Archive for November, 2013

Precize Fuzziness

Thursday, 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,