Did the CC finally come down hard on the Big Four?

Functional stupidity.

In the aftermath of England’s crushing defeat of Australia in the second Ashes Test last weekend, the Times’s chief sports Writer, Simon Barnes, described two sorts of England fans

There were, he wrote, the “glass half-full sort” who felt the result reflected how well England had played and how good they know are as a cricket team. But there were also the “glass half-empty sort” for whom the result showed how bad Australia were and are.

Readers of the Competition Commission provisional recommendations on remedies to fix the UK audit market this week might have fallen into the same trap. Depending on your perspective, the Commission either came down hard on the Big Four (at last) or didn’t listen as intently as they might have to the demands of the mid-tier firms looking to break the Big Four’s dominance of the audit market. In other words the report apparently had something to please everyone and yet ended up pleasing no one.

The one group whose interests failed to get a look in were the boards of the businesses now expected to organise a tender for their audit every five years. One senior FTSE 100 audit committee chair pointed out that while this sounds like good practice in principle, for his business it means tendering in 140 countries every five years. As well as putting extra work on audit firms, he pointed out this would also place considerable extra demands on boards (and audit committees in particular) without demonstrable evidence it will improve the quality of the audit. It is the sort of regulatory burden the coalition government has made a lot of noise about reducing.

Putting to one side the vexed question of whether the Competition Commission is the right body to be setting the rules for audit (it is not), there is the danger once again of well-intentioned regulatory change not delivering to the intended outcome, imposing unexpected burdens and having unintended consequences. It is a great example of what André Spicer, professor of organisational behaviour at City University’s Cass Business School and Mats Alvesson, professor of business administration at Lund University in Sweden call “functional stupidity”. In a recent paper for the Journal of Management Studies, A Stupidity-Based Theory of Organizations, Spicer and Alvesson found that the unintentional encouragement of organizational stupidity might have been one of the major causes of the financial crisis.

“Our argument is that stupidity is different from irrationality,” Professor Spicer explained in an interview with Cass Business School’s InBusiness magazine. “Irrationality is an outcome, but stupidity is a process.”

It seems that the Competition Commission is in danger of imposing a whole raft of new process measures in an attempt to fix a specific problem that not everyone agrees is a problem. There is also a widely held view that auditors could have done more in the run-up to the financial crisis (when several banks were given unqualified audits), but if audit did fail in that instance, where is the logic to support the notion that auditors looking over their shoulder at a likely retender would have done anything different, or offered a more robust questioning of the basis for the valuations of loans or the pricing of risk at financial institutions? The measures announced this week would not have made a significant difference to that outcome had they been in place in 2007/8. For some this is because they are too lenient and don’t go far enough, while for others they are simply tackling the wrong problem.  

The imposition of new audit regulations and accounting regimes is an inevitable consequence of any major business collapse. Often these changes are made without questioning the role and purpose of audit.

This time at least we have projects such as the Finance Innovation Lab’s Audit Futures initiative, which is investigating exactly what role audit should play in society and business in the 21st century. The outcome from this sort of intelligent and thoughtful approach will be more beneficial to business, auditors and society than the alleged remedies proposed this week.

What is perhaps most disappointing is that this reaction to corporate failure isn’t a new phenomenon. I recently rediscovered a Demos report by Michael Power called The Explosion of Audit. In it he points out that increased auditing does not necessarily lead to greater organisational transparency. Further he suggests that audits have a near miraculous ability to be invulnerable to their own failure. As he writes, “Rightly or wrongly, corporate collapse is always accompanied by scrutiny of the role of the auditors… One of the surprising features of these experiences is that they tend not to call into question the role of audit itself. Where audit has failed, the common response has been to call for more of it. Indeed, the great puzzle of financial audit is that it has never been more a powerful and influential model of administrative control than now, when many commentators talk of an auditing crisis.”

What’s really alarming is that he was writing not last year or even 10 years ago, but in 1994, in the wake of scandals at BCCI and with Robert Maxwell’s media empire. Perhaps more alarming is that as he was writing, a little known energy company in the US (which had not long changed its name to Enron) was just starting to establish a number of limited liability special purpose entities.

The rest is history. And still we didn’t learn. Perhaps more than anything else, that is the epitome of Spicer and Alvesson’s definition of functional stupidity.

This piece first appeared on economia.

 

KPMG. Photograph: Getty Images

Richard Cree is the Editor of Economia.

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Do you see yourself as British or English? The answer could help define modern politics

The rise of English identity has left a glaring space in politics for an English nationalist party. Who is going to fill it?

