STRUCTURE OR JUDGEMENT? A field study in auditing.

Stig Westerdahl (Ph D) Mid Sweden University, Dept. of Social Sciences SE 831 25 stersund Sweden Telephone: +46-63-165534 Fax: +46-63-165560 E-mail: stig.westerdahl@mh.se

ABSTRACT
Structure vs. Judgement is a classical divide in auditing and forms point of departure for this paper. Structure represents the formal procedures and a developed computer support, whilst Judgement stands for auditing as an interpretative practice, built on experience and knowledge rooted in practice. Most research studies in auditing are influenced by the Structure approach. They are grounded in a specific version of cognitive psychology and prefer experiments and statistical methods. The sparse field studies looking into auditing practice have not specifically studied the Structure vs. Judgement discussion. In this paper the divide is studied in an alternative cognitive perspective, using Bruner (1986) as an inspiration. The idea is to look at what can be understood of Structure and Judgement in light of the everyday work of auditors. A final meeting on an audit is presented from a field study, and the findings clarify that balancing formal procedures and interpretations is characterising the audit practice. The paper shows also that there is ample room for judgements, in spite of written norms and developed routines. This indicates that more focus should be directed at how and under what circumstances this balancing between structure and judgement is done as well as looking into the values and assumptions (the-taken-forgranted) that are influencing the judgements made in the profession.
(Many thanks to the people who have read and commented on this paper earlier some of you are also attending this CARR Workshop. None forgotten, none mentioned your suggestions have surely made the paper better. The errors and shortcomings are of course the responsibility of the author. A revision of language is also lacking.)

STRUCTURE AND JUDGEMENT IN AUDITING

The overall idea of auditing is to generate trust in financial statements. This is supposed to be a precondition for well-functioning capital markets. Still, there are widespread doubts about what audits actually produce (Power, 2003). Authors have claimed that the actual end product is comfort (Pentland, 1993). Others have pointed to the abstract knowledgebase and even seen a deep epistemological obscurity (Power, 1997:28) in auditing.

Parallel with this questioning of the foundations of auditing, the industry itself has changed drastically in the last decades. After the recent collapse of Enron and the wave of other wellknown accounting scandals only four Big Auditing Firms remain. One of the major players, Andersen, disappeared completely as a brand after the scandals. After a period of mergers in the audit industry the expression a few years ago was The Big Six and behind this concentration-process other changes are equally apparent. Auditing fees were falling, and more lucrative consultancy assignments tempted auditors. This led to a further diffusion of independence, as it was increasingly difficult to identify the border between consultancy and auditing in operational terms. The status of auditing appeared to be diminished in the large auditing firms, and new technologies emphasising Business risks were underway as a replacement (Humprey, et al., 2003). Signs after the Enron-debacle indicate that fees are moving upwards and that the Big Four make attempts to demarcate audit and consultancies.

Another development has been equally important, one of increased use of audit software, computers and an emphasis on formal approaches to auditing. Auditing is according to this approach regarded as a step-wise process, directed by rule following and based on mathematical models. The aim is to achieve an optimal methodology and this specific focus on technical procedures in auditing is often labelled Structure. Against this position is Judgement posed as a view that emphasises the interpreting part of auditing work, and where the intuitive aspects and experience are seen as crucial. Judgement focuses on the capacity residing with the practising auditor, to know what is important in a specific situation. This is the essence of the Structure vs. Judgement discussion on auditing, an issue in both the academia and the practice.

The discussion in auditing on structure and judgement clarifies how auditing can be regarded as something more than a technical process in need of an optimal technology. It is also a social phenomenon, which needs to be studied in its social and organisational context. This implies further that the Structure vs. Judgement divide can be looked at from several angles. Structure, on the one hand, shows an industry in search of efficiency: increased control of labour costs and reduced risk of litigation can make the business more profitable. The net of national and global norms, recommendations and laws regulating accounting and auditing is enforcing this stand. An extensive number of up-dated, anchored and relevant norms have to be in place, if the rule-following creating Structure is to be consistent. The explicit rules are hence equally important as computers and the technical process as such, to establish Structure. But on the other side, Structure is also a question of legitimacy. It is important to provide auditing with a seemingly solid knowledge base. A transparent process based on scientific ideals is believed to accomplish this, where the work is proceeding in predetermined steps aided by computers. Structure is thus, as Power (2003) has shown, emphasising both Business and Legitimacy.

This paper will deal with yet another aspect of the Structure vs. Judgement discussion: one on cognition in the everyday work of auditors. While Business highlights the normative aspects; how the methods can be more efficient, and Legitimacy shows the societal implications; how auditing can be respected as a practice, the cognitive will be related to the practice of an auditor. The research underpinning Structure as a path to efficient methods in auditing draws on behavioural sciences and mainly one version of cognitive psychology. In this paper, an alternative view on cognition will be presented (Bruner, 1986). The question in focus is to what extent the division Structure-Judgment helps to understand auditors everyday action. What is the impact of extensive formal frameworks and sophisticated computer support? And what about the judgemental parts of auditing - how are they visible?

