The political economy of the accounting firm

The aim of this thesis is the development of a political economy of large accounting and auditing firms. The importance of this lies in the rapid growth of these firms and the lack of appropriate theories. Economists have applied the theory of the firm to accounting and have approached auditing from agency and litigation costs perspectives, while sociologists have studied the culture of accounting firms and approached auditing using concepts such as ‘legitimation’ and ‘jurisdiction’. These approaches do not recognise that to do justice to the subject matter, we must study accounting firms in the broader context of accounting and its many conceptual and practical problems. These include the conceptual framework, auditor independence, the audit expectations gap, creative accounting, and fraud. To study the accounting firm within the context of accounting the thesis develops a political economy approach that emphasises conflict between investors, managers, workers, and the state. This approach proves helpful because it encompasses all accounting and auditing problems within a framework that recognises agency and links together the profits of accounting firms with their legitimation. The method adopted is the development of a theory of the profits of accounting firms and a model of factors driving auditor independence. Following Bryer, the thesis develops the theory from Marx’s Capital by combining his analyses of ‘bookkeeping’ and ‘commercial capital’. The theory highlights that as capitalist enterprises accounting firms compete with all other capitalist firms for a share of surplus value, as well as competing with other accounting firms. However, the political economy approach also highlights the essential contradiction in accounting: that measuring and disclosing profits can exacerbate the ‘labour danger’. The provocative character of accounting means that disguise of profits is part of its nature, but that this must co-exist with the contradictory need for accurate, objective measurement of profits. The model therefore suggests that the role accounting firms play in disguise is the key to understanding their behaviour. It predicts that as the level of profits and labour militancy rises, so do investors’ demand for disguise. However, because investors need disguise, auditors cannot have full independence, and the thesis concludes that this explains why auditing is within the private sector. Its general conclusion is that rather than being a principle, auditor independence is a variable driven by investors’ needs and the capitalist tactics of accounting firms. The thesis derives and tests two behavioural predictions. First, that accounting firms will exhibit the same types of behaviour as other capitalist firms. Second, the auditor does not act independently. The thesis tests these predictions with evidence of accounting firms’ mergers and profit margins (1986 to 1995), the changes introduced in the US to increase auditor independence (2001 to 2003), and the change to limited liability partnership status (2004 to 2007) in the UK. The high levels of profits disclosed by the LLP accounting firms and the close relationship between mergers and profit margins support the hypothesis that accounting firms adopt capitalist tactics. The wide-ranging debates (1995 to 2005) and changes to auditor independence rules introduced by SEC and Sarbanes-Oxley support the hypothesis that claims of auditor independence are untrue, and that the level of audit independence is a variable. The thesis proposes further development of the theory through historical research and formalising the model