transforming audit technologies

8/7/2019 transforming audit technologies

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Accounting, Organizations and Society 32 (2007) 409438

www.elsevier.com/locate/aos

0361-3682/$ - see front matter 2006 Elsevier Ltd. All rights reserved.

doi:10.1016/j.aos.2006.09.002

Transforming audit technologies: Business risk audit

methodologies and the audit Weld

Keith Robson a,, Christopher Humphrey b, Rihab Khalifa c, Julian Jones b

a CardiVUniversity, Aberconway Building, Colum Drive, CardiVCF103EU, United Kingdomb University of Manchester

c Warwick University

Abstract

Business Risk Audit (BRA) methodologies have been promoted by a number of the large audit Wrms in response, they

claim, to the challenges of the information age and corporate clients needs for assurance. This paper subjects their claim

to critical scrutiny, drawing on the perspectives of neo-institutional theories of legitimacy, the sociology of professional

knowledge and the sociology of science and technology. To bring into play new Business Risk Audit methodologies a

number of the larger Wrms have sought, through their auditing practice, to renegotiate the bases of their professional

identity and status within audit Wrms and to widen their jurisdictional claims over other areas of expertise. These moveshave been accompanied by the legitimation and embedding of Business Risk Audit in revised constructions of the mar-

ket for audit, in abstract academic knowledges, reforms of professional education, and professional regulations. In pro-

viding a constructivist account of Business Risk Audit technologies, we argue for a theory of audit change that

recognises (i) the centrality of legitimation processes and (ii) the co-construction of audit technology and the audit Weld.

2006 Elsevier Ltd. All rights reserved.

This paper addresses the issue of audit change;

more speciWcally, technological change in audit

practices and the embedding of audit technologies

in professional and institutional structures. OurspeciWc focus is the collection of audit technologies

and methods that have as a deWning characteristic

the incorporation of client-Wrm strategy and busi-

ness risk into the assessment and planning of audit

risk. While there may be diVerences between thespeciWc technologies, and their labels, used by audit

Wrms, there are suYcient commonalities to group

them as Business Risk Audit (BRA) methodologies

(see Bagshaw, 1999; Curtis, 2003; Curtis & Turley,

2005; Eilifsen, Knechel, & Wallage, 2001; Knechel,

2004; Lemon, Tatum, & Turley, 2000; Winograd,

Gerson, & Berlin, 2000).

* Corresponding author.

E-mail addresses: [email protected] (K. Robson),

[email protected] (C. Humphrey), Rihab.Khalifa@

wbs.ac.uk (R. Khalifa), [email protected] (J. Jones).
mailto:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]:%[email protected]


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410 K. Robson et al. / Accounting, Organizations and Society 32 (2007) 409438

To understand audit change the paper argues

that it is necessary to understand the organiza-

tional Weld of relations in which audit Wrms oper-

ate (Scott, 2001, pp. 13644). DiMaggio and Powell(1991, p. 148) deWne the organizational Weld as

those competitors, regulators, suppliers, and con-

sumers that collectively constitute a recognized

area of organizational life and is institutionally

deWned.1 Hence, the audit Weld of the title refers to

the audit Wrms, clients, investors, professional asso-

ciations, regulators (professional, state, supra-

national) and, a source of normative legitimacy,

educational institutions. In our account we note the

interactions between members of the audit Weld. In

this paper, the emergence of Business Risk Audit

(henceforth BRA) methodologies are examined as

institutional events (Burchell, Clubb, & Hopwood,

1985; Hopwood & Miller, 1994) through which to

analyse and comment upon the audit industry and

the profession. We argue for a theory that views

technologies of audit as co-constructed with their

economic, social and cultural environments

(Latour, 1993). In eVect we seek the development of

a theory of technological change in audit that sees

the technologies and contexts as co-produced and

co-dependent. Our title: transforming audit technol-

ogies signals both the transformations of audittechnology and the wider transformative relations,

adaptations and eVects within the audit Weld.

In pursuing our theoretical agenda we draw on

the perspectives of neo-institutional theories of

organizations, the sociology of professional knowl-

edge and the sociology of science and technology.

Accordingly, we argue that in order to distribute

and embed BRA methodologies, audit Wrms have

had to seek legitimacy for them and enrol allies in

the institutional environment (Latour, 1987). In

related processes of co-construction, actors in theaudit Weld attempt both to establish new technolo-

gies and build the supportive environments in

which those technologies are mobile, through such

processes as regulation, standardization and edu-

cation. This in turn involves deWning, redeWning or

embedding a claim or claims to knowledge (upon

which the profession stakes its professional statusand jurisdiction) within a complex of professional,

regulatory and cultural, including academic, envi-

ronments (Abbott, 1988; Lounsbury, 2004; Strang

& Macy, 2001; Strang & Meyer, 1993; Suchman,

1995). The production and the legitimacy of new

technologies are co-terminous and overlapping

processes in practice, but for the purposes of ana-

lytical clarity we have tried to consider them sepa-

rately in the two main sections of the paper.

With such ends in mind, our paper illuminates

what is at stake in the development of a new audit

methodologies and the conditions of possibility for

their emergence. We consider the network of eco-

nomic and cultural relationships that established

BRA and how such technologies come to be

embedded (insofar as this has been achieved). Of

particular relevance is how new claims to audit

knowledge are articulated, to which constituencies

new knowledge claims are addressed, and how and

from whom legitimacy is sought. In the concluding

discussion we consider whether, after Enron, there

are challenges that constrain the ascendance of

Business Risk Audit. We argue that the BRA pro-ject is not simply indicative but productively

revealing of the changing character of the profes-

sion, the status of auditing and, in particular, the

professional identities of auditors in the Big

Wrms, of course, but also in terms of the contrast to

the professional self-image of accountants, and the

norms and beliefs of auditors working in small and

medium sized Wrms.

The Wrst main part of the paper presents a brief

review of recent audit methodological develop-

ments and identiW

es the scope for developing theo-retical conceptualisations of the ways in which

auditing technologies are transformed. This is fol-

lowed by a short outline of our methodology. The

second main section of the paper commences with

our empirical analysis of the development of BRA,

considering the particular signiWcance of the

nature of the market for professional services and

the potential appeal oVered by BRA in terms of

extending the professional jurisdictional bound-

aries of an auditing profession experiencing threats

1 Scott (1995) deWnes an organizational Weld with the follow-

ing: the notion ofWeld connotes the existence of a community

of organizations that partakes of a common meaning system

and whose participants interact more frequently and fatefully

with one another than those actors outside of the Weld (Scott,

1995, pp. 207209).


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K. Robson et al. / Accounting, Organizations and Society 32 (2007) 409438 411

to its status. The third part considers the ways by

which the profession, or key players within it, have

sought to legitimise BRA and facilitate the diVu-

sion of such technologies. SpeciWc consideration isgiven here to attempts to provide a knowledge base

for BRA, whether through professional Wrm publi-

cations, education and training developments, or

the development of auditing standards and regula-

tions. The paper concludes by highlighting its

contribution in terms of enhancing conceptual

understanding of the (complex) nature of change

processes in audit technologies and the continuing

value and signiWcance of subjecting the practical

operation and achievements of such technologies

to critical scrutiny.

Business risk audit techniques and audit research

The rise of business risk audit methodologies

Since the publication of The Audit Explosion

(Power, 1994), a number of social science and

political commentators have noted the extension

of old and the rise of new audit technologies in the

emergent evaluative and accountability processes

of economic, social and political organizations(Power, 1997; Strathern, 2000). We are, for exam-

ple, accustomed to hearing of medical audit,

eYciency audit, eVectiveness audit, performance

audit, value-for-money audit and environmental

audit (Pentland, 2000). One of the contradictions

of this apparent audit explosion has, however, been

the loss of prestige and legitimacy that has accrued

to traditional Wnancial audit (Wyatt, 2003; ZeV,

2003a, 2003b). There has been in traditional audit

an implosion through which continued question-

ing of audits signiW

cance and contribution has ledto a critical re-evaluation of audit practices. New

models ofWnancial audit have been developed and

promoted in the name of client service (Power,

2000). During the 1990s many of the large audit

Wrms announced the development of new BRA

methodologies. These have been heralded as

the audit of tomorrow and a complete transfor-

mation in assurance practices is said to be

accompanying changes in the management and

organization of modern corporations (for example,

see Elliott, 1997, 1998; Elliott, Rasmussen, Rucker,

Strange, & Williamson, 1999; Stewart, 1998, 1999a,

1999b). Lemon et al. (2000, p. 1) have observed

that:during the 1990s several of the major inter-

national accounting Wrms developed their

methodologies on the basis of business risk

analysis.