A story from the field will be presented: an example from a final meeting on an audit-project. The balance between Structure and Judgement is explored as language is interpreted and the written recommendations are partly ignored. The discussion during the meeting turns into a language-game, where interpretations are emphasised. Findings lead to a new set of questions: What is influencing the judgements made and what values are directing the work of auditors? This type of questions are deemed more essential that that of constructing a division between 3

structure and judgement or advocate one stand instead of the other in the everyday work of the auditor.

Next section of this paper will give an overview of auditing and introduce the influential Judgement and Decision-making school (JDM) in auditing research. This approach, grounded in cognitive psychology, has been crucial by underpinning a formal perspective on auditing work. An alternative notion of cognition is hereafter presented in the next section together with examples of previous field-studies. The lack of field-studies with a focus on Structure vs. Judgment is noticed. After that follows the section with a field-study, presenting a final meeting where the Yearly Statements is discussed just before going to print. Its implications are discussed at the end of the paper.

AUDITING AND COGNITION

The research on auditing has never been conducted in a vacuum. It has always mirrored the spirit of contemporary scientific ideals. For a long time, auditing was seen as nothing more than an art or a craft. Dicksee (1892/1951) is a typical early representative of. He describes, without any scientific ambitions, different practical aspects of an auditors work. When auditing was to become something legitimate to conduct research on, the Natural Sciences and theirs ideals provided the inspiration. Mautz & Sharaf (1961) are often seen as pioneers with a contribution built on postulates or rules. There seems to be a general opinion that before the 1960s most studies regarded auditing as a merely practical endeavour (Ashton & Ashton, 1995). At that time, the advances in psychology was brought into auditing research. This section will at first explore the underpinnings of this version of cognitive psychology that has become so influential in auditing research. Judgement and Decision making school will be contrasted with a presentation of an alternative view of cognition, stressing context and meaning. A following part will introduce the reader to some of the field studies in auditing that have been published. A conclusive part will so pave the way for the next section, where the story from an audit project is presented.

Judgement and Decision-making

As explained, a partly new orientation in auditing research was announced with the introduction of Judgement and Decision-making ideas (Ashton, 1995). This school took 4

inspiration from the behavioural sciences, and particularly cognitive psychology. The aim was to study how auditors formed judgements and made decisions. It expressed also a normative ambition: how could auditing be improved? This school should not be described as a coherent approach; it has rather served as an umbrella for diverse studies with some general common traits. It has also changed over time, from a departure in social psychology and behavioural decision-making to a later emphasis on cognitive task oriented stance (Gibbins & Swieringa, 1995). Different views on expertise and experience in auditing over the years can illustrate this transition.

Bedard (1989) distinguishes between the behavioural view, where the output is essential, and the cognitive, where process is stressed. He advocates the later approach and his findings suggest that expertise is essential for quality in auditing work. Studies in the behavioural tradition were less convinced about the merits of experience, their comparative studies gave contradictory results. An influential article by Ashton & Ashton (1990) forms another contribution looking at experience with a focus on the characteristics in judgement studies They investigate how auditors handle evidence, in comparison with other groups and find that auditors are more sensitive to evidence and especially negative evidence. Their study is based on experiments and founded on assumptions that humans treat information sequentially and that this treatment is hampered by a limited capacity. Choo (1996) provided another example. His study asks also how judgement can be linked to experience but is grounded on theories on cognitive scripts borrowed from psychology. Scripts are perceived as the mental patterns humans have created from experience, and believed to influence and guide the actions of humans. Through this view, he assessed differences in knowledge among auditors and how these differences affected their decisions in an experimental setting. The result showed that the more an auditor had experience from a certain situation, the better he or she mastered it. Several review-articles can deepen the picture of Judgement and Decision-making studies, three of them are found in the same volume (Ashton, 1995), (Libby, 1995) and (Solomon & Shields, 1995). Setting aside the diversity, a summery of this tradition in auditing research can be presented:

Focus on the individual actor rather than on auditing as a social activity inferring interaction. Handling of information is crucial and described as sequential and process-like. Humans are believed to have a limited capacity in this respect. 5

Storing and retrieving information is a crucial aspect of knowledge (Libby, 1995:181) Experiment is favoured as research method.

These characteristics have been important in auditing research, and also given impact on auditing practice. The aspirations to make artificial intelligence part of auditing work are derived from this intellectual tradition, as is generally the emphasis on formal, step-wise procedures. Solomon & Trotman (2003) have conducted a recent literature-overview and confirmed that the Judgement and Decision-making approach has been influential, also in for example AOS (Accounting Organisation and Society) where experimental studies and auditing otherwise have not been very prominent.

An alternative view in accounting research

Judgement and Decision making research has been important by setting the agenda for auditing studies, and its scientific assumptions have directed a majority of auditing research, most of it American. The impact on practice has also been considerable, as computers have become increasingly important as bearer of a step-wise approach to auditing work. In accounting research, where auditing studies are a sub-genre, another trend has been increasingly visible. A technical focus on accounting has over time shifted to studies grounded on a contextual basis with authors such as Hopwood (1978) among the first.

