THE HISTORY AND RHETORIC OF AUDITOR INDEPENDENCE CONCEPTS
Sara Ann Reiter Associate Professor School of Management Binghamton University Binghamton, New York 13902-6015 Phone 607-777-6174 Fax 607-777-4422 Email
[email protected] Paul F. Williams Department of Accounting Box 8113 North Carolina State University Raleigh, North Carolina 27695-8113 Phone 919-515-4436 Email
[email protected]
THE HISTORY AND RHETORIC OF AUDITOR INDEPENDENCE CONCEPTS Abstract This paper presents an historical and rhetorical analysis of auditor independence concepts. This analysis is relevant as the newly formed Independence Standards Board in the U.S. is beginning work on a conceptual framework of audit independence to use as a basis for regulation. Debate about independence concepts has a long history and some elements of the accounting profession are suggesting that a radical turn away from historical and philosophical conceptions of independence is currently needed. Independence concepts are both defined and limited by the metaphors used to convey them. These metaphors in turn reflect culturally significant narratives of legitimation. Both the metaphors and legitimating narratives surrounding auditor independence are historically rooted in the moral philosophy framework of the ethics of rights. Current independence proposals represent a shift from the profession=s traditional moral philosophy grounding to a basis in economic concepts and theory. The character of the independent auditor is changing from Ajudicial man” to Aeconomic man.” A number of consequences to the standing of the profession in the public=s eyes, as well as to its internal character, may arise from the changing narrative of auditor independence.
THE HISTORY AND RHETORIC OF AUDITOR INDEPENDENCE CONCEPTS Concepts of auditor independence are again a hot topic as the U.S. profession waits for its newly constituted Independence Standards Board (ISB) to begin unveiling its conceptual framework of independence concepts. The concept of auditor independence has a long history, but some in the current debate urge the ISB to disregard the historical and philosophical underpinnings of auditor independence: It is unlikely that a conceptual framework worthy of the profession=s heritage will emerge without a frank admission that past independence concepts B to the extent they existed at all B left much to be desired. Those who revere the profession=s history may find the admission difficult, but it would be in the best traditions of independence [Elliott and Jacobson, 1998a, p. 37]. There are a number of histories of the profession and the development of independence concepts [see, for example, Miranti, 1974; Cooper, 1982; Higgins and Olson, 1978; Berryman, 1978; Carey, 1969, 1970]. This paper applies a rhetorical analysis to the history and philosophy of independence concepts. The analysis illuminates why independence is so hard for the profession to talk about in a clear way and sets the stage for understanding the issues in the current controversy between the Securities and Exchange Commission (SEC) and the U.S. public accounting profession. The implications of a shift in the rhetoric of independence are explored. Classical, Aristotelian rhetoric was concerned with persuasion in civic discourse. Rhetoric was "[i]nitially conceived by the ancient Greeks as an art of persuasion by which ordinary citizens could exercise their responsibility in civic affairs..." [Simons, 1990, p. vii]. Speeches were analyzed in terms of a system of rules and procedures, a "grammatical" focus [Ehringer, 1971, p. 327]. The "new" rhetoric expands classical rhetorical analysis in a number of ways. In addition to spoken civic discourse, written discourse and oral discourse in a number of settings are subject to analysis [Brockriede, 1971, p. 43]. In the expanded view of the new rhetoric, analysis can focus on a particular rhetorical act or event "as an object of interest in its own right or because it helps illuminate some larger issue, problem, or theoretical question" [Simons, 1976, p. 296]. New rhetorical analysis has strong ethical and normative connotations [Simons, 1971, p. 51]. Robertson [1996] explains that "a classical or Aristotelian analysis is presumed to include as the ultimate aim raising questions about how society ought to be, and of judging the quality of persuasive appeals against that criterion" [p. 99]. McCloskey [1985] lists the four elements of rhetoric as fact, logic, narrative, and metaphor. A number of authors have examined the concepts of auditor independence from the perspectives of fact and logic [see, for example, Bartlett, 1991; Berryman, 1978; Buckley and O=Sullivan, 1980; Carmichael, 1998, 1999; Edwards, 1978; Elliott and Jacobson, 1998a,b; Kinney, 1999; Ponemon, 1996; Saul, 1996; Walker, 1999]. This paper examines the discourse about auditor independence from the perspectives of metaphor and narrative. We show that the metaphors used to speak about 1
independence, particularly the metaphor of independence as separation, create problems in working with independence concepts. How can you discuss appropriate relationships when your basic concept is one of separation, or no relationship? The metaphors used historically to discuss independence are closely connected to a particular strand of Western philosophical discourse which has recently become the subject of critique. This critique is helpful in understanding the assumptions and values that have been loaded on the independence concept, in a largely unconscious manner, over the years. The narrative of auditor independence is also undergoing a change in the major character, from the Ajudicial man” who was so appealing earlier in the century to the Aeconomic man” in whom we believe at the end of the millenium. This change in narrative parallels a change in the moral sensibility of American society [Wolfe, 1989]. The paper begins with a summary of the history of the discussion of independence concepts in the United States. This is the history of a sometimes uneasy alliance between the profession and its regulator the Securities Exchange Commission, who have traditionally held differing views on auditor independence. The remainder of the paper explains the importance of metaphor in directing discourse and identifies metaphors used in the independence discussions. The philosophical bases of these metaphorical understandings are discussed and critiqued. The narrative of the independent auditor is also considered with particular attention to changes in the moral character of the independent auditor. The new story the profession would like to tell about independence differs from the historical, philosophical narrative. We leave it to the reader to decide whether a re-alignment of the auditor=s story with the economic-based mores of the late twentieth century is an imperative and desirable development or a tragic breach of professional ideals. A BRIEF HISTORY OF AUDITOR INDEPENDENCE The auditing profession is organized around a central ethical conflict. The client hires the auditor and pays the fees but the auditor is supposed to conduct the audit in an independent fashion adhering to the profession's "covenant with society" [Briloff, 1990] to audit in the interests of the public. The appearance of independence is maintained by a number of detailed rules about forbidden commercial and familial relationships between auditor and client. Independence in fact, or the reality of the auditor=s independence of judgment, has proved more difficult to legislate. The U.S. Securities and Exchange Commission (SEC) regards auditor independence as the cornerstone of the capital formation process. Walter Schuetze, former Chief Accountant of the SEC, notes that the "Commission has stated repeatedly that the independence of auditors, both in appearance and in fact, is crucial to the credibility of financial reporting and, in turn, the capital formation process" [Schuetze, 1994, p. 69]. SEC Commissioner Steven Wallmann also asserts that "[i]ndependence is part of the essence that underlies the success of our public accounting system -- it helps provide the objectivity that permits the profession to perform its attestation and monitoring functions effectively"
