
can nevertheless generate and legitimize com-
peting discourses (Willmott, 1991). In helpfully
commending a focus upon the work “profes
sionals” do, as contrasted with how profes
sions are organized (Abbott, 1988, p. 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 mem-
bers work in industry (and elsewhere) as well
“INDEPENDENCE” 549
as in “public practice”. He does recognize that
“professionals work in a variety of settings”
(ibid., p. 125) but is more concerned with
drawing distinctions between autonomous
and heteronomous professionals than with
exploring the significance of hybrid member-
ship for the defence of established jurisdic-
tions. It is relevant to underscore the
understanding that the U.K. accountancy pro-
fession is not homogeneous (Willmott, 1986).
Its members are employed in industry, com-
merce, local government, central government,
state industries, public practices and other
organizations of various sizes. In each of these
arenas, accountants are agents of, and are sub-
jected to, diverse and sometimes contradictory
priorities and pressures. Abbott’s (1988) ten-
dency to conceptualize professions as if they
are fundamentally homogeneous (see espe-
cially Chap. 4), albeit that they may incorpo-
rate 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 U.K. accountancy body, the ICAEW,
that work outside of public practice in multi-
farious positions within the private, public and
voluntary sectors.’ Thus, when we refer to
’ It is appropriate to place “scare quotes” around this term since, in many respects, the so-called professional bodies in the
U.K. are more plausibly studied as “trade associations” that are formed to secure and advance the interests of their
members. Indeed, the U.K. accountancy bodies openly claim that they are “responsible for protecting and promoting
the interests of [their] members” (Certified Accountant, September 1991, p. 12). The “professionalization strategy”,
including the privilege of self-regulation, can be viewed, in part, as a means to this end. This theme is elaborated and
illustrated in the body of the paper. In recent years, it has been increasingly argued, even amongst leading accountants,
that the progressive commercialization of the industry in the U.K., facilitated by weak and ineffective forms of self-
regulation, has brought about some “deprofessionalization” of accounting practice. Some evidence of this concern is
considered in later sections of the paper.
6 Abbott (1988, p. 110; see also p. 236) touches briefly upon this issue when he notes that professions that are dominant
“cognitively” as well as “structurally” - of which accountancy in the U.K. is surely a premier example - can be plagued
by the “system property” of resfduul fty. I f, historically, insolvency and audit arc regarded as the core elements of the
accountancy jurisdiction, then other kinds of work undertaken by many members of accountancy associations working in
industry are, in Abbott’s systems theoretic sense, residual and thus “open to attack” (ibid., p. 1 lo), from other, established
or emergent, associations. The logic of Abbott’s argument is that the retention of residual elements is problematical as
550 P. SIKKA and H. WILLMOTT
“the accountancy profession”, we mean, first
and foremost, those representatives of the
major bodies and/or spokespersons of large
accounting firms who take it upon themselves
to assert and defend the authority and indepen-
dence of accountancy practices in general and
the prevailing regulatory arrangements in parti-
cular. But, to repeat, whenever reference is
made to the accountancy profession in the
U.K., it is necessary to be mi ndful of i ts hi ghl y
compl ex and fractured organi zati on as wel l
as the di verse ki nds of work undertaken by
qual i fi ed C’professi onal ”) accountants.
This paper is organized as follows. We begin
with an overview of the formation and devel-
opment of the accounting jurisdiction in the
U.K. We highlight the heterogeneity and exten-
siveness of this jurisdiction, its continuing reli-
ance 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 nar-
rowly, 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.’
We then present three case studies that illus-
trate how the U.K. accounting profession has
responded to recent major challenges to its
aura of independence - challenges which
threaten to damage its credibility and imperil
control of lucrative jurisdictions. First, we con-
sider responses to corporate collapses in the
mid-1970s which cast doubt upon accoun-
tants’ claims to be objective constructors of
reality. Second, we consider responses of the
U.K. accountancy profession to questions
about auditor independence raised by the
requirements of the Eighth EC Directive,
requirements that also posed a potential threat
to accounting firms’ operation within, and con-
tinued expansion into, EU markets for non-
audit services. Third, we examine current
respones by the U.K. profession to questions
currently being raised about the reliability of
audits and, relatedly, the adequacy of self-regu-
lation. In each case, we note how doubts about
accountants’ claims to independence are routi-
nely appeased by introducing some reforms
and refinements into their self-regulatory
arrangements, by updating ethical and disci-
plinary arrangements and/or by seeking to
redefine public understandings and expecta-
tions about accounting expertise. We also
strive to show how issues relating to “inde-
pendence” do not arise singly, and are not
necessarily articulated explicitly. Rather, con-
cerns about independence form an integral
part of discourses and practices that are mani-
festly concerned with professional ethics, dis-
ciplinary arrangements, self-regulation and
other symbols of “professionalism”.
“excess expansion” will lead to increased poaching and consequent division. It has to be said, though, that the U.K.
accountancy bodies, especially the ICAIW, have to date been highly successful in managing continuous expansion without
significant poaching or division. But, of course, Abbott’s theoretic concept of “excess expansion” is doubtless highly
elastic!
’ See, for example, Kaplan (1983), Johnson & Kaplan (1987X Johnson (1994), Miller &O’Leary (1993), Munro & Hatherley
(forthcoming).
THE POWER OF “INDEPENDENCE” 551
THE ACCOUNTANCY PROFESSION IN THE
U.K.: FORMATION, COMPETITION AND
COLONIZATION
The development of the accountancy profes-
sion in the U.K.* cannot sensibly be detached
from the existence and organization of other
groups that compete to define and occupy par-
ticular jurisdictions. In establishing, extending
and defending their terrain, accountants have
formed associations and have enjoyed the
patronage of the state and corporations (John-
son, 1972). They have also drawn inspiration
from, and sought to displace, the claims of
other groups, principally lawyers but also engi-
neers, who have been competitors in the mar-
ket-place for their services.’ In this section, we
sketch the historical background to contempor-
ary developments that have posed a threat to
the boundaries of the accounting jurisdiction.
Forging the jurisdiction of accounting in
the U.K.
In the U.K., the emergence of sellers of spe-
cialist labour who described themselves as
“accountants” (amongst other things) were
initially stimulated by a buoyant demand for
services in the area of bankruptcy, liquidation
and trusteeship (Brown, 1905; Stacey, 1954;
Loft, 1988). However, accountants’ occupa-
tion of this emergent jurisdiction was vulner-
able 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).”
’ There is no substantial socioIogicaI history of the accountancy profession in the U.K. It is therefore necessary to piece
together and interpret chronologies of its development provided by historians and practitioners. Amongst the more useful
sources are Brown (1905), Chatfield (1977), Garrett (1961), Institute of Chartered Accountants in England and Wales
(1965, 1980), Stacey (1954), Edey (1979), Edey & Panitpakdi (1956), Jones (1981), Littlejohn (1966) and Zeff (1971).
SocioIogicaIly informed treatments of selective aspects and periods of the U.K. accountancy profession can be found inter
aliu in Johnson (1972, 1982), MacdonaId (1984, 1985, 1989), Wilhuott (1985, 1986), Armstrong (1985, 1986), Loft (1988),
Puxty et al. (1987), Robson & Cooper (1990), Robson (1991). Willmott et al. (1992). Cooper et al. (1992a), Sikka et al.
(1992), Napier & Noke (1992), Gilmore L Wilhnott (1992). As the dating of these references suggests, there is an
increasing interest amongst accounting academics in applying sociological insights to understand the dynamics of account-
ing practice. This interest is reflected In the number of journals that support work In this area: Accounting, Organfmtfons
and Soctety, Advances in Public I nterest Accounting, Accounting, Auditing and Accounmbility J ournal and Crikal
PerspecHves on Accountfng.
9 Of course, to refer to “a market for accounting services” (or legal services) is potentially misleading insofar as it implies
that the boundaries around these markets are given rather than constructed and permeable. To the extent that reference to
a market or jurisdiction for accounting labour or accounting fmns is plausible, this plausibility is itself indicative of the
success of a particular group in establishing areas of jurisdiction to which the label “accounting” rather than, say, “legal” is
commonsensically assigned.
lo According to Macdonald (1984), this association of accounting with the prestigious legal profession was important in
facilitating the successful petitions for a Royal Charter by the accountancy societies of Edinburgh (1854), Glasgow (1854)
(later to be amalgamated within the Institute of Chartered Accountants in Scotland) which occurred some 16 years before the
Institute of Accountants in London (1870) which together with the Society of Accountants in England (1872) was later to
form the core of the Chartered Accountants of England and Wales. Many aspects of MacdonaId’s account have been
challenged persuasively by Briston & Kedslie (1986, pp. 122-130). Although Briston and Kedslie do not question Macde
nald’s argument that Scottish accountants derived some of their standing from the closeness of their association with the legal
profession, it is contended that their petitioning for a Charter was inspired more by immanent changes in bankruptcy
legislation that applied to Scotland only than by their fitness for Chartered status. Briston and Kedslie also argue that the
class background and diversity of activity pursued by Glaswegian accountants was very similar to that of London accountants.
However, given this similarity, it is difficult to understand why London accountants were refused a Charter when they initiaIly
applied for it unless they were less welI connected. One possible explanation, which is not considered either by Macdonald
or by Briston and Kedslie could simply be that the criteria for scrutinizing applications changed during the intervening years.
552 P. SIKKA and H. WILLMOTI
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”, “auc-
tioneer” and “rent-collector” - the relation-
ship between accounting and the law had a
different trajectory of development.” For law-
yers working in England and Wales, the under-
taking of accounting work was considered
demeaning, the price exacted for such profes-
sional 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 respect-
able, line of work for upright, bona fi de law-
yers. 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, p. 24).
The jurisdiction of accounting practice is rooted
in, and parasitical upon, the growth and instabil-
ity of capitalism and is closely aligned to the
allocation and husbandry of fmance capital.
Early accountants forged close contacts with
financiers (Scott, 1985). Such connections pre-
sented opportunities for securing patronage,
support and clientele (Johnson, 1972). Accord-
ing to Donna&e (1977, p. 275) it was a com-
mon 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 ln the community over the disbursement of
loans and the discounting of bills for local farmers, mer-
chants 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 domain reserved for an
elite of accountants who were acceptable to
the authorities. In effect, this Act, which was
to become known as “the accountants’ friend”,
lent statutory authority to the differentiation of
“respectable” accountants from others who
were simultaneously engaged in less reputable
forms of “trade”. And, as if this source of status
and support were not enough, the 1862 Com-
panies Act also required that dividends to
shareholders be paid exclusively from
income, a requirement that further boosted
the demand for “respectable” accountants. l2
This legislation, which was so supportive of
the growth of specialist accounting labour,
i’ We acknowledge a debt to Loft (1988) for the following interpretation of the emergence of the accountancy profession.
i* Given the very broad sweep of Abbott’s (1988) analysis, it is perhaps unfair to single out for criticism his interpretation
of the emergence of accounting ln the U.K., which he presents as a “subtle example” of an external force that brings about
a new jurisdiction. However, there are a number of worrying deficiencies in his account. First he relates this change to
development of the joint stock company (JSC) which he mistakenly places in the late nineteenth century when, arguably, it
occurred in the mid-nineteenth century (Iones, 1981, p. 28 ft). Second, he contends that the JSC was devised by bankers
and lawyers “to bring the mobilization of capital out of the family world and into their professional world”. There is
certainly an element of truth in this claim - the l&14 and subsequent Companies Acts were supported broadly by the elite
members of these groups, But Abbott’s interpretation suffers from his “profession reductionism” in which professions are
assumed to be the principal agents of organizational innovation. Or, as he expresses his position: “the evolution of
professions ln fact results from their interrelations” (ibid., p. 8). A less professionscentric view of the development of
the JSC would take account of a consensus amongst a broad section of the rising bourgeoisie to promote economic growth,
growth that had been held ln check by highly restrictive legislation on the formation of companies passed to avoid a repeat
of the politico-economic crisis following the bursting of the South Sea Bubble. Politically and sociologically, the creation of
JSCs, and the associated development of company law, is significant not because it represented a triumph for bankers and
lawyers whose range of activities and intluence were undoubtedly increased by their development. gather, their signifi-
cance resides in marking a break from the direction of commercial activity by the state to direction by private associations
of individuals. Whereas incorporation by Charter had required support from the Courts or an Act of Parliament, the
THE POWER OF “INDEPENDENCE” 553
was enacted prior to the development of a state
register of accountants or even the estabfish-
ment of an association that could lobby govern-
ment. As we have already suggested, the
emergent jurisdiction of accounting was
secured by an elite of “reputable” accoun-
tants, a number of whom were invited to give
evidence to Parliamentary Committees (Iones,
1981, pp. 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 pro
fessional accountant, as contrasted with those
who lacked their skills and took on many other
kinds of work (Cooper, 1886, 1921).13
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, 1965). Through
the activities of this body, including the publi-
cation of its journal, the members of the Insti-
tute assiduousIy 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
Prior to the formation of accountancy asso
ciations, 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
a formidable array of clerks of all kinds. . shopkeepers,
valuers, collectors of taxes, bailiffs. pawn-brokers and
manure merchants (quoted by Stacey, 1954, p. 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
modem U.K. accountancy profession.
