Critical Perspectives on Accounting (1992) 3, 291-314

PU’ITING AUDITING PRACTICES IN CONTEXT:

DECIPHERING THE MESSAGE IN AUDITOR
RESPONSES TO SELECTED
ENVIRONMENTAL CUES
LINDA M. KIRKHAM

Department of Accounting and Finance, University of Manchester

This paper explores the contribution made by conventional audit research

studies such as the one by Wright (“The Impact of Selected Environmental
Cues on Audit Disclosure Judgements,” Critical Perspectives on
Accounting, Vol. 3, 1992, pp. 273-240. It is suggested that the theoretical
underpinnings and methodological tools employed in such studies are
inappropriate vehicles for pursuing issues of audit practice. The Wright
study is used to illustrate three areas which are treated inadequately: (i) the
concept of the environment; (ii) the relationship between audit practice and
laboratory studies; and (iii) the relationship between audit practice and
concepts. The paper concludes by reflecting upon the context (environ-
ment) of the recently publicized corporate collapse of the Bank of Credit and
Commerce International. It is suggested that such cases illustrate the
importance of a much wider set of environmental cues than could ever be
accommodated in conventional models of the audit process. Making
progress on understanding auditor disclosure judgements is argued to
require a more adequate theorization of the institutional and social context
of auditing.

Introduction
The recent, and seemingly endless, stream of publicized financial scandals
and collapses has served to highlight the problematic nature of the audit
function and placed the audit profession under increasing pressure to account
for itself. Concerns over the role, practices and regulation of auditors have
been voiced by a range of commentators, including academics, practitioners,
politicians, journalists and company executives both in the US and in the UK
(Fogar-ty et a/., 1991; Sikka et al., 1989; Willmott, 1991). Such problems are not
seen to be confined to issues of the technical superiority of one audit
technique over another or the ability of the audit function to respond to
changes in the business environment in a timely manner. Rather, challenges
are being made to the very bases upon which the audit profession has
claimed its powers and privileges and the knowledge structures underlying
their practices (Hopwood, 1990). These bases are founded upon a schema of
the trustworthy auditor which emphasizes the attributes of independence,
expertise, morality and fitness to act in the public interest (e.g. see Neu, 1991;
Willmott, 1986). It is a questioning of these fundamental attributes of the
auditor which has led some to suggest that public accounting has become “a
Address for correspondence: Professor Linda Kirkham, University of Manchester, Department
of Accounting, Roscoe Building, Manchester Ml3 9PL, UK.
Received 15 July 1990; revised 13 October 1991; accepted 8 February 1992.
291
1045-2354/92/030291 + 24 $08.00/O 0 1992 Academic Press Limited
292 L. M. Kirkham

profession under siege” (Fogarty ef a/., 1991, p. 220) and to question whether
“a profession so besieged (can) survive?” (Somner, 1990).
Such a debate is not, however, new. Similar debates have frequently arisen
in the wake of corporate scandals (Briloff, 1990; Tinker et a/., 1991; Tricker,
1982; Willmott, 1991), only to disappear again as public attention is either
diverted or reassured (Humphrey & Moizer, 1990). This disappearing trick has
been facilitated, in part, by the absence of any serious and sustained
challenges to many of the central concerns raised in the wake of perceived
audit failures. Thus, too often, critics have viewed such failures as aberrations
or exceptions to the rule rather than pursuing the problem as a critical, unitary
matter (Briloff, 1991) and have dwelt upon the symptoms of such failures
whilst neglecting to scrutinize their root cause (Tinker et a/., 1991). General
concerns over auditor independence or expertise have been submerged
within attempts to identify detailed inadequacies or failures in specific audits.
This auditor or that audit practice are scrutinized and judged and characteris-
tic solutions are proffered. Invariably, such analyses have resulted in press-
ures for change which are aimed at improving control of. the extant audit
process whilst leaving unchallenged its underlying meaning and functioning.
Thus, despite two decades of periodic crises in the auditing profession, the
underlying concepts of the trustworthy auditor (Neu, 1991, Sikka et al., 1989)
and the idealistic audit (Fogar-ty et al., 1991) have escaped any sustained and
serious challenges.
Current concerns regarding the audit function have centred upon a series of
major scandals both in the UK, the US and internationally [e.g. Maxwell
Communications Corporation (MCC), savings and loan associations (S&Is),
Bank of Credit and Commerce International (BCCI)]. These scandals have
revived a questioning of the independence, integrity and expertise of auditors
(Treadway Commission, 1987) in relation to a number of aspects of the audit
function, including the absence of qualified audit opinions despite apparent
evidence of problems and the adequacy of the collection and evaluation of
audit evidence’. The collapse of MCC, the latest scandal to erupt into the UK
public domain merely underscores these concerns:

And the role of the firm, the UK’s largest accountancy practice, who have
audited Maxwell companies over the last 20 years without ever qualifying a
report, has already led to renewed calls for far-reaching reform of auditor
relationships with clients (Accountancy Age (AA), 12 December 1991, p. 1).

Such issues lay at the heart of the research questions posed in the paper by
Arnold Wright which attempts to explore the impact of key environmental
factors (defined as characteristics of the client), selected because of their
potential significance in “affecting the objectivity of auditors”‘, on audit
disclosure judgements.
As Wright points out, there is a lack of empirical evidence addressing
whether auditors rely on environmental factors in practice; how these factors
impact upon audit judgements and whether reliance on these factors is
beneficial or harmful (the “value” of reliance). The importance of such issues
is underscored by those academics arguing for a more contextual approach to
understanding audit practice whereby recognition is given to how audit
 Putting auditing practices in context 293

judgement decisions are not merely procedural outcomes of the application of

a narrow set of techniques (see Humphrey & Moizer, 1990). From such a
perspective, audit judgements are seen to involve the mediation of an array of
factors and pressures, both technical and non-technical, and outcomes are
viewed as emerging from negotiated processes between management and
auditors in particular contexts (environments). With a better understanding of
the nature of the audit environment and the processes by which auditor
judgements emerge from within it, such an approach seeks to make progress
in addressing some of the fundamental concerns being voiced about the
modern audit function.
In recognition of the lack of extant auditing literature which deals which
issues relating to environmental factors, Wright’s research aims are modest;
his study is seen as exploratory and viewed as “an initial inroad into this area
of research that hopefully will stimulate further research”. Nevertheless he
claims to offer the reader a number of insights in terms of whether and why
audit disclosure judgements are affected by selected environmental cues. This
paper takes issue with these claims, both in terms of the underlying model
utilized and the evidence provided. It challenges the theoretical and methodo-
logical bases of Wright’s study in terms of their suitability and adequacy to
attend to the research agenda set. In the following section a number of
general concerns with Wright’s study are identified. These are developed in
more detail in the following sections through discussions of the concept of the
environment, the relationship between the results of laboratory experiments
and audit practice and the relationship between concepts and audit practice.
Finally, the paper returns to some of the concerns which motivated the Wright
study and reflects upon the relationship between the environment and a
recently publicized case of audit practice-BCCI.

