Reform or renaissance? France's 1966 Companies Act and the problem of the ‘professionalisation’ of the auditing profession in France

Abstract

This paper revisits an episode in the history of the auditing profession in France: the period that saw the ‘professionalisation’ of auditing in the late 1960s, almost 100 years after enactment of the law that had officially created the activity. Despite the existence of practitioners with a reputation for competency and despite the more stringent conditions imposed on the recruitment of these practitioners during the 1930s, certification of accounts had remained a ‘function’ rather than a profession. The reform of France's commercial code in 1966 thus gave auditors a second chance, making them a key component in an ambitious plan to modernise French financial markets. The paper considers this reform from the angle of the problem facing the reformers, that of ‘professionalising the profession’ of auditor. Two aspects of the problems are discussed. The first concerns the need to take into consideration the existence of another profession, the profession of the French chartered accountant (expert-comptable), which in the opinion of its leaders had a legitimate claim to a monopoly on auditing. The second concerns the fate reserved for pre-reform audit practitioners (comissaires de sociétés), not all of whom would be admitted as members of the new auditing profession.

Keywords:

• audit
• professionalisation
• France

Notes

This division effectively split the profession along the lines of the social origins of its members. From 1942 onwards, the experts-comptables included the 600 holders of the 1927 brevet qualification (most of whom had been exempted from actually sitting the examination) and candidates with sufficient educational qualifications for ex officio registration as experts-comptables (law graduates, HEC business school graduates, and some graduates of the prestigious Ecole Polytechnique). In contrast, few of the comptables agréés had been in higher education. Although it was logical from a social point of view, this division soon became difficult to manage from an economic point of view, particularly for the ‘small’ experts-comptables without the necessary social connections to obtain engagements that would enable them to earn a living from monitoring accounts. Poaching on the comptables agréés’ territories was all the more intolerable because although the registered accountants made up the majority of members, they had only minority representation under the statutes of the OECCA (see below). No less than ten bills of law were filed between 1950 and 1965 seeking either to divide the OECCA in two, or merge the two categories. Ultimately, a 1968 Act put an end to recruitment of comptables agréés and offered to them the opportunity to join the Order as experts-comptables (this is discussed later in the paper).

In 1921, another bill had sought to oblige French companies to have at least one accountant among their auditors, but only mentioned accountants as individuals (and experts-comptables as expert witnesses for the courts), rather than a professional category. However, the 1926 bill, brought by members of the Left, suggested creating a body of accounting specialists in charge of overseeing the introduction of accounting standards in businesses.

Further measures were added to the provisions of these decrees in October 1935, July 1937 and August 1937 (see Mikol 1993).

The January/June 1950 issue of the auditors’ journal Revue de la Compagnie des commissaires de sociétés agréés par la Cour d'appel de Paris, page 86, describes how auditors insisted they should be members of these boards.

For an illustration of this idea in the study of professions, see Krause (1996).

Regarding the attitude of certain employers’ representatives towards auditing, it is interesting to consult the Chambers of Commerce and Industry's reports on the proposed auditing reforms. These reports generally repeat the arguments put forward in the parliamentary reports of the 1920s and 1930s, advising against granting a monopoly on auditing on the general grounds that professional accountants lack ‘reputation’, and more particularly that only a small number of them, for instance the qualified chartered accountants (experts-comptables), have any real technical abilities. In the Paris Chamber of Commerce and Industry archives, one major source is cote III-3.33 (18), commissaires aux comptes 1926–8.

Only with the issuance of a decree on 3 July 1985 did professionals come to be paid on an hourly basis.

In a letter to the French Minister of Justice on 22 July 1968, Henri Courbot, president of the Paris Chamber of Commerce and Industry, returned to the question of the rules on auditors’ fees: ‘While there is no doubt that auditors should receive remuneration that guarantees their work will be done conscientiously, care must be taken that their remuneration does not become too large an expense for companies in addition to all the other charges already incumbent upon them’. In Courbot's opinion, the proposed new tariffs for audits did not meet this requirement. The Chamber of Commerce even found them ‘exorbitant’ (CAC, 0019910594, art. 52).

It is also interesting to note that the CNPF's proposals included an upper limit of 50,000 francs regardless of the basis used, and no increase in fees if there was a second auditor. Furthermore, the cost of any experts or assistants who worked with the auditor was not covered. A few international comparisons indicate the low level of resources available to French auditors to carry out their engagement. One good illustration is the Papeteries de Navarre affair in 1971, which concerned one of the leading figures of the profession, Jacques Frinault. A graduate of France's prestigious Polytechnique engineering school, Frinault was at the head of a large firm serving a clientele of big listed companies and co-auditor of the major paper manufacturer Papeteries de Navarre. With his colleague Michel Descazes (aged 77 at the time), he was accused by the buyers of Papeteries de Navarre of having erroneously approved accounts showing profits, whereas a private audit by the British firm Cooper Brothers commissioned by the same buyers concluded that the company was several million francs in the red. Apart from accounting quibbles, Frinault argued in his defence that auditing in France suffered from a ‘tragic’ lack of resources. Descazes summed up the ‘tragic’ aspect of the situation by comparing the 2500 (current) francs he had received for auditing in 1969 with the 700,000 (current) francs paid to the British firm for their audit (CAC, 0019910594, article 54. Décisions de la chambre nationale de discipline des commissaires aux comptes de sociétés – Année 1972).

Although many auditing textbooks had been published since the start of the twentieth century, the question remained to what extent the auditors had sufficient means to apply the methods proposed. The ‘legal’ tendency of the French-style conception of auditing can be contrasted with the ‘economic’ conception held by the British and Americans, based on statistical techniques that meant audits required more time and resources (Power 1992). For a comparison between French auditing in the late 1960s, when it was still essentially a matter for individuals, and the ‘Anglo-Saxon’ full audit as carried out by firms, see Archavlis (1961) and Wisner (1967).

