Skip to main content
main-content
Top

Hint

Swipe to navigate through the articles of this issue

Published in: Journal of Business Ethics 2/2022

04-03-2021 | Original Paper

Non-audit Engagements and the Creation of Public Value: Consequences for the Public Interest

Authors: Bertrand Malsch, Marie-Soleil Tremblay, Jeffrey Cohen

Published in: Journal of Business Ethics | Issue 2/2022

Login to get access
share
SHARE

Abstract

In this article, we extend the research on the public interest to non-audit engagements performed by accounting firms and public accountants. Our thesis is that non-audit engagements, as private goods, require a distinct approach to the public interest than auditing. We suggest that a public value perspective can be used conceptually to provide substantial criteria for designing non-audit engagements conducive to public value creation and greater accountability. We illustrate the applicability and consequences of a public value perspective by analyzing and contrasting the decision of two judicial opinions deciding whether Deloitte and the lead partner of a consulting engagement failed to act in the public interest in engineering the sale of collapsed British carmaker MG Rover. We advocate for a significant change in ethical codes of conduct by defining public interest obligations, not only in terms of professional attributes, but also in terms of outcomes. Our approach also suggests a requirement regarding planning a non-audit engagement, including establishing a public value proposition detailing the planned nature of the engagement, and extent of the assessment of the intended public value creation. We discuss the aspirational function of codes of conduct to provide accountability other than in terms of technical output, and to maintain the legitimacy and purpose of the profession.
Footnotes
1
Audit regulators have shown increasing concerns about the recent “revival of large consulting practices at the Big 4” (Donelson et al. 2020). Since 2012, “[Big Four] firms’ combined revenue from consulting and other advisory work has risen 44% compared with just 3% growth from auditing” (Rapoport 2018).
 
2
As further specified by Stewart (2006, p. 329): “Audit output, of which a key feature is auditor independence, has many of the characteristics of a public good (analogous to clean streets), but in contrast to other public goods, all costs are borne by the audit client.”
 
3
See Roberts (2009) about the fundamental limits of transparency and accountability, or Power (2021) for a recent critique of the audit society.
 
4
Although governments and state-related organizational actors perform a special role “as guarantor of public values,” Jørgensen and Bozeman (2007, pp. 373–374) recognize that the latter “are not the exclusive province of the government, nor is government the only set of institutions having public value obligations.”
 
5
Tribunals dealing with allegations of professional misconduct predate the creation of the FRC. The tribunals that ruled in 2013 and 2015 on Deloitte’s implication in the MG Rover transaction were governed by rules similar to those currently stated in the AEP.
 
6
FRC fines to accounting firms jumped from 44% in 2019 with a record high of £24.3 M.
 
7
Mr. Einollahi was a Public Accountant and the lead partner at Deloitte in charge of the two projects.
 
8
The Executive counsel to the financial reporting council v. Deloitte & Touche, Mr Maghsoud Einollahi, Report of the trial Tribunal [Trial] at paras 6 and 7.
 
9
Ibid, at para 37.
 
10
Ibid, at para 46.
 
11
Ibid, at para 48 and 49.
 
12
Ibid, at paras 193 and 194.
 
13
Ibid, at para 22.
 
14
The Executive counsel to the financial reporting council v. Deloitte & Touche, Mr Maghsoud Einollahi, Report of the Appeal Tribunal [Appeal], at para 71.
 
15
Ibid, at para 79.
 
16
Ibid, at para 78.
 
17
Ibid, at para 81.
 
18
Ibid, at para 82.
 
19
Trial, at para 55.
 
20
Trial, at para 55.
 
21
The contrast between the two decisions reflects different moral frameworks. The first decision is consistent with a utilitarian approach in which the morality of an action depends on its consequences for the overall well-being (i.e., the consequences for the public), whereas the second decision reflects a deontological approach in which an action is considered morally acceptable because of some characteristic of the action itself (i.e., the application of professional attributes) (Xu and Ma 2016).
 
22
In common law jurisdictions, a duty of care is the “legal obligation imposed on individuals and corporations to take reasonable care to avoid causing damage […] There is a duty to take care in most situations in which one can reasonably foresee that one's actions may cause physical damage to the person or property of others” (Oxford Dictionary of Law, 2015).
 
