What is a “fair framework”?

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.

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