The reflection of a foggy mirror

Audit and Assurance Service Industry 2020 & Beyond

As the saying goes, there is nothing new under the sun. This also holds true for self-regulation, a valuable mechanism which can ensure that companies, professionals and entire industries do their work properly, meeting expectations from the outside world.

However, things not always turn out well. Recently the accountancy sector was rebuked, including a call-to-action addressed at the legislative powers, ‘enough is enough’. In order to put this matter into context – and perspective, which at the same time invites another direction to arrive at a solution - trigger points can be interpreted as related to the implementation and acting upon old principles. Is there a sound business practice, are principles of consistency met over time? And what about the public interest, does it hold a number one position?

Limited self-reflection

A common thread runs through the report of the independent Accountants Monitoring Committee (MCA). The industry’s self-reflection is limited and the self-image is too positive. Change is needed, and it is only by putting (and keeping) pressure on the lid that what is deemed necessary, actually will happen. There is not much going against this consistently present theme. Indeed, when it comes to self-regulation, improvements could be made. In this case, i.e., the accountants, and elsewhere. Simply because there is much more to it.

Over time the accountant has become the gatekeeper of our economic system. Rightly so, society has set expectations high, aligned with the major importance vis-a-vis the general interest. The financial interests, on paramount level, match and explain this key role in society as well. If the accountant fails, the safety valve apparently does not perform properly.

Rules, reason, and human nature

A welcome wakeup call, undoubtedly this is a positive effect of this report. The MCA report states clearly that improvements should be made, now. Also, because the supervisory authority AFM in November 2019 already voiced its criticism. Three in a row, the most recent report has been presented to Minister Hoekstra on 30 January. Here, the Committee on the Future of the Accountancy Sector, addresses all actors with a kind yet not noncommittal invitation to contribute to a futureproof sector. Proportionality receives distinctive recognition, as it is seen as an essential guiding principle.

In the months ahead, these three reports (AMF, CMA and CTA) will be at the core of the discussion and the decision-making process in the House of Representatives. All in all, major changes are on their way. It cannot be otherwise, now that such a great deal of attention needs to go to a matured sector. ‘Just teething troubles' is an invalid excuse for what does not go well. So, let’s take a closer look.

On a rational level, we are very capable of modelling the perfect world. Unfortunately, in real life things often turn out differently. Which does surprise us, sometimes even annoy us, making us ask ‘What went wrong?'  Well, the secret lies in human nature. Our amazing ability to ruin something good. Inattentiveness. Tiredness. Greed, too much ‘me’ instead of ‘we’. Selfishness and hubris, big egos. Fear. And occasionally it’s just bad luck.

We're getting closer to the heart of the matter. There is market failure, there are negative externalities, the third-party costs. In recent years, the sector has set everything in motion towards adjustments, correction and revision and it also did achieve positive results, but 'something' is not working, keeping the process in a loop. The question is what this 'something' might be and why the system still isn’t what it should be, in accordance with what is commonly felt. An industry attributing to and thus serving the interests of a healthy, flourishing market, whilst contributing to the economy and society at large.

The regulation’s pendulum

In its essence, laws are the codification of the principles guiding good behavior. Rules that are not laws but stipulated with the same purpose - self-regulation, i.e., codes, standards – must, like legislation, also be supported by good enforcement procedures and provisions.

In general, more or stricter regulation will only generate the intended result if the means are attuned to well-defined ends. The concept of proportionality, which is also applicable, provides the regulatory type framework. In other words, which measure, regulation or method could best be used to meet the objective.

Since the grand deregulation era (1980’s) this concept of proportionality has its own key role to play. This applies to the area and the process of state regulations and non-state regulations alike, for the legislature is not automatically called upon to develop and implement standards. There is more distance, which also means that there is more freedom for markets, and this can only be balanced with more responsibility. With regulation, it seems there are cyclical patterns. From overregulation to deregulation, from deregulation to reregulation. With a constantly changing world and the mostly following nature of regulation this is no surprise. Besides, hundred percent waterproof a system will never be. Some rain inevitably shall fall.

Two horizons and three options

Back to accountancy. Now what to choose from a set of possibilities? One option is not doing anything. Everything stays the same, nothing changes. For obvious reasons this is a no choice. At the opposite side of the spectrum is a new horizon, a new system with state auditors only. Fees and salaries have a fixed maximum. The quality of services will improve, overall costs will go down (meanwhile, large companies are still being served from branch-offices in London or New York). Is this a wishful reality or is it overregulation? Is this what we want?

Looking ahead, there seems to be a third option. Not the typical road in between but a new course. A direction towards proportionality between means and end, not giving up on beneficial features and functions of the market. Taking up responsibility for the sector, with a shift in focus from maximising profits to satisfying profitability and thus leaving thinking in volumes behind.

In other words, present-day good business practice, with a steady and reliable course of action which provides for a healthy company. Correspondingly ensuring continuity, innovation and appropriately meeting justified expectations. Professional pride and joy, chance and opportunity for young professionals to join and shape their own future and a clear yet distinctive role for outsiders (combining the unbiased opinion and the critical eye). It all must come with clear determination, wanting to act and being accountable oneself. If and when the parties involved should want to backup this self-regulation, it’s the government that can offer this support. Legal possibilities are available. Then it becomes statutorily conditioned self-regulation.

Once more the foggy mirror

The accounting profession has been practicing introspection for quite some years. But those who do not see what is there, when the window is clear, but the reflection comes from a foggy mirror, easily and almost certainly miss out on the essence. The mysterious 'something': A culture where checking off and compliance anxiety are left behind. Professional behaviour and transparent, open communication. Intrinsic motivation on the individual level, supported by trust and cooperation, at all levels. All of this, of course, isn’t a typical accountancy thing, look for instance at the healthcare sector. Many safety requirements, quality standards and controls to be found here. However, goals only can be achieved if the organisational culture permits the nurse to point out a mistake at the doctor, directly. Where major interests are at stake, it is crucial that learning in a safe environment is embedded in the system.

It is not an easy journey, travelling this road. But it certainly isn’t a sheer distant view either. It is the way towards a corporate environment where sound professional knowledge, responsibility and a strategy towards 'wellbeing for everyone' is the common denominator. Shared by all, empowered by all. It does pay off, in the end. Let’s call it the new economy attitude.

More information

Harry Commandeur is Professor of Industrial Economics and Business Economics at Erasmus School of Economics and Dr Marina van Driel LLM is Director at Spes Factory in Amsterdam.