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Audit policy making in the UK
Article in European Accounting Review · December 1992

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European Accounting Review 1992, 1, 349-392
Audit policy making in the UK

The case of 'the auditor's considerations in
respect of going concern'
Prem Sikka
University of East London
ABSTRACT
In accounting discourses, the going concern concept is considered to be 'funda-
mental" yet in auditing it is considered to be 'material but not fundamental'.
Like all other social concepts and practices, 'going concern' is multi-accented
and its meanings cannot be stabilized. Against such a background, the UK
accountancy bodies formulated and issued the auditing guideline The Auditor's
Considerations in Respect of Gotng Concern in 1985. The purpose of this paper
is to explore audit policy making in the UK by examining the formulation of
the auditing guideline. The evidence suggests that the auditing guideline was
an attempt by the professional bodies to manage a crisis of auditor responsibility.
It suggests that a major aim of the guideline was to minimize audit effort in
order to give maximum protection from litigation to major auditing firms.
INTRODUCTION
Audited financial information has a major regulatory and legitimizing
influence on social relations. It continues to function as an instrument of
social control (Zeff, 1978) and accountability (Flint, 1982). It influences
the workings of capital markets (Firth, 1978), consumer prices (Scott,
1931) and government policies (Loft, 1986). Audited information legitim-
izes corporate activities (Cooper and Sherer, 1984) and affects distribution
of wealth and property rights (Tinker, 1985; Mitchell et al., 1991). Despite
its social importance, auditing policy in the UK is not primarily formulated
by any department of the government or democratic agencies representing
a plurality of social interests. Indeed, following the implementation of the
European Community's Eighth Directive (Companies Act 1989), regu-
lation of the auditing firms and the auditing standard setting process in
particular is firmly in the hands of the accountancy professional bodies
who consider themselves to be primarily 'responsible for protecting and
Address for correspondence

Department of Accounting and Finance, University of East London, Longbridge
Road, Dagenham, Essex RM8 2AS, UK.
350 The European Accounting Review
promoting the interests of [their] members' (Certified Accountant,

September 1991: 12). Such standards have implications for audit effort
and visibility, auditor responsibility, liability, firm profitability, wealth
distribution, legitimacy of corporate disclosures and social policies. They
also form the quasi-legal base by which the State (Registry of Friendly
Societies, 1979; Department of Trade and Industry, 1991) and the courts'
assess the probity of auditees and auditors.
In the UK context, some studies have examined the shaping of account-
ing standards (for example, Hope and Briggs, 1982; Hope and Gray,
1982), but very little is known about the shaping of auditing pronounce-
ments and the social relations promoted by such policies. This paper
examines the development of the auditing guideline The Auditor's Con-
siderations in Respect of Going Concern published by the Auditing Prac-
tices Committee (APC)^ in August 1985. The insights are based upon
discussions with twenty-one auditors (who included two members of the
working party which formulated the guideline, members of the APC and
one president of a professional accountancy body), senior civil servants
and an examination of the submissions received by the APC.
Following the European Community's Fourth Directive, the going con-
cern concept is enshrined in the UK company law (Companies Act 1985,
Schedule 4, paragraph 10). Together with consistency, prudence and
accruals, the 'going concern concept' is considered to be 'fundamental' to
financial reporting. It has been defined as:
the enterprise will continue in operational existence for the foreseeable future.
This means that the profit and loss account and balance sheet assume no
intention or necessity to liquidate or curtail significantly the scale of operation.
(Accounting Standards Committee, 1971: paragraph 14)
Despite being described as 'fundamental', the implications of the concept