Companies Act of 1844 provided automatic incorporation to any venture subject to compliance with standardized articles
of association (Gihnore & Willmott, 1992). As Abbott (ibid., p. %) rightly notes, one outcome of this process was a
spectacuiar rise in company failures and, with it, a demand for individuals capable of winding up their affairs. However, he
attributes this failure exclusively to the inexperience of capitalists, and not to the scope for (often unintentional) fraud
(Pollard, 1%5): ‘English capitalists grew more skilled and fewer companies failed” (Abbott, 1988, p. 94). An alternative
interpretation would suggest that opportunities for fraud were reduced in part by (a widespread belief in) the develop-
ment and application of accounting and auditing techniques which deterred fraud, and associated insolvencies, as much as
they actually detected it. However, this did not mean that the reduction and eventual loss of insolvency work (in 1883)
“forced the profession to seek another jutisdiction” (ibid.) since this “other” jurisdiction - namefy, auditing - was
already quite firmly established as a consequence of the requirement for audit contained in the Companies Acts and
Banking Acts of 1862 and 1879 that had been passed prior to 1883. In fact, Abbott seems dimly aware of this when he later
notes the significance of audit for the jurisdiction of accountants (ibid., p. 101). But he continues to regard this as a
replacement for lost bankruptcy business rather than as something that developed in parallel with receivership. Abbott
recognizes, but then fails to draw out, the crfrfcal importance of the audit as the key area of jurisdiction for the
accountancy profession. To some extent, these deficiencies may be ascribed to Abbott’s reliance upon a limited number
of sources (ibid., Chap. 1, note 35, and Chap. 4, notes 11 and 18).
t3 It is worth stressing that the rise of the accountancy profession was by no means automatic. For one thing, until 1900,
boards of companies were able to exclude themselves from the audit provisions of the 1862 Act. Secondly, and of no less
importance, a body of auditing expertise took time to be established and legitimized. The first auditing book Audi tors:
Tbet Duti es and Responsi bi l i ti es, by F. W. Piiey, appeared in 1881 at a time when “the bulk of the legal profession .
looked upon accountants with ill-concealed dislike and jealously” (The Accounl ant, 28 July 1877, p. 2). The book is almost
totally confined to a paraphrasing of the extant legal aspects of accounting and auditing. Some detailed aspects of auditing
were presented in the second book on auditing written by Lawrence Dicksee which appeared in 1892. Third, prior to the
development of the accountancy bodies, there was no institutionalized conduit for the elaboration and dissemination of
auditing expertise.
554 P. SIKKA and H. WILLMOlT
Although formally a requirement of the Joint
Stock Companies Acts of 1844, this require-
ment was not applied effectively until the
beginning of this century (Edey, 1979; Gihnore
& Willnlott, 1992).‘4 Nonetheless, its influence
was vital for the economic, social and political
rise of the profession. As Cooper noted
tion As Abbott (1988) has persuasively
observed,
What really determined the history of the [accountancy]
profession was the development and shift of its judsdic-
don - from bankruptcy to auditing, with gradual
expansion Into cost accounting and now into “man-
agement services” (Abbott, 1988, p. 26).
under the patronage of the state, auditors began to
lncreasc in numbers, in 1836, out of 107 banks, only
nine had auditors whilst 14 had power to appoint audi-
tors but chose not to exercise it. But after the Compa-
nies 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 ha-
bility companies which rose from the 1864 figure of 891
to 14,445 in 1880 (Cooper, 1886, 1921).
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.
Since World War I, when the state moderated
its laissez-faire approach to economic manage-
ment (Loft, 1988), to the present day, the audit-
ing niche has provided the accountancy
profession with a base for the expansion of its
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: diversifzcation,
commercialization and defamation
To sum up: that specialist accountants As Abbott (1988, p. 62) notes, but does not
emerged as a distinctive group, rather than as elaborate, processes of establishing and defend-
a branch of legal practice, is attributable to a ing boundaries of jurisdiction are mediated by
combination of state sponsorship and the dis- available forms of discourse about jurisdiction.
dain of lawyers for accounting work. Capitaliz- For us, “independence” is a powerful signifier
ing upon the opportunities presented by the in such discourse. To develop and sustain a
passing of the 1862 and 1879 Companies position of power, status and high remunera-
Acts, as well as their connections with finan- tion, members of professions, such as audi-
ciers, leading accountants formed Iirms and tors, are obliged to articulate and defend a
associations through which they secured the discourse and set of regulatory practices that
accounting jurisdiction. Most importantly, reassures the public that they (can be trusted
they argued successfully that only individuals to) act “independently”. Any weakening of the
trained and regulated by their own associations aura of independence’5 renders professionals
were fit to act as “independent” auditors. State (more) vulnerable to the claims of predatory
patronage, institutionalized in the bestowal of groups that may seek to occupy their jurisdic-
Chartered status upon the elite associations, has tion (Dezalay, 1989, p. 33). When comparing
subsequently empowered accountants to and contrasting the work of lawyers and
defend and expand the accounting jurisdic- accountants, Dezalay observes that:
i4 Indeed, the Zafssez-faire political philosophy of mideighteenth-century Britain resulted, in 1856, in the repeal of the
audit requirement of the 1844 Act. Nonetheless, demand for audited accounts was maintained by anxious shareholders
fearful of fraud; it was also required by statute for some of the specialist corporate legislation (e.g. railways, banks) before it
became a general requirement in 1900.
‘s The concept of “aura” is drawn from the work of Benjamin, an intluential though somewhat neglected member of the
Ptankfurt School. In the field of accounting, the concept has been used by Gallhoffer & Haslam (1991) to examine the use
of accounting in Germany up to the aftermath of World War I.
THE POWER OF
a Iawyer is b_u deJ 9nftion an advocate defending his (sic)
cIicnt’s interests whereas the auditor clulms to be a
neutral expert providing a tech&J and objective
point of view [emphases added].
However, it is pertinent to question whether
the definitional identity between the work of
advocates and the defence of their clients’
interests is as unproblematical as Dezalay sug-
gests - not least because advocates are
engaged in constituting the interests of cll-
ents, and not simply defending them. It is
equally relevant to underscore the understand-
ing that the claim of the auditor to be a neutral,
independent expert fs i ndeed a cl ai m, 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 contin-
gent upon sociopolitical developments, devel-
opments that can fan doubts about the
accuracy16 and value, if not the very purpose,
of audit. Meanings are irremediably precarious
and cannot ln any final sense be fixed. Thus,
the aura of independence is inescapably con-
testabl e. Unless challenges are circumvented
or effectively parried, the claim to indepen-
dence, and the status and power that it
bestows, may become discredited and de-
valued, with consequences for the reputation
of accountants and their capacity to secure and
extend their jurisdiction.
In contrast to other major European coun-
“INDEPENDENCE” 555
tries (e.g. Germany), the leading U.K. accoun-
tancy bodies comprise members drawn from
both “industry” and “practice”.” Prior to the
development of business degrees in higher edu-
cation, becoming a chartered accountant was
widely regarded as the passport to a high-flying
career ln industry and commerce.” Conse-
quently, 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 profes
sion, and often the same association, as their
major providers, such as their auditors. More-
over, whilst the movement of accountants from
industry to public practice is controlled (e.g.
practising certificates are required), there are
no restrictions on chartered accountants mov-
ing from public practice to industry. This free-
dom of movement, in addition to other factors
such as the central role of capital markets in
the U.K. economy and the weak competition
from other professions (e.g. engineers) for busi-
ness training, goes a long way to explain why
the U.K. has spawned and supported vast num-
bers of qualified accountants in comparison
with other countries. These numbers, it is
worth stressing, are not inconsequential in
terms of lobbying governments. Nor are they
unimportant in developing an extensive net-
work of members, including many members
of Parliament, l9 whose training and connec-
I6 We are certainly not claiming here that Iinancial accounts are, or even should be (Gilmore & Willmott, 1992), capable of
accurately reflecting reality. Instead, we are suggesting that, historically, accountants and auditors have raised, or at least
done little to deflate, this expectation. In this sense, what is defined as a real ability to reflect economic reality, is real in its
consequences when it is perceived to fail. One consequence, especially when failures are spectacular and numerous, is a
loss of contidence in the claims of auditors to be independent.
I7 The U.K. has six professional accountancy bodies with royal charters. Their combined membership is around 205,000
and the ICAEW is the Largest with approximately 105,000 members.
I* Approximately 20% of all U.K. graduates have been making a career In accountancy-related work. Major firms such as
Peat Marwick M&mock have been recruiting more graduates than the entire British chemical sector put together
(Accountancy Age, 27 October 1988; Times Higher Education Supplement, 3 February 1989, p. 9).
I9 After the 1992 elections, 14 of the IJ.K.‘s 650 MPs were accountants. A number of them subsequently occupied senior
positions. For example, Tim Smith (former adviser to the ICAEW and a consultant to Price Waterhouse) was a Vice-
chairman of the Conservative Party (the nding Party in office from 1979 onwards) and subsequently a Minister for
Northern Ireland. Jeremy HanIey (a former adviser to the ICAEW) was a member of the Cabinet with responsibilities
for Northern Ireland and Defence before becoming Party Chairman. John Watts (adviser to the ICAEW until early 1992)
556 P. SIKKA and H. WILLMOn
tions make it more difficult for them to ques-
tion 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 et al ., 1993).
However, accompanying the expansion and
diversification of accounting Iirms into new
markets is the risk of jeopardizing, diluting or
discolouring the pristine claims of indepen-
dence upon which the assumed reputation of
the accountancy profession is established.
Accountants become vulnerable to accusa-
tions, well founded or otherwise, that they
have neglected or distorted their responsibil-
ities 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
U.K. 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 de-
value not only the material and symbolic value
of a core area of expertise but jeopardize
accountants’ capacity to defend and expand
other lucrative (and growth) areas (e.g. other
business services). In the words of the Presi-
dent of the Institute of Chartered Accountants
in England and Wales (ICAEW):
strong prima facie grounds for doubting the
independence of accounting expertise and
increased difficulties in defending its objectiv-
ity. Associated with accusations of (excessive)
commercialization is the complaint that audi-
tors 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 pres-
sure to issue a clean (unqualified) audit report.
Relatedly, there is the suspicion that accoun-
tants’ self-regulating methods of developing
and enforcing standards are designed to be suf-
ficiently flexible to accommodate this pressure
whilst ensuring that litigation and liability is
minimized when audits “fail”.
because of audit’s high public profile, it is on the per-
formance of auditors that our profession will often be
judged (Plaistowe, 1992b).
Whether or not such accusations are justill-
able, the reputation of accountants, and ulti-
mately their capacity to secure and further
expand their markets, depends upon their col-
lective 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 selfregulat-
ing 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 exam-
ines some of the stratagems deployed by mem-
bers of the U.K. accountancy profession to
deflect and neutralize criticisms that have
threatened to unsettle or weaken its capacity
to secure and/or expand its jurisdiction.
