Independence Day

July 4th, 2016

Why should we accountants and auditors think about independence? There is an urgent need, because ethical questions are “back on the scene”, which could not be solved technically. It seems as if the figures themselves have become unstable, because they have no true ethical basis.

There are several standard scripts on how accountants and auditors talk about ethics. First, there are our 12 standard hours in continuous professional education in ethics. The accounting profession wishes to train members ethically. There is the standard “Sunday speech”, in which members of the profession claim that “we are held to a higher standard”. This sounds somehow elevating, although it is a question of whether it is fully ethical to claim to be ethical. There is also the cynical talk about ethics, which I heard recently from an audit professor in a lecture: “Independence is the core value of the profession, but of course“, he said, and then he looked through his fingers, “true independence is an illusion!” A lecture in ambiguity. Last but not least there is the intimate talk of professionals who confess to each other (in the evening, in a bar, during a business trip) that they have doubts, that they have a bad conscience, that they sleep badly, because of the permanent and increasing ethical challenges. All these modes of talking about ethics I will not address here.

Instead, I would like to use a mode that I would call the general narrative of the profession. It goes like this: once upon a time – flash, thunder, smoke –the independent subject appeared, who was able to decide what is right and what is wrong. In free association, it interacted with other free subjects, and as a result of this interaction, numeric values appeared, and these numeric values are verifiable in ever higher developing third party confirmations.  This verification through an independent third party we call auditing. It makes that our figures are a true representation – so goes the saying – of reality.

As you can see from this narrative, there should be a clear and unbroken line from an ethical value (independence) to numeric values. This sounds prudent. If things would be like this, then our accounting languages, our national GAAPs, would converge. We would overcome our national accounting systems. Who can withstand the language of prudence? If things would be like this, ever higher constructions of third party verification would develop, voluntarily, automatically, and our normatives would become more perfect, more exact, and thus ad infinitum. Unfortunately, this is not the case.

My thesis is that there is no unbroken line from the core ethical value “independence” to our normatives. There is and must be a disruption. If you look carefully, you will see this gap; but I must warn you: our normatives do a lot, in order to paste the crack. The easiest way how you can see the disruption is if you look on the two terms “independence” and “Generally Accepted Accounting Principles”. Then you ask yourself: “If I am independent, how can I then accept GAAP?” I mean, if you are independent, you must critically review these standards, and then, maybe, maybe not, you accept them. General acceptance does not fit into the concept of independence.

Or you could say: our house of GAAP is solid, with a good fundament, it has been stable already for decades and regularly renewed and maintained. Your interpretation of independence, as suggested above, is somehow too radical. Can we not somehow define “independence” with a standard, so that it fits to GAAP?

And indeed this is what happens. There is a popular narrative path from normatives to ethics, in which the normatives try to dominate the ethics. The results are “independence standards” or “codes of ethics”. As you can see, this is now the other way round: while in our original narrative, the movement was from ethical values to numeric values, now the crowd plods in the other direction, from normatives towards ethics. In the same way, as we determine a new accounting standard, we try to find unified ethical value: there should be a defined process, with approved commissions, and these pundits will know what true ethical values are! Normatives always appear as thick files. This is because they try to paste the crack that exists between pure ethics and normatives.

A pure ethical moment is a moment when the initiator puts himself or herself radically at risk: he or she does what he or she must do, usually because of a higher calling, not out of selfish reasons. For example, citizens risk their lives on the barricades for the sake of the republic; settlers risk their lives for the sake of independence from the colonial power. It is the purity of this action (there is no exchange operation at work), which makes the value believable. There is also no third party confirmation of this initial moment. There is even no process in place. Pure ethics must be free from normatives, in order to find a resonance . In other words, “independence” exists, but in a much more radical way than our Sunday speakers can imagine. The initial ethical move is radically opposed to normatives, and it is completely illogical, why this moment should appear. It is impossible but constitutive.

Groups create values, and values define a group, and the core value of every group is – independence from others. The accounting profession is no exception. With this we have an understanding of the basic paradox of ethical life. But there is one more development, which we should have in view: what happens if globalization is complete, if there are no others?

This is our current phase, and this is what is happening: it seems that our technical elites have no understanding of ethical life. They imagine that there is a continuum from human rights to stable currencies, as shown above. They think that a next higher organizational development should develop automatically. They wonder why there is no voluntary convergence. They wonder why they bump their heads on the ceiling – should not be there an unlimited growth perspectives for normatives? Why is there such a surprise? Because they forgot that ethics are radically different from normatives.

Let us take International Financial Reporting Standards. The IFAC tries to construct an international language as a cultural neutral language. While US GAAP, for instance, breathes the spirit and the strictness of the pilgrim fathers, IFRS could not risk making a reference to the Bible, or to the Koran or to “The Capital” – this would be politically incorrect. But this does not work: accounting as a global lingua franca, in which we could determine, peacefully, who owes what to whom, cannot be created as a purely technical language, in a culturally neutral way. Our numerical values are not culturally neutral; they only exist as the result of a pure ethical moment. To say that our numeric values are true and objective, because they are verified through comprehensive normative procedures underestimates the power of ethics, which still operates in the background.

Ethics show themselves in the cracks of our normality, sometimes unspecifically and chaotically, for instance, as resistance against transnational institutions (the EU, the IMF) or agreements (TTIP or CETA for example), as a protest against an untrue representation, as a nostalgia of a lost values, or as an attempt to regain control.

Did you notice that the International Financial Reporting Standards do not include a single line about non-profit accounting? A numeric language without social backup is not only fragile – it simply has no chance.

At the same time, national accounting systems ignore globalized figures, because they define independence nationally. This must end up in an untrue representation. Let us be very clear in this respect: Mutual dependence in this world is not a feedback function that can be switched off by re-activating a button in your national profile. There is no button “Reset original values”. Mutual dependence is real and irreversible because we have a track record in nature: Other figures accumulated over the decades, which were never debited and credited, precisely because of our limited horizons.

One light blow of nature, for instance an unusually hot artic summer, which results in a slowdown of the Gulf Steam or a rise of the sea level of 3 cm, superstorms on the Atlantic, a jump in ocean acidification and record droughts on the Indian subcontinent, and our perspective of numeric growth collapses. The only problem is: in such a situation, it is important to account. It is important to count the remaining resources in order to distribute them in a more or less just way.

So this is the situation: The way back into the national cosy accounting environment is closed; the perspective of consensual, automatic and neutral normative solutions collapsed a week ago (the Sun called it “Independence Day”).

The perspective of voluntary conversion collapsed, precisely because of a misunderstanding of the interrelation between ethics and normatives. There is, definitely, no normative substitute for a pure ethical decision.


What does that mean for the accounting profession? Now we must take a deep breath: it is time for a pure ethical moment. As we have seen above, a pure ethical moment means that we radically question our own set-up. For accountants this means that we should question the way we account. It means that we should set up the profession as a true transnational profession, and not as a pale superstructure. It means that we should make it an ethical requirement to reflect the reality with all its facets in the figures, and not only those values, which were true in the boundaries of our limited national horizons.