Jnsson & Macintosh (1997) address the division between the technical and the social among accounting researchers in an easy terminology. They identify three camps: RATS (Rational Accounting Theory Studies), CATS (Critical Accounting Theory Studies) and EARS (Ethnographic or Interpretative Accounting Research Studies). RATS stands for the classical approach, with a stronghold in the USA. This is also where most JDM-research would be placed, emphasising the analytical and rational perspective and looking at practice with the help of statistical methods and preferably in controlled laboratory settings. CATS is explicitly political, and discusses accounting in terms of power relations, oppression and underscore the ideological implications of accounting. EARS is the avenue favoured by the authors themselves, described as sensitive to what is going on out there. In this school the interaction and talk among actors on the shop- or office floors are followed and reported. The results are not presented in columns or causal models, but through stories. These narratives present illustrative glimpses from the organisational life that can be point of departure for

understanding interaction and the role of accounting. Jnsson and Macintosh (1997:370) summarises their standpoint in a sort of field-cry: Walk their walk, talk their talk and write their story. And, one might add to give a fuller description plus let the actors react on it. This thinking is influencing my own work, and in the following some aspects of this approach will be explored. It points to ethnomethodology as an important inspiration, and this will be shown through the contrasts of two conflicting versions of cognition. Accounts provide a point of departure.

Accounts
As the social aspects of accounting are emphasised, accounts (Munro & Mauritsen, 1996) in human interaction are also encircled. The art of producing accounts can be described as the cement in relations between people. They make the world understandable and clarify our membership of a community. Through the reciprocal giving and taking of accounts we help each other in making our existence comprehensible. Accounts also shape our identities. By receiving feedback on our accounts we understand ourselves, and in giving response to others accounts we contribute to their identities. Ethnomethodology (Garfinkel, 1967) is a school where accounts have a fundamental importance.

A study with a Scandinavian signature, Jnsson (1996) presents how ethnomethodology can be made use of in research in accounting. A central idea is underpinning his argumentation: ethnomethodology is concerned with what is taken for granted in human interaction. He posits trust as a clear ontological antidote to opportunism and the maximisation of utility, as they both appear in traditional Economics (the academic discipline from which accounting is derived). Trust points to how crucial the experience of what the taken for granted is.

Cognition opposing views

An alternative to mainstream auditing research can be outlined from here, building on accounts and narratives. It is characterised by a focus on interaction: between humans, as well as between humans and the organisations and the surrounding society. Further: accounting or for that matter auditing are seen in a historical and societal context. Lastly, in a vein of cognitive anthropology the way actors (natives) speak and listen is researched. (Bruner, 1986) and his distinction between a paradigmatic and a narrative mode of cognition offer a

useful source for inspiration. It points to how we take care of our experience and construct our realities either in a rational and deductive manner (paradigmatic) or through the accounts produced by actors (narrative). The presentation of Bruner (1986) together with Harr & Gillett (1994) will here constitute a framework where cognitive processes are placed in an alternative light to the Judgement and Decision making school. Cognition is lifted into a context and humans are seen as creators of meaning rather than processors of information.

Bruners main claim in respect of research in psychology is that the cognitive revolution in the 1950s, an inspiring force in auditing research, has been technicalized. The original aim was to establish meaning as a fundamental ingredient in the research into human actions. This would be accomplished by merging the work of psychology with ongoing studies in anthropology, linguistics and philosophy. The events took however another direction: meaning was replaced with information and the construction of meaning was turned into processing information. Bruner summarises by suggesting computation as the model for this development. But what is the problem? To Bruner the deviation from the original ideals in cognitive psychology has inferred obvious shortcomings. Vagueness cant be coped with is the first one. Computation requires precise rules and an advance planning. Another problem is that the scientific work in this tradition excludes context, when what is to be computed must be under strict control.

Harr and Gillett (1994) also start by tracing the roots of the cognitive revolution. They find them in behaviourism and earlier in the Cartesian dualism: the separation of mind and body. Their expression for this is the First Cognitive Revolution, that they contrast with the Discursive Psychology they advocate as an alternative. The first cognitive revolution in the 1950s stands in their account for rule following. It implied that scripts or rules in the human brain facilitated strict behaviour and paved the way for converting rules into formal computer programs. As a consequence of this, the idea of an Artificial Intelligence was born. This is linked to another foundational view in the cognitive approach, also explained in Harr and Gillett (1994). They claim that this approach suggests that laws also exist in societies and in human actions. Laws are hence not confined to the Natural Sciences. Research stands in this version for measuring something in an organism and in the environment and to establish a correlation between the two measurement-values and thereby proof causation. But Harr and Gillett (1994) protest: no absolute laws exist in society or in the actions of humans. The main problem, they summarise, is that the first cognitive revolution excludes context. The ideas of 8

causation do not pay attention to the way actors interpret and understand their context and this explains why measuring in laboratories or elsewhere is insufficient.

The later works of Wittgenstein inspires Harr and Gillett. It involves fundamental perceptions of meaning and understanding, where the use of language become crucial. Understanding is not an isolated mental activity hidden in a human brain. Understanding and meaning are instead seen as essentially social, and defined in the human interaction and directed by informal rules. These informal rules are seen as essentially different from casual laws as presented in traditional cognitive psychology. Informal rules are constructed in the context where people operate and they decide also how different words are understood. Language is open for negotiation, is the essence, but only to the degree that the informal rules accept. Language-games (Wittgenstein, 1953) have rules, just like any other game we play and to understand these rules we have to study the environments in which people play language games: the social, political, historical and inter-personal context.