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[1996, p. 77]. The accounting profession's product of audited financial reports and corporate disclosure is viewed by SEC Commissioner Wallmann as central to the efficiency of the capital markets: Accountants are the gatekeepers of our financial markets. Without accountants to ensure the quality and integrity of financial information, the markets for capital would be far less efficient, the cost of capital would be far higher, and our standard of living would be lower [Wallmann, 1995, p. 82]. However, declining perceptions of the quality of accounting threaten the economic franchise of the accounting profession: The accounting profession has undertaken a function that promises society a number of benefits, including lower investment risk and better resource allocation. In turn, accountants have been granted a legally enforceable franchise -- no company can come to the public markets without an accountants' attestation [p. 82]. Professional accounting is under considerable economic pressure which has intensified in recent years. As Elliott [1994] notes, "the traditional audit service is not now a growth industry.." [p. 107]. The low profitability of traditional audit services produces concomitant pressure to provide value to clients in other ways which include consulting, management advisory services, and even contracting to perform corporate functions such as internal control. Commercial pressures also push the profession to expand into new areas. Bailey [1995] notes that "[t]oday's world ... is a market in which survival means finding new value-added products to sell to clients" [p. 192]. The financial reporting process is also challenged by changes in information technology. As Elliott [1992] explains: Information technology [IT] is changing everything. It represents a new, post-industrial paradigm of wealth creation that is replacing the industrial paradigm and is profoundly changing the way business is done [p. 61]. These changes information technology have "created a new post-industrial paradigm of wealth creation, transforming the way people do their jobs and the organizations that employ them; making possible new products, services, and industries; radically revising concepts of management; revamping modes of production; reshaping demands for labor; changing the way we think about sources of future cash flows; eliminating at an ever greater pace the constraints of time and location on command and control; and above all promising an even greater transformation in the coming years" [Elliott, 1994, p. 106]. Furthermore, these transformations will change the ways in which we think about future cash flows and eliminate constraints on command and control, leading to completely different financial reporting and assurance technologies. In Elliott's words, "[w]e are talking about a paradigm shift of 3
incredible proportions that would affect everything" [CPA Journal Symposium, 1996, p. 19]. SEC Commissioner Wallman worries that if accounting does not change, it will impede the process of economic growth: As we approach the end of this century, I am concerned that financial accounting and corporate disclosure is not keeping pace with the rapid changes in the business world. Not only is accounting and disclosure increasingly at risk of failing to satisfy its promise to society, but I fear that, unless we begin to take actions to ensure its future utility, accounting and disclosure may become a detriment -- a deterrent -- to worthwhile business innovation [Wallman, 1995, p. 83]. The Public Oversight Board (POB) of the American Institute of CPA's (AICPA) SEC Practice Section's advisory board on auditor independence concluded that the auditing profession is at a critical juncture: Forces at work both within and outside the profession could erode its independent role as a watchdog for the public. That role needs buttressing by measures that go beyond changes in processes and procedures [Saul, 1996, p. 131]. Recent Developments In response to the growing crisis, the AICPA embarked on a set of initiatives to conceptualize the future of financial reporting and auditing. The AICPA formed the Special Committee on Financial Reporting in 1991 to address concerns about the relevance and usefulness of business reporting. This Committee, commonly referred to as the Jenkins Committee, reported in 1994. The Jenkins Committee's work is part of a broad initiative to "enhance the utility of business reporting," "improve the prevention and detection of fraud," assure the independence and objectivity of the independent auditor," "discourage unwarranted litigation that inhibits innovation and undermines the profession's ability to meet evolving financial reporting needs," and "strengthen the audit profession's disciplinary system" [AICPA, 1994, p. 2]. The AICPA sponsored a conference in Santa Fe in 1993 to explore where the attest function was headed. As an outgrowth of that meeting, the AICPA charged the Special Committee on Assurance Services in 1994 [CPA Journal Symposium, 1996, p. 14]. The Committee, headed by Robert Elliott, has widely disseminated its working findings. SEC Chief Accountant Walter Schuetze's critique of client advocacy by the profession [Schuetze, 1994] launched a plethora of response by the profession. The Public Oversight Board of the AICPA's SEC Practice Section appointed an advisory panel which made recommendations to the POB and the POB subsequently issued a report which was endorsed by the advisory panel [Wriston et al., 1996, p. 36]. The basic idea of the POB report was that greater board of director and audit committee involvement with financial reporting would help resolve conflicts of interest between auditors and management clients. The board of directors is supposed to recognize their accountability responsibilities, the auditors are supposed to look to the board as their client, and the board must 4
expect the auditors to deliver "candid communication about the appropriateness, not just acceptability, of accounting principles and estimates and the clarity of the related disclosures of financial information that the company reports publicly" [Briloff, 1995, p. 127]. Around the same time, the GAO report on the accounting profession requested by Congressman Dingell Ato evaluate how well the profession had responded to changing needs to better protect the public interest” [Carmichael, 1997, p. 18] was released. While giving the profession a passing grade, the GAO raised concerns about lack of professional skepticism and too easy acceptance of management=s representations [CPA Journal Symposium, 1996, p. 16]. The response of the public accounting profession in the US to crises has been to form committees and commissions whose recommendations end up changing little of substance. In the 1980's the US accounting profession responded to the so-called "expectations gap", which refers to the public's expectation that companies with clean audit opinions should be free of financial fraud and shortterm risk of business failure. Baker [1993], Hooks [1992], Fogarty et al., [1991], Lee [1995] and Humphrey et al. [1991] view responses to the expectations gap crisis of the 1980s - the promotion of audit committees, intensification of peer review, and the "expectations gap" auditing standards - as largely cosmetic in the sense that the professional image was shored up without fundamental changes that addressed the underlying problems. Real solutions, such as new audit procedures, substantive selfdisciplinary actions, pursuit of more certain accounting standards, and issuing more qualified opinions, have not been pursued [Fogarty et al., 1991, pp. 213-219].1 2 The GAO report called for more direct SEC involvement in independence issues rather than waiting for a voluntary response from the profession. In May of 1997 the AICPA and SEC announced formation of a new Independence Standards Board (ISB) which would take over setting independence standards for auditors of public companies. The ISB has eight members, four from the public, four from the profession. A nine member Independence Issues Committee deals with issues that can be solved using current guidance. The ISB is a response to two changes in the professional environment - an increase in the complexity of the environment with changes in the size and structure of large firms and increasing diversity of services 1
Willmott et al. [1993] demonstrate how tensions within professional regulatory bodies, such as segmented interest among the membership, makes adequate response to outside pressure difficult [p. 75].