Is this not too much for a small profession? Please keep in mind, that the modern states are a result of a process in which urban professionals claimed that they could sharper account than clumsy knights in their armor. And it is not exaggerated to state that this last change (the beginning of modern civil society) started as a discussion of ethical values, as a question of conscience. For the moment being, in July 2016, our figures are still stable. But if (in a few months or so: Please, no panic!) you see that our figures are no longer a true representation of the reality, then, I think, it is the duty of every accountant to rethink our basic assumptions.

Autonomy means that a group is aware of its dependence and is willing to make compromises with existing structures. At the same time, autonomy means that the terms of interrelation will be made explicit. It means that tacitly accepted principles will be revised. Thus I think it is time for the accounting profession, to declare its autonomy from both national accounting bodies and alleged cultural neutral superstructures. It is time to build a true transnational profession.

Frank Fabel, Chairman Empacta e.V. Please be invited to E16:

Anorexia Periculi: The Risk of Avoiding Risks

May 4th, 2016

An Introduction to E16:


In a well-known study of the OECD  the authors describe how the inability “to provide the requested guarantees on reporting and accountability” for aid projects in Somalia and elsewhere resulted in a stop of funding from major donor agencies – the results of this risk avoidance of the donors were disastrous: whole regions were destabilized; civil war flamed up. The death toll went into the thousands.
Similar experiences were reported from the Global Fund, where audit findings of misused syringes in an HIV program resulted in a massive cut of funding: in the wake of the scandal, nearly half of the employees in HQs had to be dismissed and country programs had to be cut – it is not exaggerated to say that this reaction of the donors resulted in a direct loss of human lives.
Needless to say that crying “scandal!” in a secure office surrounding somewhere in Western Europe was nearly risk free, while implementing the programs was not.
These and similar experiences brought the theme of risk communication to the boards of supranational and international organizations. How to communicate risks to back donors? This seemed to be a core issue for the organizations. How to mitigate these risks? How to measure them? And – after all: which risks?
Risk assessment has a long and strong tradition in business. The commercial world is used to taking risks: taking opportunities is, after all, the core attitude of all entrepreneurship. Entrepreneurs risk capital, because there are chances out there. No risk, no fun or – to put it a bit more seriously – in responding to needs, the entrepreneurs receive a premium for the risked capital. The rational was and is: when the risk was a private one, the profit should be private either. This algorithm has broad acceptance. In short, success is our justification.
“Aha!”, we say, “These naïve people in the non-profit sector have no business attitude. They are risk-shy. These cowards should learn from business that you cannot use chances without risks!” So, because business is so highly developed in risk assessment and risk management, why not use the knowledge from the business world in the international aid industry? Risk is risk – so why not approach the risk of climate change like the risk of a credit default? This is the point, where terrible misunderstandings came into the game.
Business consultants were hired. Power point presentations made for bankers were updated for aid workers. Yes, risk awareness somehow increased. All international and supranational players now produce heavy files with risk assessments. Country directors are proud to present their risk mitigation policy. This sounds good: a success story! At least for the consultants involved.
And this is what happens when the risk management tools from business are implemented in the non-profit scene: the tools are used to avoid, to mitigate, to camouflage partial risks. Managers diminish their personal risks for their career. Organizations diminish their risks as organizations. Governments diminish their risks as governments. States diminish their risks as states. The only problem is: we do not deal with privatized risks in the non-profit sector. If you safe your own backside (as a manager, as an NGO, as a government, as a state), it does not necessarily mean that the mission was accomplished or that the public problem was solved. So, in the case of the Global Fund, budget cuts reduced the risks of the donors, while the world is probably less protected against epidemics. If the budget of Germany is balanced, it does not mean that the EURO is stable. If Munich Re invests in hedge funds, it does not mean that financial markets are insured against collapse.
Is this just an accident? Or is there an incremental risk in risk management, that partial interests misuse risk management for its own purpose?

Excursus: difficulties in communicating the risks of climate change
A few weeks ago, I visited a Climate Change Office in a small country. Climate Change Offices are an initiative of the UN and their task is to raise the awareness of governments to the risks of climate change. We took a taxi to the location, and the taxi driver was very talkative. He claimed that a profession which is not able to predict the weather for 3 or 4 days in advance should shut up when it comes to the prognosis for the next 30 or 40 years. This is a kind of popular assessment of professional risk assessment.
A few minutes later, in the Climate Change Office, the managers complained that they had difficulties in communicating the risks of climate change to politicians and the general public.
One problem is that all prognosis deals with uncertainty. And if politicians requested taxes now in order to finance vague prevention measures, taxi drivers would probably disagree.
The second problem is that talking about climate change does not only implicate the question of what to do, how to react, how to adapt. It also includes the question of “Who is responsible for this mess?” This is a language that a taxi driver would understand.
You see between the lines how the word “risk” is mutating, when we talk about the “risks of climate change”? While once it covered the possibility of privatizing a portion of the future, it now tries to blur the links to the past. We say “risks of climate change” where we should say “impact”. But then the next question would be: “Who is guilty?” So, let us rather talk about “risks”.
In his book “Risk Society” (1986) Ulrich Beck describes what happens if the stock of privatizable chances is exhausted and the unintended side effects of this process, which show themselves as public risks, become predominant. The whole order of values is mixed up. Examples:
Recently, the SEC, the Wall Street supervisory body, started legal proceedings against EXXON, because shareholders and the general public were not correctly informed on the risk of burning fossil fuels. Shareholders could claim damages from EXXON, for the damage that was caused by their investment. — Most readers would probably have difficulties to follow this argument. I mean, drilling for oil in the Arctic is an even more evident risk than buying hot coffee at McDonalds, isn´t it?
At the same time, the Rockefeller Foundation announced that it would sell its shares in EXXON “because of ethical reasons”. — Most readers would probably have difficulties to find the ethical aspect in this move. Was this sale not simply a strategy of private risk reduction?
As a last consequence, the initiative of the SEC would mean that investors should receive a warning that they should know that endless growth is not possible and that their growth expectations would lead to disastrous side-effects. I even imagined a kind of mandatory label on shareholder certificates that says: “Ministry of Economics warning: economic growth is dangerous for the ecological stability of the planet”…

Our question was: How to awake the risk appetite in the non-profit sector?
The mantra of business consultants, that there are “chances out there”, does not work in the area of public risks: there are no privatizable chances. This standard script is rather part of the problem than a solution.
Missing risk appetite is, clearly, not only a phenomenon in the non-profit sector. All big organizations suffer from anorexia periculi. But in the profit world, principals can find ways to let their agents participate in the expected success. This possibility is very limited in our sector.
An entrepreneur can formulate his personal risks and chances quickly and precisely, while the general public has usually difficulties to formulate its response. But, so what? Yes, it is an eternal tragedy that humans are clever when they think about themselves and careless when they think about the public. There is no action coming from this insight. Especially no increased risk appetite in the non-profit sector.
Even the words are against us: in the current risk narrative, the term “risk” is distorted and used to blur responsibilities. The clever employee, who re-insures himself against all possible career risks, is the one who triumphs in these language games.
Our problem seems to be hopeless. Non-profit risk appetite appears to be a kind of impossible necessity. Necessary, because the need to respond to the unintended side-effects of our high risk economy is rising. Impossible, because there is no rational argument, why we should be heroic. To promise a gratification for heroic action would be, seen from the comfort position of market saturation, in itself as a high risk attitude, which destabilizes our habits.
On the other hand, there is “the risk”, if not the inevitable consequence, that our societies commit suicide because of the fear of death.
So what to do? What I suggest here is a balanced radical approach.