Wright’s Study
In order to explore whether auditor judgements are affected by environmental
cues, Wright draws upon a theoretical framework which “depicts an input,
process, output sequence”. Environmental factors enter the framework in-
directly in terms of information accumulated as part of the evidence-gathering
process. Using this framework as a model, Wright employs a laboratory
experiment as a means of examining “the impact of selected environmental
cues on audit disclosure judgements” and evaluating the posited theoretical
framework of the audit decision process. However, as with other laboratory
studies, Wright’s choice of research tool can be seen to labour under a major
handicap in that it cannot observe the phenomenon of interest-the influence
of environmental cues on auditor judgement processes (Hogarth, 1991) or
behaviour (Johnson et a/., 1989). In laboratory studies, processes and
influences can only be inferred and evaluated by observing inputs and
outputs in relation to the model specified. Consequently, such an approach
must rely upon a theoretically well-specified model in order to support any
claims for a relationship between the observed experimental phenomena and
the theoretical framework utilized. Wright’s model would seem to be only
loosely specified and little theoretical explanation is offered for either the
choice of variables studied (which is rationalized in terms of citations in the
294 L. M. Kirkham

literature) or the nature of their relationship to the framework articulated

(which is explained in terms of a disparate body of empirical and professional
literature). Without such explanation, the meaning of any experimental results
remains ambiguous and open to question.
Despite the potential offered by the research topic selected, Wright’s choice
of theoretical framework and research methodology to examine it can be
argued to ignore or assume away many of the interesting issues. In particular,
the framework draws upon, but fails to elaborate upon, a number of central
(to this study) concepts such as the environment, auditor independence and
auditor expertise. These concepts are employed explicitly and implicitly but
little attention is given to explaining or exploring their meaning for, or
relationship to, audit decision processes and practices. And yet such concepts
are being increasingly revealed to be both problematic and important to any
understanding of audit practices (Hines, 1988, 1989; Hopwood, 1990; Tinker,
1985; Tinker et al., 1982; Willmott, 1986, 1990, 1991). The contested nature of
such concepts renders their theorization essential and their operationalization
within the experimental laboratory difficult. In the Wright study, as with other
studies employing the research tool of a laboratory experiment, subjects are
asked to respond to experimental stimuli designed to recreate the audit
environment. However, the examination of relatively isolated tasks away from
the demands of the audit practice environment makes it difficult to understand
the implications of any findings either in terms of statements concerning the
performance of auditors in practice or in terms of how the findings might be
used to improve practice (Hogarth, 1991, my emphasis). Any implications for
practice drawn from such studies are debatable.
In the following sections these arguments are developed through a more
detailed examination of the research question posed and the methodology
employed in the Wright study. First, the primary research question “are audit
judgements significant/y affected by environmental factors?” is examined in
terms of both its meaning and any implications for the researchers’ choice of
research tool. It is argued that Wright’s choice of theoretical framework and
methodology are not really up to the task set for them. Second, the results of
Wright’s research study and his interpretation of them are focused upon and
questioned as to their relationship to the primary research question. It is
suggested that the conclusions, in terms of how well auditors performed (e.g.
“length of client association did not seem to impair auditor objectivity”) and
how they might improve their performance (e.g. “greater attention may be
needed in auditing education, training and the development of decision
aids”), are only loosely, if at all, coupled to the research findings. In other
words, this paper will argue that whilst the study by Wright explores an
interesting and important issue, it contains a number of questions with no
answers and answers with no questions.

Questions with no Answers

What are Environmental Cues?

The concept of the environment has attracted increasing attention in account-
ing research (e.g. see Burchell ef al., 1980, 1985) and, to a lesser extent, in
 Putting auditing practices in context 295

auditing research (e.g. see Fogarty et al., 1991; Humphrey & Moizer, 1990;
Willmott, 1991). Its nature, boundaries and interrelationships with the audit
function have proved a contested terrain between competing theoretical
paradigms. At one extreme, cognitive researchers in auditing, employing a
variety of perspectives such as the lens model (e.g. Ashton, 1974) and the
literature on heuristics and biases (Joyce & Biddle, 1981), have viewed the
environment in terms of a restricted set of information about an enterprise
which can be meaningfully reproduced in laboratory settings. At the other
extreme, critical researchers argue for an appreciation of the wide array of
economic, political and social factors and influences which serve to create the
environment in which audit decisions take place. This perspective not only
involves a consideration of such factors at the societal and/or organizational
levels, but demands an appreciation of how such factors may be conflictual
and contradictory. From this perspective, auditing is viewed as a social
practice to be understood in relation to other social practices (Tinker et al.,
1991).
In cognitive research studies, the environment is frequently viewed as
exogeneous to the auditor and her/his human information processing capabi-
lities such that judgements are seen to be influenced by data in the
“environment” and data retrieved from memory (e.g. Ashton, 1991; Frederick,
1991). Auditor decisions are viewed as the outcomes of applying purely
procedural techniques, constrained only by the limits of human information
processing. In contrast, critical researchers view the auditor as part of the
environment of the audit such that their decisions are both a product
(reflection) of the environment and may also serve to constitute it
(Hines, 1989).
Wright describes environmental factors as “characteristics of the client”
which “deal with the setting in which the audit takes place”. However, such a
definition is ambiguous and demands further elaboration. From an examina-
tion of the theoretical framework adopted in the paper, the environment
emerges as an independent set of discrete variables which constitute
information which the auditor may or may not draw upon to make audit
decisions. What is not clear however, is the theoretical basis for the
identification of the set of environmental variables and their relationship to
each other and the framework articulated.
In order to test the objectivity of the auditor, Wright selects three client
characteristics as “key” environmental variables-client size, length of audit
engagement and the growth pattern of the client. The choice of variables is
justified in terms of a priori assertions made in the literature. However, the
audit literature also contains assertions and evidence regarding the potential
importance of the organizational setting of the auditor (i.e. the professional
accounting firm environment) in influencing auditor decisions and objectivity.
In particular, an increasing number of researchers have identified the
increasingly commercialized and competitive environment of audit firms as
potentially influencing the nature and outcome of the audit process at a
variety of levels. On a general level, these developments have led some critics
to question auditors’ continuing claims to professionalism (e.g. see Briloff,
1990; Zeff, 1987; Tinker, 1985; Willmott, 1986). More specifically, researchers
296 L. M. Kirkham