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This pattern of "doing nothing" has also characterized the actions of the British accounting profession [Robson et al., 1994; Sikka and Willmott, 1995; Willmott et al., 1993].
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offered by public accounting firms with increasing economic importance of nonattest services [Craig, 1997, p. 16]. The ISB has been charged to develop a conceptual framework for independence to serve as a foundation for development of principles-based standards. The battle over independence concepts was launched in October 1997 at the initial meeting of the ISB where the AICPA delivered a White Paper proposal for independence issues. Basically, the White Paper reviewed independence concepts, recommending rejection of independence in appearance as the basis for regulation, and proposed that each firm develop an independence code that would be reviewed by the ISB. Carmichael [1998, p. 18] recalls that George O. May proposed a similar scheme in 1932. The ISB diplomatically put the White Paper aside for future study [Craig and Carmichael, 1998a] but the SEC reaction was more pointed. For example, SEC Chief Accountant Lynn Turner faults the White Paper for neglecting investor profession and asserting that Abusiness purposes alone can not drive the process” calls the White Paper Aa low mark for the profession” Craig and Carmichael 1998b, p. 49]. John Burke, director of enforcement for the SEC, concurs that the White Paper does not represent a balanced view and reiterates the SEC=s commitment to maintaining the appearance as well as the fact of independence [Burke, 1998]. Observers question whether the ISB will be successful in making dramatic progress on the issue of independence: Will the new Independence Standards Board provide a breakthrough in the approach to auditor independence, an essential break with tradition and old ways of thinking, or will it be an ephemeral cure-all B a fleeting remedy for all the ills and difficulties that have plagued auditing practice and caused growing concern that existing trends will ultimately and irrevocably impair auditor objectivity and integrity? [Carmichael, 1998, p. 16]. The first crucial move by the ISB will be work on the conceptual framework and currently the battle for control of auditor independence is being conducted at the conceptual level. There is a long history to the present controversy, which echoes tensions between the SEC and the auditing profession since the economic franchise of required audits by independent accountants was granted to the profession in the 1933 and 1934 Securities Acts. The Profession, the SEC, and Independence Chandler and Edwards [1996] and Preston et al. [1995] explain how independence in fact has been viewed in terms of Victorian ideals. Because of an emphasis on the moral character and upbringing of the accountant providing the appropriate state of mind, the profession resisted code of ethics rules on independence until the mid-1960's. Berryman [1978] concludes that A[i]n the United States, independent status for the auditor appears to have emerged slowly as a major concern.” The 6
American Association of Public Accountants, formed in 1887, had no formal recognition of independence. In 1907, the bylaws mentioned the desirability of avoiding incompatible or inconsistent occupations. The American Institute of Accountants formed in 1916 was not actively concerned with independence issues until the 1930's. Carey [1969, p. 240] notes that A[d]espite frequent references in professional literature to the independence of auditors in certifying financial statements, the word Aindependent” had not yet appeared in the Rules of Professional Conduct.” As accountants came to apply the concept of independence to themselves, it Awas generally assumed to mean integrity, honesty, and objectivity” [p. 175]. Independence was regarded as Aa state of mind and a matter of character”and it Adid not seem necessary to deal with it formally” [p. 175]. The Council of the Institute debated a rule against dual relationships, such as serving on the board of directors of an audit client, in 1931 but the proposed rule was defeated in 1932. As Carey notes, AThe profession had missed a chance to take a forward step voluntarily” [p. 242]. According to Carey, this does not indicate a lack of concern with independence: ANo doubt, the general feeling was that an auditor could be just as honest and just as objective whether he served on the board of directors or owned stock in the client company or whether he didn=t” [p. 176]. The leadership of the profession, however, was becoming concerned with the need to demonstrate independence in appearance. A resolution was adopted by Council in 1934, after the passage of the 1933 Securities Acts began the relationship between the profession and market regulators (eventually the SEC).3 Formal recognition of independence concepts by the profession has been spurred by its regulatory body, the SEC. The original draft of the 1933 Securities Act did not mandate audits by independent auditors, but this provision was incorporated into the Act after Senate hearings [Cooper, 1982]. Former SEC Chief Accountant Michael Sutton [Sutton, 1997, p. 87] concludes from a review of the testimony by Colonel Arthur Carter, President of the New York State Society of CPA=s, that Aindependence was a critical factor in Congress= decision to accept Col. Carter=s proposal and look to the public accounting profession to examine the financial statements of SEC registrants.” Early on, the SEC introduced rules designed to foster independence in appearance. Originally any financial interest in the client was barred, but this was revised in 1936 to cover only significant interests [Berryman, 1978]. However, it was not until 1941 that the Institute adopted prohibitions on stock ownership in the client that were partially like the SEC=s [Carey, 1970]. In 1947 the AIA=s Committee on Auditing Procedure issued a ATentative Statement of Auditing Standards” with an emphasis on independence in fact. The SEC banned any financial interest in the audit client in 1950, largely as a matter of administrative convenience given the large number of inquiries about the significance of various holdings, and the profession followed in 1962 [Berryman, 1978]. Berryman 3
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Montagna [1974] explains that SEC regulation of the profession is a double-edged sword. On the one hand the Securities Acts have given a franchise for producing required audits to independent accountants. On the other hand, the legal requirement forces a focus on auditing work and results in interference in professional functions in the form of SEC rules and regulations.