  • Public risks are the place where missions are found and fulfilled
    There is no use in trying to privatize public risks. A public sector actor should admit the possibility to fail. The possibility to fail is a proof that there is mission.
  • Risk assessment must include the risk of non-performance
    There is no risk-free activity. Even if we do nothing, we run into risks.
  • To manage risks means also to create risks for others
    Risk management is not only a passive process of risk exposure. At the same time, an advocate of ecology, a representative of social needs etc. should and must also generate scenarios of risks to the causer of the public risk.
  • Communicate blind spots – avoid alarmism
    The highest risk is always the risk which we cannot see because we stand in our own way. We are depending on others who are able to tell us about our blind spots. This also means that Grand-Viziers live a dangerous life. If they try to avoid this risk by introducing a kind of permanent alarmism, they surely miss their calling.

Let us keep in mind that there are many concepts of how to work with the uncertainties of the future. Every culture has its own approach, and over time the concepts are changing. Risk management is not courage, and courage is not destiny or fate.
“The citizen is neither a person of virtue nor of bravery. The highest ethical movement to which he is able is – charity”, as Georg Friedrich Wilhelm Hegel wrote in his “Systems of Ethical Life” 1806. It was already then visible that civil society has a problem with risk avoidance.

Frank Fabel, Chairman EMPACTA e.V.

How do you think? Do you agree or disagree? Write a comment into the comment bracket below. We would like to explore these and other questions at E16, the EMPACTA event in Berlin, Germany: Risk Management and the Risk of Avoiding Risks: Explorations in Cross Cultural Accounting Please be invited!

Frameworks in Emergency Situations: The Provisions of ISA 800

November 17th, 2015

We are auditors and financial controllers. Our task is to control finances. In the last years, we – i.e. our firm, my colleagues and I – we were asked more and more to perform audits in countries which undergo a crisis. This could be civil unrest or civil war but also processes of nation building, ecological crisis, droughts or floods, this could natural disasters and epidemics, or a mixture of many factors.
Frequently, in these engagements, it is not so clear which accounting framework would apply. Which rules should be followed if the world is drowning in chaos? Which rules should be followed in regions of limited statehood? Which rules should be followed, if the implementers openly do not accept the legal environment? If these tasks are put in front of us, we have to make one major decision:

Do we accept this engagement or do we not accept this engagement?

In many cases, this decision is made too quickly. Even worse, this decision is too often made purely on commercial grounds. What I would like to say is: it is worth thinking about this point of acceptance. This, I will try in the next minutes.
Acceptance of an engagement has several aspects:
• We could ask ourselves, whether an engagement is acceptable in the framework of our professional standards. This we will do: we will analyze the ISAs, whether engagements in regions of limited statehood or in a hostile environment are acceptable, and what conditions exist for this.
• We could ask ourselves, whether an engagement is legally realizable in a certain country or whether the established framework contradicts somehow with the legal environment.
• We could ask ourselves, whether the engagement is sufficiently secure, and we can weigh the possible monetary output against the risk, or sometimes even the ethical gain of doing what has to be done.
• We could ask ourselves, whether an engagement is ethically justifiable, i.e. whether this engagement contradicts with the core values of our profession, namely with our conceptions of integrity, objectivity, professional competence and due care, confidentiality and professional behavior and with our conception of independence.

If the overall result is NO, this would mean that, in our opinion, the funds are not controllable, at least they are not controllable with this setting or these resources, because the framework is not acceptable. This also means that, with the result of this analysis, we can enter into negotiations.
In other words, what I suggest is that we first think before we take action. It may be that certain pre-conditions must be fulfilled in order to start an audit.
I give here one classical example: imagine you have to perform an audit in another country, in a “nasty” environment. Clients have conflicts with law-enforcing organs. However, it is not that foreigners are put into custody when they enter this country. What could you do to make this engagement acceptable?

Acceptance in the light of the International Standards on Auditing

If an auditor accepts an engagement, which determines that his framework for his working processes should be the ISAs, then of course these standards are mandatory for this auditor. Financial controllers usually do not work in the framework of the ISAs. Anyway, this paragraph could also be taken as a guidance for their work.

Framework for Auditors: International Standard on Auditing e.a.
Framework for Reporting: Financial reporting framework

You see that we must make a difference between our framework as controllers (our control framework) and the framework in which the reporting is drawn up (the financial reporting framework). These frameworks should not to be mixed. While the reporting framework can be determined by the client for instance with a project contract, the framework for the auditors is more or less limited: either ISAs or a national framework, for instance US GAAS or UK GAAS or others apply.
However, if an audit framework is absent, you cannot call the result an audit. This would then rather be “agreed upon procedures” – agreed upon procedures are also regulated by the IFAC, but this would be then a different discussion.
The differentiation between the framework for the controller and the framework for the controlled is a very important differentiation, because in emergency situations, auditees too easily require that auditors should do this or that – “because it is an emergency”. The professional answer here from the auditor is: No, the procedure for reporting is the “cup of tea” of the funding organisation, while the work procedure for the audit is the auditor’s “cup of tea”.

The financial reporting framework can be drawn up for general purposes or specific purposes. Specific means that these reports satisfy only the specific information needs of specific users. Most project audits are special purpose audits: this means that the financial report which has to be controlled, audited, checked, is drawn up for a special purpose not for a general purpose. The difference is that a financial report drawn up for general purposes must satisfy the information needs which could be expected from the general public.

The linkage between the frameworks for the reporting entity and the framework for the controller is the following: if the reporting framework is a special purpose framework and the ISAs should apply for the envisaged engagement, then we must use ISA 800 for this engagement.
The standard deals with special considerations in the application of those ISAs to an audit of financial statements prepared in accordance with a special purpose framework. You see that first this standard is a kind of exception standard: we try to standardize exceptions (you remember what we have said about the rule and the exception at the beginning of this workshop), second the standard treats special considerations to other standards, i.e. it is a kind of overrunning standard in special situations.

Who decides whether an engagement is a special purpose audit engagement? Ultimately the auditor: if the auditor sees that the reporting is only limited to special information needs, then the audit report could not be a general audit opinion. ISA 800 gives guidance, how this decision – the decision whether a financial reporting framework is firstly a special purpose framework, and second whether this financial reporting framework is acceptable – could be taken. The auditor should ask himself three questions:

The auditor shall obtain an understanding for which purpose the financial statements are prepared. This means others prepare it, with a view of a purpose – and we should understand this purpose. This includes even the following: statements could be “evidently” prepared for a special purpose, but they do not fulfil this special purpose. They still would be special purpose statements. Thus the question is:
Do I understand for which purpose the financial statements are prepared? As you see, I only ask myself. And if I answer YES to myself, then it is acceptable. It is an interesting question whether others could, and if yes, how, they could challenge this understanding.