Consider the contemporary situation. To the
extent that accountancy practice has become
transformed from (the ideal of) a bespoke rela-
tionship 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
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
U.K. The accountancy profession was directly
was the Chairman of the powerful House of Commons Treasury and Civil Service Select Committee. Until early 1993, the
late Judith Chaplin (Conservative MP for Newbury), a former Special Adviser to the Chancellor of the Exchequer (19s8-
1990) and a Political Secretary (1990-1992) to the Prime Minister, John Major, acted as an adviser to the ICAEW.
THE POWER OF “INDEPENDENCE” 557
implicated in this turbulence, and it came
under pressure to reform the regulation of
audit. In this section, we sketch the back-
ground to the economic crisis of the mid-
1970s before indicating how the profession
sought to restore its credibility, and thereby
secure its jurisdiction.
Background to the cri si s
In 1960, the average rate of return (before
tax and interest) on U.K. businesses was
around 13% per annum. By 1975 it had
declined to an average of around 4% (Bri ti sh
Busfness, September 1988, p. 32) and in 1980
hit a low of 2% (Bank of Engl and Quarterl y
Bul l eti n, June 1981, p. 161). Fierce interna-
tional competition and low investment in
British industry resulted in double-digit intIa-
tion and unemployment began to rise (Wilson
Committee, 1978; Lisle-Williams, 1986).
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 biII and
increased industrial costs by 2-3% (Bank of
Engl and Quarterl y Bul l eti n, March 1974, p.
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.
As manufacturing declined, Britain faced a
balance of payments crisis. In a bid to avert
this crisis, the government encouraged expan-
sion of the services sector, especially the finan-
cial sector (Clarke, 1986). For example, foreign
banks were offered incentives to locate in
London as a “less formal system of regula-
tion” was introduced (Reid, 1982, p. 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.
Poi nti ng the fi nger at the audi t
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 property sector
was engulfed in crisis.2o Wellestablished com-
panies such as Moorgate Mercantile, Cedar
Holdings, Keyser Ulhnan, First National
Finance Corporation, SIater WaIker, London
and Capital Group, ComhiII Consolidated
Group and others collapsed. Between Decem-
ber 1973 and March 1974, the state rescued
twenty-one institutions by spending some
&400 miUion. With the collapse of the Stem
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 on a
massive scale. For one infhtential commentator,
the crisis was fuelled by the
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 com-
pared with manufacturing. Much speculative
activity occurred, especially in the property
sector where the borrowing trebled between
1971 and 1973 (CoakIey & Harris, 1983), with
the new, secondary banks being key players in
this process. Easy credit assisted in the trebling
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 pub-
lic 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, p. 112)
The state sought to manage the crisis by
spending an estimated &3000 million to rescue
^^
‘” This crisis was made worse by the fact that the lenders who had sequestrated assets on which the loans were secured
could not sell such assets at the values assumed because the property sector was locked in a downward spiral.
558 P. SIKKA and H. WILLMOTT
ailing concerns (Reid, 1982, p. 192) and itself
had to seek help from the International Mone-
tary Fund (IMF). As a part of its crisis manage-
ment mechanisms, the Department of Trade
(DOT) authorized investigations into a number
of collapsed businesses, especially where fraud
was suspected (this is discussed in Sikka &
Wlllmott, 1991). The related press speculation
and the eventual DOT reports directly ques-
tioned the ability of auditors to act as indepen-
dent and objective constructors of economic
reality. For example, the auditors of Roadships
were criticized for failing to check adequately
the amounts for creditors, accruals, purchases
and profit forecasts (DOT, 1976a). The inspec-
tors 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 ln three; firstly, by the auditors having a
financial interest in the company; secondly, by the audl-
tom being controlled in the broadest sense by the com-
pany; 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 objec-
tive 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 &32,040 was shown as
&820,040, but was not spotted by the audi-
tors. Major audit deficiencies were also
exposed by the report on London and County
Securities (DOT, 1976b). 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., p. 234).
In response to these and other revelations,
the quality press expressed growing disquiet
about the independence and integrity of
accountants. The Economist (14 February
1976) declared that
Civil servants, politicians, and even City folk are begin-
ning to wonder whether the accountancy profession is
capable of policing itself unless the profession
improves its auditing standards someone else will
(ibid., pp. 79-80).
The I nvestors Chronicle (13 February 1976, p.
419) questioned the value of audited accounts
and self-regulation. The Ffnancfd Tfmes (10
July 1976) doubted the profession’s ability “to
exercise control over the activities of large
accountancy firms” (p. 26). Even the ICAEW
President was forced to acknowledge that
public confidence ln the standards of our performance
has been badly shaken by a number of well publicised
cases (Accountancy, November 1976, p. 4).
Questions relating to the reliability of auditing
were raised in Parliament. On 9 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 (Hmsurd, Vol. 904/905, cob
10-11).
It is worth recalling that, at this time, politi-
cians and civil servants were wrestling with a
full-blown economic crisis in which they
sought to control inflation, prices and unem-
ployment, 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)
560 P. SIKKA and H. WILLMOTT
not begin until 1%1.23 Auditing and account-
ing 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 out-
side” (APC, 1978, p. 50).
such information was made available to the
major firms, thus furnishing them with the
information relevant to shape the parameters
of decisions and nondecisions and to pursue
their own agendas (Sikka et al., 1989). Nor,
finally, did government question the absence
of mechanisms to monitor and enforce firms’
compliance with auditing standards.
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 knowledge-
able 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 criticized 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
Observations of this kind can be interpreted
in a number of ways. They may, for example,
be viewed as confirmation of a conspiracy in
which members of the profession scheme
amongst themselves, and even with govem-
ment, to minimize their responsibility and lia-
bility. Without doubting that such scheming
can, and does, occur, we are inclined to the
view that much of the decision making (and
non-decision making) is symptomatic of
engrained, taken-for-granted (hegemonic)
understandings about what is “appropriate”
and “sensible”. Although the outcomes may
be very similar, we believe that actions are
guided more by institutionalized discourse
than by any more calculating and devious
efforts to maximize benefit or evade responsi-
bility. Central to these discourses has been the
understanding that existing self-regulatory
arrangements are fundamentally sound,
though they can always be further improved
and may, on occasions, be in need of some
reform in order to accommodate a changing
economic environment.
To return to the aftermath of the mid-1970s
economic crisis, the profession responded to
criticism by strengthening its ethical guide-
L3 Following the subsection of the Members’s handbook in which they were contained, they came to be known as “U
Statements”. Residues of these statements can be found in modern-day auditing standards.
** There is clearly a timing difference between the publication of the critical DoT/DTI reports and the actions taken by the
profession. This is not particularly slgniiicant as one of the inspectors is usually a partner from a major auditing tirm. In
their capacity as agents of the state, the partners (who are also highly placed in the professional bodies) are well aware of
immanent pressures and of the need to initiate reforms that limit damage to the profession. The profession also benefits
from its “insider” relationship with the DTI. Regular meetings are held between DTI officials and the professional bodies.
During such meetings, matters of mutual interest, including the shortcomings of the profession, are discussed. On
occasions, critical DTl reports that are unavailable to Parliament have been given to the ICAEW (Sikka et UC., 1991).
a5 Of course, the success of such efforts is not guaranteed. Indeed, in the late 198Os, the (mjeffectiveness and governance
of the APC became a source of difficulty and embarrassment for the profession.
,..--.. ..___.. ,-._ “INDEPENDEN(-E”
I”E k-“WEI vr 561
lines, guidelines which aspire to ensure the
integrity of individual accountants WAEW,
1979) rather than to address the adequacy of
the regulation and enforcement of auditing
standards.26 For example, in recognition of
the concern over revelations relating to cases
where small firms audited major companies,
the guidelines proposed that an auditing firm’s
income from one client should not exceed 15%
of its gross fees.27 To quell disquiet about trans-
actions between companies and auditors, the
guidelines urged auditors to ensure that all
transactions were on normal commercial
terms. To show concern with possible con-
flicts which might arise from a situation in
which auditors (or their associates) act as
receivers and liquidators for their audit clients,
the guidelines urged auditing firms not to
accept the position of a receiver where there
is a “continuing professional relationship”28
with the client. It was also reported that “Gov-
ernment sources would like to see . . . a ban on
shareholdings, non-beneficial as well as benefi-
cial, in audit client companies; and that such a
ban should apply equally to listed and nonlisted
companies” (me Accountant, 1 December
1977). But the ethical guidelines did no such
thing. Whilst there was much “talk” about the
importance of avoiding conflicts of interest
that might arise from personal and financial
relationships, this was not translated into the
monitoring of compliance.
services by auditing ftrms to their audit
clients. Nor did it put forward any proposals
for curmiling the personal relationships which
develop owing to the longevity of the auditor’s
term in office (i.e. no proposals for a compul-
sory change for auditors at regular intervals).
Conscious of these limitations, some commen-
tators dismissed the reforms as nothing but a
botch-patch of pious hopes and exhortations, carefully
hedged with inscrutable detkitions which leave plenty
of room for interpretations (Tbe Accounrfng BuUeiin,
August 1983, p. 10).
Whilst we share this scepticism about the capa-
city of the reformed guidelines to achieve any
substantive change in professional conduct, we
would emphasize their role as a proven
mechanism for diffusing criticisms, restoring
the aura of independence and professionalism
and, in this way, protecting the profession’s
jurisdiction.
Reforming the ethical guidelines offered the
profession a way of signalling their responsive-
ness to criticisms without incurring any signi&
cant costs or exposing auditing regulation to
more sustained scrutiny. The profession did
not forbid the provision of any non-auditing
Reform of its disciplinary arrangements was
a third element of the profession’s response in
defence of its domain.29 Previously, piecemeal
action had been taken by individual profes
sional bodies against their members and the
disciplinary machinery was poorly financed.
Following the secondary banking crisis,
reforms were recommended by the Cross
Report (1977) and the Grenside Report
(1979). Anxious to provide an alternative to
the prospect of government investigating cases
of audit failure, and taking civil action against
firms implicated in major scandals, the profes-
sion’s response was the establishment of the
Joint Disciplinary Scheme (IDS) whose objec-
tives, i nter al fa, were to
^,
‘O The composition of the working party which formulated the guideline was not announced and there was no public
consultation in draft@ the guidelines.
*’ Infant and newly establIshed firms were exempt from this requirement. It is difficult to identify a Iirm that had to give
up business as a result of this rule.
*a In subsequent years, this requirement became a source of embarrassment. This is discussed below.
29 As the Accounti ng Bul l eti n (August 1983) noted: “The Department of Trade applied the thumbscrews In the aftermath
of the financial scandals of the mid-seventies and the profession came up with theJoint Disciplinary Scheme” (ibid., p. 10).
562 P. SIKKA and H. WILLMOTT
promote the highest possible standards of professional
and business conduct, efficiency and competence
by providing a system of investigation and regulation of
activities of Members and Member Iirms so as to secure
their adherence to all professional criteria including
but not limited to all relevant recommendations and
standards promulgated. (para 4 of the JDS
Constitution).
As in the case of the APC, where the mem-
bership was dominated by the large firms,
much of the financial support for the JDS
also came from these firms (Z%e Accounting
Bulletin, March 1983, p. 9) - the very Brms
that had been criticized in the DoT/DTI reports
and were to be the future subjects of disciplin-
ary hearings.30 Together with the creation of
the APC and the revised ethical guidelines,
the existence of the JDS proved effective in
repairing the profession’s aura of indepen-
dence, professionalism and objectivity. Their
limitations, as sketched above, were seemingly
either unrecognized or unremarkable to gov-
ernment, academics and the media. Fault lines
within the accountancy profession had been
exposed but had not been rectified. In the
absence of substantial institutional reform,
they would reappear when the profession
was once again subjected to close and critical
scrutiny, as occurred when, for example, the
DTI reviewed the implications of the Eighth EC
Directive for the regulation of the U.K. audit
industry.