have identified the practices of opinion shopping (the ability of corporations

to elicit and choose from, a number of audit opinions), low balling (price-
cutting of audit work with the expectation of subsequent recoupment) and the
provision of management advisory services (MAS) as ways in which the audit
process may be influenced by this changing environment.
Empirical evidence supporting the existence of opinion shopping (Knapp,
1985; Serlin, 1985) and low balling (Turpen, 1990; Simon & Francis, 1988) has
heightened concern that such practices place auditors under increasing
pressures to please the client so as to retain their fee income3. Such pressures
pose a serious threat to auditor independence and may have a detrimental
effect upon the nature, extent and interpretation of audit work undertaken.
The threat to auditor independence posed by the increasing provision of MAS
to audit clients has been well documented and its potential effects on aspects
of audit quality extensively researched (e.g. Armstrong & Vincent, 1988;
Briloff, 1990; Carmichael & Swieringa, 1968; Knapp, 1985; Shockley, 1981;
Tinker, 1985; Zeff, 1987).
The professional firm environment, its changing nature and its incumbent
pressures has thus been revealed as a potentially significant influence on the
audit process; a process which includes the judgements and decisions made
by individual or groups of auditors. However, much of the research noted
above has been concerned with identifying the existence and influences of
such practices at the level of the audit market and, to a lesser extent, at the
level of the individual auditor. Relatively little is known of how such practices
are reflected in, and recreated through, audit judgement decision processes at
the level of the audit firm. And yet, writers point out that audit opinions are
signed, not by individuals, but by firms, and auditor judgements are subject to
managerial influences and pressures both before, during and after individual
inputs (Hogarth, 1991). Different firms may exhibit different corporate cultures
which may effect not only the methods of conducting audits (Cushing &
Loebbecke, 1986) but a range of other dimensions of audit expertise and
judgement (see Schein, 1985). Attitudes towards concepts such as risk,
professionalism and image-building, as well as the negotiation and resolution
of technical disputes and client objections, may differ amongst (or even within)
audit firms. For example, the empirical findings of Dirsmith and Haskins
(1991) lead them to “strongly suggest that an audit firm’s philosophical
position with respect to structure, influences what client characteristics audit
team members see as important in assessing inherent risk” (p. 82) and Goetz
et a/. (1991) suggest that increasing firm size may have an adverse impact on
professionalism.
Recognition of such organizationally-grounded factors operating within a
changing audit market enlarges the concept of the environment within which
audit decisions are made and emphasizes the possibilities for differences both
in the “audit setting” and the audit decision process which cannot be
encapsulated in terms of a selected number of client characteristics, as in the
Wright study. In particular, despite claiming that the most important variable
of the model is “the auditor”, Wright’s theoretical framework portrays
auditors as essentially homogeneous and independent of pressures and
influences in their general or specific organizational environment. But, as
 Putting auditing practices in context 29.7

Hopwood (1990) suggests, “the micro politics of audit negotiations now take
place in an arena shaped, not just by financial pressures on (client) manage-
ment, but also by a much more commercial orientation in the auditing firms
themselves“ (p. 83). Essentially, Wright’s concept of the environment is
constrained to considerations of the client company with little, if any,
recognition of the environment of the auditor and its interdependencies with
the environment of the client and the client-auditor relationship. Such a
concept is not only partial, it may be misleading since the meaning and
significance of client characteristics (such as client size, growth pattern and
length of engagement) to audit decisions in practice must be viewed in
relation to characteristics of the audit market, auditors and audit firms.
The concept of the environment can be expanded even further to include a
consideration of the broader societal context within which the audit function
takes place (e.g. see Hines, 1989; Tinker et al,, 1991). From such a perspective,
audit decisions are viewed in relation to a wide set of constituents and factors
including professional bodies, government, the regulatory process, auditors’
relationship with the state and economic and political conditions (Tinker,
1985; Sikka et a/., 1989; Willmott, 1991). These aspects of the audit environ-
ment are viewed as an interacting whole rather than as a set of discrete,
independent influences. Thus, the meaning and significance of factors such as
client size and growth patterns for audit decisions are understood in relation
to political and economic pressures and changing professional standards
which, inter alia, may influence auditor attitudes to, and assessments of, risk,
pay-offs, professionalism, etc.
Auditing firms and individual auditors face a number of potential costs,
including loss of reputation, lawsuits and sanctions, if the audit is sub-
sequently shown to be defective. The risk of an audit being exposed as a failure
and the incumbent costs may depend upon the politico-economic environ-
ment prevailing. For example, the risk of exposure may increase in the wake
of a period of publicized audit failures, legal actions and heightened govern-
ment attention to the regulation and organization of the audit function.
Evidence cited by Fogarty et al. (1991) leads them to conclude that “(i)n sum,
research supports the intuition that, at the margin, qualification has been a
reaction to the worsening malpractice exposure of accountants” (p. 218).
Thus, audit decisions need to be understood in relation to changing regula-
tory and professional pressures.
The economic climate may impose significant pressures both on the client
and on the auditor and may alter the meaning and significance of client
variables in auditor judgement decisions. In a recession, client firms may seek
to minimize cash outflows in the form of audit and related fees whilst facing
increased pressure not to jeopardize market confidence through either poor
reported results or an audit qualification. The potential power of client firms to
exert control over the auditor’s ability to earn fees (Knapp, 1985) may be
exacerbated during a recession since the increasing commercialization of
auditing firms has placed them under similar economic pressures as other
businesses. Thus, they may be less able to withstand client pressures whilst
facing a heightened threat of losing the audit fee annuity and any related fee
income in a shrinking market for their services. From this perspective, the
2% L. M. Kirkham

meaning of client characteristics such as size and growth pattern, for audit
decisions, can be assumed to vary in relation to altered economic conditions.
Changes in domestic and international capital markets and the market for
audit and management advisory services may serve to influence the assess-
ments of risks and pay-offs associated with audit decisions.
The audit environment can be seen to be much larger and more complex
than a narrow set of client characteristics. It constitutes an array of factors and
influences which may be conflicting and contradictory. Understanding the
nature and significance of this enlarged concept of the environment is an
important issue in auditing research and is discussed in more detail in the
final sections of this paper.
Although Wright acknowledges an array of potential environmental cues as
“others” in his framework, these are not theoretically specified. Consequently,
there is little theoretical justification and, as he himself acknowledges, scant
empirical research, to support his choice of cues. Whilst on a pragmatic level
it may be acceptable to adopt an incremental approach to understanding the
impact of the environment on audit judgement decisions, it is nevertheless
necessary to specify the theoretical basis on which selected cues are identified
for empirical testing. Otherwise, it is difficult to accept the validity of his
empirical transformation of the research question posed. The audit setting is
questioned but its nature and characteristics are left unexplored. Without
some theorization of “the environment”, questions relating to the nature,
significance or impact of environmental factors or cues will remain
unanswered.

Laboratory Studies and Audit Practices

Whilst the theoretical and empirical debate over the meaning of the environ-
ment in the audit function is unresolved, it is nevertheless possible to
question the methodology which might be employed to explore the concept,
however it is construed. As noted earlier, Wright employs a laboratory
experiment to explore the impact of environmental cues on audit judgements.
Laboratory experimentation research is characterized by “(a) manipulation by
the researcher, of one or more independent variables, and observation of the
impact on one or more dependent variables; and (b) isolation of the research
in a physical situation apart from the routine of ordinary living” and has been
increasingly employed to examine human judgements or decisions in ac-
counting or auditing research (Snowball, 1986, p. 48).
The problems associated with such a choice of research tool have been
discussed in relation to accounting (Swieringa & Weick, 1982) and auditing
(Hogarth, 1991) and studies employing laboratory experiments have been
shown to suffer from a number of limitations, some of which are acknow-
ledged in the Wright paper. In particular, auditors are presented with relatively
isolated experimental stimuli (in the Wright study, a description of the firm
and the audit issues, a set of summarized financial statements and key
statistics) and are asked to make judgements (about audit adjustments and
opinions) concerning hypothetical clients. The issue is essentially whether
such a research design can inform our understandings of how and which
 Putting auditing practices in context 299