The auditor should obtain an understanding of the intended users. Thus, we should ask ourselves: “Do I understand who is intended as user of the financial statements?” Immediately, we would ask: whose intention? This could be either the intention of those who prepare the report, or the intention of those who require the report, or even a third party. Once again, it is not necessary that the statements were or will be really used by a specified group. It is sufficient if we can say: “ah, this is done for the grant giving institution, and nobody else would understand this report”. It is not necessarily the auditee nor the ordering party who determines who should be the final user. A determination could be also fixed in the side conditions.

Example: The UNDP requires that a grantee engages an auditor, with the view that the back donors of the UNDP are informed. Although the back donors are not present, they do not determine the reporting format and they do not dictate the contract, they are still the intended final users of financial report.

The auditor has to obtain an understanding of the steps taken by management to determine that the applicable financial report framework is acceptable in the circumstances. We already understand which is the purpose or the report under audit and who are the intended users. Now, we also ask: what has been done by management? They also should determine whether the financial reporting framework is acceptable.

This regulation is already very thin air: yes, we could say, management read the project contract, indeed! And we can criticize management by saying: no, they did not fully understand what the purpose of their report is. They do not know what they want to say. Why can we say so? Because we know better what they want to say – because we obtained an understanding – of their misunderstanding.

ISA 800 explicitly says that the financial information needs of the intended users are a key factor in determining the acceptability of the financial reporting framework. We should understand the consequences: if the framework is inadequate for the intended purpose, we should not accept.
Example: A funding agency develops a reporting standard, which includes the complete general ledger. The full reporting in accordance with this standard covers more than 1,000 pages – this is of course non-sense. The intended user of this non-sense reporting is their back donor, a ministry of finance in another country. Is this acceptable? No, because a reporting in the form of a telephone book does not satisfy their information needs.

Why is this question so important? Because this is the only anchor that we have to maintain our independence. A client, who has the power to decide that a framework is acceptable, could do whatever he wants: if the audit opinion is qualified, he could interpret the framework in a different, more suitable way. The audit opinion would be always clean, because the framework could be amended or interpreted in a way that the result is without any qualification. You understand that auditors have no possibility to determine the framework – but they can say that it is not acceptable. Thus, this “Caveat” in ISA 800 is our only remedy to prevent a downgrading of the framework or distorted frameworks.

Unfortunately, this discussion seems to be easy only at first glance. There are, in our emergency situations, manifold cases which are not regulated. What kind of invoice, receipt or documentation should you require for a ransom sum, paid for a kidnapped aid worker? Are there any requirements to the form? Could you say to kidnappers, we would like to have a prenumbered invoice for the ransom sum, duly dated, addressed and signed? Who would write this into a financial manual? And because we are in exceptional situations, there could have been no rule for this (or, if there would be rules, it would not be an exceptional incident).

Thus, we are doomed to say whether a practice is acceptable or not – post factum and without an explicit rule. Some even say: rules always start like this. Somebody starts with a practice, without regulation. If there is a second kidnapping, we already have a kind of practice.

If you follow this thought carefully, you see that here is a point where we can learn something from emergency cases for our normality: all rules start as a risky first step. It is our task to evaluate this step. It could be that we honor the risk taken by the actors – in the example above, we could say: it was very good to mark the transmitted cash to the gangsters with fluorescent ink, so that the way of the cash could be traced later, or the like.

If we do so, we try to establish a rule. And with this we are also exposed to a risk (because rules can go wrong). On the other hand, there is also a risk of non-performance. If we are not able to cope with emergency situations, the ISAs loose a lot of their power, because then it would mean that the standards are not able to generate normality, but only benefit from normality.


We can accept – acceptance in the sense of the ISAs – an engagement in an emergency situation , i.e. in a situation without a functioning legal framework or in a hostile environment, if

  • we understand the purpose of the report,
  • we understand who are the intended users of the report, AND
  • if we understand what management has done in order to understand these questions.

The key is that the auditor determines the information needs of the users of the report – independently. Others (clients, users, auditees) have no power to superseed this determination.

Frank Fabel, CEO FWS, Chairman Empacta, CPA (inactive), MA

June 2nd, 2015

Preparing E15 :

Corruption prevention and the disciplined subject

It is useful to investigate the link between world-constructions and self-constructions, and I am deeply convinced that accounting is one of these bridging constructions between something that could be called “inner space” and something that could be called “outer space”. Keith Hoskin is investigating this link, and thus, I am happy to review his essay/article
‘‘What about the box?’’ Some thoughts on the possibility of ‘corruption prevention’, and of ‘the disciplined and ethical subject’. (Critical Perspectives on Accounting (2015))
Readers of this blog know: This is of course not an academic review. It is a review for practitioners. Thus, you will not find what others have said on this topic. I will only take up on what I understand Hoskin wants to say. Then I will say what he says but should not say. And finally I will add what he does not say but should say.


I. Content
Hoskin is searching for different ways of how to address “corruption”. An article of Neu, Everett, Rahaman, Martinez (2015) on “Preventing corruption within government procurement: Constructing the disciplined and ethical subject” stimulated him to re-read Foucault. Following Foucault, a French philosopher who died in the 80s of the last century, Hoskin offers two ways of how to approach the general theme of “how to address corruption”: an analysis of our construction of the outer world, an analysis of our construction of ourselves, and the link between these two worlds.
In the construction of the outer space, definition power would mean to have a frame in which others could be accused of being corrupt (i.e. dishonest) or could be praised to have integrity. For an elite, it is important that it could violate the rules of others, but has a tool at hand to legalize this violation of the rules of others. Hoskin believes that auditing is a perfect tool for this. Following Foucault, he calls this mechanism “hyper-legalization”. The flipside of this process is the criminalization of the oppressed. On this he writes:
“The illegalism of rights exercised by those descendants of the old bourgeoisie who now populate large corporate entities, big government, and the professional service firms operating across the accounting, financial and legal arenas appears as inoculated and impervious to law’s attacks now as then. On the contrary, we increasingly witness how such recourse, thoughtfully strategised, can operate in a directly contrary direction: just select the appropriate specific form of law (usually of the contract or commercial type) and you can incarnate an illegalism of rights which, with the appropriate admixture of disciplinary experts and expertise, can decisively trump old sovereign state law.” (p. 8)
Because it is so essential to move the frontier of what is legal or illegal, Hoskin calls the overall behavior (following the terminology of Foucault) “illegalism” which would include these two elements: criminalization of the suppressed and hyper-legalization of the actions of their superiors. In short, elites have the possibility to hide themselves in “cloaks of transparency” – which is a very nice metaphor.
Secondly, there is a line of self-construction, a self-formation which creates a subject which in turn takes part in “truth games”. It is not further explained where these truth games come from. Knowing Foucault a bit, I would say that this topic rests on the ultimately opaque “care for the self”, described by Foucault in his last lectures, which could be found in „La courage pour la verité“. Foucault´s thinking is circling around the problem how truth is generated.
The post-Foucaultian subject, a kind of entrepreneur of oneself – is, as Hoskin continues, a subject that is disciplining itself, and disciplining others. This subject should have ethical values in order to fight corruption – and here Hoskin would like to make a connection between both streams.