SECURING THE ACCOUNTING
JURISDICTION: 2. RESPONSE TO THE
REQUIREMENTS OF THE EIGHTH EC
DIRECTIVE
The Eighth EC Directive sought to harmonize
audit regulation in Europe. Such developments
raised questions about whose meaning, and
whose terms, of regulation are to prevail, not
least because in a number of European coun-
tries auditors act exclusively as auditors (e.g.
Gemany). In this section, we present a brief
sketch of the sociopolitical context in which
audit firms have operated in the U.K. We
then look more closely at how, during the
198Os, the profession sought to defend and
extend its jurisdiction within Europe.
Background
In the early 1980s the pursuit of monetarist
policies designed to squeeze inefficiency and
inflation out of Britain’s economy resulted in
“no significant growth in (audit) business”
(i%e Accounting Bulletin, October 1982, p.
4) although the impact on audit fees was com-
pensated to some extent by the increase in
insolvency business.31 At the same time, many
of the professional rules on competition and
advertising were being swept away. To all
intents and purposes, accountancy Iirms were
now expected to take an unequivocally com-
mercial approach to the sale of their ser-
vice~.~~ Audit firms came under pressure to
enter, or expand their business in, non-audit
markets. In this, they were greatly assisted by
‘” Whether the irdluence of the major fnms on the professional bodies ln any way constrained the ability of the JDS to
enforce discipline remains a matter for conjecture. But such issues were to be raised agaln ln the 1990s.
31 Their position was to be tinther strengthened by the insolvency Act 1986 which restricted this llne of business to
licensed practitioners (accountants) who would have a Iimt &ii for their fees on any assets recovered. Also, ln the local
government arena, the Local Government Finance Act 1982 modiied the extant system of local authority audits and
opened the field (previously totally closed) to accounting firms who could be appointed auditors, But, ln sharp contrast
to the thrust of corporate legislation, and despite some opposition from the auditing firms, a statutory duty to detect and
report fraud was imposed upon local government auditors.
32 Auditors were also expecting the “floodgates on litigation to open” (World Accounting Report, July 1982, pp. 7-8) as
court cases such asJEE Fasteners v. Marks Bloom 6 Co (1981) All E.R. 289 suggested that auditors owed a duty of care to
third parties. This was subsequently challenged and reversed by the 1990 Caparo judgment.
THE POWER OF “INDEPENDENCE” 563
various state initiatives to revive and redirect
the new, “lean” U.K. economy. For example,
as the Department of Trade and Industry
shifted from a regulator to a promoter of indus-
try, in excess of 200 different ways of obtaining
linance from the government were developed
(The Accounti ng Bul l eti n, March 1983, p. 8);
and the big accounting firms were identified as
key intermediaries and advisors.
In an effort to contain public expenditure,
the government prompted “Value for Money”
(VFM) auditing throughout the public sector
(Humphrey et al ., 1993).33 As significant bene-
ficiaries of these programmes, the accounting
firms rolled the VFM philosophy through the
fields of health, education, transport, energy,
etc. Other major opportunities for expansion
occurred in the financial sector where, follow-
ing the Financial Services Act 1986, everyone
operating in this field needed the services of an
accountant. FinalIy, the government’s policy of
privatizing national utilities created a veritable
bonanza for auditing firms as they played a
central role in reporting on profit forecasts,
preparing prospectuses and dealing with mat-
ters related to the sale of British Gas, British
Telecom and British Airways, to name a
number of the major privatizations.
Given the government’s dependency upon
the accountancy profession for implementing
its flagship policies, it was not likely that the
accountancy profession would simultaneously
be subjected by government to close and criti-
cal sc~tiny.~* However, this happy affinity of
interests did not protect the profession from
forces outside the direct control of the U.K.
govemment,35 such as the requirements of EC
directives, relating, for example, to the regula-
tion of auditors.
Tbe Ei ghth EC Di recti ve: chal l enge and
response
After due discussions with representatives of
the profession and other relevant parties, the
government published its proposals for the
regulation of auditors in August 19B6 (DTI,
1986). Somewhat to the surprise and alarm of
the profession, the document raised the
spectre of an independent body that would
regulate auditors (Rutteman, 1987). How-
ever, since this proposal was incongruent
with the broad thrust of government policy
and also seemed to go weII beyond the require-
ments of the wording of the Eighth Directive
-
a directive that had been patiently nego-
tiated over many years and eventually adopted
33 There is also a political dimension to this. Most of Britain’s local authorities were, at the time, under the control of the
Labour Party and espoused values different from those propagated by the New Right. Most of the Value-for-Money studies
applied managerial-type yardsticks and showed almost all Labour controlled authorities to be inefficient and wasteful.
34 It is perhaps no coincidence that during this period, DTI reports into failed companies were slower to be published and
some have never appeared. See Sikka & WiBmott (1991).
35 There were, nonetheless, unintended impacts upon the profession that arose from the government’s efforts to stimul-
tate the financial services sector through the “Big Bang” detonated by the Financial Services Act (FSA) (1986). The basis of
this legislation was developed in the Gower report (1984) which sought to bring self-regulation into a statutory framework.
There is strong evidence to indicate that the degree of involvement of accountants in the sale of financial services came as
something of a shock to Professor Gower who associated the work of accounting firms with audit, taxation advice and the
like. Once it was revealed that accountants regularly acted as Bnancial intermediaries for insurance and pensions compa-
nies, it was necessary to make provision for their regulation within the new Act. Members of the accountancy profession
were highly resistant to regulation by any other body. Indeed, they questioned the very need for the regulation of
accountants whose professional training and integrity provided more than a sufticient guarantee of sound and impartial
financial advice. Under pressure, the accountants reluctantly took upon themselves the role of regulator, a recognized
body under the terms of the FSA. Not onJy did this legislation make visible the involvement of accounting firms in selling
financial services, it explicitly made the accountancy bodies an arm of the state in which self-regulation is disciplined
within a statutory framework. See Cooper et ul. (1992a).
564 P. SIKKA and H. WILLMO’IT
formally in Brussels two years earlier36 - this
threat to self-regulation could not be taken very
seriously. A much more credible and therefore
serious threat was posed by a suggestion in the
DTI document that, in order to satisfy the
requirements of the Eighth Directive, it might
be necessary to curtail the sale of non-auditing
services and also to require a compulsory
rotation of auditors.
Any enactment of this suggestion threatened
to dent and destablilize the lucrative non-audit
business that had grown steadily during the
1960s and 1970s and massively expanded dur-
ing the 1980s. Alert to these implications, emi-
nent accountants from the big Iirms - Arthur
Andersen, Coopers & Lybrand, Grant Thornton
and others - strongly questioned the necessity
of changing existing practices in order to
comply with the Eighth Directive (Hanson,
1987; Accountancy Age, 23 October 1986, p.
9). Publicly, Coopers & Lybrand went furthest
by urging all their clients to lobby government,
opposing the proposals on independence
(Accountancy Age, 16 October 1986, p. 1).
The major professional associations also
sought to mobilize their members, resources
and contacts in a concerted effort to discredit
and resist the DTI suggestions. The Institute of
Chartered Accountants of Scotland wrote
directly to 1000 company chairmen urging
them to oppose government proposals on the
grounds that they threatened industrial effi-
ciency and the right of companies to choose
their own advisors (Accountancy Age, I6
^,
October 1988, p. 1). The ICAEW published a
report on the future of the audit in which it
was argued that the profession itself was in
the best position to decide whether non-
auditing services and other reforms on inde-
pendence were desirable (ICAEW, 1986).
According to Rutteman (1987) there was
some debate in the ICAEW about whether a
concession to the DTI should be made by iden-
tifying a few services that might be restricted.
Fearing that the identification of specific ser-
vices would simply provide the DTI with
ammunition, the formal response of the
ICAEW to the DTI document, which took the
form of a technical release, simply reafftrmed
the adequacy of existing regulatory arrange-
ments and stressed the ICAEW’s contribution
to ensuring ethical standards and enhancing
audit quality. This document also rehearsed
the argument, already voiced by the big firms,
that the suggestions made in the DTl report
would prevent management from having a
free choice in the appointment of consult-
ants; and that this would deprive them of the
best consultant when this also happened to be
the auditor.
The organized and orchestrated3’ nature of
the profession’s responses successfully
silenced the DTI suggestions. The status quo,
and with it the territory occupied by the firms
was broadly preserved.38 Compliance with the
Eighth Directive was secured through the Com-
panies Act 1989. This required the professional
bodies to regulate all aspects of the auditing
‘O Some felt that the preservation of self-regulation in a statutory framework would create tension between the ICAEW’s
traditional trade association role and its explicitly social role as a regulator. Therefore some firms called for the formation of
an independent body to regulate auditors (Accountancy Age, 11 December 1986, p. 1). Others have contended that “self-
regulation cannot work where big money is concerned’ (The Accountant, 3 September 1986, p. 3). For fuller discussions
of the U.K. accountancy profession and the Eighth Directive, see Cooper el al.
Accountants are part of what Abbott 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.
Pergamon
Accounting, OqanlzaNons and Society, Vol. 20, No. 6, pp. 547-581, 1995
Ekvier Science Ltd
Printed in Great Britain.
0361-3682/95 $9.50+0.00
03613682(94)00027-1
THE POWER OF “INDEPENDENCE”:
DEFENDING AND EXTENDING THE JURISDICTION OF ACCOUNTING IN THE
UNITED KINGDOM*
PREM SIKKA
Unlverslty of East London
and
HUGH WILLMOTT
lJnivers@ of Manchester I nstitute of Science and Technology
Abstract
Accountants are part of what Abbott 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 defming, 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 197Os, 1980s and early
199Os, the profession is shown to have taken a number of initiatives to defend and reinforce this
“image”. In its efforts to neutralize 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 mobilizing 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 neutralize threats to self-regulation and to redefine the terrain on which
it combats its challengers.
A convenient way to introduce this paper is to
consider the thesis developed by Abbott in his
highly itiuential book Z&e System of Profes-
sions (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 med-
ium and outcome of this structure. Abbott’s
preference is to study professional develop
ment by considering the link between a profes-
sion and its work - a link that he characterizes
as its jurisdiction (ibid., p. 20). In turn, his
focus upon jurisdictions draws attention to
the ways in which the boundaries of jurisdic-
tion are negotiated - attacked and defended
l 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 Account-
ing Conference, New York. We are grateful for comments received at these meetings and for the constructive criticisms of
two anonymous referees.
547
548 P. SIKKA and H. WILLMO’IT
-
as different professions compete over emer-
gent or vulnerable territories.
Abbott’s study of expert labour’ usefully
highlights the importance of interprofessional
competition in the process of professional for-
mation and development.’ Urging a close con-
sideration of the interconnectedness and
rivalry between professional groups in shaping
the conditions of their development, he cham-
pions the study of the negotiation of jurisdi-
tional boundaries between professions:
each profession has its activities under various kinds of
jurisdiction Jurisdictional boundaries are perpe-
tually in dispute, both in local practice and in national
claims . an effective historical sociology of profes
sions must begin with case studies of jurisdictions and
jurisdiction disputes (Abbott, 1988, p. 2).
An attentiveness to disputes over jurisdiction is
enlightening and timely in countering a ten-
dency to study professional groups in isolation
from their competitive contexts. Not surpris-
ingly, Abbott’s work is increasingly cited by
students of the accountancy profession3 (e.g.
Dezalay, 1989, 1991; Neu, 1991). However,
his approach is wanting in at least three impor-
tant respects. First, by focusing upon systems
of professions within different nation-states, he
takes little account of how supranati onal pres-
sures increasingly condition both the local
practice and national standing of professional
groups (see Montagna, 1986; Dezalay, 1989;
Picciotto, 1989; Hanson, 1990).* In the “busi-
ness 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 internationalization of markets
for legal, financial and consultancy services. In
this paper, we touch upon this point by refer-
ence to the formulation and Implementation of
the Eighth EC Directive in the U.K.
