Auditor–Client Interactions in the Changed UK Regulatory Environment – A Revised Grounded Theory Model

Abstract

Audit and financial reporting quality are under intense scrutiny nationally and globally. The outcome of high-level auditor-auditee discussion and negotiation issues (auditorclient interactions) is central to this debate. Beattie et al. (2001) developed a grounded theory model of these interactions in the 1997 UK setting. This paper reports on a field study of 45 interactions in nine case companies in the radically changed post-SOX regulatory environment. Crucially, interviewees in each case company extend the chief financial officer -audit partner dyad to include the audit committee chair. Fundamental revisions to the model emerge. The strongest influence on interactions has become the national enforcement regime, overlaid upon the international standard-setting regime. The outcome in both the eyes of the participants and in our evaluation is full compliance (contrary to the findings from the 1997 setting), regardless of the perceived quality of the standards and the integrity of the outcome. Personal and company characteristics, which were of most importance in 1997, have become peripheral. The audit committee chair is shown to fulfil a gatekeeping role in relation to the full audit committee.

Clash of corporate governance logics obscuring auditor independence

“…By providing findings on the ways in which audit committees are engaged in auditor planning, the study's results, by way of a Critical Discourse Analysis of CGRs, contrast with Beattie et al (), who found that audit committees were not satisfactorily engaged in auditor planning. In Beattie et al (), the audit committee chair has specific monitoring responsibilities over the CFO and auditor, but in the narratives presented in the CGRs studied the audit committee chair is not delineated as having specific prominence in the auditor and audit committee interactions. Instead, such interactions in these Swedish companies are disclosed as taking place between the whole audit committee and the auditor.…”

“…Studies have found that controlling owners may not have the same agenda as other shareholders (Yeh & Woidtke, ), and large shareholders in the audit committee may influence other members (Bédard & Gendron, ). This may become even more important if UK practices—in which the audit committee chair is gaining increased importance in monitoring the external audit (Beattie et al, )—spread into national contexts marked by concentrated ownership. Future studies are thus warranted of the audit committee composition, particularly regarding the independence of the audit committee chair from large owners, in such national contexts.…”

“…They found that audit committees were not satisfactorily engaged. Recent research by Beattie, Fearnley, and Hines () indicated that the audit committee chair has taken on much of the monitoring over auditors that was previously performed by the whole audit committee. Hellman () undertook an interview‐based study, representing a large part of Swedish listed entities, regarding chief financial officer (CFO) practices to influence auditor planning.…”

“…Recent research by Beattie, Fearnley, and Hines (2015) indicated that the audit committee chair has taken on much of the monitoring over auditors that was previously performed by the whole audit committee.…”

“…In the Volvo CGR, the audit committee has "discussed the external audit plan" (Volvo, 2011, p. 157 Beattie et al (2012), who found that audit committees were not satisfactorily engaged in auditor planning. In Beattie et al (2015), the audit committee chair has specific monitoring responsibilities over the CFO and auditor, but in the narratives presented in the CGRs studied the audit committee chair is not delineated as having specific prominence in the auditor and audit committee interactions.…”