Bagshaw also argued:

over the last two years, the Big 5 have all

rolled out major changes to the way they per-

form audits, in the form of new audit meth-

odologies that are said to be powerful tools

designed to pinpoint the critical elements ofbusiness risk and audit risk, (1999, p. 96).

Following a study of audit methodologies

encompassing all the Big Five (as was) and two or

three of the largest second tier Wrms in three

countries, Lemon et al. (2000) concluded that,

while some diVerences of approach existed:

(t)here is good reason to view the business

risk approaches as a signiWcant innovation to

the existing model (Lemon et al., 2000, p. 10).

The script for BRA methodologies runs as fol-lows: BRA innovation focuses upon the modelling

of business risk processes of the clients company,

and using this knowledge as the basis for establish-

ing Wnancial statement risk and, accordingly, the

main focus of subsequent audit testing. Analysis of

business risk forms the precursor to an analysis of

the likely sources of audit risk (see Fig. 1). As part

of the new audit the client companys strategy is

examined and tied to its business process. Out of

this emerges an assessment of key business risks

that in turn informs the essential areas of potentialaudit risk for the auditor.

In addition to the fulWlment of the statutory

audit task, BRA methodologies are claimed to pro-

vide valuable feedback to the client. Client com-

pany strategy is analyzed by the auditor and a

report on the key areas of business risk is fed back

to the client, serving as a knowledge spillover

from the audit. BRA provides, it is said, a better

focussed, more streamlined audit plus assurance

for the client that their business strategy is sound.


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Bell, Marrs, Solomon, and Thomas (1997, p. 50)

draw upon this script (see Fig. 2) to summarize

the key diVerences between traditional audit and

BRA Audit Plus (ToZer & Reingold, 2003,

p. 132).

In summary, this new process ofWnancial state-ment attestation claims to incorporate both more

eVective auditing and greater added-value client

service by allowing the auditor to comment and

advise the client, both upon business risks and the

accounting implications of those risks. While tradi-

tional audit is said to be oriented towards compli-

ance, the BRA approach is said to create value;

whereas the traditional approach is transactions

based, the evolving audit is risk based. An accom-

panying rhetoric also suggests that BRA oVers

auditW

rms economies of professional audit labour(see Curtis, 2003), and, as we note below, audit cost

reduction has been regarded as a critical factor

explaining the design of the methodological

programme of BRA. Moreover, Lemon et al.

(2000) go somewhat further in their summary, sug-

gesting that this top down approach to auditing,

starting with the business processes and moving

down to the Wnancial statements, potentially oVers

greater audit eVectiveness, eYciency, client service,

better corporate governance and consistency at an

international level. The emphasis on (potentially)

enhanced audit eVectiveness is signiWcant as earlier

attempts to enhance the value oVered by auditors

to their clients rested upon providing add-on(often classiWed as free), extra services such as

treasury or risk management advice, rather than

building such work directly into the audit investi-

gation (see Humphrey & Moizer, 1990).

To date, there has been relatively little explora-

tion, empirical or theoretical, of the processes

through which audit techniques change (Carpenter

& Dirsmith, 1993). Indeed, although it is now

widely accepted, almost to the point of clich, that

there is much to be gained from attempting to

understand accounting in its social context (see, for

example, Burchell, Clubb, Hopwood, Hughes, &

Nahapiet, 1980, 1985; Cooper & Sherer, 1984;

Hopwood & Miller, 1994), auditing research has

remained relatively immune from the inXuence of

this type of theorizing, particularly in terms of the-

oretical and empirical analysis of contemporary

audit practice. There have been relatively few stud-

ies exploring the ways in which the rise, implemen-

tation and application of new audit technologies

are shaped by the formal and informal schemata,

beliefs and norms that make up the organizational

culture of an audit Wrm and its environment (Car-penter & Dirsmith, 1993; Power, 2003). As Hop-

wood (1996) and Jeppesen (1998) have argued,

much of audit and its associated technologies

remain a black box (cf., Humphrey & Moizer,

1990).

The emergence of BRA oVers an opportunity

to enhance theoretical understanding of processes

of technological change in auditing and to

explore how changes in audit technologies can be

conceptualized as socially constituted, rather

than simply operative within economic and socialenvironments (Mizruchi & Fein, 1999, p. 654). In

doing so we draw upon three bodies of social the-

ory that are perhaps more usually considered

separately: neo-institutional theories of organiza-

tional legitimacy (DiMaggio & Powell, 1991;

Suchman, 1995), the sociology of professions

(Abbott, 1988; Freidson, 1986), and the sociology

of translation (Latour, 1987). In the next section

we outline in more detail our theoretical con-

structs.

Fig. 1. The business risk link to audit risk.


5/30


6/30


need for new responses in the information age

(Elliott et al., 1999; Lindsey, 2001).

The growth of business risk based audit tech-

niques has been more or less contemporaneous inArthur Andersen (Business Audit), Ernst and

Young (Audit Innovation), KPMG (Business Mea-

surement Process) and PricewaterhouseCoopers

(PwC Audit Approach) (Bagshaw, 1999; Eilifsen

et al., 2001; Knechel, 2004; Lemon et al., 2000;

Winograd et al., 2000), though Deloitte and Tou-

che seem, thus far, to have withstood the trend. In

a professional service industry where technological

innovations are viewed as commercial weapons,

there is little reason to deduce that these large and

medium audit Wrms worked collaboratively in the

establishment of BRA methodologies. Rather, this

degree of simultaneity in developments in BRA is,

we suggest, indicative of wider processes of social

and cultural rationalization.

Of course, the KPMG document is a self-

reported account (see also Elliot, 1994, 1997), not a

report of research Wndings. In contrast academics

such as Jeppesen (1998) view the BRA phenomena

as linked to the dissolving by audit Wrms of the

boundaries between management advisory services

and audit. Similarly, Fischer (1996) suggests that

the substitution of procedures by new audit tech-nologies has as a common theme the attempt by

audit Wrms to reduce procedures and costs. Kne-

chel (2004) refers to a cauldron of globaliza-

tion in the market for audit requiring that audit

costs and proWtability improve. While Knechel

(2004) considers BRA to be perhaps, more a reXec-

tion of determinism by economic market environ-

ments, in contrast to Fischer (1996) and Jeppesen

(1998) who both emphasise the agency of auditors,

all three authors views are linked by conceptions

of audit change that focus upon the economics ofaudit: audit markets are driving change and audi-

tors are demanding cost reductions. In this way

audit techniques appear as mere servants or tools

to economic processes.

Although the costs and prices of audit plainly

have a role in audit changes, such aspects tell us

little about the form or structure of the new audit

techniques that emerge. Many possible changes to

audit methods may result in a lower cost proWle,

but how do these changes account for the concur-

rent rise of business risk audit methodologies?

This paper seeks to illuminate how the inside of

these new audit techniques embodies broader cul-

tural assumptions and constructions linked to theoutside audit Weld; in other words how the out-

side, being market, Wrm and knowledge construc-

tions, help to construct audit technology. To

conceptualize these relationships, we suggest that

the development of audit technologies are best

considered as processes in social construction, as

indicated by the three moments in the social ori-

gins of institutionalization that Berger and Luck-

mann outlined (1966; cf. Carpenter & Dirsmith,

1993, pp. 4453), namely: externalization (the pro-

cess through which the products of human activity

appear external to the individual); objectivation

(the process through which the products of human

activity attain the character of objectivity); and

internalization (the process through which the

objectivated social world acts back upon the pro-

ducer through socialization). For Berger and

Luckmann (1966, pp. 7079) the construction of

the institutionalized world is simultaneously an

external and an internal process. To this end we

develop neo-institutional theories of legitimacy to

frame our analysis.