Second, and of greater relevance for this
paper, Abbott’s approach suffers from aprofes-
si ons-centri c treatment of jurisdiction disputes.
Despite an avowed attentiveness to “external
forces” (e.g. the state granting or diluting audi-
tors a monopoly of the external audit function)
that open up or close down jurisdictions,
Abbott largely neglects the importance of chal-
lenges posed to the legitimacy of jurisdictions
by groups who do not themsel ves seek to
occupy thei r tewi toy, 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
i The term “expert labour” is used ln the subtitle of 7Zre @#em of Professfons. It is worth noting that Abbott expresses
little discomfort or reservation about giving academic legitimacy to the common-sense ascription of the soubriquet of
pmfessionallsm to an elite group of occupations, such as doctors, lawyers and accountants. Without deny@ that the term
is difficult to pm down because its meaning is contextually dependent and politically negotiated, we are unhappy with the
way that Abbott (ibid., pp. S-9) uncritically ascribes to some groups distinctive (i.e. “professionai” skills). Abbott’s “loose
definition” of pmfessions is that they are “exclusive occupational groups applying somewhat abstract knowledge to
particular cases” (Abbott, 1988, p. 8). In effect, the term “profession ” is unpmblematized. Our reservations about this
and other aspects of Abbott’s thesis are elaborated in the following paragraphs. More detailed criticisms are assigned to
footnotes. See especially footnote 10.
a In this regard, there is the remarkable omission of the highly influential work of Armstrong (e.g. Armstrong, 1984, 1985)
which appeared before other sources that Abbott cites.
3 When referring to “the accountancy profession”, we acknowledge that we court the danger of implicitly and usually
inadvertently legl ’ nmlalng cIaiis that deserve more critical scrutiny (see Willmott, 1990, and Sii, 1992b. for elaborations
of this). However, as a target of our study is the plausibility of professional claims, reference to the “profession” is difficult
to avoid. See also footnote 5.
4 A point that is belatedly conceded in the conclusion to the book when Abbott (1988) acknowledges that organizations
- for example, the big international firms of accountants which, with the exception of passing references on p. 25 and p.
152, are strangely absent in Abbott’s account - are “commodlfying”, and thereby destroying, claims of professionalism as
a distinctive form of institutionalization.
THE POWER OF
coincide in his very restricted appreciation of
how any profession’s capacity to mobilize sup
port for their “local practice” and “national
claims” is dependent i nter al i a upon their
credibility with, and influence over, “third par-
ties” - such as politicians, journalists and aca-
demics, as well as regulators and clients. In
Abbott’s model of “the system of profes-
sions’ ’ , and in his three detailed case studies,
there is scant consideration of the micropoli-
tics of how professions actually organize to
define, defend or enlarge their area(s) of juris-
diction (Willmott et al ., 1993), or of how the
control of jurisdictional boundaries is chal-
lenged and loosened by the activities of groups
who have no direct “professional” interest in
occupying their territory but whose activities
can nevertheless generate and legitimize com-
peting discourses (Willmott, 1991). In helpfully
commending a focus upon the work “profes
sionals” do, as contrasted with how profes
sions are organized (Abbott, 1988, p. 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 mem-
bers work in industry (and elsewhere) as well
“INDEPENDENCE” 549
as in “public practice”. He does recognize that
“professionals work in a variety of settings”
(ibid., p. 125) but is more concerned with
drawing distinctions between autonomous
and heteronomous professionals than with
exploring the significance of hybrid member-
ship for the defence of established jurisdic-
tions. It is relevant to underscore the
understanding that the U.K. accountancy pro-
fession is not homogeneous (Willmott, 1986).
Its members are employed in industry, com-
merce, local government, central government,
state industries, public practices and other
organizations of various sizes. In each of these
arenas, accountants are agents of, and are sub-
jected to, diverse and sometimes contradictory
priorities and pressures. Abbott’s (1988) ten-
dency to conceptualize professions as if they
are fundamentally homogeneous (see espe-
cially Chap. 4), albeit that they may incorpo-
rate 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 U.K. accountancy body, the ICAEW,
that work outside of public practice in multi-
farious positions within the private, public and
voluntary sectors.’ Thus, when we refer to
’ It is appropriate to place “scare quotes” around this term since, in many respects, the so-called professional bodies in the
U.K. are more plausibly studied as “trade associations” that are formed to secure and advance the interests of their
members. Indeed, the U.K. accountancy bodies openly claim that they are “responsible for protecting and promoting
the interests of [their] members” (Certified Accountant, September 1991, p. 12). The “professionalization strategy”,
including the privilege of self-regulation, can be viewed, in part, as a means to this end. This theme is elaborated and
illustrated in the body of the paper. In recent years, it has been increasingly argued, even amongst leading accountants,
that the progressive commercialization of the industry in the U.K., facilitated by weak and ineffective forms of self-
regulation, has brought about some “deprofessionalization” of accounting practice. Some evidence of this concern is
considered in later sections of the paper.
6 Abbott (1988, p. 110; see also p. 236) touches briefly upon this issue when he notes that professions that are dominant
“cognitively” as well as “structurally” - of which accountancy in the U.K. is surely a premier example - can be plagued
by the “system property” of resfduul fty. I f, historically, insolvency and audit arc regarded as the core elements of the
accountancy jurisdiction, then other kinds of work undertaken by many members of accountancy associations working in
industry are, in Abbott’s systems theoretic sense, residual and thus “open to attack” (ibid., p. 1 lo), from other, established
or emergent, associations. The logic of Abbott’s argument is that the retention of residual elements is problematical as
550 P. SIKKA and H. WILLMOTT
“the accountancy profession”, we mean, first
and foremost, those representatives of the
major bodies and/or spokespersons of large
accounting firms who take it upon themselves
to assert and defend the authority and indepen-
dence of accountancy practices in general and
the prevailing regulatory arrangements in parti-
cular. But, to repeat, whenever reference is
made to the accountancy profession in the
U.K., it is necessary to be mi ndful of i ts hi ghl y
compl ex and fractured organi zati on as wel l
as the di verse ki nds of work undertaken by
qual i fi ed C’professi onal ”) accountants.
This paper is organized as follows. We begin
with an overview of the formation and devel-
opment of the accounting jurisdiction in the
U.K. We highlight the heterogeneity and exten-
siveness of this jurisdiction, its continuing reli-
ance 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 nar-
rowly, 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.’
We then present three case studies that illus-
trate how the U.K. accounting profession has
responded to recent major challenges to its
aura of independence - challenges which
threaten to damage its credibility and imperil
control of lucrative jurisdictions. First, we con-
sider responses to corporate collapses in the
mid-1970s which cast doubt upon accoun-
tants’ claims to be objective constructors of
reality. Second, we consider responses of the
U.K. accountancy profession to questions
about auditor independence raised by the
requirements of the Eighth EC Directive,
requirements that also posed a potential threat
to accounting firms’ operation within, and con-
tinued expansion into, EU markets for non-
audit services. Third, we examine current
respones by the U.K. profession to questions
currently being raised about the reliability of
audits and, relatedly, the adequacy of self-regu-
lation. In each case, we note how doubts about
accountants’ claims to independence are routi-
nely appeased by introducing some reforms
and refinements into their self-regulatory
arrangements, by updating ethical and disci-
plinary arrangements and/or by seeking to
redefine public understandings and expecta-
tions about accounting expertise. We also
strive to show how issues relating to “inde-
pendence” do not arise singly, and are not
necessarily articulated explicitly. Rather, con-
cerns about independence form an integral
part of discourses and practices that are mani-
festly concerned with professional ethics, dis-
ciplinary arrangements, self-regulation and
other symbols of “professionalism”.
“excess expansion” will lead to increased poaching and consequent division. It has to be said, though, that the U.K.
accountancy bodies, especially the ICAIW, have to date been highly successful in managing continuous expansion without
significant poaching or division. But, of course, Abbott’s theoretic concept of “excess expansion” is doubtless highly
elastic!
’ See, for example, Kaplan (1983), Johnson & Kaplan (1987X Johnson (1994), Miller &O’Leary (1993), Munro & Hatherley
(forthcoming).
THE POWER OF “INDEPENDENCE” 551
THE ACCOUNTANCY PROFESSION IN THE
U.K.: FORMATION, COMPETITION AND
COLONIZATION
The development of the accountancy profes-
sion in the U.K.* cannot sensibly be detached
from the existence and organization of other
groups that compete to define and occupy par-
ticular jurisdictions. In establishing, extending
and defending their terrain, accountants have
formed associations and have enjoyed the
patronage of the state and corporations (John-
son, 1972). They have also drawn inspiration
from, and sought to displace, the claims of
other groups, principally lawyers but also engi-
neers, who have been competitors in the mar-
ket-place for their services.’ In this section, we
sketch the historical background to contempor-
ary developments that have posed a threat to
the boundaries of the accounting jurisdiction.
Forging the jurisdiction of accounting in
the U.K.
In the U.K., the emergence of sellers of spe-
cialist labour who described themselves as
“accountants” (amongst other things) were
initially stimulated by a buoyant demand for
services in the area of bankruptcy, liquidation
and trusteeship (Brown, 1905; Stacey, 1954;
Loft, 1988). However, accountants’ occupa-
tion of this emergent jurisdiction was vulner-
able 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).”
’ There is no substantial socioIogicaI history of the accountancy profession in the U.K. It is therefore necessary to piece
together and interpret chronologies of its development provided by historians and practitioners. Amongst the more useful
sources are Brown (1905), Chatfield (1977), Garrett (1961), Institute of Chartered Accountants in England and Wales
(1965, 1980), Stacey (1954), Edey (1979), Edey & Panitpakdi (1956), Jones (1981), Littlejohn (1966) and Zeff (1971).
SocioIogicaIly informed treatments of selective aspects and periods of the U.K. accountancy profession can be found inter
aliu in Johnson (1972, 1982), MacdonaId (1984, 1985, 1989), Wilhuott (1985, 1986), Armstrong (1985, 1986), Loft (1988),
Puxty et al. (1987), Robson & Cooper (1990), Robson (1991). Willmott et al. (1992). Cooper et al. (1992a), Sikka et al.
(1992), Napier & Noke (1992), Gilmore L Wilhnott (1992). As the dating of these references suggests, there is an
increasing interest amongst accounting academics in applying sociological insights to understand the dynamics of account-
ing practice. This interest is reflected In the number of journals that support work In this area: Accounting, Organfmtfons
and Soctety, Advances in Public I nterest Accounting, Accounting, Auditing and Accounmbility J ournal and Crikal
PerspecHves on Accountfng.
9 Of course, to refer to “a market for accounting services” (or legal services) is potentially misleading insofar as it implies
that the boundaries around these markets are given rather than constructed and permeable. To the extent that reference to
a market or jurisdiction for accounting labour or accounting fmns is plausible, this plausibility is itself indicative of the
success of a particular group in establishing areas of jurisdiction to which the label “accounting” rather than, say, “legal” is
commonsensically assigned.
lo According to Macdonald (1984), this association of accounting with the prestigious legal profession was important in
facilitating the successful petitions for a Royal Charter by the accountancy societies of Edinburgh (1854), Glasgow (1854)
(later to be amalgamated within the Institute of Chartered Accountants in Scotland) which occurred some 16 years before the
Institute of Accountants in London (1870) which together with the Society of Accountants in England (1872) was later to
form the core of the Chartered Accountants of England and Wales. Many aspects of MacdonaId’s account have been
challenged persuasively by Briston & Kedslie (1986, pp. 122-130). Although Briston and Kedslie do not question Macde
nald’s argument that Scottish accountants derived some of their standing from the closeness of their association with the legal
profession, it is contended that their petitioning for a Charter was inspired more by immanent changes in bankruptcy
legislation that applied to Scotland only than by their fitness for Chartered status. Briston and Kedslie also argue that the
class background and diversity of activity pursued by Glaswegian accountants was very similar to that of London accountants.