audit decisions are made in practice; can it further our understandings of the
impact of environmental cues on audit judgement decisions made in
practice?.
The demands of the audit environment are highly complex and ambiguous
(Humphrey & Moizer, 1990) and audit judgements involve a great deal of
discretion and choice. Nevertheless, audit researchers continue to explore
questions about audit practice in abstracted, partial contexts. Claims are made
for progress in understanding what individual auditors can achieve in specific
tasks whilst relatively little attention is given by such researchers to how
auditors make decisions, and what they do (or do not) achieve in practice.
Whilst attempts are made to employ “realistic tasks” and introduce com-
plexity into experimental stimuli (see Hogat-th, 1991; Johnson et al., 19891,
audit research studies employing laboratory experimentation have continued
to neglect the myriad of (non-technical) pressures and conflicts which
characterize the multi-faceted nature of auditing.
Wright’s study may be seen to be typical in this respect. Although he
attempts to introduce realism, complexity and conflict through his choice of
“real” audit cases, these dimensions of auditing tasks are construed in a
static, uni-directional way. Subjects were presented with a highly structured
task in terms of being “asked to make a disclosure/materiality judgement” on
the basis of information provided by the researcher. In practice, however,
decision tasks are poorly structured (Einhorn, 1974) and in most situations
auditors will adopt an active role in searching for information to evaluate. The
nature and extent of the information sought and evaluated will depend on a
number of factors and pressures and the auditor cannot be assumed to
retrieve sufficient information for each audit task. Research in the US related
to audit quality reduction acts, such as premature sign-offs, has identified a
number of contributory factors, including budget time pressure and type of
CPA firm (see Kelley & Margheim, 1990, for a summary). The report of the
Treadway Commission (1987) suggested that, in addition to budget pressure,
fee pressure and reporting deadlines may adversely affect audit quality and
recommended that public accounting firms need to recognize and control for
such organizational pressures.
In view of these organizational pressures on the completion of audit tasks,
the responses of subjects presented with structured tasks in the laboratory
setting cannot be easily generalized to the setting of audit practice. Moreover,
the focus on specific aspects of audit procedures ignores or renders difficult
the assessment of how these fit into the overall design and process of the
audit and the pressures and conflicts therein. An audit constitutes more than
the sum of its constituent parts and the non-interactive, static nature of
laboratory studies poses fundamental concerns regarding their suitability to
provide insights into question of audit practice. In practice, the general and
specific context of the audit and the auditor may influence not only the
evaluation of information (including environmental cues) but also its
constitution.
The ability to re-create the pressures and conflicts inherent in the audit
setting may be crucial to the validity of any research findings. In their
absence, subjects’ responses may be distorted, or simply inaccurate, reflec-
300 L. M. Kirkham

tions of audit practice. For example, although Wright acknowledges the

client-auditor relationship as a potential (environmental) factor in arriving at
audit decisions, it is operationalized in his study in such a way that auditors
are required to respond to a predetermined set of client attitudes and
characteristics and there is no acknowledgement of the dynamics of the audit
negotiation process. Thus, scant attention is given to exploring the balance of
power between auditors and client management and the negotiation proc-
esses which take place. Where the audit firm is involved in MAS, Knapp (1985)
has argued that the balance of power in the auditor-client relationship is
altered in favour of the client, and Fogarty et a/. (1991) suggest that auditors
may experience a subtle shift in self-perceptions towards client advocacy and
service which may compromise their reasoned scepticism. These dimensions
of the audit process are missing from the Wright study where the auditor
faces a hypothetical client in a laboratory setting. Under these conditions, the
auditor is likely to find it relatively easy to resist the client objections and
pressures outlined in the experimental stimuli, not least because of the
absence of any interactions and counter-objections to her/his decisions.
Other dimensions of audit judgement and expertise, such as attitudes to,
and assessments of, risks or pay-offs may also be distorted in the experimen-
tal setting. For example, the loss function implied by the disclosure judgmen-
tal tasks in Wright’s laboratory study is essentially restricted to issues of
general auditor reputation (assuming the results are publicized) and penalties
for errors appear to be absent. In particular, the cost of requiring an
adjustment by, or giving a qualified audit opinion to, a hypothetical client
might be deemed to be zero. In contrast, such decisions may bear heavy costs
in practice in terms of the potential loss of business if the client decides to
“shop around” for a more “understanding” auditor. As noted earlier, the
practice of opinion shopping is likely to give client management increased
leverage over auditors in disputes about accounting methods and audit
decisions by increasing the pressures on auditors to please the client in order
to avoid any actions which might jeopardize future fee income4. In the
commercialized world of the modern audit function, the reward for standing
on principle, when to do so may result in a client departure, goes to zero
(Kaplan, 1987).
By insisting on adjustments to the accounts or issuing qualifications, audit
firms do not merely risk losing audit fee income; the proliferation of MAS and
its increasing significance in overall fee income has served to exacerbate any
potential losses arising from client decisions to switch auditors. Pressures on
audit firms, resulting from operating in an increasingly commercialized and
competitive environment, give rise to pressures on individual auditors to
“keep the client happy” and generate other business (e.g. see i’eff, 1987;
Humphrey & Moizer, 1990) and serve to introduce a dimension into audit
decisions which are difficult, if not impossible, to reproduce in the anonymous
sanitized setting of the laboratory.
The complex modern audit environment contains a number of conflicts,
contradictions and ambiguities for auditors in terms of how the pressures,
incentives and influences they face are reflected in loss/reward functions.
Whilst the costs of standing on principle by requiring an adjustment in the
 Putting auditing practices in context 301

financial statements or issuing a qualified audit report may be large, failing to

take such action may also be costly. Doing “nothing” may result in litigation
proceedings and legal penalties, a loss in (non-management) client con-
fidence and/or a reduction in professional privileges if the government or
regulatory bodies intervene. It may also contribute to a general erosion of
public confidence in the professional standards on which auditors rely for
their privileges and status in society. Private litigation over audits is frequently
“settled out of court” and thereby often avoids publicity for the auditing firms
involved. Consequently, the costs associated with such actions are pre-
dominantly in the form of direct financial penalties, and the associated risks
may, in part, be offset through insurance.
Potentially more significant are those costs associated with government
sanctions such as those imposed by the SEC in the US. The potential costs
resulting from SEC enforcement activities have been suggested to include
loss of reputation resulting in a reduced market share and a reduced ability to
retain clients and attract new ones (Bremser et a/., 1991, Wilson & Grimlund,
1990). A study by Wilson and Grimlund (1990) into the effects of SEC
enforcement activities provides some empirical support for the existence of
such costs. However, Bremser et al. (1991) have noted the infrequency of such
actions against auditors and the preponderance of local firms of auditors in
named actions, leading them to question whether “the SEC is being tough
enough on auditors?” and whether “smaller firms may be more susceptible to
SEC sanctions than larger auditing firms?” (p. 198). Such research might be
interpreted as suggesting that, whilst acceding to client pressures may result
in costs associated with loss of reputation, the risk of incurring such costs is
low, or very low in the case of large auditing firms.
Client pressures on auditors have been shown to have a potentially large
impact on assessments of the risks and pay-offs associated with audit
judgement decisions. Such pressures cannot be reproduced easily in the
laboratory setting. In their absence, not only are assessments of risk and
pay-offs distorted but auditors may exhibit different attitudes to these and
other dimensions of audit practice, such as professionalism. Auditor judge-
ments and disputes (as in the Wright study) are rarely, if ever, decided and
resolved by individual auditors. Rather, they emerge from discussions and
consultations between a team of auditors, who will in turn be influenced by
management procedures and firm policies which need not always be directly
related to audit judgements per se (Hogarth, 1991). When isolated from their
normal working environment, auditors may be relieved of some of the
pressures imposed, not only by clients, but by their own professional setting.
Whilst the importance of the increasing competitive, commercial and
professional pressures faced by auditors has been well documented, relatively
little is known of how these pressures are mediated, negotiated and reflected
in audit judgement decisions in practice. How are the conflicting risks and
expected pay-offs/penalties associated with different audit judgement deci-
sions identified, negotiated and evaluated by auditors? How significant are the
risks and pay-offs associated with non-technical pressures in relation to
technical dimensions? How does the auditor mediate and understand these
pressures in her/his different social roles, as a professional, an employee, an
302 L. M. Kirkham