Political scientists call it the “Moreno question”. In the 1980s, the Spanish academic Luis Moreno Fernández came up with a test for identity, which was originally applied to gauge interest in Catalan independence. In its English incarnation, it asks voters to grade themselves from “I feel more British than English” to “I feel more English than British”. Unsurprisingly, Ukip does best among those who describe themselves as “English, not British”, while Labour’s vote rises the more people see themselves as British. In the biggest group – the 47 per cent who see themselves as equally English and British – the Tories lead.

The Moreno question helps us make sense of three interlinking trends in modern politics. First, the stark fact that in the 2015 election, a different party won in each nation of the United Kingdom: Labour in Wales, the SNP in Scotland, the Tories in England and the Democratic Unionist Party in Northern Ireland. Second, Ukip’s lack of success north of the border: the Herald reported in July that Ukip’s only elected representative in the country, David Coburn MEP, had been forced to take on the role of treasurer at his local branch in Fife because it has so few members. Third, Labour’s declining performance in its historic northern heartlands. Many voters there want a party with a distinctively English flavour and don’t feel that Labour is it.

Devolution has had many unexpected consequences, but the rise of an English identity is one of the least explored. Because of its demographic dominance, mainstream politicians have long argued that it would be unfair to give England its own parliament. Labour is particularly resistant to the idea because it would magnify the Conservatives’ power. As it is, the principle of “English votes for English laws” will exclude the SNP and Plaid Cymru from the grand committee-stage hearings on grammar schools, because education is a devolved matter.

However, the last general election showed that there’s a problem with English voters feeling ignored. In Worcester, the Tory MP Robin Walker told me in April 2015 that arguments about the SNP holding Labour to ransom cut through on the doorstep. “There is a real concern if [voters] are saying, ‘The proceeds of the mansion tax are all going to go on nurses in Scotland. That doesn’t help us,’” he said. Many English voters felt that the SNP would be a successful lobby group at Westminster for Scotland’s interests. Where was their equivalent?

For John Denham, the former Labour MP who now leads the Centre for English Identity and Politics at the University of Winchester, the same dynamic applied this summer in the EU referendum campaign. “Scotland got ‘Scotland Stronger in Europe’,” he tells me. “England had to put up with ‘Britain Stronger in Europe’. That was an elite campaign run by people who think Britain and England are the same thing.”

Once again, the Moreno question helps us understand a fundamental divide among English voters. Denham says that 80 per cent of people who defined themselves as “English only” voted Leave, while 80 per cent of those who called themselves “British only” voted Remain.

Denham thinks that this presents an enormous challenge for Labour in northern seats where Ukip is in second place, given that its intellectuals and leading politicians feel so squeamish about Englishness. “If Labour continues as a cosmopolitan, liberal party that doesn’t want anything to do with the politics of identity,” he warns, “it won’t reach those voters.”

Other politicians worry that if Labour doesn’t occupy this space, another party will. “As nationalists go, the SNP is pretty good,” a senior left-wing politician told me recently. “An English nationalist party could be something altogether more nasty.”

In this light, the election of Diane James as the leader of Ukip looks like a rare stroke of luck for Labour. She is a southerner, educated at Rochester Grammar School, and an MEP for south-east England. Although she is polished and professional – albeit prone to outbursts of admiration for Vladimir Putin – she seems unlikely to appeal on an emotional level to working-class white voters in the north, where the greatest potential for an English nationalist party lies. Thanks to Ukip’s Caligulan internal politics, the deputy leader, Paul Nuttall (from Bootle), did not stand and the charismatic Steven Woolfe (from Burnage) was excluded from the race after the party’s executive committee ruled that he had submitted his nomination papers 17 minutes after the deadline. (Another potential candidate, Suzanne Evans, was suspended by the party, and pretty much everyone else in Ukip seems to hate its only MP, Douglas Carswell.)

If not Labour, or Ukip, perhaps the Conservatives? Theresa May’s rebranding of the party, complete with articles on bringing back grammar schools in the Daily Mail, shows that she is pitching for Ukip-leaners. “In terms of language and biography, she has a better understanding of that struggling, socially conservative, English nationalist voter than Cameron did,” says Robert Ford, a professor of political science at Manchester University and co-author of Revolt on the Right. He believes that any party that thinks a simple economic message can sway these voters is underestimating the “emotive” nature of identity-based politics. “It’s no use going to Sunderland and saying, ‘We’re going to nationalise the trains,’ and thinking, ‘They’ll come back to us.’”

There is another option. A new party could be born, perhaps even out of the ashes of post-referendum Ukip: Arron Banks, its mega-donor, has said that he fancies the idea. With the right leader, nationalist sentiment could spread like wildfire among the “English, not British”. And, as Nigel Farage has shown, you don’t need to get elected to Westminster to have an effect.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 22 September 2016 issue of the New Statesman, The New Times