However, given this similarity, it is difficult to understand why London accountants were refused a Charter when they initiaIly
applied for it unless they were less welI connected. One possible explanation, which is not considered either by Macdonald
or by Briston and Kedslie could simply be that the criteria for scrutinizing applications changed during the intervening years.
552 P. SIKKA and H. WILLMOTI
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”, “auc-
tioneer” and “rent-collector” - the relation-
ship between accounting and the law had a
different trajectory of development.” For law-
yers working in England and Wales, the under-
taking of accounting work was considered
demeaning, the price exacted for such profes-
sional 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 respect-
able, line of work for upright, bona fi de law-
yers. 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, p. 24).
The jurisdiction of accounting practice is rooted
in, and parasitical upon, the growth and instabil-
ity of capitalism and is closely aligned to the
allocation and husbandry of fmance capital.
Early accountants forged close contacts with
financiers (Scott, 1985). Such connections pre-
sented opportunities for securing patronage,
support and clientele (Johnson, 1972). Accord-
ing to Donna&e (1977, p. 275) it was a com-
mon 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 ln the community over the disbursement of
loans and the discounting of bills for local farmers, mer-
chants 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 domain reserved for an
elite of accountants who were acceptable to
the authorities. In effect, this Act, which was
to become known as “the accountants’ friend”,
lent statutory authority to the differentiation of
“respectable” accountants from others who
were simultaneously engaged in less reputable
forms of “trade”. And, as if this source of status
and support were not enough, the 1862 Com-
panies Act also required that dividends to
shareholders be paid exclusively from
income, a requirement that further boosted
the demand for “respectable” accountants. l2
This legislation, which was so supportive of
the growth of specialist accounting labour,
i’ We acknowledge a debt to Loft (1988) for the following interpretation of the emergence of the accountancy profession.
i* Given the very broad sweep of Abbott’s (1988) analysis, it is perhaps unfair to single out for criticism his interpretation
of the emergence of accounting ln the U.K., which he presents as a “subtle example” of an external force that brings about
a new jurisdiction. However, there are a number of worrying deficiencies in his account. First he relates this change to
development of the joint stock company (JSC) which he mistakenly places in the late nineteenth century when, arguably, it
occurred in the mid-nineteenth century (Iones, 1981, p. 28 ft). Second, he contends that the JSC was devised by bankers
and lawyers “to bring the mobilization of capital out of the family world and into their professional world”. There is
certainly an element of truth in this claim - the l&14 and subsequent Companies Acts were supported broadly by the elite
members of these groups, But Abbott’s interpretation suffers from his “profession reductionism” in which professions are
assumed to be the principal agents of organizational innovation. Or, as he expresses his position: “the evolution of
professions ln fact results from their interrelations” (ibid., p. 8). A less professionscentric view of the development of
the JSC would take account of a consensus amongst a broad section of the rising bourgeoisie to promote economic growth,
growth that had been held ln check by highly restrictive legislation on the formation of companies passed to avoid a repeat
of the politico-economic crisis following the bursting of the South Sea Bubble. Politically and sociologically, the creation of
JSCs, and the associated development of company law, is significant not because it represented a triumph for bankers and
lawyers whose range of activities and intluence were undoubtedly increased by their development. gather, their signifi-
cance resides in marking a break from the direction of commercial activity by the state to direction by private associations
of individuals. Whereas incorporation by Charter had required support from the Courts or an Act of Parliament, the
THE POWER OF “INDEPENDENCE” 553
was enacted prior to the development of a state
register of accountants or even the estabfish-
ment of an association that could lobby govern-
ment. As we have already suggested, the
emergent jurisdiction of accounting was
secured by an elite of “reputable” accoun-
tants, a number of whom were invited to give
evidence to Parliamentary Committees (Iones,
1981, pp. 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 pro
fessional accountant, as contrasted with those
who lacked their skills and took on many other
kinds of work (Cooper, 1886, 1921).13
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, 1965). Through
the activities of this body, including the publi-
cation of its journal, the members of the Insti-
tute assiduousIy 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
Prior to the formation of accountancy asso
ciations, 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
a formidable array of clerks of all kinds. . shopkeepers,
valuers, collectors of taxes, bailiffs. pawn-brokers and
manure merchants (quoted by Stacey, 1954, p. 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
modem U.K. accountancy profession.
Companies Act of 1844 provided automatic incorporation to any venture subject to compliance with standardized articles
of association (Gihnore & Willmott, 1992). As Abbott (ibid., p. %) rightly notes, one outcome of this process was a
spectacuiar rise in company failures and, with it, a demand for individuals capable of winding up their affairs. However, he
attributes this failure exclusively to the inexperience of capitalists, and not to the scope for (often unintentional) fraud
(Pollard, 1%5): ‘English capitalists grew more skilled and fewer companies failed” (Abbott, 1988, p. 94). An alternative
interpretation would suggest that opportunities for fraud were reduced in part by (a widespread belief in) the develop-
ment and application of accounting and auditing techniques which deterred fraud, and associated insolvencies, as much as
they actually detected it. However, this did not mean that the reduction and eventual loss of insolvency work (in 1883)
“forced the profession to seek another jutisdiction” (ibid.) since this “other” jurisdiction - namefy, auditing - was
already quite firmly established as a consequence of the requirement for audit contained in the Companies Acts and
Banking Acts of 1862 and 1879 that had been passed prior to 1883. In fact, Abbott seems dimly aware of this when he later
notes the significance of audit for the jurisdiction of accountants (ibid., p. 101). But he continues to regard this as a
replacement for lost bankruptcy business rather than as something that developed in parallel with receivership. Abbott
recognizes, but then fails to draw out, the crfrfcal importance of the audit as the key area of jurisdiction for the
accountancy profession. To some extent, these deficiencies may be ascribed to Abbott’s reliance upon a limited number
of sources (ibid., Chap. 1, note 35, and Chap. 4, notes 11 and 18).
t3 It is worth stressing that the rise of the accountancy profession was by no means automatic. For one thing, until 1900,
boards of companies were able to exclude themselves from the audit provisions of the 1862 Act. Secondly, and of no less
importance, a body of auditing expertise took time to be established and legitimized. The first auditing book Audi tors:
Tbet Duti es and Responsi bi l i ti es, by F. W. Piiey, appeared in 1881 at a time when “the bulk of the legal profession .
looked upon accountants with ill-concealed dislike and jealously” (The Accounl ant, 28 July 1877, p. 2). The book is almost
totally confined to a paraphrasing of the extant legal aspects of accounting and auditing. Some detailed aspects of auditing
were presented in the second book on auditing written by Lawrence Dicksee which appeared in 1892. Third, prior to the
development of the accountancy bodies, there was no institutionalized conduit for the elaboration and dissemination of
auditing expertise.
554 P. SIKKA and H. WILLMOlT
Although formally a requirement of the Joint
Stock Companies Acts of 1844, this require-
ment was not applied effectively until the
beginning of this century (Edey, 1979; Gihnore
& Willnlott, 1992).‘4 Nonetheless, its influence
was vital for the economic, social and political
rise of the profession. As Cooper noted
tion As Abbott (1988) has persuasively
observed,
What really determined the history of the [accountancy]
profession was the development and shift of its judsdic-
don - from bankruptcy to auditing, with gradual
expansion Into cost accounting and now into “man-
agement services” (Abbott, 1988, p. 26).
under the patronage of the state, auditors began to
lncreasc in numbers, in 1836, out of 107 banks, only
nine had auditors whilst 14 had power to appoint audi-
tors but chose not to exercise it. But after the Compa-
nies 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 ha-
bility companies which rose from the 1864 figure of 891
to 14,445 in 1880 (Cooper, 1886, 1921).
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.
Since World War I, when the state moderated
its laissez-faire approach to economic manage-
ment (Loft, 1988), to the present day, the audit-
ing niche has provided the accountancy
profession with a base for the expansion of its
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: diversifzcation,
commercialization and defamation
To sum up: that specialist accountants As Abbott (1988, p. 62) notes, but does not
emerged as a distinctive group, rather than as elaborate, processes of establishing and defend-
a branch of legal practice, is attributable to a ing boundaries of jurisdiction are mediated by
combination of state sponsorship and the dis- available forms of discourse about jurisdiction.
dain of lawyers for accounting work. Capitaliz- For us, “independence” is a powerful signifier
ing upon the opportunities presented by the in such discourse. To develop and sustain a
passing of the 1862 and 1879 Companies position of power, status and high remunera-
Acts, as well as their connections with finan- tion, members of professions, such as audi-
ciers, leading accountants formed Iirms and tors, are obliged to articulate and defend a
associations through which they secured the discourse and set of regulatory practices that
accounting jurisdiction. Most importantly, reassures the public that they (can be trusted
they argued successfully that only individuals to) act “independently”. Any weakening of the
trained and regulated by their own associations aura of independence’5 renders professionals
were fit to act as “independent” auditors. State (more) vulnerable to the claims of predatory
patronage, institutionalized in the bestowal of groups that may seek to occupy their jurisdic-
Chartered status upon the elite associations, has tion (Dezalay, 1989, p. 33). When comparing
subsequently empowered accountants to and contrasting the work of lawyers and
defend and expand the accounting jurisdic- accountants, Dezalay observes that:
i4 Indeed, the Zafssez-faire political philosophy of mideighteenth-century Britain resulted, in 1856, in the repeal of the
audit requirement of the 1844 Act. Nonetheless, demand for audited accounts was maintained by anxious shareholders
fearful of fraud; it was also required by statute for some of the specialist corporate legislation (e.g. railways, banks) before it
became a general requirement in 1900.
‘s The concept of “aura” is drawn from the work of Benjamin, an intluential though somewhat neglected member of the
Ptankfurt School. In the field of accounting, the concept has been used by Gallhoffer & Haslam (1991) to examine the use
of accounting in Germany up to the aftermath of World War I.
THE POWER OF
a Iawyer is b_u deJ 9nftion an advocate defending his (sic)
cIicnt’s interests whereas the auditor clulms to be a
neutral expert providing a tech&J and objective
point of view [emphases added].
However, it is pertinent to question whether
the definitional identity between the work of
advocates and the defence of their clients’
interests is as unproblematical as Dezalay sug-
gests - not least because advocates are
engaged in constituting the interests of cll-
ents, and not simply defending them. It is
equally relevant to underscore the understand-
ing that the claim of the auditor to be a neutral,
independent expert fs i ndeed a cl ai m, 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 contin-
gent upon sociopolitical developments, devel-
opments that can fan doubts about the
accuracy16 and value, if not the very purpose,
of audit. Meanings are irremediably precarious
and cannot ln any final sense be fixed. Thus,
the aura of independence is inescapably con-
testabl e. Unless challenges are circumvented
or effectively parried, the claim to indepen-
dence, and the status and power that it
bestows, may become discredited and de-
valued, with consequences for the reputation
of accountants and their capacity to secure and
extend their jurisdiction.
In contrast to other major European coun-
“INDEPENDENCE” 555
tries (e.g. Germany), the leading U.K. accoun-
tancy bodies comprise members drawn from
both “industry” and “practice”.” Prior to the
development of business degrees in higher edu-
cation, becoming a chartered accountant was
widely regarded as the passport to a high-flying
career ln industry and commerce.” Conse-
quently, 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 profes
sion, and often the same association, as their
major providers, such as their auditors. More-
over, whilst the movement of accountants from
industry to public practice is controlled (e.g.
practising certificates are required), there are
no restrictions on chartered accountants mov-
ing from public practice to industry. This free-
dom of movement, in addition to other factors
such as the central role of capital markets in
the U.K. economy and the weak competition
from other professions (e.g. engineers) for busi-
ness training, goes a long way to explain why
the U.K. has spawned and supported vast num-
bers of qualified accountants in comparison
with other countries. These numbers, it is
worth stressing, are not inconsequential in
terms of lobbying governments. Nor are they
unimportant in developing an extensive net-
work of members, including many members
of Parliament, l9 whose training and connec-
I6 We are certainly not claiming here that Iinancial accounts are, or even should be (Gilmore & Willmott, 1992), capable of
accurately reflecting reality. Instead, we are suggesting that, historically, accountants and auditors have raised, or at least
done little to deflate, this expectation. In this sense, what is defined as a real ability to reflect economic reality, is real in its
consequences when it is perceived to fail. One consequence, especially when failures are spectacular and numerous, is a
loss of contidence in the claims of auditors to be independent.