Drawing upon the work of Berger and Luck-mann (1966), Meyer and Rowan (1977) developed

a theory of institutionalization that suggested

organizations act to produce (and consume) legiti-

macy for their activities. One example of this is

how they build representations about themselves

and their actions in order to achieve legitimacy

from their environment. Such accounts may often

be loosely coupled with what the organizations

actually do, but their key role is to serve as sym-

bolic accounts of their activities that tie in with

what inX

uential environments consider organiza-tions should do. Building upon Meyer and

Rowan (1977), DiMaggio and Powell (1991), in a

seminal article Wrst published in 1983, drew atten-

tion to the way that organizations show many

structural similarities in modern societies. These

similarities, they argued, were a consequence of

organizational responses to institutional impera-

tives from the environment. DiMaggio and Powell

described the pressures for homogenization as

isomorphism and analyzed three mechanisms


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through which institutional isomorphism might

occur: coercive, mimetic and normative processes.2

As Mizruchi and Fein (1999, p. 653) argue,

DiMaggio and Powells contribution to the devel-opment of neo-institutional theory is now a social

construction itself, in the sense that their contribu-

tion to knowledge is the outcome of selective

interpretation and operationalization in neo-

institutional research. Following on from Mizruchi

and Feins argument, in our view, one problemati-

cal aspect of the exploitation of neo-institutional

theory has been an overly mechanical selection and

interpretation of the process of institutional iso-

morphism: in particular, relying on a model of

institutionalization that sees changes internal to

organizations simply as responses to external iso-

morphic pressures (DiMaggio & Powell, 1991).

In ways that recall GarWnkels criticism (1967, p.

71) of social theories that suggest actors as cul-

tural dopes (actors who can do only what cultural

roles provide), Bowring (2000) and others (Barley

& Tolbert, 1997; Hirsch, 1997; Hirsch & Louns-

bury, 1997; Lounsbury & Ventresca, 2002) have

argued that this model of environment and organi-

zation set up by selective applications of the con-

cept of institutional isomorphism has had the eVect

of occluding the role that organizational actors intheir Welds play in interacting with the environ-

ment and interpreting the meanings of their

contexts to construct and re-construct their envi-

ronment.3 Moreover, such interpretations of neo-

institutional theory also appear to have little to say

about how organizations are themselves powerful

agents in the construction of social, economic and

cultural environments (Perrow, 1985, 1986; Stern

& Barley, 1996).

Pursuing such concepts, any attempt to theorise

the BRA phenomenon should in our view treattechnologies simultaneously as a product or con-

struction of the audit Weld, and yet also capable of

impressing a re-construction of this Weld as technol-

ogies are promoted and enacted by auditors and

audit Wrms. This process we term the co-construc-

tion of technologies and audit Welds. Although it is

clear that auditors perceive institutional and com-

petitive pressures as both objective and external,

how they interpret and act, perhaps by such inno-

vations as new organizational forms, adapting tech-

nologies or product innovations, are themselves

both a outcome of their internalization of an exter-

nalized social reality, and a medium through which

to re-construct that social reality in accordance

with their professional identity. While the social

world does not have the ontological status of objec-

tivity, experience of it as externalized and objecti-

Wed is dependent upon a socialized internalization

(Berger & Luckmann, 1966, p. 70; Giddens, 1984).

What this paper is moving towards, therefore, is

a theory that does not simply observe and recite the

environmental pressures that act upon organiza-

tions, but one that has something to say about howthose pressures are constructed, perceived and

drawn upon in action by auditors inside their Wrms

in ways that also change audit Welds. Hence our

focus upon co-construction: technologies that audi-

tors develop are both a construction of the audit

Weld and an intervention that construct the audit

Weld in new ways. While acknowledging that the

economic conditions facing audit Wrms bear a

prominent role in the transformation of organiza-

tional products, structures and technologies, we

want to emphasise the signiW

cance of the co-con-struction and co-presence of internal technologies

and external environments in the production of

audit change. Building upon concepts of co-con-

struction connected to the work of Latour and his

associates in the sociology of translation (Latour,

1987; Shapin & SchaeVer, 1986), our account will

highlight the central role of organizing knowledge

and legitimation processes in audit change (Abbott,

1988, pp. 5354). In detailing the processes through

which BRA has assumed the form of an abstract

2 Coercive isomorphism refers to pressures upon organiza-

tions to conform that might arise, for example, from state regu-lation or the requirements of the organization to gain resources

from signiWcant environmental actors, such as funding agencies.

Mimetic isomorphism is the result of a pressure to conform that

emerges from uncertainty. In uncertain environments, organiza-

tions often choose to mimic their peers. Normative isomor-

phism refers to homogenization arising from the inXuences of

professions on the norms, structures and practices of organiza-

tions.3 Bowring, in particular, has questioned the relationship to

concepts of social construction (and the work of Berger and

Luckmann) that many applications of neo-institutional theory

seem to present (2000).


8/30


and legitimate knowledge, we note the work of the

three central agents in the formal institutionaliza-

tion of professional knowledge, namely, practitio-

ners (technicians), administrators (technocrats) andacademics (intellectuals; cf. Freidson, 1986, pp.

209230). From an ensemble of technical practices,

regulations and academic knowledges, the con-

struction and legitimation of BRA knowledge

claims in the audit Weld are then traced. Following

the methodology section, we develop these argu-

ments with respect to the rise of Business Risk

Audit methodologies, starting with the audit Wrms

problematization of the market for audit services.

Methodology

To address the emergence of BRA in the con-

text of the transformation of audit, we adopted a

pre-dominantly qualitative approach. The research

presented here builds on an analysis of discourses

within a range of archival evidence, and is based

upon an examination of the major Wrms publica-

tions, brochures and websites (including archive

sites dating back to 1996), as well as documentary

material emanating from the professional accoun-

tancy institutes (in particular relating to matters ofaudit regulation, practice, training and education).

The analysis has also been informed by material

obtained through a series of interviews that we

have conducted with audit partners and senior

managers from a range of Big, mid-tier and small

Wrms with UK oYces in Manchester and London,

and with a limited number of former auditors, now

working in business consulting and private equity.

The interviews, most of which were conducted

post-Enron, explored recent changes in modern

audit technologies. The combination (or triangu-lation) of several research sources was important

in improving the reach and robustness of the theo-

retical claims made in this paper and overcoming

the perspectival problems normally associated

with using a single data source/method.

We used our data sources in diVerent processes

of textual interpretation, the overall purpose of

which being to extract the systems of meanings

that surrounded the emergence of BRA. Above

and beyond the close attention to the data that we

collected for this research project, we relied sub-

stantially on our familiarity with the Weld of audit-

ing. Prolonged engagement with audit Wrms in

various studies conducted by each of the research-ers was valuable in interpreting patterns observed

in our data. Interview transcripts and archival

evidence cast each other in a particular light and

both were interpreted in the context of the

researchers wider understandings of the audit

Weld and the accounting profession. Spending time

in the Weld, or hanging around (Strauss & Cor-

bin, 1998) provides the researcher with a special

perspective on the material collected during the

research, as well as a special understanding of the

participants and how these individuals interpret

their social worlds (Berg, 2004, p. 266). Hanging

around denotes an ongoing engagement with the

Weld that can yield insights that cannot be directly

extracted from individual textual, visual or verbal

clues, an approach that has often been linked to

social anthropological styles of research (Bernard,

1998).

Our interpretive approach is characterized by a

focus upon the discursive construction of BRA as

a technology (Potter, 1996, p. 35). Our usage of the

term discourse refers to a contextual form of

language use (van Dijk, 1997) with a focus on thesymbolic order and communicative elements of

such discourses, such as how, why, when and by

whom is language used to describe changes, the

facts of those changes, in audit methodologies. By

focusing upon the constructive eVects of discourse,

we indicate how the descriptions of BRA and the

claimed needs for audit change are constructed

through discourse in relation to the social identity

of auditors, their relationships to clients, aca-

demics and professional administrators and regu-

lators, as well as existing knowledge practices inthe audit Weld (Fairclough, 1992, p. 64; 1989). Dis-

course refers to the context of an interpretive com-

munity which is the frame of its existence. In this

paper the interpretive community is understood as

the institutional Weld of audit.

Our analysis relies in part on content analysis as

a way of understanding meanings emerging from

discourses in the audit Weld. Accordingly we ana-

lysed discourses related to BRA at two levels. At a

manifest level (Berg, 2004, p. 269) we describe cer-


9/30


10/30


particularly in the area of management consulting,

with the 1990s being a quite intense period in terms

of the relative rise in consulting revenues and the

pressures on audit fees (Suddaby, Cooper, &

Greenwood, 2004).