Literature
go back to reference Baud, C., Brivot, M., & Himick, D. (2019). Accounting ethics and the fragmentation of value. Journal of Business Ethics, 168, 1–15. Baud, C., Brivot, M., & Himick, D. (2019). Accounting ethics and the fragmentation of value. Journal of Business Ethics, 168, 1–15.
go back to reference Baudot, L., Roberts, R., & Wallace, D. (2017). An examination of the U.S. public accounting profession’s public interest discourse and actions in federal policy making. Journal of Business Ethics, 142(2), 203–220. CrossRef Baudot, L., Roberts, R., & Wallace, D. (2017). An examination of the U.S. public accounting profession’s public interest discourse and actions in federal policy making. Journal of Business Ethics, 142(2), 203–220. CrossRef
go back to reference Benington, J. (2011). From private choice to public value. In J. Benington & M. H. Moore (Eds.), Public value theory and practice (pp. 31–51). Palgrave Macmillan. Benington, J. (2011). From private choice to public value. In J. Benington & M. H. Moore (Eds.), Public value theory and practice (pp. 31–51). Palgrave Macmillan.
go back to reference Benington, J., & Moore, M. H. (Eds.) (2011).  Public value: Theory and practice. Palgrave Macmillan. Benington, J., & Moore, M. H. (Eds.) (2011).  Public value: Theory and practice. Palgrave Macmillan.
go back to reference Bozeman, B. (2007).  Public values and public interest: Counterbalancing economic individualism? Georgetown University Press. Bozeman, B. (2007).  Public values and public interest: Counterbalancing economic individualism? Georgetown University Press.
go back to reference Bozeman, B., & Moulton, S. (2011). Integrative publicness: A framework for public management strategy and performance. Journal of Public Administration Research and Theory, 21, i363–i380. CrossRef Bozeman, B., & Moulton, S. (2011). Integrative publicness: A framework for public management strategy and performance. Journal of Public Administration Research and Theory, 21, i363–i380. CrossRef
go back to reference Bozeman, B., & Johnson, J. (2015). The political economy of public values: A case for the public sphere and progressive opportunity. The American Review of Public Administration, 45(1), 61–85. CrossRef Bozeman, B., & Johnson, J. (2015). The political economy of public values: A case for the public sphere and progressive opportunity. The American Review of Public Administration, 45(1), 61–85. CrossRef
go back to reference Bruijn, H. D., & Dicke, W. (2006). Strategies for safeguarding public values in liberalized utility sectors. Public Administration, 84(3), 717–735. CrossRef Bruijn, H. D., & Dicke, W. (2006). Strategies for safeguarding public values in liberalized utility sectors. Public Administration, 84(3), 717–735. CrossRef
go back to reference Bryson, J. M., Crosby, B. C., & Bloomberg, L. (2014). Public value governance: Moving beyond traditional public administration and the new public management. Public Administration Review, 74(4), 445–456. CrossRef Bryson, J. M., Crosby, B. C., & Bloomberg, L. (2014). Public value governance: Moving beyond traditional public administration and the new public management. Public Administration Review, 74(4), 445–456. CrossRef
go back to reference Coffee, J. C. (2019). Why do auditors fail? What might work? What won’t? Accounting and Business Research, 49(5), 540–561. CrossRef Coffee, J. C. (2019). Why do auditors fail? What might work? What won’t? Accounting and Business Research, 49(5), 540–561. CrossRef
go back to reference Cooper, D. J., & Morgan, W. (2008). Case study research in accounting. Accounting Horizons, 22(2), 159–178. CrossRef Cooper, D. J., & Morgan, W. (2008). Case study research in accounting. Accounting Horizons, 22(2), 159–178. CrossRef
go back to reference Cotterill, J. (January 2020). Global firms under scrutiny in Isabel dos Santos alleged corruption leak. The Financial Times. Cotterill, J. (January 2020). Global firms under scrutiny in Isabel dos Santos alleged corruption leak. The Financial Times.
go back to reference CPA Australia. (2010). APES 110 Code of ethics for professional accountants. CPA Australia. (2010). APES 110 Code of ethics for professional accountants.
go back to reference Dellaportas, S., & Davenport, L. (2008). Reflections on the public interest in accounting. Critical Perspectives on Accounting, 19(7), 1080–1098. CrossRef Dellaportas, S., & Davenport, L. (2008). Reflections on the public interest in accounting. Critical Perspectives on Accounting, 19(7), 1080–1098. CrossRef