I7 The U.K. has six professional accountancy bodies with royal charters. Their combined membership is around 205,000
and the ICAEW is the Largest with approximately 105,000 members.
I* Approximately 20% of all U.K. graduates have been making a career In accountancy-related work. Major firms such as
Peat Marwick M&mock have been recruiting more graduates than the entire British chemical sector put together
(Accountancy Age, 27 October 1988; Times Higher Education Supplement, 3 February 1989, p. 9).
I9 After the 1992 elections, 14 of the IJ.K.‘s 650 MPs were accountants. A number of them subsequently occupied senior
positions. For example, Tim Smith (former adviser to the ICAEW and a consultant to Price Waterhouse) was a Vice-
chairman of the Conservative Party (the nding Party in office from 1979 onwards) and subsequently a Minister for
Northern Ireland. Jeremy HanIey (a former adviser to the ICAEW) was a member of the Cabinet with responsibilities
for Northern Ireland and Defence before becoming Party Chairman. John Watts (adviser to the ICAEW until early 1992)
556 P. SIKKA and H. WILLMOn
tions make it more difficult for them to ques-
tion 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 et al ., 1993).
However, accompanying the expansion and
diversification of accounting Iirms into new
markets is the risk of jeopardizing, diluting or
discolouring the pristine claims of indepen-
dence upon which the assumed reputation of
the accountancy profession is established.
Accountants become vulnerable to accusa-
tions, well founded or otherwise, that they
have neglected or distorted their responsibil-
ities 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
U.K. 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 de-
value not only the material and symbolic value
of a core area of expertise but jeopardize
accountants’ capacity to defend and expand
other lucrative (and growth) areas (e.g. other
business services). In the words of the Presi-
dent of the Institute of Chartered Accountants
in England and Wales (ICAEW):
strong prima facie grounds for doubting the
independence of accounting expertise and
increased difficulties in defending its objectiv-
ity. Associated with accusations of (excessive)
commercialization is the complaint that audi-
tors 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 pres-
sure to issue a clean (unqualified) audit report.
Relatedly, there is the suspicion that accoun-
tants’ self-regulating methods of developing
and enforcing standards are designed to be suf-
ficiently flexible to accommodate this pressure
whilst ensuring that litigation and liability is
minimized when audits “fail”.
because of audit’s high public profile, it is on the per-
formance of auditors that our profession will often be
judged (Plaistowe, 1992b).
Whether or not such accusations are justill-
able, the reputation of accountants, and ulti-
mately their capacity to secure and further
expand their markets, depends upon their col-
lective 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 selfregulat-
ing 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 exam-
ines some of the stratagems deployed by mem-
bers of the U.K. accountancy profession to
deflect and neutralize criticisms that have
threatened to unsettle or weaken its capacity
to secure and/or expand its jurisdiction.
Consider the contemporary situation. To the
extent that accountancy practice has become
transformed from (the ideal of) a bespoke rela-
tionship 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
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
U.K. The accountancy profession was directly
was the Chairman of the powerful House of Commons Treasury and Civil Service Select Committee. Until early 1993, the
late Judith Chaplin (Conservative MP for Newbury), a former Special Adviser to the Chancellor of the Exchequer (19s8-
1990) and a Political Secretary (1990-1992) to the Prime Minister, John Major, acted as an adviser to the ICAEW.
THE POWER OF “INDEPENDENCE” 557
implicated in this turbulence, and it came
under pressure to reform the regulation of
audit. In this section, we sketch the back-
ground to the economic crisis of the mid-
1970s before indicating how the profession
sought to restore its credibility, and thereby
secure its jurisdiction.
Background to the cri si s
In 1960, the average rate of return (before
tax and interest) on U.K. businesses was
around 13% per annum. By 1975 it had
declined to an average of around 4% (Bri ti sh
Busfness, September 1988, p. 32) and in 1980
hit a low of 2% (Bank of Engl and Quarterl y
Bul l eti n, June 1981, p. 161). Fierce interna-
tional competition and low investment in
British industry resulted in double-digit intIa-
tion and unemployment began to rise (Wilson
Committee, 1978; Lisle-Williams, 1986).
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 biII and
increased industrial costs by 2-3% (Bank of
Engl and Quarterl y Bul l eti n, March 1974, p.
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.
As manufacturing declined, Britain faced a
balance of payments crisis. In a bid to avert
this crisis, the government encouraged expan-
sion of the services sector, especially the finan-
cial sector (Clarke, 1986). For example, foreign
banks were offered incentives to locate in
London as a “less formal system of regula-
tion” was introduced (Reid, 1982, p. 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.
Poi nti ng the fi nger at the audi t
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 property sector
was engulfed in crisis.2o Wellestablished com-
panies such as Moorgate Mercantile, Cedar
Holdings, Keyser Ulhnan, First National
Finance Corporation, SIater WaIker, London
and Capital Group, ComhiII Consolidated
Group and others collapsed. Between Decem-
ber 1973 and March 1974, the state rescued
twenty-one institutions by spending some
&400 miUion. With the collapse of the Stem
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 on a
massive scale. For one infhtential commentator,
the crisis was fuelled by the
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 com-
pared with manufacturing. Much speculative
activity occurred, especially in the property
sector where the borrowing trebled between
1971 and 1973 (CoakIey & Harris, 1983), with
the new, secondary banks being key players in
this process. Easy credit assisted in the trebling
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 pub-
lic 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, p. 112)
The state sought to manage the crisis by
spending an estimated &3000 million to rescue
^^
‘” This crisis was made worse by the fact that the lenders who had sequestrated assets on which the loans were secured
could not sell such assets at the values assumed because the property sector was locked in a downward spiral.
558 P. SIKKA and H. WILLMOTT
ailing concerns (Reid, 1982, p. 192) and itself
had to seek help from the International Mone-
tary Fund (IMF). As a part of its crisis manage-
ment mechanisms, the Department of Trade
(DOT) authorized investigations into a number
of collapsed businesses, especially where fraud
was suspected (this is discussed in Sikka &
Wlllmott, 1991). The related press speculation
and the eventual DOT reports directly ques-
tioned the ability of auditors to act as indepen-
dent and objective constructors of economic
reality. For example, the auditors of Roadships
were criticized for failing to check adequately
the amounts for creditors, accruals, purchases
and profit forecasts (DOT, 1976a). The inspec-
tors 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 ln three; firstly, by the auditors having a
financial interest in the company; secondly, by the audl-
tom being controlled in the broadest sense by the com-
pany; 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 objec-
tive 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 &32,040 was shown as
&820,040, but was not spotted by the audi-
tors. Major audit deficiencies were also
exposed by the report on London and County
Securities (DOT, 1976b). 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., p. 234).
In response to these and other revelations,
the quality press expressed growing disquiet
about the independence and integrity of
accountants. The Economist (14 February
1976) declared that
Civil servants, politicians, and even City folk are begin-
ning to wonder whether the accountancy profession is
capable of policing itself unless the profession
improves its auditing standards someone else will
(ibid., pp. 79-80).
The I nvestors Chronicle (13 February 1976, p.
419) questioned the value of audited accounts
and self-regulation. The Ffnancfd Tfmes (10
July 1976) doubted the profession’s ability “to
exercise control over the activities of large
accountancy firms” (p. 26). Even the ICAEW
President was forced to acknowledge that
public confidence ln the standards of our performance
has been badly shaken by a number of well publicised
cases (Accountancy, November 1976, p. 4).
Questions relating to the reliability of auditing
were raised in Parliament. On 9 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 (Hmsurd, Vol. 904/905, cob
10-11).
It is worth recalling that, at this time, politi-
cians and civil servants were wrestling with a
full-blown economic crisis in which they
sought to control inflation, prices and unem-
ployment, 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)
560 P. SIKKA and H. WILLMOTT
not begin until 1%1.23 Auditing and account-
ing 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 out-
side” (APC, 1978, p. 50).
such information was made available to the
major firms, thus furnishing them with the
information relevant to shape the parameters
of decisions and nondecisions and to pursue
their own agendas (Sikka et al., 1989). Nor,
finally, did government question the absence
of mechanisms to monitor and enforce firms’
compliance with auditing standards.
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 knowledge-
able 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 criticized 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
Observations of this kind can be interpreted
in a number of ways. They may, for example,
be viewed as confirmation of a conspiracy in
which members of the profession scheme
amongst themselves, and even with govem-
ment, to minimize their responsibility and lia-
bility. Without doubting that such scheming
can, and does, occur, we are inclined to the
view that much of the decision making (and
non-decision making) is symptomatic of
engrained, taken-for-granted (hegemonic)
understandings about what is “appropriate”
and “sensible”. Although the outcomes may
be very similar, we believe that actions are
guided more by institutionalized discourse
than by any more calculating and devious
efforts to maximize benefit or evade responsi-
bility. Central to these discourses has been the
understanding that existing self-regulatory
arrangements are fundamentally sound,
though they can always be further improved
and may, on occasions, be in need of some
reform in order to accommodate a changing
economic environment.
To return to the aftermath of the mid-1970s
economic crisis, the profession responded to
criticism by strengthening its ethical guide-
L3 Following the subsection of the Members’s handbook in which they were contained, they came to be known as “U
Statements”. Residues of these statements can be found in modern-day auditing standards.
** There is clearly a timing difference between the publication of the critical DoT/DTI reports and the actions taken by the
profession. This is not particularly slgniiicant as one of the inspectors is usually a partner from a major auditing tirm. In
their capacity as agents of the state, the partners (who are also highly placed in the professional bodies) are well aware of
immanent pressures and of the need to initiate reforms that limit damage to the profession. The profession also benefits
from its “insider” relationship with the DTI. Regular meetings are held between DTI officials and the professional bodies.
During such meetings, matters of mutual interest, including the shortcomings of the profession, are discussed. On
occasions, critical DTl reports that are unavailable to Parliament have been given to the ICAEW (Sikka et UC., 1991).
a5 Of course, the success of such efforts is not guaranteed. Indeed, in the late 198Os, the (mjeffectiveness and governance
of the APC became a source of difficulty and embarrassment for the profession.
,..--.. ..___.. ,-._ “INDEPENDEN(-E”
I”E k-“WEI vr 561
lines, guidelines which aspire to ensure the
integrity of individual accountants WAEW,
1979) rather than to address the adequacy of
the regulation and enforcement of auditing
standards.26 For example, in recognition of
the concern over revelations relating to cases
where small firms audited major companies,
the guidelines proposed that an auditing firm’s
income from one client should not exceed 15%
of its gross fees.27 To quell disquiet about trans-
actions between companies and auditors, the
guidelines urged auditors to ensure that all
transactions were on normal commercial
terms. To show concern with possible con-
flicts which might arise from a situation in
which auditors (or their associates) act as
receivers and liquidators for their audit clients,
the guidelines urged auditing firms not to
accept the position of a receiver where there
is a “continuing professional relationship”28
with the client. It was also reported that “Gov-
ernment sources would like to see . . . a ban on
shareholdings, non-beneficial as well as benefi-
cial, in audit client companies; and that such a
ban should apply equally to listed and nonlisted
companies” (me Accountant, 1 December
1977). But the ethical guidelines did no such
thing. Whilst there was much “talk” about the
importance of avoiding conflicts of interest
that might arise from personal and financial
relationships, this was not translated into the
monitoring of compliance.
services by auditing ftrms to their audit
clients. Nor did it put forward any proposals
for curmiling the personal relationships which
develop owing to the longevity of the auditor’s
term in office (i.e. no proposals for a compul-
sory change for auditors at regular intervals).