The provision of non-audit services by the self-

styled large Professional Service Firms (who tend

not to classify themselves as just audit Wrms)

appears to have been particularly lucrative. More-

over, pressing the advantage of the global scale

and reach of the large audit Wrms still further, the

1980s and 1990s have seen the contraction of the

Big Eight auditing Wrms to Big Six, Five and now

Four. This process has been conducted in conjunc-

tion with an ever-increasing diversiWcation in the

services oVered by such Wrms (Dezalay, 1991,

p. 793).Other constructions of the problem of audit

point to pricing: commentators have argued that

since the late 1980s audit clients have become

much more prepared to shop around for their

audit (Greenwood & Lachman, 1996; Boyd, 1999).

While this contest for audit clients has probably

contained audit fee levels, the contraction in the

percentage revenue split between audit and non-

audit sources of revenue, however, is not simply a

reXection of pressures upon audit fees by clients.

The stratiWcation of the market for audit and theconcentration of large audit Wrms indicate a mar-

ket for audit services at the large corporation level

that is far from the neo-classical model of perfect

competition (Fligstein & Freeland, 1995). While

methodological problems with the measures

remain, there is ample justiWcation for aYrming

that the supply side of the market for audit ser-

vices market is highly concentrated (Moizer &

Turley, 1989; Pong, 1999; Tonge & Wootton,

1991).

The market for audit services is constructed by

statutory obligation and highly regulated. More-

over, it is based upon a complex social as well as

economic network of individual auditor and clientrelationships (Dezalay & Sugarman, 1995; Ander-

son-Gough, Grey, & Robson, 2004) in which ex-

employees of the large audit Wrms often become

audit clients (Squires et al., 2003, chap. 5). A mar-

ket in which there have been, during the 1990s,

only Wve or six main providers is connotative of

one in which the supplier of services is not a sim-

ple price-taker. As such, it is widely acknowledged

that audit Wrms appear to have been keen to low-

ball (Boyd, 1999; Chapin, 1992, p. 18; Jacob,

1991; Knechel, 2004; Sikka & Willmott, 1995) the

bid for audit, in the expectation that the provision

of non-audit services to the captured client will be

a suYciently lucrative and oVsetting source of

proWtability (Abdel-Khalik, 1990; Beck, Frecka, &

Solomon, 1988; David, Ricchiute, & Trompeter,

1993).

Additionally, it has been claimed that audit

costs have tended to increase following hikes in

auditor training costs and insurance premium

charges (Eilifsen et al., 2001, p. 193), particularly in

the wake of increased litigation (OMalley, 1993).

Moreover, as others have noted (Boyd, 1999; Man-son, 1997; Matthews, 2002; Power, 2000) one of the

expected consequences for BRA practice is that the

requirement for substantive testing of transactions

is diminished one of the more sensitive beneWts

of BRA (Hatherley, 1998) and that the level of

audit costs is reduced. Yet the market position of

audit and large audit Wrms is not determined sim-

ply by a cost proWle of audit, but reXects the con-

scious pricing strategies of audit Wrms in the

market for audit services and divergent price strat-

egies in the market for non-audit services(DAngelo, 1981; Ezzamel, Gwilliam, & Holland,

1996; Palmrose, 1986; Simon & Francis, 1988;

Simunic, 1984). In short, partners of large audit

Wrms are signiWcant actors in the construction and

functioning of these markets (Granovetter, 1985;

Dezalay & Sugarman, 1995), and not passive recip-

ients of market forces. Nevertheless, discourses of

the depressed market of audit, in Berger and

Luckmanns (1966) terms, externalize concepts of

the market that Wrms through their audit practices

Table 3

Proportional US Revenue Sources for Big Eight (Five) Firms:

1975, 1990 and 1999

(Source:Suddaby et al., 2004).

Year

1975 (%) 1990 (%) 1999 (%)

Audit 71 49 30

Tax 17 25 21

Consulting 12 26 49


11/30


have helped to construct. At the same time the

market position of audit is treated as objective by

audit Wrm actors. In so doing, audit market dis-

course partially constructs the problem that BRAis claimed to address.

As we argued above, however, acknowledging

the declining proWtability of audit tells us little

about the form and nature of the organizational or

technological responses that emerge. As Louns-

bury and Rao (2004) have explained, the disci-

plines of market demand do not dictate the

speciWc changes in organizations that reconstitute

products or technologies. The functionalist eco-

nomic demand-led, change explanations neglect

how outcomes such as BRA methodologies are

negotiated by members of the organizational Weld.

There is now an extensive literature that examines

how the political (such as the presence of dominant

producers) and cultural (such as dominant tastes

and preferences) characteristics of an organiza-

tional Weld structure the emergence and redeWni-

tion of products in speciWc markets (Hirsch, 1972;

Fligstein, 2001).6 BRA methodologies appear to

combine the characteristics of products the large

audit Wrms already supply audit and business

advice and in so doing have established a degree

of product ambiguity where none previouslyexisted. The externalizedmarket reality of audit is

interpreted and reproduced by the Wrms them-

selves, and as such the response of auditors is con-

structed by their internalization of the objectivated

market. To understand these aspects of the pro-

duction of BRA methodologies is to incorporate

the political and cultural relations in the audit Weld

that re-structure and re-constitute the audit prod-

uct.

In these terms, the declining proWtability of

audit has implications that extend beyond the eco-nomic and into the status and legitimacy of audit,

its position in the organizational hierarchy of prac-

tices, products and services within the large diver-

siWed audit Wrms and identities that audit profes-

sionals bring to their work.

Professional service Wrms and the legitimacy

of audit

The legitimacy of audit resides substantially inthe statutory frame in which audit requirements

are embedded and by those claims that legitimate

the profession as a whole, that is, the attachment of

auditor expertise to dominant cultural codes and

values such as eYciency, rationality and science

(Abbott, 1988; Dirsmith, Fogarty, & Gupta, 2002).

However, the status of audit and the professional

identity of auditors is also connected to the cul-

tural and socialization processes within the large

audit Wrms. The loss of proWtability or, indeed,

decline of audit (Boyd, 1999) stands in close rela-

tion to the loss of prestige of the audit function

inside the large audit Wrms themselves.

While the evidence that validates this loss of sta-

tus is less immediate than fee data, the spectacle of

the split between Andersen Consulting and Arthur

Andersen in 1999, the most diversiWed of the Big

Six Wrms, was indicative of the tensions and rival-

ries between the value adding activities of the self-

styled professional service Wrms non-audit services

and the statutory, seemingly unproWtable, prac-

tice of audit attestation (Squires et al., 2003). Fur-

ther clues to the position of audit practice in largeWrms are found in examinations of the training and

socialization of auditors which relate closely to the

redeWnition of audit inherent in BRA methodolo-

gies (Saks & Ashforth, 1997).

US and UK studies of audit socialization and

professional identity in the large audit Wrms share

many of the same judgments as to the constitution

of the accounting professional and the main

features of professional identity amongst auditors

and trainees, and clearly point to a substantial

decline in the prestige of audit within the largediversiWed professional service Wrms.7 Although

6 The lobbying of elites, for example, structured the categori-

zation and associated pricing of wines in France rather than soil

conditions or climate (Ulin, 1996; Lounsbury & Rao, 2004).

7 Whereas ten years ago there were less than a handful of

qualitative and ethnographic studies of accountants (Dirsmith

& Covaleski, 1985a; Harper, 1988, 1989), the present decade has

seen something of a proliferation of such work (for a review, see

Anderson-Gough et al., 1998a, 1998b, 2000; CoVey, 1993, 1994;

Dirsmith & Covaleski, 1985b; Grey, 1994, 1998; Hanlon, 1994).

We now know a great deal more about how accountants live

their daily lives and enact professionalism, at least in the large

public accounting Wrms.


12/30


the provision of statutory audit to a corporation

has usually been a conduit to the provision of

value creating non-audit services (tax, manage-

ment consulting), the studies that exist of auditWrm culture (Anderson-Gough, Grey, & Robson,

1998a, 1998b, 2000; Dirsmith, Heian, & Covaleski,

1997; Grey, 1994, 1998; Khalifa, 2004) have

aYrmed that audit is accorded low status in the

hierarchy and division of labour within the Big 5

professional service Wrm activities (Abbott, 1988,

pp. 125129; Wyatt, 2003; ZeV, 2003a, 2003b).

Personnel management systems of the large

Wrms have reinforced through appraisal mecha-

nisms, a notion of professional that has a range of

speciWc organizational and cultural meanings.