go back to reference Donelson, D. C., Ege, M., Imdieke, A. J., & Maksymov, E. (2020). The revival of large consulting practices at the Big 4 and audit quality. Accounting, Organizations and Society, 87, 101157. CrossRef Donelson, D. C., Ege, M., Imdieke, A. J., & Maksymov, E. (2020). The revival of large consulting practices at the Big 4 and audit quality. Accounting, Organizations and Society, 87, 101157. CrossRef
go back to reference Folkers, G. K., & Fauci, A. S. (1998). The role of US Government agencies in vaccine research and development. Nature Medicine, 4(5), 491–494. CrossRef Folkers, G. K., & Fauci, A. S. (1998). The role of US Government agencies in vaccine research and development. Nature Medicine, 4(5), 491–494. CrossRef
go back to reference Frank, J. (1947). Words and music: Some remarks on statutory interpretation. Columbia Law Review, 47, 1259. CrossRef Frank, J. (1947). Words and music: Some remarks on statutory interpretation. Columbia Law Review, 47, 1259. CrossRef
go back to reference Gendron, Y., Cooper, D. J., & Townley, B. (2007). The construction of auditing expertise in measuring government performance. Accounting, Organizations and Society, 32(1–2), 101–129. CrossRef Gendron, Y., Cooper, D. J., & Townley, B. (2007). The construction of auditing expertise in measuring government performance. Accounting, Organizations and Society, 32(1–2), 101–129. CrossRef
go back to reference Hall, M. A., & Wright, R. F. (2008). Systematic content analysis of judicial opinions. California Law Review, 96, 63. Hall, M. A., & Wright, R. F. (2008). Systematic content analysis of judicial opinions. California Law Review, 96, 63.
go back to reference Hirschl, R. (2008). The judicialization of mega-politics and the rise of political courts. Annual Review of Political Science, 11, 93–118. CrossRef Hirschl, R. (2008). The judicialization of mega-politics and the rise of political courts. Annual Review of Political Science, 11, 93–118. CrossRef
go back to reference ICAEW. (2020). Five views on the future of audit. ICAEW Insights (3). ICAEW. (2020). Five views on the future of audit. ICAEW Insights (3).
go back to reference Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. CrossRef Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. CrossRef
go back to reference Jørgensen, T. B., & Bozeman, B. (2007). Public values: An inventory. Administration and Society, 39(3), 354–381. CrossRef Jørgensen, T. B., & Bozeman, B. (2007). Public values: An inventory. Administration and Society, 39(3), 354–381. CrossRef
go back to reference Kempin, F. G. (1959). Precedent and stare decisis: The critical years, 1800 to 1850. The American Journal of Legal History, 3(1), 28–54. CrossRef Kempin, F. G. (1959). Precedent and stare decisis: The critical years, 1800 to 1850. The American Journal of Legal History, 3(1), 28–54. CrossRef
go back to reference Knechel, W. R., Thomas, E., & Driskill, M. (2020). Understanding financial auditing from a service perspective. Accounting, Organizations and Society, 81, 101080. CrossRef Knechel, W. R., Thomas, E., & Driskill, M. (2020). Understanding financial auditing from a service perspective. Accounting, Organizations and Society, 81, 101080. CrossRef
go back to reference Linos, K., & Carlson, M. (2017). Qualitative methods for law review writing. University of Chicago Law Review, 84, 213. Linos, K., & Carlson, M. (2017). Qualitative methods for law review writing. University of Chicago Law Review, 84, 213.
go back to reference Lydenberg, S. (2014). Reason, rationality, and fiduciary duty. Journal of Business Ethics, 119(3), 365–380. CrossRef Lydenberg, S. (2014). Reason, rationality, and fiduciary duty. Journal of Business Ethics, 119(3), 365–380. CrossRef
go back to reference Mahoney, J. T., McGahan, A. M., & Pitelis, C. N. (2009). Perspective—The interdependence of private and public interests. Organization Science, 20(6), 1034–1052. CrossRef Mahoney, J. T., McGahan, A. M., & Pitelis, C. N. (2009). Perspective—The interdependence of private and public interests. Organization Science, 20(6), 1034–1052. CrossRef