II. Outreach
However, at this point, for me, the chain of logic was broken. Why should subjects of this kind have ethical values? How should they fight corruption? Why they should do this?
Hoskin describes the biological reality of these subjects – he makes a big leap to the biological reality of human capital. It is a complex idea, and I think the best is too make it short and to listen to these “subjects” as they describe themselves in:
This is a bit an interpretation of what Hoskin is doing, but I think it is admissible: Indeed, it is a very far leap, and it would probably require several steps to make the link between truth production and biological human capital evident. I do not want to say that this link does not exist; I want to say that it requires more explanation. For instance, we could probably say that in the traditional civil society, the net worth of a person is determined by his or her personal capital balance (his or her “net worth”), while in the post-Foucault world, it is determined by verifiable, uploaded bio-parameters?
I have difficulties in believing that self-quantifiers enter into difficult ethical discourses – but this may be a prejudice. (U. Vormbusch is investigating this new form of number based self-construction: uni hagen.)

There are many other topics in the text of Hoskin, which are also interesting and also somehow connected with the general theme; but, on the other hand, it would be no loss for the reader if the passages on prison, Colbert, Mr. Snowden, NSA and Ms. Chelsea Manning were missing. Also the link to TTIP is not so self-explainable: Yes, TTIP (Transatlantic Trade and Investment Partnership) is a project of a multilateral agreement that is intended to introduce courts of arbitration, which are then superior to “sovereign” state laws, and this is a kind of the described hyper-legalization. But, you cannot say that TTIP is that kind of agreement that is made in order to create new realms for bribing or corruption. The link between TTIP and corruption and corruption prevention is loose.


III. Outlines for re-assembling the original idea
This brings me to my third point: Let us say what could be said, but is not said, or not said clearly enough, according to my taste. I must admit that this is a very free interpretation of the article.
To say what corruption is, is a technique of truth production. If you say what is not true, you do this with the intention to determine what is true (or, rarely, you tell the truth by mistake – the Freudian slip, which is irrelevant here). Even if you say that a person is corrupt, you say this with the intention to deconstruct his or her constructions. This discourse (of allegations and defense) is linked with the production of the self. You need somebody else to determine who you are – in a pure and honest sense. You can further investigate this desire (to know about yourself), but first it is clear that you do certainly not need corruption in this process. What is more: if you claim that others are corrupt, you deeply and knowingly violate their integrity. In order to know who you are you must fight corruption in others, because, if their view would be corrupted, you will never find out who you are: You would sit in the dictator trap – your lackeys would never tell you the truth. From this ensues that anti-corruption is an accelerating game in truth production. Uncorrupted world construction is in this way a by-product of a disciplined self-construction. An uncorrupted self is the product of a disciplined world construction. The word “product” means that this is a dynamic process.
Imagine the following situation: You are an auditor. You are to verify books of an NGO (i.e. enthusiasts), working in another country, ignoring local laws and regulations (because “it is a cruel dictatorship”). Of course, you understand now that this is a process of hyper-legalization – you should introduce correctness from scratch. Really, you “incarnate an illegalism of rights which, with the appropriate admixture of disciplinary experts and expertise, can decisively trump old sovereign state law”, as Hoskin said. Not this process is seen critically (because it is inevitable), but more the ethical implications: How do you decide what is right and what is wrong? How do you legitimize yourself? How do you construct yourself in order to serve as a subject with the competence to construct a fair framework? I mean, you cannot say that the Declaration of Human Rights says something about Generally Accepted Accounting Principles, can you?
One answer could be: There should be standards! (A sufficiently arrogant auditor has to say this with a nasal tone: “But, there should be standards! – It is impertinent, that there aren’t any!”). In other words, we request that there should be rules of procedures how to disregard laws in other countries. This is difficult to imagine, at least in a public form. Maybe, some of the security services have this.
And here is one important message to Mr. Hoskin: You can read the International Standards on Auditing forwards and backwards, in particular ISA 800 “THE INDEPENDENT AUDITOR’S REPORT ON SPECIAL PURPOSE AUDIT ENGAGEMENTS” and ISA 250 and SAS 56 on supposed illegal acts by clients, and you can imagine why I have done this in the past (because I was constantly and exactly in the situation of hyper-legalization as described above); in the end you come to the following conclusion: the ISAs do not prohibit that auditors express an opinion on reports which are created in a hyper-space of hyper-legalism. They even exactly and precisely allow it. This is, I would say, and always has been the purpose of auditing: extracting and sanctioning rules or conventions or at least practices from scratch in worlds of chaos. It is part of our success. There is nothing cynical about this. You must understand that rules do not grow on trees; they are forged by ugly accounting workers in the workshops of the world in daily practice, followed blindly, based on trust. There is nothing democratic about this: it is work.
From this ensues that standards cannot ease our bad conscience. Standards could, at best, create comfort, because you can learn them, and then reality would be the “subject” of expert opinion. However, this is of course not satisfying. The answer of the self to the above described situation would be: There must be ethics! In our historical situation, this is, I feel, the best answer.
You must understand how true to life this answer is: it is an answer of an auditor-self that would like to survive in the current hyper-legalized world. It is a very proactive approach. Maybe it is a bit barbaric. You simply say to yourself: “I know that ethics are a bit unethical; so being ethical is not a reason for being afraid of dirt!“ And at the end of the working day, this auditor-self would say: “Somebody has to tidy up this pile of figures! It smells but that is what I am paid for. I get paid for telling others the truth about themselves, based on figures. This is unpleasant. They do not like this. I do not like this. The main thing is that they pay for this! Also something based on figures.”
The result of the hyper-legalistic situation described above is that the auditor-self must start with theory. If we do not start with theory, there is a risk that our profession will develop an ethical code similar to Samurai ethics, or the ethics of contract killers as Marion Hersh described this in “Ethical Engineering” (London 2015):
“… successful hitmen, like other successful “professionals”, must have a code of professional ethics. It might cover issues such as charging a fair price, confidentiality, refusing bribes, meeting deadlines, rejecting commissions which cannot be fulfilled and behaving discretely and professionally”.
In other words, it could be that we develop a professional code that only talks about the form but not about the substance of our business. In this example, one question is always avoided: Is killing others ethically justifiable? We see that a kind of ethical engineering is required, not in the sense that scientists should provide us with Sunday speech ethics, but that we must engineer our ethics ourselves.
Yes, accounting is a link between world-construction and self-construction. Accounting speaks the language of both of these worlds. Take “integrity”, “discipline”, “debt” – all these words construct something in the outer world, something in the inner world and they construct a bridge. “Integrity” is an ethical value and it has also the meaning of “physical integrity”; “discipline” could be a scientific profession or an inner value; “debt” could be a “subjective” feeling or an “objective” necessity. You see that our professional language in itself is systematically bridging the worlds! And so far we even have not talked about “money”, and what it is! But do we understand what our language has done to us?
May be, we could say: Accounting is about finding formulas about balancing the self and the others. I personally would not like to go into the direction of an “enhanced” construction of a self – Foucault does not offer a tool box for optimizing yourself; I would prefer taking part in the construction of a scientific accounting school. Theory is a requirement of practice.