It was shown how Judgement and Decision-making School is grounded in theories derived from one version of cognitive psychology. The criticism against this view, here presented by Bruner (1986) and Harr & Gillett (1994) concentrates on these aspects:

The reigning mode of cognitive psychology oversees social interaction and focus instead on scripts and rules in the individual actor. The context is absent as an actor is studied in the isolation of the laboratory. The cognitive school focuses information, instead of meaning and see exactness in computation as the prime value, not to understand human interaction. This version of cognition is based on ideas of humans or even societies as rule following and therefore draw on casual assumptions. The shortcomings humans have as processors of information are stressed in the cognitive school, at the expense of a perception of human actors as creators of meaning in interaction with others and interpreting the context. Language is seen as an unproblematic way of conveying information in the traditional cognitive school, while Harr and Gillett regard it as governed by informal rules created in the context where humans operate.

How to proceed, with these deficiencies in the established cognitive theories?

Bruner (1986) advocates the use of narratives as a remedy. Stories bring in communication into a context and language is looked at in an interactive way. In the terminology of (Jnsson & Macintosh, 1997) it is Ethnographic or Interpretative Accounting Research as an alternative to much of auditing research rooted in a paradigmatic tradition. The narrative approach presents stories, look into language and study interaction, to provide an alternative path.

Field-studies in Auditing
A broad alternative perspective in accounting studies has emerged in the 1980s and 90s. Accounting practices have been lifted into a context, as opposed to be regarded as an isolated technicality. This change has here been mirrored through different perspectives on cognition. The technical view on auditing has been represented by Judgement and Decision-making studies influential and traditional. But all auditing research is not based on their assumptions, restricted to laboratories or drawing on statistical methods. A more fieldoriented tradition, though weak, is gaining ground. Hermeneutics in auditing research has for example been suggested by Francis (1994), claiming that technocratic dominance in auditing tends to undermine the capacity to judge. This is in his opinion a fundamental competence in auditing, as it highlights also the ethical aspects, something a technical focus might set aside. Alex (2001) suggests a similar hermeneutic position in auditing research. These two authors mainly philosophical discussion has been accompanied by a methodological re-thinking. Still, studies into the practice of auditing in its real context are sparse (Power 1997) and in a later overview Gendron (2000) confirmed that little research of this type has been conducted. When Solomon & Shields (1995) assessed the impact of judgement and decision-making studies in accounting and auditing they also concluded that an appropriate next step to take would be to study auditors not only in laboratories but also in the environment where they operate.

Trust and the taken-for-granted were depicted as fundamental in ethnomethodological research. It can here be placed in light of auditors everyday work. Pentland (1993) takes as his point of departure the auditors position as producer of trust in financial markets. Auditors produce, according to him comfort by reassuring that the accounts are trustworthy. He

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studied two auditor engagements and his findings identify rituals in different ways. How things are done is presented as more important in his studies, than what actually is done. The auditors are even characterised as machines, due to their behaviour and their high degree of socialisation. Together with the importance of dress codes it indicates a ritualistic trait in auditing.

van Maanen & Pentland (1994) compare in another contribution to the ethnographic genre of audit research the work of policemen and auditors. The common ground is that of records. Records have according to the authors a rhetorical function, and auditors are said to routinely write their conclusions in advance (van Maanen and Pentland 1994:56). The records are no neutral reports of what has taken place, but accounts presented to an audience with the aim of achieving a desired effect. Another similar study looks into how newcomers are transformed into respected auditors in one of the big accounting firms. Grey (1998) points in this article to how being a professional in such a firm has less to do with technical knowledge, and is more dependent on conduct. To become an auditor is to a large extent a matter of making the right impression. This is confirmed in another study where Power (1991) presents ethnography of accounting education and vividly describes the straits of a novice in auditing and the way to certification. Reflection is set-aside in a system where quantification is emphasised and learning becomes a matter of grasping technical details. There is also little room for ethical considerations in the hard work leading to the desired exam. Power wants to encourage more studies in this spirit (critical ethnography) to disclose how the auditing profession is shaped and reproduced through its certification process. Dirsmith, Heian & Covaleski (1997) have focused on control aspects in the (by then) Six Big audit firms, inspired by both Institutional and Structuration theory. They argue that Management by Objectives and Mentoring, important components in the formal organisation, also function as focal points for the different interests that struggle within the firms. In a study looking into how structure is actually implemented, Fischer (1996) links prevailing methods in auditing with the introduction of new technology. He reports on the introduction of a computerized decision aid in one of the big auditing firms. It was developed and marketed internally by the national office. The core problem is according to Fisher that audit quality is impossible to identity and that the practice of auditors is constructed. The issue whether a new practice is efficient and should be adopted, is hence a matter of consent among practitioners, as no clear criteria are available. The community of auditors determines the efficiency, and the order of events is consequently that a new technique first has to be legitimate, and following this can be 11

regarded as more efficient. Gendron (2001) discusses how auditors take decisions on what clients to work with. This decision process is looked at in light of the tension between professionalism and commercialism. The interviews conducted emphasise flexibility; the results indicate that explicit rules: written policies and decision aids, are adapted to different situations and that informal communication is essential. Anderson-Gough, Grey & Robson (2000) take the notion of a client as point of departure. After research in two of the Big Five firms, they claim clients are so emphasised, that other values or interests become suppressed. Friends, families, community at large are all excluded. But this has also effects for the firm itself, as it makes management control, profits and ideas on independence and public service merely invisible. Another study, (Anderson-Gough, Grey & Robson, 2001), places the socialisation process in focus. This exploration results in the identification of time as crucial in the two firms. Time consciousness is described as decisive for how trainees form both their working days and their careers. Eklf (2001) has in a study on how Swedish auditors handle non-tangible assets described negotiations between auditors and auditees. She shows how what is shaped as an asset also can be seen as a result of agreements among professionals.