go back to reference Malsch, B. (2013). Politicizing the expertise of the accounting industry in the realm of corporate social responsibility. Accounting, Organizations and Society, 38(2), 149–168. CrossRef Malsch, B. (2013). Politicizing the expertise of the accounting industry in the realm of corporate social responsibility. Accounting, Organizations and Society, 38(2), 149–168. CrossRef
go back to reference Marcon, G., & Panozzo, F. (1998). Reforming the reform: Changing roles for accounting and management in the Italian health care sector. European Accounting Review, 7(2), 185–208. CrossRef Marcon, G., & Panozzo, F. (1998). Reforming the reform: Changing roles for accounting and management in the Italian health care sector. European Accounting Review, 7(2), 185–208. CrossRef
go back to reference Morrell, K. (2009). Governance and the public good. Public Administration, 87(3), 538–556. CrossRef Morrell, K. (2009). Governance and the public good. Public Administration, 87(3), 538–556. CrossRef
go back to reference Morrell, K., & Clark, I. (2010). Private equity and the public good. Journal of Business Ethics, 96(2), 249–263. CrossRef Morrell, K., & Clark, I. (2010). Private equity and the public good. Journal of Business Ethics, 96(2), 249–263. CrossRef
go back to reference Mills-Scofield, D. (November 2012). It’s not just semantics: Managing outcomes vs. outputs. Harvard Business Review. Mills-Scofield, D. (November 2012). It’s not just semantics: Managing outcomes vs. outputs. Harvard Business Review.
go back to reference Meynhardt, T. (2009). Public value inside: What is public value creation? International Journal of Public Administration, 32(3–4), 192–219. CrossRef Meynhardt, T. (2009). Public value inside: What is public value creation? International Journal of Public Administration, 32(3–4), 192–219. CrossRef
go back to reference Moore, M. H. (2014). Public value accounting: Establishing the philosophical basis. Public Administration Review, 74(4), 465–477. CrossRef Moore, M. H. (2014). Public value accounting: Establishing the philosophical basis. Public Administration Review, 74(4), 465–477. CrossRef
go back to reference Muzio, D., Kirkpatrick, I., & Kipping, M. (2011). Professions, organizations and the state: Applying the sociology of the professions to the case of management consultancy. Current Sociology, 59(6), 805–824. CrossRef Muzio, D., Kirkpatrick, I., & Kipping, M. (2011). Professions, organizations and the state: Applying the sociology of the professions to the case of management consultancy. Current Sociology, 59(6), 805–824. CrossRef
go back to reference Norris, F. (August 2013). When accountants act as bankers. The New York Times. Norris, F. (August 2013). When accountants act as bankers. The New York Times.
go back to reference Oppenheimer, M., LaVan, H., & Martin, W. F. (2015). A framework for understanding ethical and efficiency issues in pharmaceutical intellectual property litigation. Journal of Business Ethics, 132(3), 505–524. CrossRef Oppenheimer, M., LaVan, H., & Martin, W. F. (2015). A framework for understanding ethical and efficiency issues in pharmaceutical intellectual property litigation. Journal of Business Ethics, 132(3), 505–524. CrossRef
go back to reference Power, M. (2021). Modelling the micro-foundations of the audit society: Organizations and the logic of the audit trail. Academy of Management Review, 46(1), 6–32. CrossRef Power, M. (2021). Modelling the micro-foundations of the audit society: Organizations and the logic of the audit trail. Academy of Management Review, 46(1), 6–32. CrossRef
go back to reference Rapoport, M. (April 2018). How did the big four auditors get $17 billion in revenue growth? Not from auditing. Wall Street Journal. Rapoport, M. (April 2018). How did the big four auditors get $17 billion in revenue growth? Not from auditing. Wall Street Journal.
go back to reference Roberts, J. (2009). No one is perfect: The limits of transparency and an ethic for ‘intelligent’ accountability. Accounting, Organizations and Society, 34(8), 957–970. CrossRef Roberts, J. (2009). No one is perfect: The limits of transparency and an ethic for ‘intelligent’ accountability. Accounting, Organizations and Society, 34(8), 957–970. CrossRef
go back to reference Rutgers, M. R. (2015). As good as it gets? On the meaning of public value in the study of policy and management. The American Review of Public Administration, 45(1), 29–45. CrossRef Rutgers, M. R. (2015). As good as it gets? On the meaning of public value in the study of policy and management. The American Review of Public Administration, 45(1), 29–45. CrossRef