Dominant conceptions of being professional con-

structed through professional training stress con-

duct and appearance. These meanings typically

refer to trainees personal aspects and conduct,

especially in front of the client. As the client ser-

vice ethic is closely connected to the selling skill

and commercial awareness aspects of performance

appraisal (including seizing the opportunities to

expand the Wrms non-audit services), it is unsur-

prising that although many auditors and trainees

consider the possibility of a career within the large

audit Wrms, the audit task is commonly perceivedas one of the lower prestige points in the Wrm hier-

archy of accounting careers. Auditors develop lit-

tle professional identiWcation with audit through

their training and socialization.8 Prestige points

within the Wrm lie in the divisional functions

judged creative and value adding, such as man-

agement consulting and corporate recovery. As

Anderson-Gough et al. (2000, p. 1166) have

argued:

Notwithstanding the claims of practicality

and general business training that traineesattach to their work in audit Wrms, one curi-

ous element of this is the low esteem in which

audit is held, once qualiWed. Audit is no

longer held to be a lucrative, challenging or

enticing career within the Wrms by the major-

ity of those who either leave or remain with

the Wrms in the hope of future partnership.Recent research focusing on the intra-profes-

sional rankings amongst specialisms in UK

accounting Wrms found that accounting profes-

sionals placed auditing the lowest:

Indicators of the specialisms professional

status include references to salaries, the age

of members, the nature of their knowledge

base, the potential mobility after qualiWca-

tion, the number and social composition of

members and their commercial value to

Wrms (Khalifa, 2004, p. 156).

The falling cachet of audit was conWrmed by an

accompanying survey of ICAEW members in

which auditing and personal taxation were ranked

by respondents as least prestigious and auditing as

least Wnancially rewarding (Khalifa, 2004). More-

over, Gwilliam and Brierley (2001) found that

auditing personnel were regarded as most easily

replaceable by human resource managers in

accounting Wrms, while ICAEW members work-

ing in industry were recently found to rank the

contribution of the statutory Wnancial audit

within their organisation quite lowly placing it

behind internal, health & safety and quality audits

(see Humphrey, Bowerman, Owen, & Stride, 2002,

p. 11).

Other indicators of audits status conWrm these

assessments: for example, the report by the Panel

on Audit EVectiveness (2000) set up by the Public

Oversight Board in the US, at the request of the

SEC, remarked critically on the apparent com-

modiWcation of audit and the questionable tone

at the top set by large audit Wrms:

Focus group participants often indicated

that not only clients, but also engagement

partners and Wrm leaders, treat the audit

negatively as a commodity. Some respon-

dents to the Panels survey and some engage-

ment teams interviewed..expressed a similar

view, in some cases implying, by the more

positive comments made about the Wrms

other service lines and their perceived higher

8 This does not mean that auditors lack concern with formal

accreditation as professionals indeed, the contrary. The way in

which accreditation is conceptualised, however, appears some

way removed from the traditional picture of the profession as a

repository of technical knowledge or as exemplifying a public

service ethic.


13/30


levels of growth and proWtability, that the

audit was viewed as a commodity. The

emphasis on providing proWt-enhancing

ideas to the clients management, so theaudit would appear to have value beyond

meeting statutory requirements, also con-

tributed to the perception that audit itself

had little value. (Panel on Audit EVective-

ness, 2000, pp. 99100).

The erosion of status has been linked to audits

declining proWtability despite the unmistakable

strategies of the large Wrms to treat audit as the

gateway to the supply of the more diverse and

Wnancially rewarding non-audit services to the cli-

ent. While audit partners could justify the eco-nomic role of the audit function to the Wrm as a

subsidized or loss leading activity, the emphasis

within the Wrms upon managing and evaluating

partners through measures of fee income, realiza-

tion rates and proWtability suggests that in prac-

tice they are just as subject to the same sort of

Wnancial targets as their senior managers and

partners in the other commercial divisions of the

Wrms (Covaleski, Dirsmith, Heian, & Samuel,

1998; Squires et al., 2003, pp. 95102; Stevens,

1991, pp. 174175). This in turn suggests that thecultural status attached to individualized mea-

sures of fee income and proWtability, sales cul-

ture (Squires et al., 2003, chap. 6), has worked in

practice to the disadvantage of audit divisions

within the Wrms.

Viewing the development of BRA from such a

perspective adds a diVerent dimension to explana-

tions of external economic market pressures driv-

ing technological change. The accent on business

advice (adding value) embodied within BRA

methodologies potentially oVered higher prestige

and a new identity for auditors more consonant

with the other functional identities of the large

professional service Wrms, such as management

consultancy or corporate recovery. The transfor-

mation of auditor to an added value business

advisor promised an enhanced status for audit

and the possibility of new markets, as well as

addressing the economic problems of audit in

ways that are considered to be in the interests of

the client.

Extending professional jurisdiction: business risk

audit, assurance and internal control markets

Abbott has argued that the ability of a profes-sion to sustain jurisdiction resides in part on the

power and prestige of its academic knowledge

(1988, pp. 5354). Professional knowledge relies

upon a process of abstraction and as such the main

function of academic knowledge for the profes-

sions is often symbolic rather than practical (1988,

p. 54; Bourdieu, 1986). To this end the role of aca-

demics in the system of professions is signiWcant

though not necessarily at the level of technical

development. The research evidence that follows

supports Abbotts claim, suggesting that the devel-

opment of BRA has been legitimated by its associ-

ation with an abstract, academic theory of business

strategy.

The development of BRA is tied to the wider

cultural emergence of strategic, risk and assurance

technologies in the management of corporations.

Through the 1980s diVerentiation, cost leader-

ship and focus became key mantras as corpo-

rate managers and business schools absorbed and

reproduced an abstract strategic analysis of com-

petitive position (Porter, 1980, 1985). The late

twentieth century witnessed an explosion in busi-ness texts outlining the importance to corporations

of managing their risk in seemingly scientiWc ways

(Bernstein, 1996). This rise of academic and expert

knowledge forms emphasizing corporate strategy,

competitor assessment and business risk manage-

ment over operational eVectiveness, has contrib-

uted signiWcantly to the intellectual antecedents of

BRA technologies. The risk models underlying

BRA methodologies developed by the professional

audit Wrms borrowed heavily from the industry

analysis/industry structure model of competitiveposition and, in turn, the academic discourse of

strategy helped to legitimate them (Bell et al., 1997).

BRA methodologies have given auditors access

to a new discourse and market rationale for audit

that ofassurance for the client. In the aftermath of

the Treadway Commission Report on Internal

Control (COSO, 1990) in the US the large audit

Wrms were, throughout the 1990s, at the forefront

of the dissemination of the Corporate Risk Man-

agement, Business Risk programme throughout


14/30


the 1990s (e.g., Coopers & Lybrand, 1996; DeLo-

ach, 2000; Economist Intelligence Unit, 1995,

1998). As Eilifsen et al. (2001) have noted, with

BRA, the task of the auditor commences with afocus on business issues and processes, both

generic to the clients industries or market (bench-

marking) and speciWc to an analysis of the Wrms

risk exposure, leading to an expectation that:

the audit team ..provide valuable additional

assurance to the client as part of the basic

audit engagement. As auditors obtain evi-

dence from controls and performance indica-

tors, we expect high-value assurance tasks to

replace low-value substantive testing (Eilif-

sen et al., 2001, p. 196, emphasis added).

By gaining knowledge of client strategy, com-

petitive advantage and business risk as the prelude

to the assessment of audit risk, BRA methodolo-

gies are said to generate knowledge spillovers for

the auditor that provide the basis for an assurance

report to the client. The new Wnancial statement

attestation incorporates greater added value cli-

ent service by allowing the auditor to comment

both upon business risks and the accounting impli-

cations of those risks (Eilifsen et al., 2001). The

implementation of BRA necessitates the auditorsecuring new knowledges on core processes and

information risk management from the client

(Eilifsen et al., 2001). By relating this information

to industry models the auditor is then able to

assess corporate strategic risks, opportunities, haz-

ards, controls and performance. To this end, BRA

has required investment in industry level databases

and developed knowledge management systems

through which to measure and benchmark client

related information.