Judgement and the field

Some examples of field-oriented research in auditing have been presented. Some of these rare studies depict auditing as ritualistic and obsessed with form and conduct. It is commonly described as a discipline more concerned with impression and outfit than of substance or contents. The negotiating character of auditing is also apparent when it is looked upon as a social practice. Efficiency is a matter of legitimacy, rather than a measurable outcome. Different approaches to structure and judgement are in place in different firms. Another feature often emphasised is the mystique: it is hard to say what auditing is all about and what base its knowledge is founded on. In light of existing real-world-auditing studies a conclusion is now emerging: many questions regarding contemporary auditing work remain un-answered. In existing field studies, the discussion between Structure and Judgement is seldom addressed, although it is a debate that has influenced much of auditing practice for many years and also points to important scientific issues. In light of how the auditing industry has been undergoing concentration at the same time as the importance of the legal framework is stressed and computers are getting more powerful with increasingly developed software the Structure vs Judgement motivate further examination.

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Structure vs. Judgement was initially described as a dispute with practical implications focusing the merits of technology and formal views on auditing. But it is not only a normative issue. Power (2003) shows how it also can be looked upon in light of institutional theory. Structure comes here out as legitimacy, and as an answer on the pursuit for transparent audit practice. Structure has bearing on the economic conditions for auditing; as a business activity auditing requires routines where quality and labour costs can be controlled. The concentration of audit industry emphasises this trend. Auditing has to be profitable, possible to control by the owners of the audit bureaus and still carry an opportunity for individual judgements by practising auditors. The key to the divide lies according to Power (2003) in balancing these two opposing interests. Structure vs judgement can also be looked at from a cognitive point of view: the work conducted by an auditor is traditionally seen as a matter of processing information and reaching an optimal decision, and needs therefore computers and routines to be efficient. The human brain and the computers are working parallel to achieve this. But how can this be understood in the everyday work of an auditor: is auditing a matter of doing what the computer and written norms prescribe? With an illustration from an audit project that question will be illuminated.

AUDITORS IN ACTION
This is a first result from a participatory study where I have followed auditors in two cities in their work. It has a light ethnographic flair, but not based on yearlong uninterrupted interaction. The auditors have been followed during several weeks of their work, but a continuous following has not been possible. They work for the same big auditing firm and are both certified. During the study I shadowed (Czarniawska-Joerges, 1992) them through their working days and took part of meetings, lunches, attended their working sessions and so on. I have never used tape-recorder and been careful when taking notes in meetings. Especially in the beginning, when actors were not used to my presence, my impression was that they observed my actions and especially the note taking. I preferred writing notes after the meetings, in breaks and after the working days. I had also access to all documents that were worked on during the participatory study, but could not copy any and I was also careful on returning all papers I took part of. A special agreement on confidentiality was signed that gave me the same level of obligation as the auditors themselves as regards secret information and to keep silent. I find it hard to believe that my presence affected the decisions or discussions I followed, even if the argumentation maybe had been less developed or

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articulated if I had not been present in the room. In the following case I have interviewed the involved auditors after the event, asking them for response on my impression. Some minor facts have been adjusted here to make identification more difficult. Most documentation is done on computers; signing of actions taken, the progress of different steps in the auditprogram, the accounts from the clients, the joint work in the project teams and so on, all is documented in special files available over the intranet for team-members. I was invited to follow this work on the computer screens but had no access to the files or the intranet.

The Office
The office where we are belongs to one of the big audit companies and is situated slightly outside the city centre. It is closed to outsiders and I register as all other visitors in the reception and carry a visible numbered badge. The premises are not astonishingly fashionable, and many employees share rooms. The different departments of the firm are separated with doors that open with card+code. A unit working with mergers and acquisitions, where information is especially sensitive, are even more secluded. The auditing personnel are divided into units and projects in a complex way. The overall organisation is according to type of business the client has, and every auditor or other member of staff belongs to one of these units. One unit is working with smaller firms owned by the manager, another with rapidly developing new sectors, yet another with industrial public firms and so on. There is a person in charge for each of these units, working part-time with managing the work in the unit and the rest with work in different projects. This work in projects brings in members from different units, where each project is lead by a person with overall responsibility and authority. A project-team is comprised of members with different experiences and seniority. An auditor typically develops deeper competence in one or several areas; it could be sectors but also technical aspects or leadership qualities in general. Competence and experience of similar type of projects is hence one criterion. Another is based on the level in seniority the person has. There is a very strict hierarchy, where every step (assistant, senior, manager, senior manager and partner) is clearly defined. It has to do with how long one has worked, what courses one has followed and how qualified work one has carried out. Un-experienced assistants do the more basic control work and other work is assigned according to experience or level of knowledge. An auditor is working in several projects at the same time and with many different members, why a working day for a trained person can be very diverse. Sometimes an experienced auditor can be in charge of a meeting as team-leader in the