investor, a consumer, a taxpayer or a member of the public (Tinker et al.,

1991)?
These issues are of particular importance to the research questions posed
by Wright, which seek to make progress in understanding the impact of the
environment on audit judgements. In order to make progress on such issues,
it is first necessary to identify the nature and extent of the pressures faced by
auditors in practice and provide some explanation of how they are created
and recreated through the audit process. It is unlikely that studying the
responses of auditors to experimental stimuli, which include the stated
objections of a hypothetical client as a proxy for client pressures, can provide
much insight into any of these issues. Wright’s choice of research methodol-
ogy fails to capture the dynamic, interdependent, conflictual features of the
audit environment and therefore appears to offer little chance of ever
succeeding in providing answers to the question he has set for himself.

Answers with no Questions

Concepts and Practice

Wright reports the finding that “environmental cues do not appear to be relied
upon heavily enough to alter CPA judgements”. In particular, he notes that
“the length of client association did not seem to impair auditor objectivity,
which is a positive indication”. In order to arrive at these conclusions
(answers) it is assumed that we have some reasonable understanding of how
well auditors perform in the absence of such cues. Although not explicitly
stated, it emerges that the benchmark against which performance is evaluated
is that of the disinterested, expert professional. Wright argues that “norma-
tively the length of client association should not impact the audit disclosure
decisions examined, which according to auditing standards should be based
on materiality and generally accepted accounting principles”. He imports the
normative standard of the independent expert auditor through the application
of professional pronouncements to evaluate the impact of environmental cues
on audit disclosure decisions. This standard is then used to interpret the
research results.
Adopting normative standards has implications for the researchers’ agenda
which may not always be acknowledged. In particular, by adopting the
normative standard of the expert professional auditor to evaluate and
interpret his findings, Wright implies that such a construct does or can exist,
since “ought implies can” (Goldman, 1978, quoted in Hogarth, 1991, p. 280).
But Wright does acknowledges the problematic nature of the concept of
auditor independence and does not claim to assume its existence, rather he
claims to test for it, interpret and conclude it from his research findings. In his
study, independence is seen to be demonstrated, in large part, by adherence
to generally accepted accounting principles (GAAP).
Adopting GAAP as a standard of auditor independence is in itself prob-
lematic. The establishment of what GAAP is, or should be, is influenced
by auditors in their role as public accountants and its content and meaning
have been questioned as to the extent to which it reflects any partiality or
 Putting auditing practices in context 303

non-independence in the client-accountant relationship-the “client effect”

(McKee et a/., 1991). Researchers have argued that the adoption and use of
GASP, rather than acting as a technical, neutral standard, may serve a
legitimating role for accountants and auditors (Hines, 1989, Neu, 1991) and
even governments (Carpenter & Feroz, 1991). Whilst evidence of the “client
effect” is “mixed” and more research is needed into the roles which GAAP
might play in the audit process, sufficient grounds already exist for seriously
questioning the adoption of GAAP as a standard of the objectivity, integrity
and independence of auditors.
Adopting a standard of independence, integrity and objectivity which is
dependent on the independence, integrity and objectivity of auditors to
evaluate auditor judgements exhibits a fundamental contradiction; it is
necessary to assume the existence (not the possibility) of the independent
auditor in order to test for her/his existence. This problematic can be viewed
as a reflection of the uni-dimensional approach to much audit judgement
research (Humphrey & Moizer, 1990) which leaves the basic underlying
concepts unchallenged whilst making claims as to their existence, nature or
composition (e.g. see Bedard, 1989) or attempting to identify their com-
ponents (e.g. Ashton, 1991).
By assuming rather than questioning concepts such as auditor independ-
ence or professionalism, such studies serve to represent and reinforce a
separability between concepts and the practices introduced in their name.
Audit practices are introduced, refined or developed in the pursuit of
objective, expert, disinterested professionalism. Indeed, Wright offers a
number of possible avenues for change in terms of “education, training and
the development of decision aids” which are normatively derived from such
concepts. Once introduced, such practices are seldom made accountable in
terms of the concepts which spawned them. Whilst the pursuit of independ-
ence or professionalism may spur the introduction of an audit procedure, any
subsequent inadequacies revealed in its practice are invariably attributed to
technical inadequacies or limitations in human information processing.
Hopwood (1990) makes a similar analogy in accounting. He argues that the
operationalization of concepts such as efficiency in accounting practice is
debatable, whilst a great deal can, and is, done in their name. The generality
and lack of operational precision of such concepts enables “an uncoupling of
aims and consequences to be introduced” and may constitute a source of
power to those who seek change orientated to such ends since, as Hopwood
suggests, “it is difficult to disagree” with such aims (p. 80).
In auditing, as in accounting, much is claimed and may be achieved in the
name of concepts: regulatory frameworks may be established and altered;
legislative rules and judicial rulings may be made; and the public interest may
be defined (e.g. see Hines, 1989; Humphrey & Moizer, 1990; Sikka et a/,, 1989;
Tinker, 1985; Willmott, 1986, 1989, 1991). The lack of specificity of concepts
may assume a political significance as they give rise to a segmentation of
accountabilities. Thus, the accountability of auditors in terms of their ad-
herence to concepts such as independence and expertise comes to be viewed
as only loosely linked to the accountability of companies in terms of their
relationships with stakeholders and society. They are designated different
304 L. M. Kirkham

realms and are only seen to overlap infrequently, for example when a
violation of the concept of “expertise” is viewed to have taken place which
coincides with or results in the disclosure of company fraud. Even then,
Fogarty et al. (1991) suggest that public accounting has demonstrated an
ability to survive, if not prosper, through an “ever increasing decoupling of
espousals and actions” and “a systematic manipulation of a concept of an
idealistic audit” (p. 222)
In the Wright study the relationship of concepts to practice is left unques-
tioned and the interpretation of the findings and recommendations for change
are premised on the assumption of a close relationship between the two.
Despite the ambiguity in the performance of auditors of differing levels of
“professional experience” and the inconsistent responses to different en-
vironmental cues (i.e. subjects were viewed as getting the length of client
association cue “right” and the size and growth patterns cues “wrong”), the
underlying concepts of objectivity and professionalism are left unquestioned.
Rather, these findings are discussed in relation to the technical training and
knowledge of auditors which, it is suggested, might require improving in order
“to draw attention to these potentially important clues”. Once the auditors’
attention has been drawn to such clues, it would seem we are to assume they
will act upon them in practice in a disinterested, professional manner such
that they will be better equipped to “take a global view of the client in its
environmental setting to consider fully the risks of material errors present”.
Without such an assumption, such prescriptions lose their validity since we
can no longer take for granted the process by which auditors make judge-
ments, nor the basis on which they do so. In the absence of any serious
questioning of the nature of auditor expertise, independence and profes-
sionalism, it is difficult to know how to interpret Wright’s findings. We are
offered potential solutions but, it would seem, in the absence of any
acknowledgement of the problem.