The discourse of value added may be themost distinctive element of BRA methodologies as

compared to previous developments in audit (Mat-

thews, 2002), and goes some way to accounting for

the way that this new audit technology has been

promoted so visibly as a vital component of the

audits merchandising instrument (Power, 2000;

ToZer & Reingold, 2003). Value added is of course

a term with many referents in business knowledges

of the 1980s and 1990s (EVA, Just-in-Time, ABC,

etc.), suggesting a mimetic component to the BRA

knowledge base. And in redeWning audit rationales

in this way the new audit function allows the large

audit Wrms, as Covaleski, Dirsmith, and Rittenberg

(2003, p. 338) have suggested, citing the AICPA,to migrate up the economic value chain and lay

claim to wider areas of professional expertise in the

markets for other assurance and consulting ser-

vices (AICPA, 1997).

One example of this laying claim is the US

debate on outsourcing of internal audit. The exten-

sion of markets for non-audit services into the ter-

ritory of professional internal auditors has pitched

the large Wrms into debates and conXicts that have

encompassed the AICPA, the SEC and the Insti-

tute of Internal Auditors (IIA) over the role of

auditing professionals and the economic relation-

ships between audit Wrms and their clients (Coval-

eski et al., 2003). As we noted above, the self-image

of the large audit Wrms is now as professional ser-

vice, not simply audit Wrms. To this end the

added value claimed by BRAs proponents assists

the integration of audit services within the large

Wrms as another component of their assumed role

as global knowledge experts (Covaleski et al.,

2003).

In one account from a former Arthur Ander-

sens partner in the US, the slow take-up ofBusi-ness Risk (the Andersen variety of BRA) was

countered with a memo to all AA partners spelling

out the signiWcance of the new methodology to its

marketing strategy. The memo read:

BA [Business Audit] is the key to imple-

menting other planks in [Assurance and

Business Advisorys] strategic pyramid, par-

ticularly our need to grow risk consulting ser-

vices and integrate other service categories,

i.e. cross-sell other AA services (ToZer &

Reingold, 2003, p. 137).

While audit has traditionally served as an entre

to the supply of non-audit services, BRA method-

ologies enable the extension of professional juris-

dictions into forms of corporate governance and

risk management not normally associated with the

large audit Wrms (Abbott, 1988, p. 125). Covaleski

et al. (2003) show how the movement towards the

outsourcing of internal control functions, in asso-

ciation with the risk management approach to cor-


15/30


porate control, has oVered the large Wrms the

opportunity to legitimate the extension of their

jurisdictional domain into the market for profes-

sional internal auditors. As ToZer has argued,within Arthur Andersen the rationale for promot-

ing Business Riskwas explicitly related to the pro-

vision of internal control services:

The idea seemed to be that in the rapidly

changing, highly complex world that all com-

panies were facing, risk was the enemy. What

better way to manage your risk than to make

sure that your internal and external auditors

saw life from the same perspective? (ToZer

& Reingold, 2003, p. 143).

The rhetoric of audit as business advice con-

nected to the AICPAs attempts to promote the

profession as global knowledge experts accredited

with XYZ, the Global Credential (AICPA, 2001).

The American Institute of CPAs special committee

on assurance services report also highlighted a

potentially lucrative future for the profession in

adopting an assurance perspective on audit

(AICPA, 2001). Headed by Robert K. Elliott, a

partner of KPMG Peat Marwick LLP, in New

York, the committee reported that the introduc-

tion of new assurance services could double oreven triple the CPA professions $7bn. accounting

and auditing income. The AICPA web site

reported that the Elliott committee:

found clear evidence that Wnancial state-

ment audits are a mature product. Account-

ing and auditing revenue, adjusted for

inXation, has remained Xat for the last seven

years. The traditional audit ofWnancial state-

ments adds value to both users and clients, is

widely appreciated for its eVect on the integ-

rity of the capital markets, contributes to the

CPAs reputation for objectivity and integ-

rity and will continue to be in demand in the

future. But the greatest opportunity for

growth lies in assurance services. A close

look at potential customers and the trends

changing the practice environment shows

why. The need for information services is

exploding and in those needs lie opportuni-

ties for the CPA profession. The core beneWt

of the audit-attest tradition information

improvement provides a foundation for

new value-added services. (www.aicpa.org/

pubs/jofa/jun97/assur.htm).9

From this standpoint, an apparently academi-

cally justiWable process of BRA not only con-

structs a value-added audit market but helps

realize new markets in corporate risk management

and the outsourcing or co-sourcing of internal con-

trol.

To summarize, if the vocabulary of justiWcation

for BRA methodologies has the creation of

added-value for the client as a central theme, then

this is all of a piece with the construction of the

fee-pressured, concentrated market for audit cli-ents. By transforming the rationale of audit to

encompass business knowledge and advice and

hence facilitate the extension of inXuence in new

markets for internal control, BRA oVered auditing

the potential of an enhanced standing as a com-

mercial practice within the large professional audit

Wrms. In the next section we move away from the

relative prestige of audit and the construction of

new markets to examine other key facets of the

development of BRA methodologies in the audit

Weld. We focus upon the institutional construction

of regulatory and normative frameworks that have

sought to legitimate BRA methodologies in the

audit Weld.

The co-construction of technologies and

legitimation: embedding business risk audit

A signiWcant literature now exists on the role of

audit in the production of legitimacy in organiza-

tions and society (Humphrey & Owen, 2000; Pent-

land, 2000; Power, 1997, 2003; Strathern, 2000),but much less has been written about the process

of acquiring and developing the legitimacy of audit

technologies themselves. In this section we take up

the second major theme of the paper: securing

legitimacy and enabling the mobility of new audit

9 This report was published exclusively on the AICPA web-

site: http://www.aicpa.org/assurance/scas/index.htm , but seem-

ingly is no longer there.
http://www.aicpa.org/pubs/jofa/jun97/assur.htmhttp://www.aicpa.org/pubs/jofa/jun97/assur.htmhttp://www.aicpa.org/assurance/scas/index.htmhttp://www.aicpa.org/assurance/scas/index.htmhttp://www.aicpa.org/assurance/scas/index.htmhttp://www.aicpa.org/pubs/jofa/jun97/assur.htmhttp://www.aicpa.org/pubs/jofa/jun97/assur.htmhttp://www.aicpa.org/pubs/jofa/jun97/assur.htm


16/30


technologies. While the concept of legitimacy is of

course a familiar construct in neo-institutional

sociology (DiMaggio & Powell, 1991; Meyer &

Rowan, 1977; Suchman, 1995), our emphasis hereis to contribute to an understanding of audit

change by highlighting the co-construction of

audit technologies and legitimacy. Accordingly, we

outline a number of the processes through which

BRA methodologies have gained legitimation in

the audit Weld, and how developments within the

audit Weld in turn further enhanced such legiti-

macy.

In this section we highlight the role of formal

knowledge and regulation in the establishment of

new audit techniques. Freidson (1986, pp. 913)

argued that professional powers rest, in part, on

the development of formal knowledge but that the

production of formal knowledge is necessarily

mediated by a professions linkages to the agents

of formal knowledge such as academics and uni-

versities. As we noted above, the role of abstract

knowledge for a profession is more symbolic than

practical (Abbott, 1988, pp. 5355). Similarly a

professions technocrats or administrators service

the professions educational or credentializing pro-

cess wherein professions are generally recognized

as professionals. By developing and enforcingpractice standards, such activities seek to legiti-

mate (or protect) the professions claim to conduct

its work in a professional manner, demonstrate its

ability to regulate itself and also serve to mediate a

range of political, economic and cultural forces in

the professions environment (Power, 1995). Such

processes have variously involved the engagement

of professional associations and their administra-

tors, regulatory bodies, clients and academics.

Normative sources of legitimacy: business riskauditing methodologies as knowledge claims

As noted above, the set of methodologies that

we group as Business Risk Audit reXect in part the-

ories of corporate strategy that originated in aca-

deme in the 1980s. As such the production of BRA

rested in part on its absorption of, and association

with, academic knowledge claims. However, the

promotion of BRA has also depended signiWcantly

on a range of other processes oVering normative

sources of legitimacy, including speciWc links with

universities, the writing and dissemination of texts,

the production of case studies for teaching, the

funding of research and the promotion/sponsor-ship of academic conferences.

A relevant example here is the 1997 publication

ofAuditing through a Strategic-Systems Lens: the

KPMG Business Measurement Process (Bell et al.,

1997). While the text deals speciWcally with

KPMGs chosen form of BRA, the impact ofBell

et al. (1997) has been such that it is seen to repre-

sent a theoretical case for BRA. Bell et al. is often

held out as an important formal expression of the

main contours of a BRA science of auditing (e.g.,

see Knechel, 2004; Power, 2000).