Frank Fabel, MA, CPA (inactive), CEO FWS, Chairman empacta


Rules are rules only “post factum”?

May 29th, 2015

Concerning our entry as of 11 May – “When is a rule a rule?” –  we received two comments from Wittgenstein experts (one from Munich and one from Slovenia). The commentators marked the following:

1. Mutual control is not the general scheme of Wittgenstein. According to him, it is only possible post factum to determine, which rules were followed. Following rules is done blindly. Wittgenstein would have said that the described mirroring is a proof that rules can only be described as rules post factum.

2. It would be possible to follow a rule alone (for instance, we play patience alone). It makes no sense to wait ad infinitum that the others confirm our rules. We do not follow rules in order to control each other, but as a constitutional part of society.

Concerning these comments, I would like to summarize the last blog entry: I am curious, why economic subjects ask me to control their accounts. My key problem is to decide whether a rule is a rule (i.e. what I should control). The observed phenomenon is that the controller becomes the controlled. I identified economic interest as a limiting condition for possible endless mirroring. The promise of growth seems to be the motivation why subjects start to create rules and ask for confirmation that they really followed a rule. This original motivation makes this way of rule handling dependent on growth.

I am not so good in discussions of what Wittgestein said or did not say (I took a chapter from Habermas´ Communication Theory, Vol. II – and I learned now that his interpretation of W. was probably simplified). I learned from the comments: Yes, we can only say post factum that a rule is a rule. And once again this is exactly what happens in practice! It seems as if the client accounts “blindly”, but the client is accounting somehow – only, post factum auditors determine: “Ah, obviously you are accounting in this way; this seems to be your rule; let´s fix this rule and then we can say that you followed the rule!” This is exactly what happens in our transnational audits. Did you know that this phenomenon is so far poorly addressed by the International Standards on Auditing?

Of course I cannot exactly say whether my clumsy ideas are “Wittgenstein”-derived, but I feel that your comments encourage me to go further on this path. The surprise is that we need philosophy to understand what is going on in contemporary business.

Yes, also true: You can play patience alone. Thank you for this remark. In this case an auditor is not needed. This is not our case.

When is a rule a rule?

May 11th, 2015

If someone would like to be sure that a rule is a rule, for instance that an arithmetic rule is really an arithmetic rule, this person would need someone else to check this rule. Only, if this other person also applied that rule and only if this other person received the same result, and if they compared the result, the first person could be sure that the rule is indeed a rule. A rule exists only in communication. Nobody could follow a rule alone, or at least, no single person could be sure that the rule is in fact a rule.
But this sentence is not without difficulties. For instance, how could the first person (who would like to get assurance that a rule is a rule) be sure that the second person really was able to carry out the same operations as the first one. It could be that the second person did not verify the result, but simply repeated it, blindly saying that it was okay. Thus, the first person could ask the second to repeat the arithmetic operation, not telling them that they had already done that themselves. Thus, the second person, the one who should carry out the control, becomes the one who is being controlled.
The second person, who is now being controlled, could execute the required arithmetic operation and show the result to the first person, and the first person would then compare the result with the result previously achieved by themselves . And if the result is the same, the first person would accept the second person as someone who is able to verify the rules, which were executed by the first person.
Would the second person also require proof that the first person is able to verify the operations executed by the second person? This may happen, for instance, in case the first person did not accept the second person as someone being able to verify the result. In this case, for instance, a verifier, i.e. the second person, would question the competence of the assessing person.
If both sides needed an acceptance, this process could go on endlessly, without result (and this was a procedure described by Wittgenstein). However, in commercial terms, a verifier with commercial interests would exit the algorithm (the process, the mirroring) after the first mirroring: either there is an audit contract (the second person was accepted as an auditor) or there is not. But, because of commercial reasons, an auditor would not challenge the competence of the client.
You might think that this chain of actions, which we referred to above, is abstract. It may seem to you as if this is only shadow boxing. In my conviction, it is not. Our globalized world throws us auditors into situations, which were formerly only known to extravagant philosophers. It is the first time that philosophy becomes our daily business. The reason behind this is that the market destroys all traditional coverage that would veil the pure logics. We really do not know whether a rule is a rule.
Indeed, I think the abstract scheme, as described above, is very close to what happens in transnational audits right now, and most probably you know this from practice: The controllers become the controlled; and this is not because of a power struggle, but because of pure logics. So, the first learning point here is: if you understand the logic, you feel easier, when others control you – they simply wonder whether you are really a controller.
This was the optimistic half. The pessimistic half is: Anyway the controlled parties also challenge your controlling in retrospect, because they want to defend themselves. They will challenge your competence not before accepting your audit offer, but after receiving your audit opinion. Then, indeed, the issue of legitimation would once again be unclear: The client assesses the quality of the assignment. But do they have the competence to do so? We could then question this by asking: “How do you assess the quality of the audit work? Do you really have the competence to do so?” We should talk about this, I think.
The second difficulty in our theorem lies in the very first sentence above: “If someone would like to be sure that a rule is a rule” – why should a person be motivated to find out whether a rule is a rule? Our theorem only works if there is a motivation to find out whether a rule is a rule. It is not only that commercial reasons prevent the theorem from going on endlessly, it seems to be the case that an economic interest stands at its beginning. Thus, this is all not abstract, it is real. Or better: It creates reality.
If there is an economic interest that would cause us to want confirmation that a rule is a rule, then this would drive us to create more and more rules, and create more and more mechanisms to prove them. We would enter into an expanding audit world. Once again we realize that this is really what is happening, isn´t it? But wait, we have uncomfortable news for you:
Here a really captivating thought is waiting for us at the end of the road: If everything that is stated above is true, this would mean that voluntary rule making is bound to expansion. There is no voluntary rule making, no voluntary audit, if there is not a promise of growth – no motivation of rule checking would mean that no rules will be created in this voluntary modus. In brief: No promise of growth would mean no voluntary rule making.
If there is an ultimate need for rule making (for instance, because of urgent ecological needs), I suppose we will return to the endless challenging of competences, as described above.
This is probably a simple and uncomfortable truth for a world with limited resources.

Frank Fabel

December 8th, 2014

“Developing countries – developing fraud schemes. High developed countries – high developed fraud schemes!”