in accounting are considered to be highly problematic (Fremgen, 1968;
Sterling, 1968; Yu, 1971). Indeed, multinational auditing firm Arthur
Andersen (1972) has argued that the concept 'should no longer be
regarded as fundamental' (p. 126). But the concept has been specifically
invoked to support competing accounting practices. For example, the
concept has been used to support historical costs (De Paula, 1934), market
values (MacNeal, 1939), present values (Helfert, 1966), current costs
(Edwards and Bell, 1961), constant purchasing power (Hendriksen, 1963)
and cash-fiow data (Lee, 1984), just to name a few. It has also been used
to oppose the use of realizable values (Dicksee, 1912: 194), market values
(Pixley, 1918: 502) and 'going concern values' (ICAEW, 1974: para. 3).
Mautz and Sharaf (1961) regarded going concern as one of the vital
postulates of auditing and Lee (1982) argues that its implications are *one
of the most serious problems facing the auditor' (p. 140). The UK's
auditing standards regard the concept as 'material but not fundamental'
Audit policy making in the UK 351
(APC, 1980). In 1976, the APC advised auditors 'so don't assume the
going concern basis is appropriate for all your clients - confirm that it is!'
(APC, 1976: 5). But, subsequently, one of its chairmen argued that there
'are dangers when auditors pronounce on accounting matters which have
not been fully explored' (Patient, 1983). Against such a background, the
UK professional bodies attempted to interpret the concept and formulate
an audit policy.
To explore the way in which the going concern auditing guideline was
formulated, this paper is divided into seven main sections. The first section
borrows from critical schools to provide a framework for understanding
and exploring the values which are privileged in auditing policy making
in the UK. In order to give the reader a flavour of the going concern
auditing guideline, the second section provides a summary. This will also
help in appreciating the subsequent analysis. After this, the remainder of
the paper is then devoted to examining the formulation of the auditing
guideline. Its structure is shown in Figure I.
As the privileging and understanding of the meanings is dependent upon
the institutional contexts, the third section sketches some relevant aspects
of the APC, a committee which formulated the auditing guideline. The
fourth section focuses on the socio-political environment in which the APC
developed the guideline. Particular attention is given to the consultative
Developmg Contents Underlying

the of the Agenda
Guideline Auditing
Guideline
The social Defining Protecting Legitimizing

economic foreseeable economic passive
and future interests approach
political (minimal to going
environment Symptoms increase in concern
of going audit work) issues
The concern in
consultative Protection auditing
process Application from law
of suits (minimum
The additional clarification of
respondents auditing auditor
procedures responsibilities)
Audit
reports
Figure 1 Structure of the paper
Context of the Auditing Practices Committee

processes which seek to tnobilize support for some preferred alternatives.

Therefore, this section also devotes attention to the working party and
the respondents who cotnmented upon the earlier stages (known as an
'exposure draft') ofthe guideline. The fifth section examines the contents
of the auditing guideline. Particular attention is paid to the development
of the major elements which seek to guide the auditor and users of audit
opinions on matters such as the 'foreseeable future', identification of
symptoms of going concern problems, use of additional auditing proce-
dures and advice on the choice of audit reports. Section six argues that
the guideline was informed by an underlying agenda which was to protect
auditors from lawsuits and safeguard their economic interests by privileg-
ing particular meanings of the concept. This, as section seven argues, the
profession did by promoting and institutionalizing a 'passive' audit
approach to going concern issues. The paper concludes with a summary
and discussion of the issues raised.
UNDERSTANDING AUDIT POLICY MAKING

The going concern auditing guideline is essentially about the meanings
and implications of the concept which are to be ascendant in the auditing
discourses. This is because 'going concern', like all other concepts and
social practices, is multi-accented. In a society marked by numerous social
divisions and inequalities there is a constant struggle over the "meaning' of
social practices (Laclau, 1977). Therefore, the meaning of "going concern'
cannot be stabilized and fixed in any final sense. Any meaning attached
is contextual - dependent upon historical and particular contexts rather
than valid for all time (Douglas, 1966; Williams, 1976). The criteria for
privileging some meanings is not given by the words 'going concern",
'audit" or 'auditor', but rather the meanings they signify. The meanings
of going concern which become ascendant are ultimately dependent upon
the politics, ideological struggle, contestation and subjectivity.
The subjectivity (or self-identity) of auditors is shaped by competing
discourses and ideologies which form a tradition, mutually define each
other and hang together by defining a discursive chain of meaning to form
what might be called 'regimes of truth' (Foucault, 1977, 1979). Following
Gramsci (1971), Althusser (1969, 1971) and Laclau (1977), it is argued
that ideologies (with some autonomy from the 'economic') are social
forces in their own right. People experience the social world through
competing ideological categories and images, thus ideologies have 'truth
effects', shape social practices and change conceptions ofthe world. While,
on moral, ethical or epistemological grounds, one may object to some
ideologies, the point remains that all ideas, no matter how illogical or
unsound, shape people's motivation and commitment. They persuade
them to prefer some meanings of 'going concern" and reject others.
Ideologies are not exclusively a consciously held set of beliefs, but