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notes that in the period from 1956 - 1972, the emphasis was on refining independence rules with the SEC leading the way with a concern for appearance of independence. The 1962 code of ethics notes that AIndependence is not susceptible of precise definition, but is an expression of the professional integrity of the individual” and prohibits direct financial interest in the client and specific employment relationships [Berryman, 1978]. The profession was Aconcerned by the tendency of the SEC to specify an increasing number of relationships which would result in an accountant=s being considered not independent B regardless of whether or not he was independent in fact” [Carey, 1970, p. 180]. It was felt that the rules themselves might Asuggest to observers a lack of independence, even though the accountant concerned was the soul of integrity and objectivity” [p. 180]. A quote from the Council=s 1947 statement illustrates the profession=s emphasis on independence in fact: Rules of conduct can only deal with objective standards and cannot assure independence. Independence is an attitude of mind, much deeper than the surface display of visible standards. These standards may change or become more exacting, but the quality itself remains unchanged. Independence, both historically and philosophically, is the foundation of the public accounting profession and upon its maintenance depends the profession=s strength and its stature [quoted in Carey, 1970, p. 182]. The inclusion of an independence rule in the 1962 code came after a very stormy 1960 annual meeting where opposition asserted that the Aproposed rule would impugn the professional stature of the CPA and would be an effort to legislate morality” [Carey, 1970, p. 188]. As Carey notes, A[e]ven after the SEC had adopted its rules, it had taken the profession 28 more years to ban completely the most obvious relationships likely to raise doubts about the independence of auditors. But the debate about >relationships= which might mar the >appearance= of independence had barely begun” [p. 191]. These debates, particularly around the issue of management advisory services, continue to date. In addition to concerns expressed by the SEC, academics have questioned the reality of auditor independence. Briloff [1972, 1990], for example, has been writing about the potential deleterious effect of management advisory services on auditor independence for a number of years. Mautz and Sharaf [1961, p. 211] note a number of "built-in anti-independence factors" in the audit environment including the auditor's financial dependence on the client, the "[S]trong emphasis on service to management," the emergence of a limited number of large firms, and a "[t]endency to introduce 'salesmanship'" into the audit environment. Bailey [1995] asserts that there has been an increase in the degree to which a commercial rather than a professional mental model predominates since the mid-1960s. Bailey believes that "[t]he tendency to think about a client's activities as "our" activities is subtle and, in my opinion, dangerous" [p. 193]. METAPHOR AND NARRATIVE 8
Auditor independence has been a troublesome concept for a long time. Part of the intractable nature of the conflict is no doubt rooted in the economic implications of various rules and regulations about auditor independence. But some of the problem is due to the metaphors surrounding the independence issue and the cultural narratives are brought into play. Bartlett [1991, p. 11] notes that AIndependence ... is a common English word which has assumed a special significance in the linguistic structure of the accounting profession.” The reverse is true as well - a technical professional concept has absorbed meaning from the cultural context of independence. Carey [1970, p. 175] hypothesizes that the Aterm >independent auditor= was first used in the sense of independent contractor B to distinguish the auditor offering his services to the public generally from an auditor employed by a company.” Eventually, the word >independence= Awas generally assumed to mean integrity, honesty, and objectivity” [p. 175]. It had absorbed basic tenets of moral theory associated with the concepts of judicial impartiality. For example, Agrawal [1975, p. 110] explains that A[f]rom a broad ethical point of view, a man can be held to be independent only when his higher or rational self, or his ideal personality, determines his actions.” To understand why independence is such a difficult concept to talk about - the profession still lacks a simple or clear definition4 - We examine the metaphors surrounding the concept of auditor independence. Then, we demonstrate a shift in the underlying narrative of the independent auditor from a moral ethics focus to an economic focus. INDEPENDENCE AS SEPARATION Metaphor Lakoff and Johnson [1980] have found that our ordinary conceptual system is fundamentally metaphorical. Metaphorical concepts structure "what we perceive, how we get around in the world, and how we relate to other people" [p. 3]. They point out that our conceptual system plays "a central role in defining our everyday realities" [p. 3] and that we are, to a large extent, not aware of how metaphorical concepts structure and guide our thought. For example, Lakoff and Johnson show how
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Carey and Doherty [1966] explain that the lack of definition is precisely due to the moral character of auditor independence: AOf crucial importance is the statement that independence is not susceptible of precise definition, but is an expression of the professional integrity of the individual ... The reason that independence cannot be defined with precision is that it is primarily a condition of mind and character” [p. 19].