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morning and follow a meeting after lunch in a project where his own contribution is very marginal. And at the end of the day she manages as leader of a unit she is in charge of. The teams are also different in size. The one I will recall here is small, and the manager I followed has carried out most of the work on his own. The final part of this audit on a group of companies was to be carried out during the week. One of the subsidiaries was not yet ready for auditing, and the final version of the yearly statement was still lacking. It arrived at last the day before the final meeting had to be held, a pfd-file in an e-mail. Time was now very pressed. The section consisting of numbers, the Profit/Loss- and Balance-statements and the numerical parts of the appendix, had to be checked. The manager rushed to the head of one of the units and asks for immediate help from an assistant. The request is addressed to immediately and a helper arrives. She is given instructions, the necessary documents are handed over and she vanishes. Her work must be ready by tomorrow morning, and it is now afternoon, three oclock. We start reading the text, and when I leave at 6 the work continues for the project manager. We are to meet next morning.

The last meeting before printing

At nine the next morning he sits in his office, a small space in one corner of a large room he shares with 4-5 colleagues. The little area is equipped with a desk and a bookshelf with a few books and files. Most of the documents from customers that are not computer-files are placed in big boxes or bags. He brings a few files and his laptop when we move along the corridors for todays meeting. The rooms designed for meetings all look about the same: white-board and a painting or poster on the wall, a table in lightwood and a number of chairs depending on the size of the room. It is lightly coloured, clean and standardised. We are all sitting down: the partner who is to sign the audit report, the manager who has been responsible for this specific engagement and myself. In the middle of the oval table bottles of water, glasses and mugs are placed on a tray. A telephone with a loudspeaker is also on the table to facilitate contact with the controller working for the client in a town some 150 km away. He is responsible at the client for the Yearly Statement now about to be discussed. The laptop belonging to the manager, a few files and our coffee-mugs are also scattered over the slightly des-organised table. My experience is that coffee-brakes are rare, one is supposed to sip the coffee or water while work or meetings are ongoing. If external clients or guests are present, a biscuit or cake is usually served.

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The partner is over 60 years old, and has been working as an auditor for all his working life, starting at one of the big firms and after that working with a smaller bureau that over the years was merged into this present company. He became partner after ten years of work. His retirement is not far away and preparations for this are already ongoing: looking through his clients and engagements. The rules are very strict and partnership seizes, without exceptions, when retirement is starting. The firm has earlier experienced partners who have regarded themselves as indispensable, a situation one is determined to avoid. The manager is around 35, has worked as an auditor for 10 years and is certified since 4 years. He has been working abroad for one year and is regarded as a promising coming employee. Both are strictly dressed, even if we are working indoors and no clients are in sight. The atmosphere is very friendly and open, also in relation to the clients controller. It becomes clear after a while that both the manager and the partner know him well.

The client is a parent company the audit firm has had as a client for a long time. The companies in the group are mainly active in a technically and scientifically advanced sector. We take part in what has to be the final meeting before the public annual report goes to print. The Annual General Meeting is to be held within three days from now, why all the papers should be ready. The discussion is at first, actually already in the corridor on the way to the room, at what exact date the audit report officially should be signed. As the work is very late they construct the time according to some of the information given in the accounts, relating to when a legal dispute was settled. It has also to take into account how long before the AGM the audit report must be signed. The overall conviction appears to be that no external reader will care about dates or the legal requirements for announcing the accounts and audit report in due time before the AGM for this company that is not public. A second partner is also involved in this audit, but he is not present in the meeting. He has announced his comments over the phone to the partner who is in our meeting.

The company group consists of several subsidiaries, of which at least one has assets that almost entirely consist of activated development costs. As a made to pattern, 75% of all the costs in this specific subsidiary are activated and accounted as assets (according to a recommendation from Redovisningsrdet RR 15 Swedish Financial Accounting Standards Council on Intangibles). The substance in this percentage is not discussed at this meeting, and neither whether this asset holding generally is valid. It is a development company and the plan is to construct a product that will be marketed within a year. It is a difficult question, 16

mixing the technical possibilities with commercial opportunities to make an assessment of this asset-value. The auditor leans against a judgement made last year by the former auditor, working for another of the big audit firms. When the object was taken over by this firm, the judgement was confirmed. The aspect for this specific company that is brought up is instead the burn-rate, an indication of the financial capacity the company has for survival. The liquid assets are calculated and divided with the cost the company is running at per month. If the level of costs is constant, the company has financial assets to survive still a year. After that period, the product is supposed to be ready and out on the market bringing in revenues to the company. When the financial base hence is assessed as safe, the subsidiary is more or less left aside.

