Behind Closed Doors: What Company Audit Is Really About

by Beattie, Vivien; Fearnley, Stella; Brandt, Richard

• ISBN13: 9780333747841
• ISBN10: 0333747844
• Format: Hardcover
• Copyright: 2001-06-02
• Publisher: Palgrave Macmillan

Summary

This book goes "behind closed doors" to uncover the nature of the relationship between auditors and the finance directors in major listed companies. Based on interviews with finance directors and audited engagement partners of six firms, the book uncovers both sides' perceptions of how contentious and non-contentious issues are resolved. New insights are provided about the workings of the audit process itself, how negotiation is conducted, and the personal relationships and balance of power between the auditors and the board of directors.

Author Biography

Vivien Beattie is Professor of Accounting at the University of Stirling. She has published over thirty research articles and reports, as well as contributing regularly to professional journals. Her main research interests are external audit and business reporting. She is a member of the UK Accounting Standard Board's Academic Panel. She is also a panel member for Accounting and Finance in the 2001 UK Research Assessment Exercise being undertaken in the UK.

Stella Fearnley is a Reader in Accounting in the Department of Accounting and Management Science, University of Portsmouth and was formerly a senior technical manager at Grant Thornton. Her main research interests are external audit and accounting regulation, and she has published widely on these topics. She is an elected member of the Council of the Institute of Chartered Accountants in England and Wales, being Deputy Chair of its Centre for Business Performance.

Richard Brandt is a Research Fellow in the Department of Accounting and Management Science, University of Portsmouth. He was previously Head of Audit at Grant Thornton for nine years, and is a former member of the Urgent Issues Task Force. He is editor of the 2000-2001 edition of Auditing and Reporting, published by ABG Professional Information.