The text bears careful scrutiny. Many of the

same claims to the value creating or value-adding

role of BRA are found in the Bell et al. monograph,

as they are also evident in KPMGs The Financial

Statement Audit (Elliott et al., 1999). While some

sections of Auditing through a Strategic-Systems

Lens appear to have been driven by a marketing

orientation, much of the text gestures towards

established scientiWc knowledge bases that accord

with the normative types of legitimacy that profes-

sionals traditionally recognize and aYrm. The

appeal to science in these sections is strikingly simi-lar to those that accompanied early textbooks on

statistical sampling for auditors (Carpenter & Dir-

smith, 1993, pp. 4850; Power, 1992).

The monograph opens with the following quo-

tation:

In our time, the conWdence, maturity and

promise of a science should be measured not

by its power to reduce the complex to the sim-

ple . . . but instead by its willingness to study

complexity with advanced methods under

descriptions that respect the reality of what isbeing studied. (David J. Depew and Bruce H.

Weber, Evolution, Ethics, and the Complexity

Revolution in Bell et al. (1997, p. 1).

The quotation highlights a relationship that is

frequently overlooked in many accounts of the

authority of accounting and auditing namely the

links to a culturally legitimate view of accounting

and audit as an objective science. In no small way

Auditing through a Strategic-Systems Lens articu-


17/30


lates and embraces the status of scientiWc knowl-

edge. The Wrst page continues:

Accounting plays a central role in the

eYcient allocation of resources in market-based economies. By adding credibility to

accounting measurements and disclosures,

auditing has for centuries made it possible for

accounting to play such a key role. Todays

global economy and the business organiza-

tions operating within it, however, have

become so complex and interdependent that

new approaches to auditing must be devel-

oped. With these new approaches, the auditor

would embrace and master, rather than sim-

plify, the complexity inherent in the economicweb of interrelationships of which the client

organization is a part (Bell et al., 1997, p. 1).

While most academics and researchers (and per-

haps practitioners) would deny a scientiWc basis to

the practices of accountants and auditors, the legit-

imacy of the profession rests in part upon an

acceptance that individuals and organizations are

rational and knowable. This in turn rests upon the

wider cultural dominance of science and belief in

its authority, if not as a direct source of instrumen-

tal knowledge in accounting or auditing practicebut as a cosmology that underlies the accounting

profession, and other bearers of modern rationali-

zation (Drori, Meyer, Ramirez, & Schofer, 2003).

Following the initial suggestion of a scientiWc

foundation for the new auditing approach, the Bell

et al. monograph establishes academic justiWca-

tions for BRA and organizational complexity in

the global economy. Its authors academic prestige

clearly plays a part here, with two of them, Ira

Solomon and Howard Thomas being respectively

KPMG LLP Distinguished Professor of Accoun-tancy at the University of Illinois at Urbana-

Champaign and James F. Towey Professor of

Strategic Management also at the University of

Illinois at Urbana-Champaign.10 Moreover, while

the Wrst named author (Timothy O. Bell) is Direc-

tor of Assurance Services at KPMG LLP, he was

previously a member of the accounting faculty at

the University of Texas at Austin. The monograph

has a preface by Professor William Kinney, one of

the most senior Wgures in American auditing

research over the past three decades (Kinney,1986), a consultant to the profession on many

auditing policy issues who has also served on vari-

ous AICPA committees including the Auditing

Standards Board (19811984) and the aforemen-

tioned Special Committee on Assurance Services,

the Elliott Committee (199497).

The text runs through the methodological

underpinnings of BRA, the relationships between

strategic systems, business concepts of risk and

audit, and gestures towards other, quite diverse,

knowledge claims to justify the new audit. As well

as economic reasoning, cybernetic systems metho-

dologies are drawn upon to portray the organiza-

tion as a complex, living system (Bell et al., 1997,

p. 15). Decision sciences modelled upon cybernet-

ics are explained in order to outline the organiza-

tion as a risk-bearing, quasi-organic body. New

Age physicist/philosophers, such as Fritjof Capra,

are cited in support of the holistic, systems

approach exempliWed by BRA (Bell et al., 1997, p.

14). Whilst the words theory and science are also

clustered with new age terms, most science/theory

words relate to strategy (for example, Porters con-cept of value-chain analysis (Bell et al., 1997, p. 27,

31, 334; Porter, 1980, 1985), complexity (Bell

et al., 1997, p. 1, 56, 10; Depew & Weber, 1995;

KauVman, 1995) and systems theory (Beer, 1966;

Bell et al., 1997, p. 167, 33; Richardson, 1991)).

Although Bell et al. (1997) refers to the inde-

pendent auditor, there is no discussion of the

concept of independence indeed the term inde-

pendence does not crop up. On the other had, con-

cepts of service and assurance to the business,

client or management are very prevalent indeed client- or management-words far outnum-

ber references to either auditor or shareholder. The

ongoing assumption of the text is that by servicing

the management/client through the KPMG busi-

ness risk methodology, owners are also served.

Moreover, the strategic systems audit is commonly

associated with vocabularies of change, global,

the new and the future to contrast it with the

traditional audit of the past. Bell et al. connect

the new audit to an analysis of organizational10 Thomas is now Dean of Warwick Business School.


18/30


value-creating processes (1997, p. 43) so as to dis-

tinguish it from traditional work of audit (Bell

et al., 1997, p. 2, 1922).

Auditing through a Strategic-Systems Lens is aneclectic mix. The key point, however, is that Bell

et al. legitimate the process of reconstituting the

knowledge base of audit from compliance and sub-

stantive testing towards the auditor as business

risk assessor. Although the monograph is short on

speciWcs as to the audit procedures and practices

introduced or modiWed by BRA methodology, it

delineates how external audit can be remodelled

and re-crafted to address matters of risk manage-

ment, internal audit and assurance. The signiW-

cance ofAuditing through a Strategic-Systems Lens

lies in the connections it makes to legitimate,

abstract academic bodies of knowledge that are

claimed to underpin BRA. In an industry in which

client conWdentiality is used to justify the limited

access granted to researchers and secrecy of meth-

odology is justiWed as a competitive weapon, the

Bell et al. (1997) document stands out as an open,

public expression of the new auditing, albeit to a

diVerent, if overlapping, constituency: knowledge-

able professionals, regulators and academics, per-

haps best presented by Freidson as the knowledge

class (1986, p. 8283).This approach is further illustrated in the fol-

low-up text, Cases in Strategic-Systems Auditing

(Bell, Peecher, & Solomon, 2002), which reports

the results of the Wrst eight of twenty three cases

funded under a related element of KPMGs Busi-

ness Measurement Case Development and Research

Program that had funded the Bell et al. (1997)

monograph.

Following dissemination of the monograph,

the case development and research program

was established to engage scholars in the

development of classroom materials relevant

to a 21st century audit environment, fol-

lowed by scholarly research to advance

knowledge and enable further improvements

in audit methods and techniques. Our goal

was to produce some of the most realistic

and intellectually nurturing teaching materi-

als available for business and assurance edu-

cation (Bell et al., 2002, pp. viiiix).

The cases represent a Wrst attempt at addressing

the pedagogy of BRA. The introductory chapter in

Bell et al. (2002) by Timothy Bell, Mark Peecher

and Ira Solomon seeks to clarify and extend theideas presented in the Bell et al. (1997) monograph

Our overarching goal is to help the reader under-

stand the fundamental antecedents and rationale of

Strategic Systems Auditing (Elliott et al., 1999, p.

7). It starts with the familiar premise that auditing

methodologies have become increasingly ineY-

cient and eVective as innovations in information

technology altered the business landscape. New

methodologies were needed to help auditors obtain

the in-depth business knowledge required to assess

the economic implications of complex business rela-

tionships and activities and to guide the search for

instances in which managers may have exploited

ambiguous and complex accounting rules (Elliott

et al., 1999, pp. 78). The chapter stresses the signiW-

cance of the auditors mental mode and his/her stra-

tegic-systems thinking skills. In particular, it

emphasizes the importance of holistic strategic anal-

ysis, calling for the use of forest thinking rather

than tree-by-tree thinking on the part of strategic-

systems auditors (Elliott et al., 1999, p. 19).