Most of the time is instead devoted to different linguistic questions. Very little discussion is spent on the actual numbers in the tables, apart from a miscalculation that the junior assistant had observed last evening: She has been working here for 6 months, and she noticed it, the manager laughingly commented to the clients controller. How long have you been working with financial accounts? he continues to ask the person on the phone. The controller seems not to mind the open remark but takes note of the correct numbers. The discussion turns instead into aesthetic and almost musical aspects. Whether some of the numbers among the notes should be boldfaced, italics or neither is discussed. Another issue is the true meaning of 0 or - or just a blank space in a specific table among the notes. There has to be a rhythm in the table, is one of the arguments. It is important that it looks nice and is easy to read. The client, the partner says in an interview later, pays also for a good-looking report; it must give a good impression. The value of a good language and a nice presentation is diminishing these days, he asserts.

Specify or not?
Apart from this, the talk is on other language-related problems, and on how to express some sensitive issues. One of those is particularly discussed in depth at the meeting. The company has asked if the information about wages paid to CEOs in subsidiaries in other countries could be kept candid. The company is quite small, and it would cause a not desired discussion if their salaries became public through the annual report. The different wages would be compared and open up for jealousy. The persons are all Swedish citizens working in other

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European countries with technical or commercial tasks. It is claimed that they are not managers, as they are not responsible for subordinates and do not have other type of linecommand. Though, they still have the formal position as CEO and there is only one in every specific country. It could create problems and start discussions if these salaries were known to all people working in the company, the controller explains. But I guess it is supposed to be disclosed according to the regulations. He asks whether a non- disclosure would be allowed or if the auditor would comment on it in the audit report would it cause a qualified opinion?

The partner is immediately clear on his standpoint. He would never write a qualified opinion on such basis. He suggests instead that they lump all the salaries for the CEOs working abroad in one sum, so that they cannot be identified individually. The manager is more uncertain and reads aloud from his handbook with all the accounting regulations (FARs Samlingsvolym a volume with laws and recommendations published by the Institute for the Accountancy Profession in Sweden). They jointly find the relevant paragraph in recommendations from Redovisningsrdet (Swedish Financial Accounting Standards Board). It states that the salaries for these CEOs are to be disclosed in the notes for every country. A table in the recommendations shows how it could be displayed. The partner remains convinced on his position during the discussion. The CEOs have this position for legal reasons in the countries where they are active. He claims that they are working with technical and commercial matters, not as CEOs. It is all, he claims, a matter of a true and fair view, and this little disclosure among the notes does not change this. He decides to take this step, not to disclose the salaries for each country according to the recommendations, but to lump them together. The controller appears satisfied and the manager does not air any opposing view. They turn to other questions instead. Laughs sound when they see several languages blended in one table. The introductory text by the CEO is criticised by the partner for being unclear and full of clichs. Some of the board members have a strange presentation in the document. Detail after detail are so looked into and discussed, but few references are made to the figures in the report. When we are through we go for lunch.

Too many details?

A few months after this meeting I interview the partner about the events and his standpoint. His basic view is that salaries and compensations in general are private issues. The question

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he asks himself is: What impression does an analyst get if this or that is disclosed in the yearly statement? He claims there is a general trend that recommendations get more and more detailed; the framework is digging into details. In this concrete case with CEOs salary, he says that he has never regarded these employees as CEOs but as working clerks. This is not an important issue, only a matter of whether it is specified in the note for every country. It is only a small amount.

But he adds: It is also a matter of judgement. This could be dynamite in a small company. In the Law on Yearly Statements there are lots of requirements on small details; about interest, different costs that are to be specified. I ask myself, what does this contribute for the owner or the analyst on the Stock Exchange? It is not certain that it is important, just because it is explicitly stated in a law or recommendation. The question to pose is: what is good for us to know? Everything is not equally important.

In his early career he was more faithful to the letters in the law. He didnt have, at that time and in his own words, the frame of reference he has today. An auditor in his early career was also assessed according to how the framework was mastered: the better knowledge - the brighter career prospects. But he also claims that there is a better attitude towards these issues in audit firms in this country one is less strict with applying the exact framework here.

JUDGEMENT AUDITING BEYOND STEP-BY-STEP

Auditing in context
What is the relevance of dividing everyday auditing along the line Structure vs. Judgement? The story presented here shows how audit practice is more than following step-by-stepinstructions and abiding to laws and recommendations. It is shown to be social interaction influenced by different contextual factors. The decision on disclosure of CEO salaries had to be taken fast, as the financial accounts were already late and the Annual General Meeting needed to be held almost instantly. The client, partner and manager knew each other well; the atmosphere was relaxed and cordial. Another striking impression was that words were in focus, rather than numbers. Language was more important than mathematics or logic. The anticipated reception of the statement discussed seemed to depend more on aesthetics, a good 19

language and even the rhythm in the tables. One specific issue on the meeting has been highlighted: How to handle the sensitive information on salaries for CEOs abroad? There was a clear desire expressed by the client, though far from conditional, that the specific information should be omitted. Further: the recommendations in themselves were as such hardly open for negotiations or interpretations as the participants in principle all agreed that the information was supposed to be disclosed in detail. How do we then explain the position taken?