Table of Contents

List of Figures	xv
List of Tables	xvi
Preface	xvii
Acknowledgements	xviii
List of Abbreviations	xix
Foreword	xx
Sir David Tweedie
PART I THE BACKGROUND
Introduction and Regulatory Framework	3	(7)
What this book is about	3	(1)
Fundamental issues faced by the accountancy profession	3	(3)
Structural and procedural changes in the accountancy profession	3	(2)
Public concerns regarding the quality of financial reporting and audit	5	(1)
The regulatory framework in the UK	6	(1)
Research approach	7	(1)
Outline of book	8	(2)
The Author--client Relationship	10	(22)
Overview	10	(1)
The regulatory dilemma: creative compliance	10	(1)
The author--client company relationship	11	(1)
Paucity of research into the primary relationship	12	(1)
The demand for audit	13	(1)
Audit quality	14	(1)
Audit quality attributes	14	(2)
Buyer types	16	(1)
The role of commitment	17	(1)
Auditor independence	18	(7)
The concept and its importance	18	(1)
Models of independence	19	(1)
Studies of perceived auditor independence	20	(3)
Studies of actual auditor independence	23	(1)
The influence of the auditor's personal attributes	23	(2)
Second partner review	25	(1)
Corporate governance and audit committees	26	(5)
Corporate governance	26	(1)
Corporate governance reporting requirements	27	(2)
Audit committees	29	(1)
Communication between external auditors and audit committees	30	(1)
Audit effectiveness	31	(1)
Questionnaire Stage of Study	32	(11)
Overview	32	(1)
Methods	32	(1)
Results	33	(7)
Summary	40	(3)
PART II THE CASE STUDIES
Introduction to the Case Studies	43	(13)
Overview	43	(1)
Negotiation and conflict in a generic setting -- theory	43	(3)
Negotiation strategies in non-audit settings -- empirical studies	46	(1)
Negotiation in audit settings -- empirical studies	47	(1)
How the case companies were selected and approached	48	(2)
Broad approach to the analysis	50	(1)
Writing up each case (matched pair of interviews)	50	(1)
Preliminary within-case analysis: attaching labels to the key categories	51	(2)
Labelling the concepts described in the stories	51	(1)
Preliminary analysis of the contexts	51	(1)
The interactions	52	(1)
The outcomes	52	(1)
Within-case analysis	53	(1)
Summary of cases	53	(3)
Nick and Simon (NS plc)	56	(26)
Background to the case	56	(1)
The key issues for Nick and Simon	57	(1)
Interaction NS1: renegotiation of the financing arrangements and the year-end going concern problems	58	(5)
Context NS(a): the changing role of the audit committee	63	(2)
Interaction NS2: the need for accounting reform in the group	65	(5)
Interaction NS3: negotiations over fees	70	(4)
Analysis of general contextual factors	74	(1)
The specific interactions and their outcomes	74	(5)
Interaction NS1: renegotiation of financing arrangements and year-end going concern problems	74	(2)
Interaction NS2: the need for accounting reform in the group-accounting treatment of leases	76	(2)
Interaction NS3: negotiations over fees	78	(1)
Conclusion	79	(3)
Thomas and James (TJ plc)	82	(33)
Background to the case	82	(1)
The key issues for Thomas and James	83	(1)
Interaction TJ1: stock obsolescence provisions	84	(4)
Interaction TJ2: the treatment of product development costs under FRS 3	88	(4)
Interaction TJ3: accounting treatment of restructuring costs under FRS 3	92	(8)
Interaction TJ4: events surrounding the sale of the group	100	(2)
Analysis of general contextual factors	102	(1)
The specific interactions and their outcomes	103	(10)
Interaction TJ1: stock obsolescence provisions	103	(4)
Interaction TJ2: treatment of product development costs under FRS 3	107	(2)
Interaction TJ3: treatment of restructuring costs under FRS 3	109	(3)
Interaction TJ4: events surrounding the sale of the group	112	(1)
Conclusion	113	(2)
Michael and Paul (MP plc)	115	(36)
Background to the case	115	(1)
The key issues for Michael and Paul	116	(1)
Context MP(a): the group's relationship with its auditors	116	(3)
Context MP(b): the role of the audit committee	119	(2)
Interaction MP1: accounting treatment and disclosures relating to an acquisition	121	(11)
Interaction MP2: control and accounting problems in the group's treasury function	132	(8)
Interview evidence	132	(8)
Analysis of general contextual factors	140	(2)
The specific interactions and their outcomes	142	(8)
Interaction MP1: accounting issues relating to an acquisition	142	(3)
Interaction MP2: control and accounting problems in the group's treasury function	145	(5)
Conclusion	150	(1)
Colin, Richard and Andrew (CRA plc)	151	(33)
Background to the case	151	(1)
The key issues for Colin, Richard and Andrew	152	(1)
Interactions CRA1, CRA2 and CRA3: Accounting for two acquisitions	152	(7)
Interaction CRA1: the Neweng acquisition	154	(1)
Interaction CRA2: agreeing the fair values in the Cleanup acquisition	155	(3)
Interaction CRA3: accounting for depreciation on the Cleanup landfill sites	158	(1)
Interaction CRA4: accounting for long-term leases on fixed plant	159	(4)
Interaction CRA5: restructuring provisions	163	(3)
Context CRA(a): the working relationship between the group and its auditors	166	(2)
Context CRA(b): the procedure for clearing the year-end accounts and the role of the audit committee	168	(4)
Analysis of general contextual factors	172	(2)
The specific interactions and their outcomes	174	(8)
Interaction CRA1: the Neweng acquisition	174	(1)
Interaction CRA2: agreeing the fair values in the Cleanup acquisition	175	(1)