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our thinking about language is structured by the following metaphors5: "IDEAS [OR MEANINGS] ARE OBJECTS"; "LINGUISTIC EXPRESSIONS ARE CONTAINERS"; and "COMMUNICATION IS SENDING." Therefore, we think that "[t]he speaker puts ideas [objects] into words [containers] and sends them [along a conduit] to a hearer who takes the idea/objects out of the word/containers" [p. 10]. Thus, we use expressions such as, "Your ideas came through to us" and "Try to pack more thoughts into fewer words" [p. 11]. However, the "very systematicity that allows us to comprehend one aspect of a concept in terms of another [e.g. comprehending an aspect of arguing in terms of battle] will necessarily hide other aspects of the concept ... and keep us from focusing on other aspects of the concept that are inconsistent with that metaphor." When a concept is structured by a metaphor, "it can be extended in some ways but not others" [p. 13]. This can lead to incommensurability of arguments. For example, the long-standing discussion of threats to independence has not led to any fundamental changes in the basic audit relationship. This could be because serious market pressures "force" the accounting profession to keep on going down a road that many believe is problematic and dangerous. It could also be that thinking about the concept of independence is limited by the limitations of the SEPARATION metaphor. The metaphor INDEPENDENCE IS SEPARATION, which comes from the separative model or ethics of rights perspective, underlies discussions of auditor independence. The separation metaphor has strong resonance with the morality of rights or justice, the Amore or less Kantian moral framework that dominates Western moral theory ...” [Baier, 1995, p. 49]. Tronto [1993, p. 79] explains that the morality of rights or justice is formal and abstract with an emphasis on universal abstract principles. Moral maturity is achieved through a process of separation and individuation of the self from others. The framework is distinguished by an emphasis on separateness, issues of rules and legalities, and consideration of the individual as primary [Brabek, 1993]. The rights perspective is a manifestation of the "separative model of human nature" [England, 1993, p. 37], so-called "because it presumes human beings are autonomous [and] impervious to social influences ..." [p. 37]. The ethics of rights emphasizes detachment, impersonality, objectivity, and individual autonomy at the expense of attachment, particularity, emotion, and intersubjectivity" [Cole and Coultrap-McQuin, 1992, p. 5]. The rights model represents psychological moral development as a process of increasing autonomy and separation from others. Gilligan points out that "[t]he ideals of a liberal democratic society - of freedom and equality have been mirrored in the developmental vision of autonomy, the image of the educated man thinking for himself, the image of the ideal moral agent acting alone on the basis of his principles, blinding himself with a Rawlsian 'veil of ignorance'" [Gilligan, 1987, p. 304].
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Following Lakoff and Johnson [1980], we capitalize metaphorical constructs .
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A similar concept is used in auditing to explain the "state of mind" which must be achieved to assure independence in fact [Carey, 1946]. The following excerpt from Carey's 1946 treatise on professional ethics describes independence as a state of mental separation very similar to the state of mental separation or autonomy called upon in rights-based ethical thinking: Independence is an abstract concept, and it is difficult to define either generally or in its peculiar application to the certified public accountant. Essentially it is a state of mind. It is partly synonymous with honesty, integrity, courage, character. It means, in simplest terms, that the certified public accountant will tell the truth as he sees it, and will permit no influence, financial or sentimental, to turn him from that course [Carey, 1946, p. 7]. Carey pursues this concept of independence along separation lines by maintaining that mental separation and abstraction are the keys to independent thought: It is most important that the CPA not only shall refuse to subordinate his judgment to that of others but that he be independent of any self interest which might warp his judgment even subconsciously in reporting whether or not the financial position and net income are fairly presented. Independence in this context means objectivity or lack of bias in forming delicate judgments [Carey, 1956, pp. 20-21]. Carey recognizes the essential problem with this tack in that "[i]f an auditor were to avoid all relationships which might conceivably induce a bias in his subconscious mind, he would have to work in a social vacuum" [1946, p. 9]. Carey and Doherty [1966] continue: In the literal sense it is unrealistic to assume that anyone can attain absolute independence. No human being can free himself from all outside influences B from his environment, in effect. No one except a hermit can avoid the influences of his family, friends, what he reads and hears, and the attitudes and standards of his community [p. 27]. So, true mental separation is not really practically possible and operates more as an ideal heavily influenced by ethics of rights philosophy. Likewise, the rules-based approach to demonstrating independence in appearance adopted by the profession in the mid-1960's represents an attempt to create a separation from problematic relationships through rules rather than principles. The use of rules that can be objectively and universally applied to resolve problems exemplifies the ethics of rights' moral problem resolution through objective calculus. It would seem from continuing criticism of the profession that neither the mental separation nor the rules-based approach has been particularly successful in promoting auditor independence. Mental separation is hard to believe in and detailed rules seem arbitrary and unprofessional. Furthermore, Wallmann believes that the lack of a clear rationale underlying the detailed rules makes it "difficult to 11
inculcate and instill high levels of integrity, independence and objectivity into the culture of a firm" [Wallman, 1996, p. 77]. In the separation metaphor, independence is no relationship. Yet there is always a clear set of relationships (for example, between clients and firms) which is being denied because of the ideal of radical separation and autonomy. Treating the real relationship as an "as if no relationship" creates an obviously false situation so that efforts to examine what is really going on or to resolve the independence problem are stymied. Reiter [1997] suggests that admitting the INTERDEPENDENCE of auditor relationships is a necessary step toward conceptualizing a set of appropriate relationships. Solutions to the Independence Problem Many proposed solutions to problems with public perceptions of independence are in the form of separations. As previously mentioned, independence rules in the code of ethics represent a separation approach. Proposals for creating separation between the auditor and client, such as having users pay the auditor or having audits performed by the government, are commonly rejected as impractical and potentially inefficient. Mental separations such as "Chinese walls" between the audit and consulting functions of the firm are sometimes proposed, but would eliminate potential efficiency benefits from increased client familiarity from consulting engagements [Elliott, 1994; Wallman, 1995]. Elliott and Jacobson [1998b] discuss a 1997 SEC staff proposed independence test: AWhether a reasonable investor, knowing all the relevant facts and circumstances, would perceive the auditor as [1] having neither mutual nor conflicting interests with its audit client, and [2] exercising objective and impartial judgment on all issues brought to the auditor=s attention” [p. 15]. Elliott and Jacobson assert that auditors and clients should and do share certain interests - both are interested in shareholder value and, hopefully, in truthfulness. Also, taken literally, the proposed test would Aexclude the legitimate situation” of the audit itself, which Acannot exist without creating either common or conflicting interests.” Another approach to improving auditor independence comes from SEC Commissioner Steven Wallmann who suggests that independence does not provide a clear metaphor for helping auditors understand what to do in specific circumstances. He proposes a focus on AVOIDING DEPENDENCE. While dependence may at first glance seem to be merely the flip side of independence, this metaphorical strategy makes sense if accountants have a hard time conceiving of how to have independence (i.e., no relationship) within a relationship, while they might more easily imagine the characteristics of an inappropriately dependent relationship. Again, obviously there is some degree of dependency in all relationships, and being hired and paid by the client firm to provide audit services involves dependency. Wallman conceptualizes dependence as a matter of degree. It may be easier to think of matters of degree in relation to dependence although there is some research evidence that subjects also conceptualize degrees of independence [Bartlett, 1993].