The argumentation proves that the experienced auditor, who is also to sign the audit report, does not see this as a case of mechanically implementing recommendations. It becomes a matter of judgement; a small sum, and the information is deemed irrelevant or marginal to both owners and financial analysts. The responsible auditor makes also an assessment of what it entails to be a CEO even if these persons officially hold this position, their duties are not what is commonly referred to as managerial on that level. He discusses how the legal framework in the countries where they work forces the client to use this title. By bringing all these aspects together he takes the decision not to disclose in detail but to give information at another aggregate level. He refers this to how exercising judgment is a matter of experience. This position is also taken very fast, the pondering is limited and the discussion does not alter the initial standpoint. I also want to add: my point is not to discuss in terms of Right or Wrong in this specific situation in relation to the framework. The aim is to illustrate how judgement can be exercised in an on-going audit project.

The partner in charge states afterwards that rule following was far more important in his early career. It even had implications for someones prospects to be promoted. This is confirmed by the role of the younger manager here, who is the one most eager to find the exact wordings in the handbook. To the experienced partner, this had a minor importance.

Auditing as a language game

This case emphasises how interpretations become fundamental to auditing work. Not only the written recommendations were assessed, but the complete situation. Auditing goes beyond the mere adhering to laws and recommendations when every situation is unique and requires this type of specific judgement concrete and context-bound. But an understanding of auditing can go one step further in view of this story. The discussion also shows how language

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becomes fundamental for constructing what is considered correct. The actors and their positions constitute one of the conditions for the language game: a partner, a manager and the client. They have all relations and dependencies that affect the game they enter. There is a commercial side: a client is providing revenue. There is a contradictory dependence: an auditor has the power to write a qualified report. The partner is to value the manager for possible promotion. These and other considerations can constitute some of the limits for the language game that makes the explicit rules in the legal framework less important and the informal rules in the social interaction decisive.

A language game turns CEOs into sales people, due to legal reasons. The written recommendations are marginalized, when the details in the framework are overlooked in favour of a more general assessment. What is true and fair is regarded as something more that the sum of all details in the recommendations and laws. The context influences hereby how text and language is to be understood. But the language game has also other restrictions than those formed in the actual situations, rules that turn out as more important than what explicit recommendations state. These informal rules govern, together with an assessment of the actual situation, how far the language game can move.

In the alternative version of cognition (Bruner, 1986) the context: the interpersonal relations as well as social, political and historical conditions determine the hidden rules. This reasoning encircles the taken for granted (Jnsson, 1996) in the auditing profession implicit agreements among auditors. The rules can so be seen as formed by the auditors, and the story hereby points to the question how values and norms are formed. Computers, recommendations, internal bureau rules and work routines. There is no shortage of structure when it comes to the work of auditors in the example. But when resolving a concrete issue, it is apparent how the judgemental aspects become vivid it has been described as a matter of interpretation that goes far beyond written texts and involves an understanding of frameworks. Language has been shown as fundamental what is implied in words such as CEO is placed in the context of the overall aim of the recommendations. If auditors are seen as players of a language game, as this text suggests, more attention has to be directed at the general rules for this game. Some of the rules are probably emerging in the unique social interaction at hand. But hidden assumptions and cultural norms are also setting fences for what kind of understanding that is accepted. What make up these informal rules of the language game auditors play? 21

Research
The advantages of an epistemological re-orientation in auditing research and of an alternative to mainstream view on cognition are some of the conclusions of this paper. There are however also another implication. If we emphasise judgement and interpretation in auditing, we also need much more of examples or stories that describe how auditors in daily work assess situations and how they decide their actions. In the present situation in the auditing industry with self-regulation in competition with governmental intervention, the legal framework is in focus. My example shows however that the recommendations had a minor influence in this standpoint, and that an assessment of the situation in its totality was important. Descriptions like this of auditors perceptions and handling of the prescribed framework, widen the scope for the discussion on the future of auditing. It can also bring insights to the practitioners themselves. Another important purpose of this paper becomes therefore to encourage more attempts in this vein; the lack of field-studies in auditing is still apparent.

The starting-point for this paper was that auditing work to a large degree is social, and not only technical. The interaction an auditor is involved in, with the client and signing partner as in this case, is at least as crucial to auditing practice as the framework with all its laws, recommendations and the highly formalized process. The work might be directed step-by-step by software. Documents assembled in intranet databases and help programs can assist when sampling transactions or screening company accounts. This all lies at the heart of the Structure approach and is evident also from this case. But there are still important issues that need to be assessed by humans who work together and form joint decision through negotiations. The mixture of Structure and Judgement is here condensed into a language game. This game has rules that are informal and derived from norms in the profession. Assuming that auditors work with language in social interaction, and are affected by the organisational and societal context where they work, bring up other questions. What valuebase is directing the work and what kind of perceptions and values are fostered within this community of auditors? What role has the professional organisations in this light? The issues of loyalties and relations come to the fore: independence is more than a formal aspect addressed in the audit-software-package (the Analysis-model in the auditing laws of Sweden). Independence is also the actual practice developed in the profession: implicit and beyond words. To research these questions is to disclose what is taken for granted, which is why the tradition of ethnomethodology could be a fruitful avenue. Attempting to lay bare 22

these assumptions can give a deeper understanding of the auditors work and would also increase a much-needed understanding of Judgements in auditing work. This is important in an era when so much research and huge efforts of the big companies are devoted to enhance the formal process, and governments stress the importance of legal frameworks, jointly strengthening the impression that auditing is mostly about Structure.

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