Patrick Croix-Kuah and Frank Fabel, CPA (inactive), share their experience in “Fraud Detection and Fraud Prevention” in a seminar in Jakarta, in January 2015. Many organisations internalized a kind of “cultural relativism” that makes it impossible to call things by their names. And this is one of the reasons why fraud is so difficult to tackle in international organisations. Contact:



November 17th, 2014

This blog is now four years old and has a pool of 32 articles to its credit. Data from our Google+ account show traffic of about 500 to 600 readers of the blog.  During all these years we received some very encouraging and appreciating comments. But having said this, I used to feel the relationship between me and the readers a bit remote. This encouraged me to think of something that minimize this virtual gap and hence a question ‘Why not to create a Transnational Network of Auditors?’. This was my way to a international network. Others had other approaches. As a result ‘EMPACTA’ was born.

‘EMPACTA’ is a brain child of 10 auditors/audit firms from different parts of the World. On the 2nd Day of December 2013 in Istanbul, an Association of International Auditors was created. The association was registered in Berlin, Germany, a board was elected (in which I have the honor to serve as Chairman, together with Sohail Hafeez from Lahore), statutes were drafted, website ( was made and till date it already has 17 members from 17 countries from almost every continent. So much so we already had 2nd EMPACTA Annual Conference in Bernried, Germany on 22 – 23 October 2014. In the last year, we were busy with the organizational setup; and this explains also a bit (alongside with my inherent laziness and the prosaic economic necessities) the lack of continuity of this blog.

EMPACTA was founded on a mission statement highlighting the communicative approach between audit and accounting. It is unique in a way that it has a Trans-national Approach. There are no boundaries or territories. It will play a role in forming an international profession with shared values.  EMPACTA calls itself an “Association of International Auditors”. In a sense, this extension of the name is very pragmatic. This EMPACTA Approach will help in overcoming the problems of Transnational Audits and will also provide a food for thought for discussions regarding communicative aspects of auditing and accounting.

EMPACTA is formed with a vision of collective wisdom, to discuss further that what Auditing and Accounting means or will mean in this rapidly evolving world. As a Chairman of EMPACTA, I would like to invite you all to come and discuss about EMPACTA Approach and many other different points of cooperation that we can have.

Firms have a profit interest; associations should serve to more altruistic aims. Thus, it seems to me logical, that this blog should move to the EMPACTA website, isn´t it? Probably, the setting should be a bit different: This is then already the competence of EMPACTA. With this I would like to say: Good bye FWS-BLOG.COM, hello EMPACTA.ORG. See you soon on !

Frank Fabel, CPA (inactive), MA

Precize Fuzziness

November 28th, 2013

Review: The Audit Society: Rituals of Verification; Michael Power, Oxford 1997

“Google scholar”, the web tool for quotation analysis, registered 4632 quotations of Michael Power´s “Audit Society” up to now. This means, 4632 other scientific authors have quoted this book since it´s publishing in 1997.  The citation statistics of other publications “on audit theory” show an index of 100, 150 or 200 quotations – the “Audit Society” had an unusual success. Meanwhile the book is translated into Italian, Japanese and French.


Power writes about auditing as his scientific subject; he writes about the phenomenon that audit makes all fields of human activity auditable, including science.  So why not – small joke – using quantifiable audit techniques on his book itself?

Analyzing auditing from the point of science has always the risk to end up in a race of superiority: For many university professors, it is a trauma that auditors might evaluate the effectiveness of their work. It would be quite natural to introduce a kind of revenge into the analysis of the subject. Is Power doing so?

Ms. Josephine Maltby, Chartered Accountant, and Professor for Finance and Accounting at the University of York wrote in her review: “The Audit Society and its progeny, Power’s own papers and the wails of unhappy academics and doctors and civil servants, (…) are ultimately a stifled chorus of fury at being made accountable.” With this, Ms. Maltby says that critics of a supposed audit society are supposed to be critical because they are supposed to be disgruntled by this society. Zeroing out all variables remains:  The fact of critic makes the critic already unbelievable – an argumentation which is a bit tautological.

But we should try to take Ms. Maltby serious: First, it is really a danger that academics who were already victims of audits cannot talk impartially about audits. Secondly, there is a real danger that this discussion about the interrelation between academics and auditors dominates the discussion of what audits are or could be. I mean: there are also other auditees than academics, isn´t it? It is true that more teachers, sociologists, pedagogues, managers than accountants or auditors quote Power´s book, and it could be that Power serves a certain academic demand. But it is not fair to reduce the book on this academic self-reflection. Instead, it is useful that the “audit society” is received by audit practioners. And this is the purpose of this review. So what is the “audit society” about?

Power claims that there is a demand for governance. In our current époque, he says with U. Beck, we live in a society which wants to know the dangers it faces (p.146) – at least this desire is latent. The dominating practice of governance is auditing. This tendency is not the result of a “conspiracy of large accounting firms” but the result of “regulatory philosophy” (p.110), which leads to an audit explosion. Everything should be audited, and if it is not auditable, it has to be made auditable. Power leads the reader to the history of audit.  He analyzes the audit guidance literature, for instance Dickess´s “Auditing” (1892), or the Cadbury Report, certain ISOs and EMAS. He discovers that auditors learned in the 30ies of the 20th century shifting the responsibility for internal control to management; and management learned to accept this step. Power calls this process the “managerial turn”. This step made sampling techniques possible. However, sampling minimum standards were never fixed in the audit profession; Power believes that this resistance to define the output of audits is constituting for the profession. Probably, this idea is the most provocative in his book: The obscurity of audits is, in his conception, significant. Power detects a “decoupling” (a term that he took over from N. Luhmann) of programmatic discussions on what audit could be, and technical discussion of what auditors should do (p. 21). He believes that there are good reasons for this: The expectation gap is a condition for the economic success of auditors (p. 31).  On the other side, audit has very high potentials, like (p.144)

  • developing performance indicators, by which audit could evaluate itself,
  • bringing auditees into the audit process
  • identifying cultural bias,
  • creating forms of evaluation, which are sensitive to regressive effects etc.

But usually this potential is not used. Is this the “ignorance and prejudice against social science” in the audit profession? (p.51)  Power is skeptical whether auditing, although born out of democracy, is able to contribute to self-learning. Power identifies two risks that auditing becomes dysfunctional or counterproductive:

  • “decoupling” i.e. auditing is buffered, so it is without results, or
  • “colonization”, meaning in this context that the audit is hijacked by management.

Thus, his overall attitude towards the development of auditing is skeptical.

Mr. Micheal Power holds a M.Sc. in Accounting and Finance and a M. Phil. in History and Philosophy. He also worked for four years as an auditor for Deloitte, and since 1987 he is employed at the LSE. He made his Ph. D. on the German philosopher Jürgen Habermas (his conception of “colonization” origins from this school), and he is familiar with the thoughts of Niklas Luhmann and Ulrich Beck: this combination of British audit practice and German communication theory and system theory is, no question, fruitful.

There are, however, several difficulties in his book, which make reading not easier. Power, for instance, refuses to define auditing. The reason is that the word audit is used both descriptively and normatively. “It is precisely the fuzziness in the idea of auditing that enables its migration into a wide variety of organizational contexts”. This statement is – of course – a hard imposition for the reader. What Power wants to say is that auditing describes a practice which oscillates between different extremes: Does the audit enlight, inform and influence? Or does the audit bring all inquiry to an end? Does an audit enable criticism and substantial change? Or does the audit produce only comfort? In Power´s words: the auditor is like a policeman who is permanently tempted to become a consultant.