structures which 'act functionally on men via a process that escapes them'
(Althusser, 1969: 233). Ideologies have a practical existence. They are not
some vague abstract ideas, but are inscribed in or 'inserted into practices'
through language, institutions and social relations. They confront auditors
and standard setters as 'real'. However, there are always competing dis-
courses seeking to mobilize support for some meanings of social practices.
Thus individuals cannot in any simple sense be recruited to a unitary
ideological system. This is because social subjects do not have a one-
dimensional identity; for example, auditors are also investors, entre-
preneurs, citizens, pension fund members, employees and users of finan-
cial statements, each constituted by overlapping and competing discourses.
Each 'self may seek to prioritize competing meanings. Thus meanings of
concepts such as going concern are unlikely to be consistent and are always
subject to change.
The meanings of "going concern' cannot become organized simply by
appealing to economic factors alone. Indeed, the economic itself has to
function in a political, social and cultural context. To become dominant,
the meanings of 'going concern' need to become embedded in the everyday
lived experiences of auditors and auditees and become 'common sense'
ideas. 'Common sense' constitutes the already formed and taken for
granted ground on which more coherent ideologies compete for domi-
nance (Gramsci, 1971). 'Common sense' is not immobile but is constantly
renewing itself by absorbing influences. It is a sedimented residue of
historical traces containing myths, diluted concepts, prejudices, inherited
wisdoms, folklore, etc. It is episodic and fragmentary and will contain
numerous contradictions and tensions. Thus discussions of going concern
in the accounting and auditing literature contain numerous contradictions
and tensions (Dicksee, 1912; Pixley, 1918; De Paula, 1934; Sterling, 1968;
Yu, 1971; ASC, 1971; Arthur Andersen, 1972; ICAEW, 1974; APC,
1980; Lee, 1982; Patient, 1983; Woolf, 1983b). The extent to which any
meanings of 'going concern" become ascendant is dependent upon wider
politics and institutional contexts which may systematically favour some
groups. Thus the privileged meanings are likely to be related to some
class or group interests. Ultimately, any meaning of "going concern' can
be resisted, but, due to their education, socializing and business interests,
auditors may be comforted by the fact that some meanings and practices
are sanctioned by eminent institutions. Yet due to differences in socializing
and priorities, 'significant others' may challenge the meanings preferred
by auditors and/or the professional bodies. Thus the meanings need to be
continuously (re)negotiated and there is always a need to secure consent
for a particular matrix of meanings. But how is this consent produced?
In modern liberal democracies, truth of class interests or hegemony is
pursued nol through open coercion, but through consent. This consent is
not based on illusions, but is founded on a material base (e.g. the need
for auditing firms to make profits). Hegemony requires the successful
mobilization and reproduction of the active consent of subordinate groups.
In a society marked by inequalities in the distribution of wealth and power,
consent is produced by taking systematic account of perceived demands
and beliefs of influential groups. Such demands and beliefs themselves are
selectively defined and are presented as 'real'. The active consent is not
limited to some simple show of preferences, as some accounting
researchers (e.g. Rockness and Nickolai, 1977; Hussein and Ketz, 1980;
Brown, 1981; Sutton, 1984) suggest, but rather it is facilitated by control-
ling the agenda, mobilizing bias in a system, determining which issues are
key issues, excluding some threatening issues, and by shaping the needs
and desires of the subordinate groups by a variety of ideological and
institutional means (Lukes, 1974).
In order to pursue their priorities, the dominant groups need to nego-
tiate, build alliances and make compromises, but usually only on the
secondary issues. Concessions and compromises aim to reduce the severity
of any class or group conflict, maintain general support and secure legit-
imacy of the power bloc in an inherently unstable political system. The
hegemony of a power bloc is unlikely ever to be complete as competing
discourses are always present and a struggle over meaning is never ceasing.
With the above framework, the remainder of this paper now focuses
upon the development of the going concern auditing guideline. However,
in order to help the reader to follow the subsequent analysis and evidence,
the next section provides a summary of the guideline.
THE GOING CONCERN AUDITING GUIDELINE: A SUMMARY

