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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Theresa May’s stage-managed election campaign keeps the public at bay

Jeremy Corbyn’s approach may be chaotic, but at least it’s more authentic.

The worst part about running an election campaign for a politician? Having to meet the general public. Those ordinary folk can be a tricky lot, with their lack of regard for being on-message, and their pesky real-life concerns.

But it looks like Theresa May has decided to avoid this inconvenience altogether during this snap general election campaign, as it turns out her visit to Leeds last night was so stage-managed that she barely had to face the public.

Accusations have been whizzing around online that at a campaign event at the Shine building in Leeds, the Prime Minister spoke to a room full of guests invited by the party, rather than local people or people who work in the building’s office space.

The Telegraph’s Chris Hope tweeted a picture of the room in which May was addressing her audience yesterday evening a little before 7pm. He pointed out that, being in Leeds, she was in “Labour territory”:

But a few locals who spied this picture online claimed that the audience did not look like who you’d expect to see congregated at Shine – a grade II-listed Victorian school that has been renovated into a community project housing office space and meeting rooms.

“Ask why she didn’t meet any of the people at the business who work in that beautiful building. Everyone there was an invite-only Tory,” tweeted Rik Kendell, a Leeds-based developer and designer who says he works in the Shine building. “She didn’t arrive until we’d all left for the day. Everyone in the building past 6pm was invite-only . . . They seemed to seek out the most clinical corner for their PR photos. Such a beautiful building to work in.”

Other tweeters also found the snapshot jarring:

Shine’s founders have pointed out that they didn’t host or invite Theresa May – rather the party hired out the space for a private event: “All visitors pay for meeting space in Shine and we do not seek out, bid for, or otherwise host any political parties,” wrote managing director Dawn O'Keefe. The guestlist was not down to Shine, but to the Tory party.

The audience consisted of journalists and around 150 Tory activists, according to the Guardian. This was instead of employees from the 16 offices housed in the building. I have asked the Conservative Party for clarification of who was in the audience and whether it was invite-only and am awaiting its response.

Jeremy Corbyn accused May of “hiding from the public”, and local Labour MP Richard Burgon commented that, “like a medieval monarch, she simply briefly relocated her travelling court of admirers to town and then moved on without so much as a nod to the people she considers to be her lowly subjects”.

But it doesn’t look like the Tories’ painstaking stage-management is a fool-proof plan. Having uniform audiences of the party faithful on the campaign trail seems to be confusing the Prime Minister somewhat. During a visit to a (rather sparsely populated) factory in Clay Cross, Derbyshire, yesterday, she appeared to forget where exactly on the campaign trail she was:

The management of Corbyn’s campaign has also resulted in gaffes – but for opposite reasons. A slightly more chaotic approach has led to him facing the wrong way, with his back to the cameras.

Corbyn’s blunder is born out of his instinct to address the crowd rather than the cameras – May’s problem is the other way round. Both, however, seem far more comfortable talking to the party faithful, even if they are venturing out of safe seat territory.

Anoosh Chakelian is senior writer at the New Statesman.

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