The Bell et al. monograph (1997), The Financial

Statement Audit (Elliott et al., 1999) and the Bellet al. (2002) case studies text denote the value add-

ing ideals of BRA as a major source of justiWcation

and merit. Further links between the KPMG Busi-

ness Measurement Process and academia have been

forged by sponsorship of research intent on

Advancing the State of the Art in Business Measure-

ment (KPMG, 2002). Academic researchers have

been encouraged to submit proposals related to

extending knowledge of business measurement,

including risk measurement and control, business

process performance, internal and external busi-ness reporting and transparency, assurance, corpo-

rate governance, and enabling technologies.11

KPMG has also hosted conferences in San Diego

and Copenhagen at which academics and practi-

tioners were invited to discuss the latest thinking in

the KPMG Business Measurement Process.

11 The Program Advisory Boardincludes Timothy Bell and Ira

Solomon.


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An important consequence of these processes is

that BRA is now recognized as a legitimate arena

for research. Academics have now studied the

impact of BRA on audit costs (Curtis, 2003), haveundertaken Weld studies of BRA in new market

economies (Eilifsen et al., 2001; Ballou & Knechel,

2002), compared Big Firm methodologies (Lemon

et al., 2000; Winograd et al., 2000), posited relation-

ships between business risks and audit fees (Bell,

Landsman, & Shackelford, 2001), tested assump-

tions about the connections between business risk

and audit risk (Kotchetova, Kozloski, & Messier,

2005; Salterio, Steven Knechel, & Natalia, 2005;

Wu, Roebuck, & Summers, 2002), modelled the

impact of BRA and support software on auditor

judgments (Ballou, Earley, & Rich, 2004; ODon-

nell & Schultz, 2004a, 2004b, 2005) and written

textbooks on the audit and assurance methodology

(Knechel, 2001). In these ways, and in contrast to

the conventional gap view of accounting research

and its relationship to accounting practices, such

large Wrm sponsorship of academics and academic

functions have served to promote BRA and its

associated knowledge claims and set in motion a

programme of research that now seeks to explain,

legitimate and extend the reach of BRA techno-

logies (Abbott, 1988, p. 54).

Regulation and coercive legitimacy: circulating

business risk audit

As Latour (1988) and others have noted (Sha-

pin & SchaeVer, 1986; Shapin, 1995), the develop-

ment of standards for education or best practice

enables knowledges and technologies to circulate

by creating standardized contexts for applying

such knowledges and techniques. In this section wefocus upon the actions of professional technocrats

and their eVorts to bolster the legitimacy of BRA

technologies by bringing them within recognisably

legitimate, though rarely restrictive, professional

regulations (Freidson, 1986, p. 228). Rather than

viewing professional regulation as a process that

constrains the practices and methodologies of

audit Wrms, we argue that a network of regulatory

action (DiMaggio & Powell, 1991) can be seen to

have facilitated the promotion and legitimation of

BRA methodologies (Strang & Meyer, 1993). Reg-

ulatory processes now grant to BRA a signiWcant

mode of legitimacy by recognizing its import

within the audit Weld. In this section we note howstandards, regulations and professional guidelines

in education and standard-setting have all been re-

conWgured to license and empower the develop-

ment of BRA methodologies, and in so doing these

adaptions have enhanced the legitimacy and diVu-

sion of BRA. Even though BRA has almost exclu-

sively been associated with the largest audit Wrms,

professional associations in the UK and, interna-

tionally, have enabled a wider dissemination and

approval of such methodological approaches.

The embedding of BRA in the audit Weld has

been a signiWcant political project (Covaleski et al.,

2003) for the audit Wrms within their respective

national associations. As Lemon et al. (2000) sug-

gested, the introduction of BRA subsumes several

assumptions about the expertise and competencies

of auditors:

A business risk approach emphasises judge-

ment, and broad skills to be able to assess the

position of a business in its environment,

matters of strategy, operations and Wnance.

This has implications for the nature of the

formal qualiWcations recognised as appropri-

ate for auditors, for the structure of educa-

tional courses accredited in the process of

qualiWcation and the recruitment and train-

ing of audit staV by the public accounting

Wrms. There is a heavy emphasis on strategic

management embodied in the business risk

approach and, as a consequence, auditors

conducting audits under that approach will

have to be strongly conversant with the stra-

tegic management literature (p. 22).

Revising the content of professional training

helps to aYrm that the auditor has the established

competence or expertise to conduct a re-invented,

added-value audit function. Demonstrating com-

mand over, and the appropriate credentials for

developing (Reed, 1996), an abstract body of

knowledge is a fundamental element of profes-

sional jurisdictional control (Abbott, 1988). With-

out a credible background of expertise and training

the claims of BRA could be held in question by


20/30


occupations with competing or overlapping con-

cerns with business risk- such as, for example, the

professional associations of internal auditors.

Indeed, some years prior to the publication of theLemon et al. study (2000), the English Institute

(ICAEW) had initiated a review of the professional

training process. The resulting internal inquiry into

the future of the profession and the skill set of the

accountant of the future published Added Value

Professionals: Chartered Accountants in 2005 in

which the scenario of a possible oversupply of

chartered accountants and loss of audit work

would be compensated by a transformation of the

audit sector towards assurance reporting to third

parties on matters such as pensions, internal con-

trol, public sector services as well as the traditional

audit client (ICAEW, 1996, pp. 2021). By setting

out the agenda for the UK profession in these

terms the 2005 report set in train a series of facilita-

tive reforms to professional accreditation and edu-

cational requirements that would construct the

future in these terms.

While the added value business professional

construct reXected the potency of the large Wrms, in

practice this leverage operated through engage-

ment with issues by their appointees to the relevant

ICAEW internal committees. For example, PeterWyman, the then chair of the key ICAEW commit-

tee responsible for educational matters, the Edu-

cation and Training Committee (E&T), was a

senior tax partner in what later became Pricewater-

houseCoopers. Wyman had begun a review of the

structure and curriculum of the examinations con-

stituting the professional qualiWcation process. The

ICAEWs E&T Committee subsequently issued a

Green Paper in 1998 entitled Creating the Added

Value Business Advisor, which reinforced the valid-

ity of key tenets within BRA.The Green Paper recommended the adoption

of specialist pathways within the training process.

Whilst certain technical skills remained core to the

credential, the Green Paper proposed elective

routes within the examinations process to broaden

the potential education of prospective entrepre-

neurial accountants. At public meetings held to

explain the proposals to Local District Societies

and in the Wnancial press, representatives from the

smaller accounting Wrms regularly voiced concerns

over the diluting of core accounting competen-

cies, in favour of a more general business or, per-

haps, even MBA-style education. The changes

suggested by Creating the Added Value BusinessAdvisor (1998), however, were consistent with the

skills changes that subsequent BRA methodolo-

gies have claimed as necessary if traditional

accountants were going to be capable of becoming

business risk assessors. According to Williams

(2001), by the turn of the century, 25% of the

revised ICAEW training syllabus had become

weighted to matters of business risk and internal

control.

The content of annual Wnancial reports was also

a target for regulatory initiatives that have been

underpinned by a greater focus on issues of busi-

ness risk. In 1998 the ICAEW issued a discussion

document proposing that publicly traded compa-

nies should issue a Statement of Business Risk in

their annual reports (ICAEW, 1998). Whilst mind-

ful of the probability that corporations would not

wish to disclose commercially sensitive material in

such a report, the ICAEW Steering Group, headed

by Robert Hodgkinson (then Chair of the Finan-

cial Reporting Committee and an Arthur Ander-

sen partner) maintained that such a report would

assist Wrms to reduce their cost of capital andencourage better risk management, as well as

improving accountability to investors (ICAEW,

1997, p. 1). The report drew explicitly upon the

Arthur Andersen Business Audit methodology to

outline various concepts of risk and the diVerent

methods available for assessing risk. SigniWcantly,

the report recommended that as:

[i]nvestors ascribe more value to company

reporting when it is audited. We believe that,

in principle, the proposed contents of a state-

ment of business risk are veriWable and capa-ble of being audited. (ICAEW, 1997, p. 49).

The methodology underlying the new business

risk audit was further reinforced by the reports

proposal that companies should compile reports of

their business risk for auditors to audit. One conse-

quence of a Statement of Business Risk, however,

is that some of the endeavour of the new audit

would be taken over by the corporation (providing

the business risk information for auditors to then


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K. Robson et al. / Accounting, Organizations and So

transforming audit technologies

Documents