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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Chuka Umunna calls for "solidarity" among Labour MPs, whoever is voted leader

The full text of shadow business secretary Chuka Umunna's speech to Policy Network on election-winning ideas for Labour's future, and the weaknesses of the New Labour project.

There has never been an easy time to be a social democrat (or “democratic socialist” as we sometimes call ourselves in Britain). Whereas the right can demonise the poor and extol the virtues of the market, and the hard left can demonise the market and extol the role of the state, our position of constraining the domination of markets and reforming the state is, by definition, more complex.

It is nonetheless the case that social democracy has a historic responsibility, in every generation, to renew democracy and preserve a civic culture. This is achieved not through soundbites and slogans, but through the hard-headed development of a progressive politics that reconciles liberty and democracy, new comers and locals to our communities, business and workers, in a common life that preserves security, prosperity and peace.  This historic mission is all the more urgent now and my determination that we succeed has grown not weakened since our election defeat last May.

But, in order to be heard, it is necessary to make balanced and reasonable argument that both animates and inspires our movement, and which is popular and plausible with the people.  The first is pre-requisite to the second; and there is no choice to be made between your party’s fundamental principles and electability. They are mutually dependent - you cannot do one without the other.

We are in the midst of choosing a new leader and it is clear to anyone who has watched the UK Labour Party leadership election this summer that amongst a significant number there is a profound rage against Third Way politics – as pursued by the likes of Bill Clinton, Tony Blair, Gerhard Schröder and others - as a rejection of our fundamental values.

In the UK there is a view that New Labour accepted an uncritical accommodation with global capital that widened inequality, weakened organised labour and we were too close to the US Republicans and too far from the European left.

I do not believe this is fair, not least because we rescued many of our public services from the scrap heap when we came to office in 1997 and there were very significant achievements  we should celebrate.  New Labour renewed our National Health Service in a fundamental way; we built new schools and improved existing ones; we set up new children’s centres all over the country; we brought in a National Minimum Wage; we worked with others to bring peace to Northern Ireland; we introduced civil partnerships.  Just some of our achievements.

However, though we may take issue with the critique, I do not think we can simply dismiss out of hand those who hold critical views of New Labour. Like any government, the New Labour administration made mistakes - it could and should have achieved more, and done more to challenge the Right’s assumptions about the world. In the end, it is not unreasonable to be ambitious for what your party in government can achieve in building greater equality, liberty, democracy and sustainability. It is far better we acknowledge, not reject, this ambition for a better world, as we seek to forge a new politics of the common good fit for the future.

Realising our values in office has been disrupted by globalisation and the surge of technological forces that are displacing and reshaping industry after industry.

Some argue that globalisation as an ideological construct of the right. But we must recognise that we live in an increasingly integrated world in which markets have led to an unprecedented participation of excluded people in prosperity, a rise in living standards for hundreds of millions  of people and a literacy unprecedented in human history – this is particularly so in emerging economies like my father’s native Nigeria. And the internet has led to a level of accountability that has disturbed elites.

Yet, this has been combined with a concentration of ownership that needs to be challenged, of a subordination of politics that requires creative rather than reactive thinking, and these global forces have exacerbated inequalities as well as helped reduce poverty.

So it is important that we understand the sheer scale and impact of new technologies. At the moment we are engaged in a debate about Uber and its threat to one of the last vestiges of vocational labour markets left in London, those of the black taxi cabs and their attainment of 'The Knowledge'. But the reality is that within the next decade there will be the emergence of driverless cars so we have to intensify our exploration of how to support people in a knowledge economy and the realities of lifelong learning, as well as lifelong teaching. As people live longer we will have to think about how to engage them constructively in work and teaching in new ways.

Once again, I'm addressing all of this, Social Democracy requires a balanced view that domesticates the destructive energy of capital while recognising its creative energy, that recognises the need for new skills rather than simply the protection of old ones. A Social Democracy that recognises that internationalism requires co-operation between states and not a zero sum game that protectionism would encourage.

Above all, Social Democratic politics must recognise the importance of place, of the resources to be found in the local through which the pressures of globalisation can be mediated and shaped. Our job is to shape the future and neither to accept it as a passive fate nor to indulge the fantasy that we can dominate it but to work with the grain of change in order to renew our tradition, recognising the creativity of the workforce, the benefits of democracy and the importance of building a common life.  Sources of value are to be found in local traditions and institutions.

This also requires a recognition that though demonstration and protest are important,; but relationships and conversations are a far more effective way of building a movement for political change.

One of the huge weaknesses of New Labour was in its reliance on mobilisation from the centre rather than organising. It therefore allowed itself to be characterised as an elite project with wide popular support but it did not build a base for its support within the party across the country, and it did not develop leaders from the communities it represented. It was strong on policy but weak on strengthening democratic politics, particularly Labour politics.

Over half a million people are now members, supporters or affiliated supporters of our party, with hundreds of thousands joining in the last few weeks. Some have joined in order to thwart the pursuit of Labour values but many more have joined to further the pursuit of those values, including lots of young people. At a time when so many are walking away from centre left parties across the Western world and many young people do not vote let alone join a party, this is surely something to celebrate.

So it is vital that we now embrace our new joiners and harness the energy they can bring to renewing Labour’s connection with the people. First, we must help as many them as possible to become doorstep activists for our politics. Second, I have long argued UK Labour should campaign and organise not only to win elections but to affect tangible change through local community campaigns. We brought Arnie Graf, the Chicago community organiser who mentored President Obama in his early years, over from the U.S. to help teach us how to community organise more effectively. We should bring Arnie back over to finish the job and help empower our new joiners to be the change they want to see in every community – we need to build on the links they have with local groups and organisations.

I mentioned at the beginning that in every generation Social Democracy is besieged from left and right but the achievements of each generation are defined by the strength of a complex political tradition that strengthens solidarity through protecting democracy and liberty, a role for the state and the market and seeks to shape the future through an inclusive politics. Solidarity is key which is why we must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office.

Yes, these are troubled times for social democrats. All over Europe there is a sense among our traditional voters that we are remote and do not share their concerns or represent their interests or values.  There is surge of support for populist right wing parties from Denmark to France, of more left wing parties in Greece and Spain and in Britain too. There is renewal of imperial politics in Russia, the murderous and abhorrent regime of ISIL in the Middle East, volatility in the Chinese economy and in Europe a flow of immigration that causes fear and anxiety.

But, the task of Social Democracy in our time is to fashion a politics of hope that can bring together divided populations around justice, peace and prosperity so that we can govern ourselves democratically. We have seen worse than this and weathered the storm. I am looking forward, with great optimism to be being part of a generation that renews our relevance and popularity in the years to come.

Chuka Umunna is the shadow business secretary and the Labour MP for Streatham.