Interaction CRA3: accounting for depreciation on the landfill sites	175	(2)
Interaction CRA4: accounting for long-term leases on fixed plant	177	(2)
Interaction CRA5: restructuring provisions	179	(3)
Conclusion	182	(2)
Robert and Charles (RC plc)	184	(28)
Background to the case	184	(1)
The key issues for Robert and Charles	185	(1)
Interaction RC1: accounting for businesses which were to be sold on after the Coreco acquisition	186	(3)
Interaction RC2: agreeing the accounting treatment and the level of provisions for stock and defective products	189	(4)
Interaction RC3: accounting for post-acquisition reorganisation costs	193	(1)
Interaction RC4: disclosure of reorganisation costs	194	(1)
Context RC(a): the composition of the audit committee and its involvement in accounting and auditing issues	195	(3)
Context RC(b): the working relationships between the parties and the impact on fee negotiation	198	(5)
Analysis of general contextual factors	203	(1)
The specific interactions and their outcomes	204	(6)
Interaction RC1: accounting for resale of business acquired	204	(2)
Interaction RC2: agreeing the accounting treatment and the level of provisions for stock and defective products to the brought into the group accounts on the coreco acquisition	206	(2)
Interaction RC3: accounting for post-acquisition reorganisation costs	208	(1)
Interaction RC4: disclosure of reorganisation costs	208	(2)
Conclusion	210	(2)
Dennis and Alan (DA plc)	212	(41)
Background to the case	212	(1)
The key issues for Dennis and Alan	213	(1)
Context DA(a): the background to the bid	213	(3)
Interactions DA1 and DA2: accounting for assets on disposal and acquisition of businesses	216	(5)
Interaction DA1: accounting for assets on disposal of business	216	(3)
Interaction DA2: accounting for assets on acquisition of businesses	219	(2)
Interaction DA3: disclosure of acquisitions, disposals and bid costs under FRS 3	221	(3)
Interaction DA4: last-minute adjustments to the accounts	224	(3)
Interaction DA5: the chairman's attitude to goodwill	227	(3)
Interaction DA6: compliance with the Cadbury Code and other non-mandatory disclosures	230	(3)
Context DA(b): the role of the audit committee	233	(1)
Context DA(c): the nature of the company's relationship with its auditors	234
Context DA(d): non-audit services and fees	237	(239)
Analysis of general contextual factors	239	(1)
Specific interactions	240	(7)
Interaction DA1: accounting for assets on disposal of business	240	(2)
Interaction DA2: accounting for assets on acquisition of business	242	(2)
Interaction DA3: disclosure of acquisitions, disposals and bid costs under FRS 3	244	(1)
Interaction DA4: last-minute adjustments to the accounts	244	(1)
Interaction DA5: the chairman's attitude to goodwill	245	(2)
Interaction DA6: compliance with the Cadbury code and other non-mandatory disclosures	247	(1)
Conclusion	247	(6)
PART III THE ANALYSIS AND CONCLUSIONS
The Grounded Theory Process	253	(3)
Overview	253	(1)
The analytical process	253	(3)
The nature of grounded theory	253	(1)
Procedures and techniques	254	(2)
Cross-Case Analysis and Theory Development	256	(23)
Introduction	256	(1)
Introducing the principal categories	256	(2)
A detailed examination of each principal category	258	(9)
Quality of primary relationship	258	(1)
Company circumstances	259	(1)
Firm circumstances	260	(1)
Interaction issue	261	(1)
Objectives of primary parties	262	(1)
Key third parties	263	(1)
Other specific contextual factors	263	(1)
Interaction events	263	(1)
Interaction strategies	264	(1)
Interaction outcome	265	(1)
Interaction consequences	266	(1)
Grounded theory of interaction outcomes	267	(8)
Good outcome, attained easily	273	(1)
Good outcome, attained relatively easily/as easy as could be	273	(1)
Good outcome, attained with difficulty	273	(1)
Relatively good/acceptable outcome, attained easily/relatively easily	274	(1)
As good as could be, slightly difficult	274	(1)
Poor outcome, attained easily	274	(1)
Poor/creative compliance outcome, attained with a degree of difficulty	274	(1)
AEP (seller) types	275	(3)
The `crusader'	276	(1)
The `safe pair of hands'	276	(1)
The `accommodator'	276	(1)
The `truster'	277	(1)
Other possible seller types: the `incompetent' and the `rogue'	277	(1)
Comparison with extant theory	278	(1)
Conclusions	279	(15)
Overview	279	(1)
Summary of findings	279	(5)
Factors which influence the company's predisposition towards earnings quality	279	(1)
The influence of ownership structure and corporate culture on attitudes to regulatory compliance	280	(1)
Factors which influence the outcomes of financial reporting interactions	281	(2)
The effectiveness of sanctions available to FDs and AEPs and the impact of materiality on their application	283	(1)
Partner types and quality control in audit firms	284	(1)
The policy implications of our findings	284	(2)
The auditor's influence on the quality of financial reporting	284	(1)
The key to auditor independence	285	(1)
Creative compliance	285	(1)
Substance and form of corporate governance	286	(1)
Proposals and issues for regulators and audit firms to consider	286	(4)
Regulators	286	(2)
Audit firms	288	(2)
Implications for future research	290	(4)
Further verification of grounded theory	290	(1)
Further development of grounded theory	291	(1)
Implications for related areas of research	291	(1)
In closing...	292	(2)
Bibliography	294	(8)
Index	302