Reformulating the Questions and the Answers

If we adopt a more critical approach to auditing and the concepts which are
used to explain and legitimate its practices then the research agenda is
transformed. The complexity, malleability and diversity of motives, actions
and outcomes renders it doubtful that a laboratory experiment can ever
provide meaningful insights into the actual practices of auditors. Even if the
researcher introduces more variables, more complexity, more ambiguity and
more dynamism into experiments, it is still debatable whether s/he can
capture the pressures and influences of the audit setting. These aspects may
be necessary (though not sufficient) to generalize any research findings to the
setting of audit practice5.
However, these studies may yet be revealing in a different sense. In
particular, little is known about how individual auditors negotiate their
professional status and image with different outside constituents. Whilst a
number of writers have examined this question from the perspective of the
profession as a whole (e.g. see Neu, 1991; Robson & Cooper, 1989; Willmott,
1989), there has been scant attention to questioning how the meanings of
 Putting auditing practices in context .ws

concepts such as independence and professionalism are constructed, prom-

oted and recreated by individual auditors. Studies of the so-called “expecta-
tions gap” in auditing have encompassed numerous surveys of the public’s
view of the audit profession but have provided little evidence of the views of
practising auditors (but see Humphrey et al., 19911.
In part, auditors may regard participation in laboratory studies as a means
of projecting, demonstrating and reinforcing their image claims as disinter-
ested experts. If so, Wright’s results may be more a reflection of auditors’
understandings of their professional claims and their desires to project them,
than an indication of real-world behaviour. The auditors‘ responses need not
be disingenuous, indeed they may be accurate predictors of their behaviour in
an environment with few, if any, pressures; an environment which bears little
resemblance to audit practice. By reformulating the research questions posed
by Wright it may be possible to aid our understanding about, not what
auditors actually do in practice, but what they believe they are expected to do
If we accept the potential for different motivations to influence auditor
subject responses, the uses and interpretations of laboratory studies may
assume a political significance. Those such as Wright’s which assume
disinterested motives may serve to legitimate and perpetuate professionai
claims, whilst those which focus upon image or interests may serve to
question and understand these claims. This can be demonstrated through a
reinterpretation of one of Wright’s results-the observation that the auditors
responses were not influenced by the length of client association. Wright
viewed this finding as an indicator that auditor objectivity was not impaired.
Alternatively, such a finding could be viewed as a reflection of how auditors
recognize particular “environmental cues” as potentially significant to exter.-
nal constituents’ assessments of auditor professionalism or objectivity.
Although auditors may recognize a “cue” which they perceive to be viewed
by outsiders as potentially compromizing to their professionalism, their
response will be constrained by other dimensions of audit judgement,
including human information processing capabilities and technical knowl-
edge. Thus, whilst a subject may recognize a cue, they may be incapable of
translating its meaning into technical criteria such as materiality. This could
offer some explanation for the “mixed” results whereby auditors “correctly”
ignored the length of client association whilst failing to make the “correct”
adjustments for large and growth clients. Wright offers no explanation for the
latter result but suggests that “it would be particularly valuable to explore
further the reasons for the lack of significance here of client size and growth”
By reformulating the question, it is possible to offer an alternative, albeit
speculative, interpretation of his subjects’ responses. This would view them as
a reflection of the “sensitivity” of such cues, rather than a lack of it, as Wright
suggests.

Putting Auditing Practices in Context

BCCI and all that

As noted in the introduction to this paper, many of the concerns highlighted
by recent corporate scandals and collapses are shared by Wright and this
306 L. M. Kirkham

author. Moreover, there is a common aim in that both authors, recognizing

the importance of the audit environment, desire progress in understanding its
implications for the audit process and audit judgement decisions. Wright’s
choice of research topic displays an appreciation of some of the central
challenges facing audit researchers in this respect; notably the problematic
nature of auditor independence and its relationship to audit judgement
decisions. The issue, then, is whether the approach advocated by Wright can
help in this endeavour; can it illuminate any aspects of the alleged audit
failures which have helped rationalize and which characterize these shared
concerns? For instance, can Wright’s modelling of the audit process cast any
light on the auditor disclosure judgements in the case of BCCI-“the biggest
banking fraud in history” (Financial Times, 9/10 November, 1991, p. I).
The auditing problems being revealed in connection with BCCI, MCC, S&Ls
and other publicized corporate failures cannot be dismissed as aberrations or
exceptions; the questions they have raised in relation to audit practices have
not been satisfactorily answered in terms of aberrant or criminal acts on the
part of auditors. Problems with audit procedures and collection of audit
evidence cannot, and have not, been assumed to reside within the self-
contained realm of technical inadequacies; nor should they. Rather, such
problems are seen to be symptomatic of a much larger set of problems which
involve the network of relationships which engulf the auditor and constitute
the audit process. Thus, in the case of BCCI, the auditors have been
scrutinized and criticized in terms of their relationship with the client, their
role as agents of the regulatory authorities (the Bank of England) and their
actions as professional accountants complying with the rules but withholding
information.
The collapse of BCCI involved f20bn of assets and 69 countries. It was an
international bank, lending to individuals, businesses and governments, and
collecting deposits from countless depositors, some honest, others not so
honest, through the world. An indepth analysis of the collapse in the Financial
Times (FT) has implicated the actions of governments and regulators, security
services, powerful individuals and families, as well as auditors, and has linked
its rise and fall to economic, political, cultural and social factors. (FT, 9-17
November, 1991). Its victims have been identified as including 14000 former
employees, British poll tax payers, Third World economies, depositors,
politicians and the Chinese government and many of its diplomatic staff (FT.
16/17 November, 1991, p. 4). This was the audit setting of BCCI.
Despite receiving an unqualified audit report in 1989, the financial state-
ments of BCCI were subsequently revealed to be very much in need of one:

Whole chunks of BCCl’s balance sheet were rotten: many loans were bad,
even fictitious, and deposits had been plundered to conceal enormous
losses (FT, 9/10 November 1991, p. I).