Power believes that the programmatic obscurity of audit is essential. His indicator is that audit never determines the expected output. The case Caparo vs. Dickman shows, that the liability of auditors is reduced to almost nothing. Why does this happen? Unfortunately, Power is not so clear in this. It would be possible to say: “This is a question of power. A controller, who is controlled by the controlees, loses his power.” Probably, this argument is so cheap and self-evident that Power uses it only at the end of his book (p.146). I had the feeling that sometimes Power makes things opaque, where they are not (thus imitating the supposed mechanism of audit justification). Anyway, it is really a question, why auditors succeed in their tactic to leave their expected output undefined – and this question remains unanswered.

As a practioner I would like to add here: when we talk about the obscurity of audit (which is justified), it is important to look also on the demand side. It is in the audit process that the clients can determine the control framework (this is the essence of ISA 250 and ISA 800), and thus also the client has a responsibility for the expected output. A “good auditor” would work with the users in order to determine the fair framework. Power would probably counter this argument with a statement like “users are often used as mythical reference point within the expert discourse” (p. 127) – which is also statement that is acceptable in my view. But anyway, it is not fair to say that only auditors establish the “precise fuzziness” – it would be fairer to say that these fuzzy fair frameworks are somehow “generally accepted” in order to be fuzzy fair frameworks. It would be worth to investigate this riddle deeper.

For a practioner like me, of course, it is hard to hear that the audit profession is a kind of “folk craft or art”, as he says. What Power means with this is that judgment and experience are dominating the profession, and that audit knowledge is not or not yet transferred in a scientific way – probably, most practioners would agree with this softer and a bit politer definition.

I think, for all professions, which work with people, there is always this risk of non-acceptance. As our subject is human behavior (and accounting is a writing system for a classification of human behavior), and as we all behave, we are all specialists – so, where is the profession? But if we hide this simple truth (in order to create a profession), how could we then built an honest relation with our clients? Or if we explain all the time the problems of our profession, who would listen to us? Of course, there is a way out. And this way out is: to be exact in analyzing behaviors and to be a bit mysterious in appearance (if you allow me this small joke). For my taste, not the detected “decoupling” is the interesting phenomenon, but the successful “coupling” between evaluation and auditing. It would be necessary to read Luhmann´s conception of “coupling” once again (Die Politik der Gesellschaft, suhrkamp 2002, p. 372ff). I would like to remember that Luhmann suggests a coupling between systems through the medium “money”, which gives excellent possibilities for further development of audit theory.

It is true that the detected obscurity of audits is not explained in the “audit society”, but at least it is detected and it is a beginning.

Frank Fabel, CPA,

What is a “fair framework”?

October 30th, 2013

Fairness means playing by the rules. Frameworks are sets of rules. A fair framework would be a framework which is made in accordance with certain rules. Which rules?

In transnational NPO audits, we have doubts whether the current practice of special purpose audits is satisfying. We entered this question through the instructions given in ISA 800. The claim of the ISAs is not acceptance of principles but setting a benchmark for auditors. We experienced that non-profit clients are downgrading the audit task. This is “bad for auditors, and bad for clients and bad for all final users” – i.e. the work result is not acceptable, from the side of the profession.

We looked deeper into the acceptance problem and focused it on our setting, by comparing the roles of grantors, grantees and auditor.  Applying Hegel´s methode, we identified the possibility of non-acceptance as the main driver for professionalization. Grantors and grantees may not accept the authority of the auditor; grantors may not accept reports from grantees; grantees may not accept the framework or the ethical appeal of the grantor. The internal dynamics of the audit triangle drive forward towards a formalization and professionalization of the institute of a third party certification. The highest form of this process is, or will be, the formation of an international profession.

Criteria for acceptance of transnational reports from grantees and to grantors are not regulated in IFRS or IPSAS. IFRS or IPSAS are benchmarks. They are silent on NPO problems. They are focused on capital markets. ISAs only require auditors to use fair frameworks which satisfy the information needs of final users.

With these requirements we have three problems:

  • Who determines the circle of final users?
  • Who determines the information needs of the final users?
  • Is fairness a sufficient precondition for a framework to be acceptable in a non-profit environment?

If only the paying party would determine the circle of final users, this would reduce the use of the audit report. Thus, it is in the self-interest of the auditors to include members, back donors and beneficiaries into the process. If only the paying party determine the information needs, the client would have no possibility to learn about his own mistakes. Necessity is not a quality of demand – the opposite is true. The auditor is pre-destined to insist on “objective” information needs. Thus we answered the first two questions with: The auditor should actively participate in determining the circle of users and their information needs, too. However, the appellative character of this expression already shows that this answer is necessary, but insufficient.

A fair framework is defined in the ISAs. A framework is fair, if

  • the framework “requires compliance with the requirements of the framework” and
  • the framework “acknowledges explicitly or implicitly that … it may be necessary for management to provide disclosures beyond those  (requirements) specifically required by the framework”; or
  • the framework “acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements …  in extremely rare circumstances”

These requirements (Consistency of application for the participants, voluntary duty of the participants to speak out, possibility of rare deviations) are well defined principles of voluntarily accepted frameworks. Fairness is a concept that is voluntarily accepted: It is not prohibited to play other games with other rules. This makes it necessary that there should be an incentive for a voluntary acceptance of a framework. In the commercial world, this is a monetary gain. This incentive is missing in a non-profit surrounding.  Fairness is a concept that works best in an environment of growth. Growth allows those, who are not included into the club of standard setters, that they will be included later. In a setting of distributing limited resources, this hope is obsolete, i.e. the acceptance of a “fair framework” will be challenged – by grantors and grantees, or in a wider perspective, by the beneficiaries.

If there is no acceptance through gain, the contradiction in the concept of a fair framework becomes obvious: “Fairness” means playing by the rules; but which rules exist in order to decide whether a framework is fair? This is, of course, not defined in the ISAs.

If the client decides what has to be called fair, we experience the above mentioned “down grading”. Consequently, the profession must push forward towards a method how to determine an acceptable framework. Verifying whether a framework is acceptable means that all final users have to be asked, whether they accept the framework. This is a communication task which includes explanations in plain language on the consequences of a treatment, on the methodological consistency etc. Consequently, the audit profession would develop in the direction of certifying that communication processes (on a framework) are acceptable. We suggest to to apply Jurgen Habermas “theory of communicative action” on the audit process.

Thus amended, IFRS and ISAs would receive a social basis which is currently so desperately needed.

There are not so many professions left which could claim to have an idea of a holistic rationality; most professions reduced themselves to a technical view, thus contributing to an overall mystification of techniques. Auditors should not “limit the usage” of their services, as it is currently the case in transnational NPO audits, but on the contrary demonstrate that they are able to certify the acceptance of processes, which are intended to create frameworks of mutual, transnational number based reconciliation.