Conscious of these limitations, some commen-
tators dismissed the reforms as nothing but a
botch-patch of pious hopes and exhortations, carefully
hedged with inscrutable detkitions which leave plenty
of room for interpretations (Tbe Accounrfng BuUeiin,
August 1983, p. 10).
Whilst we share this scepticism about the capa-
city of the reformed guidelines to achieve any
substantive change in professional conduct, we
would emphasize their role as a proven
mechanism for diffusing criticisms, restoring
the aura of independence and professionalism
and, in this way, protecting the profession’s
jurisdiction.
Reforming the ethical guidelines offered the
profession a way of signalling their responsive-
ness to criticisms without incurring any signi&
cant costs or exposing auditing regulation to
more sustained scrutiny. The profession did
not forbid the provision of any non-auditing
Reform of its disciplinary arrangements was
a third element of the profession’s response in
defence of its domain.29 Previously, piecemeal
action had been taken by individual profes
sional bodies against their members and the
disciplinary machinery was poorly financed.
Following the secondary banking crisis,
reforms were recommended by the Cross
Report (1977) and the Grenside Report
(1979). Anxious to provide an alternative to
the prospect of government investigating cases
of audit failure, and taking civil action against
firms implicated in major scandals, the profes-
sion’s response was the establishment of the
Joint Disciplinary Scheme (IDS) whose objec-
tives, i nter al fa, were to
^,
‘O The composition of the working party which formulated the guideline was not announced and there was no public
consultation in draft@ the guidelines.
*’ Infant and newly establIshed firms were exempt from this requirement. It is difficult to identify a Iirm that had to give
up business as a result of this rule.
*a In subsequent years, this requirement became a source of embarrassment. This is discussed below.
29 As the Accounti ng Bul l eti n (August 1983) noted: “The Department of Trade applied the thumbscrews In the aftermath
of the financial scandals of the mid-seventies and the profession came up with theJoint Disciplinary Scheme” (ibid., p. 10).
562 P. SIKKA and H. WILLMOTT
promote the highest possible standards of professional
and business conduct, efficiency and competence
by providing a system of investigation and regulation of
activities of Members and Member Iirms so as to secure
their adherence to all professional criteria including
but not limited to all relevant recommendations and
standards promulgated. (para 4 of the JDS
Constitution).
As in the case of the APC, where the mem-
bership was dominated by the large firms,
much of the financial support for the JDS
also came from these firms (Z%e Accounting
Bulletin, March 1983, p. 9) - the very Brms
that had been criticized in the DoT/DTI reports
and were to be the future subjects of disciplin-
ary hearings.30 Together with the creation of
the APC and the revised ethical guidelines,
the existence of the JDS proved effective in
repairing the profession’s aura of indepen-
dence, professionalism and objectivity. Their
limitations, as sketched above, were seemingly
either unrecognized or unremarkable to gov-
ernment, academics and the media. Fault lines
within the accountancy profession had been
exposed but had not been rectified. In the
absence of substantial institutional reform,
they would reappear when the profession
was once again subjected to close and critical
scrutiny, as occurred when, for example, the
DTI reviewed the implications of the Eighth EC
Directive for the regulation of the U.K. audit
industry.
SECURING THE ACCOUNTING
JURISDICTION: 2. RESPONSE TO THE
REQUIREMENTS OF THE EIGHTH EC
DIRECTIVE
The Eighth EC Directive sought to harmonize
audit regulation in Europe. Such developments
raised questions about whose meaning, and
whose terms, of regulation are to prevail, not
least because in a number of European coun-
tries auditors act exclusively as auditors (e.g.
Gemany). In this section, we present a brief
sketch of the sociopolitical context in which
audit firms have operated in the U.K. We
then look more closely at how, during the
198Os, the profession sought to defend and
extend its jurisdiction within Europe.
Background
In the early 1980s the pursuit of monetarist
policies designed to squeeze inefficiency and
inflation out of Britain’s economy resulted in
“no significant growth in (audit) business”
(i%e Accounting Bulletin, October 1982, p.
4) although the impact on audit fees was com-
pensated to some extent by the increase in
insolvency business.31 At the same time, many
of the professional rules on competition and
advertising were being swept away. To all
intents and purposes, accountancy Iirms were
now expected to take an unequivocally com-
mercial approach to the sale of their ser-
vice~.~~ Audit firms came under pressure to
enter, or expand their business in, non-audit
markets. In this, they were greatly assisted by
‘” Whether the irdluence of the major fnms on the professional bodies ln any way constrained the ability of the JDS to
enforce discipline remains a matter for conjecture. But such issues were to be raised agaln ln the 1990s.
31 Their position was to be tinther strengthened by the insolvency Act 1986 which restricted this llne of business to
licensed practitioners (accountants) who would have a Iimt &ii for their fees on any assets recovered. Also, ln the local
government arena, the Local Government Finance Act 1982 modiied the extant system of local authority audits and
opened the field (previously totally closed) to accounting firms who could be appointed auditors, But, ln sharp contrast
to the thrust of corporate legislation, and despite some opposition from the auditing firms, a statutory duty to detect and
report fraud was imposed upon local government auditors.
32 Auditors were also expecting the “floodgates on litigation to open” (World Accounting Report, July 1982, pp. 7-8) as
court cases such asJEE Fasteners v. Marks Bloom 6 Co (1981) All E.R. 289 suggested that auditors owed a duty of care to
third parties. This was subsequently challenged and reversed by the 1990 Caparo judgment.
THE POWER OF “INDEPENDENCE” 563
various state initiatives to revive and redirect
the new, “lean” U.K. economy. For example,
as the Department of Trade and Industry
shifted from a regulator to a promoter of indus-
try, in excess of 200 different ways of obtaining
linance from the government were developed
(The Accounti ng Bul l eti n, March 1983, p. 8);
and the big accounting firms were identified as
key intermediaries and advisors.
In an effort to contain public expenditure,
the government prompted “Value for Money”
(VFM) auditing throughout the public sector
(Humphrey et al ., 1993).33 As significant bene-
ficiaries of these programmes, the accounting
firms rolled the VFM philosophy through the
fields of health, education, transport, energy,
etc. Other major opportunities for expansion
occurred in the financial sector where, follow-
ing the Financial Services Act 1986, everyone
operating in this field needed the services of an
accountant. FinalIy, the government’s policy of
privatizing national utilities created a veritable
bonanza for auditing firms as they played a
central role in reporting on profit forecasts,
preparing prospectuses and dealing with mat-
ters related to the sale of British Gas, British
Telecom and British Airways, to name a
number of the major privatizations.
Given the government’s dependency upon
the accountancy profession for implementing
its flagship policies, it was not likely that the
accountancy profession would simultaneously
be subjected by government to close and criti-
cal sc~tiny.~* However, this happy affinity of
interests did not protect the profession from
forces outside the direct control of the U.K.
govemment,35 such as the requirements of EC
directives, relating, for example, to the regula-
tion of auditors.
Tbe Ei ghth EC Di recti ve: chal l enge and
response
After due discussions with representatives of
the profession and other relevant parties, the
government published its proposals for the
regulation of auditors in August 19B6 (DTI,
1986). Somewhat to the surprise and alarm of
the profession, the document raised the
spectre of an independent body that would
regulate auditors (Rutteman, 1987). How-
ever, since this proposal was incongruent
with the broad thrust of government policy
and also seemed to go weII beyond the require-
ments of the wording of the Eighth Directive
-
a directive that had been patiently nego-
tiated over many years and eventually adopted
33 There is also a political dimension to this. Most of Britain’s local authorities were, at the time, under the control of the
Labour Party and espoused values different from those propagated by the New Right. Most of the Value-for-Money studies
applied managerial-type yardsticks and showed almost all Labour controlled authorities to be inefficient and wasteful.
34 It is perhaps no coincidence that during this period, DTI reports into failed companies were slower to be published and
some have never appeared. See Sikka & WiBmott (1991).
35 There were, nonetheless, unintended impacts upon the profession that arose from the government’s efforts to stimul-
tate the financial services sector through the “Big Bang” detonated by the Financial Services Act (FSA) (1986). The basis of
this legislation was developed in the Gower report (1984) which sought to bring self-regulation into a statutory framework.
There is strong evidence to indicate that the degree of involvement of accountants in the sale of financial services came as
something of a shock to Professor Gower who associated the work of accounting firms with audit, taxation advice and the
like. Once it was revealed that accountants regularly acted as Bnancial intermediaries for insurance and pensions compa-
nies, it was necessary to make provision for their regulation within the new Act. Members of the accountancy profession
were highly resistant to regulation by any other body. Indeed, they questioned the very need for the regulation of
accountants whose professional training and integrity provided more than a sufticient guarantee of sound and impartial
financial advice. Under pressure, the accountants reluctantly took upon themselves the role of regulator, a recognized
body under the terms of the FSA. Not onJy did this legislation make visible the involvement of accounting firms in selling
financial services, it explicitly made the accountancy bodies an arm of the state in which self-regulation is disciplined
within a statutory framework. See Cooper et ul. (1992a).
564 P. SIKKA and H. WILLMO’IT
formally in Brussels two years earlier36 - this
threat to self-regulation could not be taken very
seriously. A much more credible and therefore
serious threat was posed by a suggestion in the
DTI document that, in order to satisfy the
requirements of the Eighth Directive, it might
be necessary to curtail the sale of non-auditing
services and also to require a compulsory
rotation of auditors.
Any enactment of this suggestion threatened
to dent and destablilize the lucrative non-audit
business that had grown steadily during the
1960s and 1970s and massively expanded dur-
ing the 1980s. Alert to these implications, emi-
nent accountants from the big Iirms - Arthur
Andersen, Coopers & Lybrand, Grant Thornton
and others - strongly questioned the necessity
of changing existing practices in order to
comply with the Eighth Directive (Hanson,
1987; Accountancy Age, 23 October 1986, p.
9). Publicly, Coopers & Lybrand went furthest
by urging all their clients to lobby government,
opposing the proposals on independence
(Accountancy Age, 16 October 1986, p. 1).
The major professional associations also
sought to mobilize their members, resources
and contacts in a concerted effort to discredit
and resist the DTI suggestions. The Institute of
Chartered Accountants of Scotland wrote
directly to 1000 company chairmen urging
them to oppose government proposals on the
grounds that they threatened industrial effi-
ciency and the right of companies to choose
their own advisors (Accountancy Age, I6
^,
October 1988, p. 1). The ICAEW published a
report on the future of the audit in which it
was argued that the profession itself was in
the best position to decide whether non-
auditing services and other reforms on inde-
pendence were desirable (ICAEW, 1986).
According to Rutteman (1987) there was
some debate in the ICAEW about whether a
concession to the DTI should be made by iden-
tifying a few services that might be restricted.
Fearing that the identification of specific ser-
vices would simply provide the DTI with
ammunition, the formal response of the
ICAEW to the DTI document, which took the
form of a technical release, simply reafftrmed
the adequacy of existing regulatory arrange-
ments and stressed the ICAEW’s contribution
to ensuring ethical standards and enhancing
audit quality. This document also rehearsed
the argument, already voiced by the big firms,
that the suggestions made in the DTl report
would prevent management from having a
free choice in the appointment of consult-
ants; and that this would deprive them of the
best consultant when this also happened to be
the auditor.
The organized and orchestrated3’ nature of
the profession’s responses successfully
silenced the DTI suggestions. The status quo,
and with it the territory occupied by the firms
was broadly preserved.38 Compliance with the
Eighth Directive was secured through the Com-
panies Act 1989. This required the professional
bodies to regulate all aspects of the auditing
‘O Some felt that the preservation of self-regulation in a statutory framework would create tension between the ICAEW’s
traditional trade association role and its explicitly social role as a regulator. Therefore some firms called for the formation of
an independent body to regulate auditors (Accountancy Age, 11 December 1986, p. 1). Others have contended that “self-
regulation cannot work where big money is concerned’ (The Accountant, 3 September 1986, p. 3). For fuller discussions
of the U.K. accountancy profession and the Eighth Directive, see Cooper el al.