If we borrow from Wright’s modelling of the audit process, can we begin to

understand what went wrong with the BCCI audit in terms of its failure to
expose the scale and extent of the problems earlie?? What are the “environ-
mental cues” which might have alerted the auditors earlier to the scale and
 Putting auditing practices in context 307

size of the problem? Wright’s model offers client and engagement charac-
teristics as environmental factors. BCCI was a large international bank doing
business across numerous national borders. The auditors had already been
involved with BCCI as joint auditors before being appointed as sole auditors in
1986 (The Observer, 1 September 1991, p. 1) and are alleged to have earned
f6m in fees from BCCI in 1990 (AA, 31 October 1991, p. 3).
Where in Wright’s model is any provision for the significance of the client
characteristics as outlined by a senior partner of the auditors, Price Water-
house (PW), who protested “(y)ou can’t qualify a bank’s accounts unless the
regulator has been preparing the ground” (quoted in AA, 18 July 1991, p. 1 l)?.
What is the meaning of such rationales for the traditional concept of auditor
independence and how does it reconcile to the auditors accountability
responsibilities to society? Moreover, it has been suggested that “it is better
not to think of BCCI as a bank in the traditional sense” since it originated from
a different culture where “banks traditionally involve themselves closely with
their customers and play an important part in the political power game” (FT,
9/10 November 1991, p. I). Where in Wright’s model is any recognition of the
need for auditors to understand the different cultural and political meanings of
business institutions and practices? The FT goes on to suggest that BCCI was
misunderstood by the Western authorities; it would seem it was also
misunderstood by their auditors.
The audit setting of BCCI was an international one with the client’s dealings
extending across the globe. In coming to the defence of PW, a number of
prominent representatives of the accounting profession in the UK have
pointed out that “PW would have been hampered by the Cayman Island’s
secretive banking laws“ (AA, 31 October 1991, p. 3) and have pointed to the
problems of tracking down the “devious offshore tangle” that “was BCCI”
(AA, 18 July 1991, p. 11). Where in Wright’s model is any recognition of the
relatively unregulated markets which allow capital to flow freely from country
to country, largely escaping the regulatory apparatuses of nation states? And
where, in his model, is any provision for the economic downturn in the world
economy which would serve to exacerbate liquidity problems of international
financial institutions and which helped expose the financial weakness of
BCCI?
A whole array of potential conflicts of interest in the auditors’ role in the
BCCI affair have been alleged. These have ranged from the auditing firm’s
own dealings with the bank as a customer, through their position as advisors
on the restructing of the group, to their role as paid agents of the regulators
(the Bank of England) to investigate the bank whilst continuing to accept BCCI
as a client. BCCl’s top management has been described as obsessed with
power and secrecy (FT, 8/10 November 1991, p. I), but where in Wright’s
model is recognition of the negotiation processes between auditors and top
management and the potential for coercive and powerful interchanges? How
can we begin to appreciate the influence and significance of the relationships,
not just between BCCI management and the auditors, but also between the
auditors and the Bank of England?
The issues raised by the collapse of BCCI underscore the naivete of
traditional discussions of auditor independence in the accounting literature,
308 L. M. Kirkham

wherein the concept is analysed within models which abstract the technical
requirements and standards of professional pronouncements from the social
context in which they are developed, enforced and given meaning. As clearly
indicated in the BCCI case-“you can’t qualify a bank’s accounts unless . . . . .‘I,
the economic and political significance of the client may have a potentially
important bearing upon audit decisions in practice. The argument advanced in
the BCCI case appears to subscribe to a thesis whereby an audit qualification
of a large bank is viewed as a provocation to a banking crisis which will result
in misery and ire for many depositors and may even jeopardize a nations
economic structure (AA, 18 July 1991, p. 11). Such arguments surrounded the
S&L crises in the US. There, as in the UK, audit partners rationalized their audit
judgements, in part, as necessary to avert a crisis in customer confidence
which may have resulted in a panic “run on the bank”.
The concern that governments and auditors might act together to conceal
the failure of some large business institutions in the belief that exposure
might seriously jeopardize a nation’s economic structure and the fear of the
consequences of such actions is a current concern amongst Washington
analysts. The “too-big-to-fall” thesis is illustrated by the rumoured f4.3m
bail-out of Chase Manhattan Bank by the US Treasury in December 1990’. If
such a thesis has any validity, and the growing number of revelations both in
the UK and the US suggest it might, then it serves to reinforce the complexity
and significance of the wider political and economic context in which audit
decisions take place. Such decisions cannot be understood in terms of models
which ignore the web of social, political and economic relations which engulf
the audit process; the problems of “independence” and the pressures and
influences faced by auditors are shown to be much more complex and
significant than is ever alluded to in Wright’s model.
The social context of audit failures needs to be viewed as part of the context
of auditing more generally (Briloff, 1991) and vice versa. Analyses of the
emergence and nature of auditing discourses and practice require an ap-
preciation of how they might reflect and, in part, help constitute wider social
concerns about the accountability of both auditors and corporations (Tinker et
a/., 1991). The case of BCCI demonstrates the need to examine the influence of
state and other regulatory bodies in determining how and whether the public
interest is served through current auditing arrangements. It is illustrative of
the range of social relations, not just market relationships which constitute the
“audit setting”.
The above discussion suggests that there is a serious disjuncture between
the circumstances surrounding audit practice, as illustrated by cases of
alleged audit failures, and Wright’s methodology for grasping them. In
particular, his modelling of the environment cannot accommodate many of
the issues and concerns which characterize audit practices. As with the genre
of auditing research which has construed the audit context as a set of
economic relations and portrayed managers and auditors as atomistic
individuals unfettered by social relations (Neu, 1991), Wright’s modelling
displays no cognizance of the structure of the wider social environment or of
the social conflicts and antagonisms which characterize it. The role of conflict
is collapsed to a narrow set of economic variables which are assumed to
represent the pressures inherent in the client-auditor relationship.
 Putting auditing practices in context -3o!l

To make progress on the important issues raised by Wright requires the

development of systematic theoretical analyses of the social and institutional
context of auditing and an articulation of the meaning and significance of the
complex web of social relations which constitute it. As the case of BCCl
illustrates, this will involve a consideration of the interactions between
auditors and society which are much larger than the auditor-client (manage-
ment) relationship (Willmott, 1991); it will include those between large and
small accounting firms, clients, the auditing profession, regulatory and state
apparatuses, international capital markets and the public. Only then can we
begin to understand how and why auditors negotiate and act upon
“environmental cues”.

Taking the First Steps

The challenge facing audit researchers essentially parallels that outlined for
management accounting researchers nearly a decade ago and is essentially
one of understanding auditing in its social and organizational context
(Burchell et a/., 1980). Explicit appeals for such an agenda have been made in
the extant auditing literature (e.g. see Humphrey & Moizer, 1990) and a small
but growing body of researchers has begun to respond to the challenges
posed. Studies are beginning to emerge which recognize the need to
appreciate the wider historical and institutional context in which auditing as a
discourse and a practice is established and regulated (Willmott, 1991). These
studies have sought to further our understandings of the audit function
through historical analyses of the emergence of audits (e.g. Mills, 1990;
Merino et al., 1991) and audit practices (e.g. Power, 19921, empirical analyses
of auditing regulatory activities (e.g. Bremser et a/., 1991), the historical
constitution of the auditing profession (e.g. Sikka et a/., 1989; Tinker, 1985;
Tinker et a/., 1991; Willmott, 1986; 1991; Walker, 1991) and analyses of its
professional claims and social practices (e.g. Boland, 1982; Fogarty et al.,
1991; Humphrey et al., 1991; Power, 1992) and ethnographic-based studies of
auditors and specific audit tasks (e.g. Humphrey & Moizer, 1990; Power,
1991).
Through these studies, audit practices and techniques are being revealed to
have their origins in social struggles (e.g. see Merino et al., 1991) and to be
based on questionable claims (e.g. Power, 1992). Fundamental concepts such
as expertise, independence, trust and professionalism, upon which the
profession relies for its power and privileges, and which are treated unprob-
lematically in conventional auditing research, have been exposed as socially
constructed schema which are historically constituted (Hines, 1989; Neu,
1991; Willmott, 1986, 1990). Such analyses have been important in estab-
lishing the need to appreciate the role of the profession itself in making and
interpreting the rules and norms by which it functions; the same rules and
norms which serve to legitimate and justify its practices and which help
constitute the audit process in society. In part, these analyses have under-
scored the importance of situating auditor judgements and decisions within
the broader audit process in society; not least in terms of emphasizing the
importance of exploring how auditors negotiate and mediate the web of social
relations which constitute the audit process.
310 L. M. Kirkham

