Institutionally Sustaining or Abandoning Mandatory Joint Audits: The Contrasting Cases of France and Denmark

Abstract

This study draws on two longitudinal case studies of the French and Danish joint audit models to understand and compare how mandatory joint audits have emerged and evolved. In both settings, joint audits appeared in the 1930s to increase auditors’ competence and independence. After a few decades of practice, joint audits became taken for granted, but in the 1980s, conglomerated audit networks attempted to circumvent the joint audit rule, entering into conflict with local auditors. In France, the main association of auditors adopted successive regulatory measures that prevented circumventing the model, therefore avoiding its erosion. Such regulatory layering crucially reshaped the model to sustain belief in its potential whenever a particular form of joint audit failed. In Denmark, the local audit firms essentially resisted attacks against the model rhetorically, which was insufficient to prevent its erosion in the 1990s and its suppression by the law in 2005. Contrasting the two cases shows the multi-modal ways in which actors undertake institutional work and it provides timely information for regulators engaged in discussions about joint audits.

Keywords:

• Mandatory Joint Audit
• Institutional Work
• Regulatory Layering
• Erosion

Acknowledgments

The authors are thankful for the helpful comments and advice that they received from the editors, the anonymous reviewers, and Mary Canning, Jørgen V. Hansen, Martin Messner, Renate Meyer, and Chrystelle Richard. We are also grateful to the participants in the research seminar of the LSE Department of Accounting and the Interdisciplinary Perspectives on Accounting Conference of 2018 for their fruitful discussions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Big audit firms (for details, see Figure 1) have three characteristics in common: 1) worldwide, they have managed to reproduce a specific professional culture that differs from that of other accountancy and audit firms; 2) they have acted together at the international level to lobby in favor of their interests; and 3) they have managed to integrate the different accounting and auditing activities into a global array of services specifically tailored to the needs of their multinational clients (Ramirez, 2010, p. 178). There are currently four of these firms: Deloitte, EY, KPMG, and PwC.

2 Four months after the company’s 2016 accounts were certified true and fair by KPMG, Carillion issued a profit warning that announced a reduction in the value of its contracts equivalent to the value of the previous seven years’ profits combined.

3 The Big Four market share of 2015 with public interest entities was 52% in France against 84% in the UK (European Commission, September 2017).

4 The Danish model is studied between the 1920s and 2005 (it was repealed 1 January 2005). The French model is studied from the 1920s to 2007 (the year the NEP 100 standard required balanced work between the two joint auditors).

5 Along with Alon et al. (2019), we define regulatory layering as the process through which ‘[actors] introduce layers of regulation that build on and expand existing regulatory structures’ (p. 16).

6 https://www.ifac.org/about-ifac

7 The Compagnie Nationale des Commissaires aux Comptes (in English, the National Institute of Auditors) is the main association of French statutory auditors.

8 The Haut Conseil du Commissariat aux Comptes (in English, the High Council of Auditors) is an independent supervisory body created in France in the aftermath of the early 2000s crisis, similar to the PCAOB in the US and the POB in the UK.

9 The Foreningen af Statsautoriserede Revisorer (in English, the Association of State Authorized Auditors) represents the first group of auditors created in Denmark in 1912 and called state-authorized auditors. State-authorized auditors were required to hold a specific university degree and pass an exam.

10 The Foreningen Registrerede Revisorer (in English, the Association of Registered Auditors) represents the second group of auditors created by law in Denmark in 1970 and called registered auditors. Registered auditors were created by the state to help small firms improve their tax accounting and were not allowed to certify financial statements until 1973. In May 2011, FSR and FRR merged under the name FSR danske revisorer (in English, FSR Danish Auditors).

11 The CNCC and the FSR are commonly seen as the respective voices of the French and Danish audit professions.

12 The Danish Commerce and Companies Agency of the Danish Ministry of Economy and Business registers company data and annual accounts in the Danish Central Business Register and is in charge of monitoring compliance with regulation.

13 These comment letters were available on the European Commission website when we carried out our data collection.

14 The role of the Commission des Opérations Boursières included overseeing disclosures made by public companies. The members of the COB board were appointed by the French government until 1989. After 1989 and until 2003, they were appointed within different guilds of public servants such as the Court of Cassation, the Court of Auditors, and the Central Bank.

15 The Loi de Sécurité Financière (in English, the Financial Security Law).

16 The Autorité des Marchés Financiers is the new stock market regulator created in 2003.

17 The French stock exchange index counts the 40 most significant companies among the top 100 market capitalizations.

18 In Danish, talrevisorer. An example of number auditing can be found in the 1921 financial statements of Transatlantisk Kompagni, where the audit opinion (despite being done by an authorized auditor) at its full length reads, ‘We have reviewed and found the above accounts in accordance with the company’s books’ (Jensen, 2000, Vol. IV, p. 166).

19 Registered auditors are the second tier of approved statutory auditors in Denmark, formally created by law in 1970. Registered auditors primarily audit small, owner-managed companies and do not seem to have been heavily involved in MJA, which is why we excluded them from our account. For an account of the relationship between the two groups of auditors in Denmark, see Jeppesen and Loft (2011).

20 Between 1984 and 1990, the Nordisk Fjer changed accounting principles no fewer than 32 times and changed auditors 8 times (Langkilde, 2013).

21 In Denmark, auditors report audit findings directly to the board in the form of audit protocols, in Danish, revisionsprotokoller. Since the Nordisk Fjer scandal, all board members have to sign these protocols.