The 8 August 1935 decree-act required auditors who had been registered by a Court of Appeal to establish an association to represent their interests, within the jurisdiction of the relevant Court. In 1938 a national structure to federate the existing regional bodies emerged as the Fédération nationale des commissaires de sociétés agréés par les Cours d'Appel. Given the distribution of the population of auditors in France, the only one of these associations with any real bargaining power was the Paris association, Compagnie des commissaires de sociétés agréés par la Cour d'appel de Paris. For some time, the only professional publication that existed was the also Paris-based Bulletin des commissaires de sociétés agréés par la Cour d'appel de Paris, which published highly technical articles essentially aimed at listed companies’ auditors. In 1964, the decision by the Fédération nationale des commissaires de sociétés agréés par les Cours d'Appel to start publishing its own bulletin probably resulted from the need to combine forces to negotiate with the government over the future of the profession (see below). Several directors of the professional auditing organisations had also held important positions in the Ordre des experts-comptables et des comptables agrees. Jean Trial, for instance, the first president of the Compagnie nationale des commissaires aux comptes, the auditors’ association that was born with the 1969 reforms, had also been president of the OECCA council (Conseil supérieur de l'Ordre) in the early 1960s. Source: Memo to the French Minister of Justice of 19 May 1969, nomination of Trial, Fauconneau and Sigaut for appointment to the French National Order of Merit (CAC, 0019910594, art. 52).

The COB had been involved in the preparatory work for the 1969 decree. When the flat-rate fee system was chosen, the COB insisted that it should be possible to go above the upper limit in certain circumstances (AN, 612 AP 29).

The Ordinance of 28 September 1967 set up the regulator Commission des opérations de bourse (COB) to provide information to securities holders and report on certain stock market transactions. Seeking to encourage long-term investment through better public information and to enable the financial market to play an international role, the government had formed an institution that was fairly similar to the SEC (Securities Exchange Commission) in the US. It is important to remember that the stock market's situation had been in constant decline during the 1960s: the lower number of investors and falling prices made it more difficult for companies seeking financing to attract investors (Bonin 1989).

Statement of the grounds for the bill. Preparatory documents for the bill of 31 October 1968 (CAC, 19830740, art. 15).

The comptables agréés had been attributed one-third of seats in the representative bodies, although they outnumbered the experts-comptables by three to one.

Visibly the government's original plan was to retain auditing's nature as a function (even though it was to be enhanced by admission of candidates with high social and cultural standing) rather than to make it a profession, i.e. a full-time activity exercised to the exclusion of all others, for which the professional had specific training (AN, 612 AP 29).

The editorial of the November 1948 Bulletin de la Compagnie Nationale des experts-comptables brevetés complained that the registration commissions at the Courts of Appeal did not automatically recognise the competence of experts-comptables to become auditors. In particular, the President of Rouen Court of Appeal refused automatic registration of accountants already registered with another court, systematically obliging them to take the examination introduced by the June 1936 decree. A monopoly was thus necessary, as ‘verification of an account is inseparable from its preparation’. In a letter dated 15 February 1962 (CAC, 0019910594, art. 52), the Minister of Education informed the Minister of Justice that ‘great confusion currently reigns over the ways in which the different Courts of Appeal proceed for registration on the lists of auditors of publicly traded companies. Some register all applicants without exception, others require all candidates to sit the examination, and others (the majority) admit most candidates and only require them to sit the examination in a very few cases’. The same letter pointed out that since 1945, the number of candidates for the examination had never exceeded 50 (there had been 859 in 1936 when the first list was established). Thirty to fifty per cent of those actually took the examination and the results were poor (in 1955: 28 candidates, 13 present at the examination, 5 passes; in 1956: 24 candidates, 14 present at the examination, 7 passes; in 1957–8: 49 candidates, 12 present at the examination, 3 passes; in 1959: 37 candidates, 12 present at the examination, 5 passes; in 1960: 39 candidates, 12 present at the examination, 6 passes; and in 1961: 39 candidates, 15 present at the examination, 6 passes).

The divergence of views predated the period covered in this article. Even in the early twentieth century, the accounting world was divided over the possible amendments to the 1867 Act. Some auditors such as Gustave Doyen, who was also President of the Compagnie des experts-comptables près le tribunal de première instance de la Seine, accepted that the formation of professional associations with a monopoly on auditing was ‘pure fantasy’ (Ramirez 2001).

In their negotiations with the government, some chartered accountants hoped that the monopoly on accounting would be reserved for an elite in the renewed Ordre. Pinceloup (1976) quotes a letter sent on 6 January 1966 to their peers by ten comptables agréés who were resigning from the Council of the Ordre, denouncing manoeuvres since the Nantes congress (1964) to prevent the comptables agréés from holding appointments as auditors.

The auditors of agricultural cooperatives and mixed economy companies were governed by different regimes from the standard laws on auditing of company accounts.

In a tract dated 2 December 1970 (AN, 612 AP 31), Sigaut rejected the idea of merging ‘Anglo-Saxon’ style and French auditing: ‘we will not accept the assumption that the methods are good because they are American’.

On this point, see note 16 above.

The ANACACI had been formed in 1968 to defend the interests of auditors who were not on the lists created by the decree of June 1936. It included many comptables agréés, auditors of small businesses who were keen to assert their rights, particularly after the reforms of the status of the OECCA that now allowed them to certify balance sheets (AN, 612 AP 29).

As noted earlier, the ANACACI was formed solely for the purpose of defending applications from auditors who considered themselves the most suitable for inclusion in the new profession.