This body of research constitutes a frame of reference from which we might

begin to address the issues raised by Wright. However, before we can address
his central research question of “what is the impact of environmental factors
on auditor disclosure judgements”, we must first attend to what constitutes
the audit environment. The environment of auditing has been revealed to be
both complex and conflict-based (Tinker et al., 1991) and to involve a range of
factors and influences that cannot be collapsed to a few micro and/or macro
economic variables. Economic factors and market relationships need to be
viewed in relation to other dimensions of the social context such as political
programmes and state-auditor relationships (Willmott, 1990) and their link-
ages and interrelationships require articulation. The nature of these relation-
ships and their inherent pressures and conflicts are not static phenomena but
will change and evolve as they are constituted and reconstituted in the
broader social context.
By example, we might consider one aspect of the audit environment, that of
the client-state relationship, in relation to another, that of the economic
climate of a capitalist nation. An economic recession may serve to exacerbate
governmental concerns about the performance and confidence of capital
markets which may, in part, be reflected in attempts to control or conceal the
scale and extent of the economic problems. In turn, these concerns may be
reflected in political programmes which challenge the auditing profession’s
control of the financial accountability reporting process through attempts to
alter the balance of power in the state-auditor relationship and increase the
influence of political considerations in the audit process. Thus, a downturn in
economic fortunes may serve to alter the political climate and change the
nature and intensity of social pressures and concerns (Burchell et a/., 1985;
Tinker et a/., 1991). By accommodating such pressures within the audit
process, the profession may be able to avoid further erosion of their powers
and privileges and may even attempt to reclaim them at some other time.
The purpose of outlining such a skeleton thesis here is merely to illustrate
the potential fruitfulness of adopting a broader theorization of the institutional
and social context of auditing. Whilst such a thesis demands a great deal
more elaboration and explanation, it nevertheless offers the potential for
making progress in understanding the absence of qualified accounts in the
BCCI case and the meaning and significance of the PW audit partner’s
comment upon it: “(y)ou can’t qualify a bank’s accounts unless the regulator
has been preparing the ground” (quoted in AA, 18 July 1991, p. 11).

Conclusion

The study by Wright draws attention to the importance of situating auditor

judgements and decisions within the wider audit process-the audit setting.
However, his model offers a limited appreciation of the wider institutional and
social context of auditing and its historical constitution. By constraining the
audit process to the negotiation of a set of discrete client and engagement
characteristics, his analysis serves to obscure more than it reveals and closes
 Putting auditing practices in context 311

down, rather than opens up, avenues for further understandings of audit
practices. A more informative approach needs to take account of the conflicts
and pressure both within the wider set of social relations from which auditors
derive and negotiate their roles and decisions as well as those which emerge
from limitations in human information processing, professional education and
training. Such an approach requires a more adequate theorization of the
“audit environment”.
Currently and historically, this “environment” has been characterized by a
growing number of audit failures which have served to expose and under-
score the problematic nature and functioning of auditing. Despite serving as a
rationale for many research studies, attempts to illuminate our understand-
ings of audit practices have too often ignored or discounted the insights
which such failures provide. The recent case of BCCI has highlighted the
potential importance of a much wider and more complex set of environmental
“cues” than can ever be accommodated within Wright’s model: the political,
as well as the economic, significance of the client: cultural understandings of
business practices, regulatory practices and pressures; processes of capital
accumulation and distribution; and political programmes, have all been
implicated in the audit setting of BCCI. To imply, as Wright’s model does, that
in practice auditors can free themselves from this complex set of social
relations when exercising judgement, sits uneasily with history. Audit re-
search needs to accommodate critical historical analyses of audit practices not
only as a rationale for identifying issues, but as a means through which we
can further our understandings of both the nature and “impact of environ-
mental factors on auditor disclosure judgements”. Critical studies in auditing
are emerging which might provide a framework for those audit researchers
who acknowledge the problematic nature of audit practice and desire to
examine its impact. It now behoves them to acknowledge its existence and
deal with the challenges it poses to conventional analyses of auditing.

Acknowledgement
The author would like to thank Tony Tinker for his helpful comments on an earlier draft
of this paper and for his informative and stimulating suggestions which resulted in an
extended version of the paper.

Notes
1. For example, the concerns of the ex-finance chief of the collapsed Bank of Credit and
Commerce International have been reported as including doubts over the independent
relationship between the auditors and top BCCI management, the reluctance of the auditors to
qualify the accounts of a bank “-even BCCI--“, and the adequacy of the audit collection
procedures governing third party confirmation of loans (The Observer, 1 September 1991, pp.
23 and 25). Similar concerns were identified in the US concerning savings and loan
associations. In 1989 the General Accounting Office reviewed the audits of 11 savings and loan
associations and concluded that six were inadequate (see Briloff, 1990, p. 8).
2. All unattributed citations are to Wright (1992).
3. The practice of low-balling recently made the headlines in the UK accountancy press when it
was disclosed that “Price Waterhouse, the most respected blue chip firm, offered financial
services giant Prudential Assurance a fZ900,OOO discount on the proposed f2.3m fee in order to
win the prestigous audit appointment” (Accountancy Age, 2 May 1991, p. 1). The article quoted
a tender document which stressed PW’s “commercial awareness” and “acknowledged track
312 L. M. Kirkham
record in constructive accounting solutions”. The auditors went on to suggest: “Our
experience and expertise in financial reporting will enable us to contribute to your discussions
on how best to present your results and balance sheet; demonstrating the strength of the
Prudential in an increasingly competitive international insurance market.
4. The failure of auditors to “blow the whistle” in terms of timely exposure of “misleading”
accounts has been noted in a number of celebrated audit failures in the US (see Briloff, 1990).
Even more recently, the increasing importance of such pressures has been acknowledged in
the UK by the chairman of the Accounting Standards Board (the UK equivalent of the FASB)
who “warned of the dangers facing auditors coming under undue pressure to sign-off
accounts or risk losing the audit” (Accountancy Age, 19 September 1991, p. 1).
5. The use of audit games which incorporate many of the dynamic interdependent features of an
audit within a simulated business setting has been suggested as a way forward and have
begun to be developed (see e.g. McDaniel, 1990). However, the problems associated with such
models are considered daunting (Ashton, 1982). In particular, it is doubtful whether such an
approach can overcome the limitations associated with the use of hypothetical clients and the
distorted loss and reward functions which ensue.
6. I am grateful to Tony Tinker for suggesting this line of analysis.
7. I am grateful to Tony Tinker for suggesting this example.

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