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Wallman recommends a return to emphasis on independence in fact, rather than independence in appearance achieved through the rules on relationships. He maintains that public perception of independence is confused by focus on independence in appearance "even when there is no tainting in fact" [Wallman, 1996, p. 79]. Independence in fact would be determined at the individual practitioner or office level by applying three criteria: ... whether a relationship or activity has the potential to create a dependency that could bias audit judgments; ... whether the potential for dependence is such that independence may not be maintained through appropriate and reasonable measures; if it cannot be, ... whether the relationship or activity would improve the quality of audits [p. 78]. Wallman sees this as a shift from emphasizing whether activities are incompatible with the auditing function to whether an inappropriate relationship of dependency is created. This new focus would be in the public's interest by resulting in independence decisions "more clearly focused on conflicts and dependencies" [p. 78]. Wallman believes that the dependency approach "more closely fits the reality of how people think" so that "it will be more readily understandable by them than the current approach and more effectively incorporated into the culture of an auditing firm" [p. 78]. The new focus also changes from emphasis on the duty owed to the public by the profession to emphasis on doing what is in the public interest [p. 83]. Wallmann=s proposal also heralds a shift away from a moral focus. The moral/philosophical concept of independence goes beyond avoiding dependencies: Independence has two criteria: 1. seeking nurturance from others relatively infrequently [and] 2. Showing initiative and achievement striving ... independence is seen as not only self-reliance, but also self-assertion. This conceptualization makes of independence something much more than lack of dependence [Agrawal, 1975, p. 461]. Elliott and Jacobson [1998b] propose a new model of auditor independence that separates out the moral aspects entirely. The White Paper that the profession delivered to the Independence Standards Board as a proposed conceptual framework for independence concepts is largely based on this conceptualization. Independence is viewed as separate from objectivity and integrity, as Anot a mental attitude or state of mind...” [p. 14]. Objectivity is seen as an intellectual or mental quality and integrity is a moral quality. The metaphor Elliott and Jacobson use for independence is INDEPENDENCE AS A MATTER OF INTERESTS. The definition offered by Elliott and Jacobson is A[a]udit independence is an absence of interests that create an unacceptable risk of material bias with respect to the reliability of financial statements” [1998a, p. 34].
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The definition is of Aaudit” independence, not Aauditor” independence. The White Paper views independence as a characteristic of an audit, rather than an aspect of the auditor-client relationship [Kinney, 1999, p. 71]. Integrity and objectivity are viewed as personal characteristics which neither be observed or regulated, but the relation of an auditor to the information produced by the audit can be regulated [p. 70]. The immediate objective of an audit is seen improving the reliability of information in financial reporting so the objective of audit independence is Ato improve the cost effectiveness of the capital markets” [Elliott and Jacobson, 1998a, p. 32]. Development of this conceptual framework leads to one major conclusion - regulators should not be concerned with independence in appearance since investors do not evaluate independence: In the end, independence is accepted by investors, not determined by them from specific evidence. If this interpretation is true, undermining their acceptance by selective disclosures or by otherwise questioning in public the fitness of qualified auditors independent in fact would needlessly damage confidence in the marketplace [Elliott and Jacobson, 1998b, p. 20]. There is a presumption that independence in fact is widespread because of the power of economic incentives for objective auditing - despite the potential bias of interests like audit fees, the auditor always has an overriding interest in the firm=s reputation [Elliott and Jacobson, 1998a, p. 34]. The set of proposed core principles is largely based on economic concepts like materiality and cost/benefit analysis: No rule intended to help ensure audit independence should result in costs to affected parties exceeding the benefits it can provide in improving the quality of the audit [Elliott and Jacobson, 1998a, p. 36]. Carmichael [1999] notes how different the Elliott and Jacobson/White Paper concepts are from the traditional view of audit independence with objectivity and integrity. He doubts whether it is useful at the individual level to try to attain a radical separation between the concepts of integrity, objectivity, and independence [p. 42]. Furthermore, audit independence has always operated at two levels - at the individual level where independence in fact is important and at the level of the profession where user=s perceptions of independence and the public=s view have always been important. Carmichael concludes that Aany conceptual framework worthy of the profession=s heritage cannot ignore the importance of the public=s perception of auditors as a professional group” [p. 43]. Changing Narratives Allen [1991] defines professional dominance as the need to "secure and maintain control over its work in the economic, political, social and intellectual spheres" [p. 51]. Professions use strategies to 14
negotiate and renegotiate their status. As members of a profession individuals have a special social warrant, not granted to most persons, which permits them, "...to describe their own actions as professional actions, that is, as actions of members of a group that professes to have special knowledge" [May, 1992, p. 100]. The privileged status afforded the group described as a profession permits each member of the group to describe his or her actions as those of a professional: "Thus, in becoming a member of a professional association an individual is publicly declared to be competent" [May, 1992, p. 100]. Professional groups must continually legitimate their privileged status in competition with other groups seeking jurisdiction over the same area of exclusive expertise [Abbott, 1988]. The independence debate may be viewed as an important rhetoric of legitimation necessitated by the institutional arrangements emerging out of the government regulation of financial reporting resulting from the passage of the Securities Acts of 1933 and 1934.6 Unlike the income tax law where the government, as the enforcer of the law, conducts the audit of the taxpayer to assure compliance, the audit of financial data required by the Securities Acts is not conducted by the enforcer of the law but by someone selected and paid by the entities subject to the law. On the face of it, the economic dependence of the auditor on the auditee raises questions about the aggressiveness with which the intent of the Securities Acts (i.e., making the contents of the accounts of firms reliably available to the public) would be pursued by the auditor.7 "Independence" was the narrative of legitimacy accountants employed to justify public trust in them. Preston et al. [1995] explored the profession's strategies of legitimation ("actions that institutions take either to signal value congruency or to change social values " [p. 510]) and found that the profession creates narratives of legitimation from the values of the surrounding society. For example the 1917 code of ethics of the US accounting profession embedded themes from Protestantism, Victorian character and idealism, and pragmatism [p. 516]. These themes were plausibly persuasive because they evoked credible images of the "professional man." For example, Mautz and Sharaf [1961, p. 205] described independence by quoting John L. Carey: It is a part of professional integrity. No self-respecting physician, lawyer, or certified public accountant will subordinate his professional judgement to that of the client or anyone else. It is part of his professional duty to assume responsibility for the advice, the opinions, and the recommendations which he offers, and he cannot shift the responsibility.