go back to reference Sikka, P. (2008). Enterprise culture and accountancy firms: New masters of the universe. Accounting, Auditing and Accountability Journal, 21(2), 268–295. CrossRef Sikka, P. (2008). Enterprise culture and accountancy firms: New masters of the universe. Accounting, Auditing and Accountability Journal, 21(2), 268–295. CrossRef
go back to reference Spalding, A. D., & Oddo, A. (2011). It’s time for principles-based accounting ethics. Journal of Business Ethics, 99(1), 49–59. CrossRef Spalding, A. D., & Oddo, A. (2011). It’s time for principles-based accounting ethics. Journal of Business Ethics, 99(1), 49–59. CrossRef
go back to reference Spiller, R. (2000). Ethical business and investment: A model for business and society. Journal of Business Ethics, 27(1–2), 149–160. CrossRef Spiller, R. (2000). Ethical business and investment: A model for business and society. Journal of Business Ethics, 27(1–2), 149–160. CrossRef
go back to reference Stewart, J. (2006). Auditing as a public good and the regulation of auditing. Journal of Corporate Law Studies, 6(2), 329–359. CrossRef Stewart, J. (2006). Auditing as a public good and the regulation of auditing. Journal of Corporate Law Studies, 6(2), 329–359. CrossRef
go back to reference Summers, R. S. (1999). Formal legal truth and substantive truth in judicial fact-finding—Their justified divergence in some particular cases. Law and Philosophy, 18(5), 497–511. Summers, R. S. (1999). Formal legal truth and substantive truth in judicial fact-finding—Their justified divergence in some particular cases. Law and Philosophy, 18(5), 497–511.
go back to reference Tremblay, M. S. (2012). Illusions of control? The extension of new public management through corporate governance regulation. Financial Accountability and Management, 28(4), 395–416. CrossRef Tremblay, M. S. (2012). Illusions of control? The extension of new public management through corporate governance regulation. Financial Accountability and Management, 28(4), 395–416. CrossRef
go back to reference Voigt, S. (2016). Determinants of judicial efficiency: A survey. European Journal of Law and Economics, 42(2), 183–208. CrossRef Voigt, S. (2016). Determinants of judicial efficiency: A survey. European Journal of Law and Economics, 42(2), 183–208. CrossRef
go back to reference Webley, L. (2010). Qualitative approaches to empirical legal research. In: P. Cane & H. Kritzer (Eds.), Oxford handbook of empirical legal research (pp. 926–950). Oxford University Press. Webley, L. (2010). Qualitative approaches to empirical legal research. In: P. Cane & H. Kritzer (Eds.), Oxford handbook of empirical legal research (pp. 926–950). Oxford University Press.
go back to reference Warnoll, C. (2015). Deloitte sees record FRC fine of £14m over MG Rover role slashed to £3m. Accountancy Age. Warnoll, C. (2015). Deloitte sees record FRC fine of £14m over MG Rover role slashed to £3m. Accountancy Age.
go back to reference Witesman, E. (2016). From public values to public value and back again. Working paper prepared for the Public Values Workshop hosted by the Center for Organization Research and Design, January 7–8, 2016 (p. 35). Arizona State University. Witesman, E. (2016). From public values to public value and back again. Working paper prepared for the Public Values Workshop hosted by the Center for Organization Research and Design, January 7–8, 2016 (p. 35). Arizona State University.
go back to reference Xu, Z. X., & Ma, H. K. (2016). How can a deontological decision lead to moral behavior? The moderating role of moral identity. Journal of Business Ethics, 137(3), 537–549. CrossRef Xu, Z. X., & Ma, H. K. (2016). How can a deontological decision lead to moral behavior? The moderating role of moral identity. Journal of Business Ethics, 137(3), 537–549. CrossRef
Metadata
Title
Non-audit Engagements and the Creation of Public Value: Consequences for the Public Interest
Authors
Bertrand Malsch
Marie-Soleil Tremblay
Jeffrey Cohen
Publication date
04-03-2021
Publisher
Springer Netherlands
Published in
Journal of Business Ethics / Issue 2/2022
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI
https://doi.org/10.1007/s10551-021-04777-5

Other articles of this Issue 2/2022

Journal of Business Ethics 2/2022 Go to the issue

Premium Partner