6
"Independent" appears in the Accountants Index as a separate keyword for the first time in 1928. "Independence of Accountants" does not appear as a separate classification until 1936. 7 Auditing is the expertise that accountants depend upon for their privileged status. Other services performed by an accountant are ones over which jurisdiction is tenuous [Abbott, 1988]. Bookkeeping, tax preparation, information systems design, cost accounting, etc. are all functions for which there is potential competition. Accounting's monopoly and, thus, its stature as a profession comes from the audit function.
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A parallel was drawn between law, medicine, and public accounting in that individual accountants possessed the same professional integrity and trustworthiness as the practitioners of the two most highly regarded professions at that time. This professional integrity notion of independence as a legitimizing rhetoric became problematic when, during the late 1960s and 1970s, public accounting firms began to substantially increase the amount of management advisory services (MAS) provided to audit clients. For example, in the January, 1966 Journal of Accountancy, an article by John Carey and William Doherty was published in response to the concern that MAS compromised independence.8 What this article illustrated was the weakness of the old rhetoric of independence as a response to those who would question the profession's social warrant to have monopoly privilege to conduct audits, yet be free to enter into other lucrative relationships with those they audited. For example, the authors argue that there is no basic incompatibility between auditing and MAS. They suggest that the profession had been overly concerned with the appearance of independence such that ethical constraints had been narrowed to "...discourage relationships which might appear to a reasonable observer to create a conflict of interest" [Carey and Doherty, 1966, p. 42]. This, they contended, was going overboard, and that: "The answer is to provide sanctions which will give the public maximum assurance that auditors will not subordinate their judgment or subject themselves to what reasonable observers would regard as conflicts of interest" [p. 43]. The weakness of this rhetoric of justification is that the burden-of-proof is always on the profession. It is always compelled to appeal to the "reasonable person" for sympathy. The inability of the profession to lay the burden-of-proof off on its critics, i.e., the onus being on those who must demonstrate lack of independence, was abetted by changes in the discourse about the nature of humans that had occurred in modern society. By the 1960s the policy sciences, notably economics, had come to dominate civic discourse and shape our beliefs about who we are. The sociologist Alan Wolfe claims that modernity, as it disillusioned the sacred, has substituted the social sciences in the the traditionally played by the sacred. According to Wolfe [ 1989, p. 7]: The contemporary social sciences, despite claims to the contrary, have not done especially well as predictive sciences. One reason they nonetheless continue to flourish is because they are a particularly modern form of secular religion, involving, in their own idiosyncratic language, fundamental questions of what kind of people we who are modern are. This transformation in the meta-narrative about human nature was noted by Preston et al. [1995]. They asserted that the 1988 code of ethics of the US accounting profession, rather than using the sacred
8
The article was actually a chapter from a then newly revised text on professional ethics [Carey and Doherty,1966].
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themes of the 1917 code, reflected the values and understandings of modern US culture: the primacy of the individual, reliance on calculative rationality, and intensification of the culture of consumption. With an "economic man", rather than a "professional man", characterization of accounting practitioners the old rhetoric of independence becomes considerably less effective as a credible justification for the accountant's professional status. In a December, 1967 article in the Journal of Accountancy, Frank J. Hoenemeyer, an executive vice-president with Prudential Insurance Company, speaking as a user of financial statements, offered the following observation about whether MAS compromises independence: One of the factors which led me to state that the rendering of management services could (emphasis in original) lead to a loss of independence but would (emphasis in original) not lead to it is my understanding that management services are secondary to the auditing function. By this I mean that the fees produced by the performance of management consulting are less than those from the auditing function. (however) If management services should grow to the point where they are the tail that wags the dog, there would be a real impact on my thinking [1967, p. 35]. The presumption underlying this conditional judgement is that accountants are economic men, not professional men, and that were the economic stakes to change whereby the audit commodity became less valuable that the management services one, the trustworthiness of the auditor would be compromised. That is, trustworthiness is an economically conditioned quality. No one is presumed trustworthy; only once we know what the economic interests are, are we able to assess trustworthiness. Today it is the case that the tail is, at last, wagging the dog. Given the large multiples by which consulting revenues exceed audit revenues for the Big 5 consulting firms, convincing anyone that a consultant could be unbiased and objective in the exclusive interest of the public is virtually impossible. Yet this is what the profession must do. Under the now unquestionable society premise that each and everyone is fundamentally economic in nature, i.e., none of us are truly virtuous, the burden of proof falls heavily on anyone who would allege otherwise. Integrity is not presumed; everyone has a price and he who claims his integrity has the onus of proving it is still intact in spite of the economic allures that are presumed to certainly compromise it. The new model of auditor independence proposed by Elliott and Jacobsen [1998b], described earlier, is a classic example of argument-from-ignorance, which is a strategy for burden-of-proof shifting [Gaskins, 1992]. The origins of this model can be traced to the transformation of academic discourse in accounting into that of neoclassical economics in which the standard economic assumptions about people are considered beyond dispute as descriptions of the world of accounting [see, e.g., Rodgers and Williams, 1996; Lee and Williams, 1999; and, Reiter and Williams, 1999]. Williams 17
[1992] provides a comparison of the traditional notion of independence and the modern analytic, economic one for which the moral character of any particular auditor is irrelevant, i.e., "(T)he crucial issue is the extent to which the auditor cooperates with manager in pursuit of their self-interests” [Antle, 1984, p. 2]. Elliott and Jacobsen adopt this conceptualization of independence when they utilize the metaphor of independence as a matter of interests. The alleged advantage of such a conceptualization is that it is more "rigorous" because it is articulated within an analytical model of human behavior. But the rigor is an illusion because the analytical models of economics have been singularly unimpressive as explanations or predictors of actual human behavior and act more as a kind of mathematical politics rather than as predictive theory [Rosenberg, 1992]. The very inability of economic models to predict provides the proposed definition of independence with a rhetorical power the old notion of independence could not match; it effectively shifts the burden-of-proof away from the profession. Consider again Elliott and Jacobson's definition: "[a]udit independence is an absence of interests that create an unacceptable risk of material bias with respect to the reliability of financial statements" [1998b, p. 34]. The locus of independence has been shifted from auditors to a commodity, the audit itself. Someone who would now contend that large consulting fees compromise independence and, therefore, should be strictly regulated, has to make the case. When independence was an essential property of the auditor which justified his privileged social position, the presence of economic temptations, given the of the presumption of the fallibility of humans' essentially economic nature, was sufficient to require proof of the case that such temptations were indeed resistible. The presumption worked in favor of the accuser because of the fact of human fallibility in the face of gain. But the audit is a thing, not a person. What about consulting fees now? Do consulting fees compromise the independence of audits? This is an entirely different question and as such the burden-of-proof is shifted in a fairly significant way. "Acceptable" of "unacceptable risk" is a purely subjective idea. There is no known economic technology that reliably permits calculating the level of risk for any particular audit, and, even if there were, acceptability is a matter of individual taste. Unacceptable risk becomes an intractable social choice problem for which the auditor bears no particular responsibility. What is material bias? By how much does the Doppler effect of the audit have to shift the financial statements to the "rosy" side?9 There is no way to assess this other than, perhaps, by going to trial. Accountants have yet to define materiality as anything other than a "state of mind." Finally, when is a set of financial statements unreliable? Again, there exists no "reliable" means to assess this. The platitude-like quality of "acceptable risk", "material bias", and "reliability" as a basis for arguing to a conclusion based on some kind of "proof" makes the task of defending itself against claims that consulting fees compromise independence much easier. Indeed, it is perfectly plausible that even in the absence of any audits at all 9
Talk of bias is both paradoxical and dangerous. To speak of bias one must presume there is a reference point, an unbiased presentation, available from which bias can be assessed, otherwise, it is meaningless to speak of bias. But if such an "unbiased" representation is presumed to exist, isn't it the role of the accountant to provide it?
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most financial statements would still be ones that were created with an acceptable risk of material bias with respect to their reliability. The very economic model upon which this notion is based argues that managers have incentives to provide reliable reports of their activities. Proving any set of interests compromises audit independence is difficult if not impossible to do.
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CONCLUSION The recent controversy over auditor independence raises a number of questions. Is the switch to an economic-based concept of auditor independence an economic imperative or does it represent the death of the profession? Can the profession survive the realignment of attest, assurance, and advisory functions in today’s dynamic and global environment? Why has the profession made such halting progress in defining the key concept of auditor independence? We suggest that inadequate metaphors for independence are partially to blame for the Profession’s lack of progress in defining independence principles. The SEPARATION metaphor impedes clear thinking about the complex balancing of relationships and interests needed for appropriate professional judgment. More recent metaphors like AVOIDING DEPENDENCE and independence as a MATTER OF INTERESTS move toward considering the relationships themselves. It is perhaps inevitable that this consideration takes an economic form with deliberations on materiality and cost/benefit analysis. As the character of the independent auditor changes from “judicial man” to “economic man”, the profession needs to be sensitive to the possibility that the changing narrative of auditor independence may affect the profession in unforeseen ways. As Carmichael [1999] noted separating independence from ethical notions like integrity and objectivity has potential consequences. One of these consequences has been discussed by Williams [1999], who argued that the substitution of a strictly economic discourse for the traditional discourse of accounting, of which the old notion of independence was a part, deprives accounting of any effective moral language with which to assess itself ethically or to articulate any of its ethical problems. What the new model of independence proposes is the abandonment of an explicitly moral idea of what it means for a person to be a good accountant, i.e., MacIntyre's [1984] notion of a good internal to the practice. If the burden of proof is on society to insure that members of a profession are behaving professionally, why should society not withdraw its warrant for privileging that group as a profession? All traditional professions (at least those understood in a functionalist sense) like medicine, law, and the clergy have moral content evidenced by their pledges to be initiators of service in the interests of all others. Imagine the fate of medicine if doctors publicly proclaimed that they were abandoning a professional commitment to the health of all persons, or lawyers to justice for all, or clergy to everyone's salvation. Furthermore, if independence is transformed into platitudes about costs and benefits, what do we teach accounting students about what it means to be an accountant? Bereft of moral meaning, accounting is merely a commodity like used cars. How does accounting attract intelligent, thoughtful, humane people into its ranks if it offers them nothing but "...vast tomes with detailed rules as if for a profession of morons" [Chambers, 1999, p. 250].
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