The auditing guideline {The Auditor's Consideraitons in Respect of Going
Concern) was developed by a working party of the APC set up in the
spring of 1982. An exposure draft was published in September 1983. This
working party is thought to have had its final meeting in July 1984 and
formally stood down in September 1985.•* After considering comments
from the various interested parties and approval from the governing bodies
of the CCAB," a revised version, in the form of the auditing guideline,
was issued in August 1985 (APC, 1985). The main contents of the auditing
guideline are shown in Figure 2. The following are its main features.
1) The guideline begins by stating that the primary responsibility for
preparation and publication offinancialstatements rests with the directors.
On auditor responsibility, Ray Hinton (chairman of the working party)
argued that 'going concern should be given specific rather than merely tacit
consideration on all engagements' (Hinton, 1985: 15). But the guideline is
based upon a 'passive' approach. An 'active approach' to making going
concern evaluations was rejected because this would
steps Guidance
A 'passive approach' to
going concern issues is
appropriate
No additiona
audit work is
necessary. An
unqualified
audit opinion
should be
given
Consider the miligaiing

circumstances, if any (see
paras 12 and 13 of the
guideline)
Are
there still Consider
doubts about the issuing an
applicability of unqualified
the going concern audit opinion or
concept" an 'emphasis
of matter'
report
Can
the assets
and liabilities be
fairly presented to Issue a
show the impact of qualified audit
going concern opinion
reservations?
Have
all the Issue a
uncertai titles been qualified
disclosed in the audit opinion
notes to ihe
accounts?
Issue an unqualifed audit

opinion
Figure 2 Flowchart summary of the auditing guideline The

Auditor's Considerations in Respect of Going Concern
involve carrying out specific audit procedures designed to obtain positive audit
evidence that substantiate the applicability of the going-concern concept. This
would be an onerous responsibility . . . and presents many practical problems
. . . it would probably prove an impossible task in many cases. At the very least
it would require substantial audit time - and cost to the clients - to obtain such
positive assurance . . . an unqualified audit report might be interpreted as a
form of guarantee of the company's viability. . . . So, in practice, it is likely
that the active approach would result in a plethora of audit qualifications.
(Charlesworth, 1985)
So the auditing guideline went on to adopt a 'passive approach' (this is
discussed later) because 'its presumption in favour of the going-concern
basis, is clearly more economical of audit effort and cost" (Charlesworth,
1985).
2) The guideline argues that in the course of the normal work audit,
an auditor is likely to be alerted to symptoms of going concern problems
of 'contrary evidence' which would 'raise questions about the continuation
of a business' (APC, 1985: para. 9) and ought to put the auditor 'upon
enquiry'. Paragraphs 10 and 11 of the guideline contain examples of
such evidence. These include matters such as recurring operating losses,
overdue creditors, working capital deficiencies, low liquidity ratios, over-
gearing, undue influence of a market dominant competitor, technical
developments and so on. Only when such problems have been identified
by normal audit work does the auditor need to apply audit procedures
specifically directed towards the going concern basis (Charlesworth, 1985).
3) If, by following normal auditing procedures, 'evidence comes to the
auditor's attention that suggests that the company may be unable to con-
tinue in business, [auditor] should review any factors that may counterbal-
ance that evidence' (para. 17). These are the mitigating factors and are
found in paragraphs 12 and 13 of the guideline. Examples are matters
such as discussions with the management, review of corporate plans, the
possibility of raising new finance, restructuring debts, reviewing guaran-
tees, obligations and collecting third party evidence in support thereof.
The auditor is asked to consider future-orientated information, because
'it is implicit in assessing the foreseeable future that a judgement must be
made about uncertain future events' (para. 7). Examples of this include
consideration of company forecasts, plans and budgets.
4) If, after considering mitigating circumstances and examining the rel-
evant audit evidence, an auditor concludes that the application of the
concept is appropriate, then an unqualified audit opinion should be given.
The guideline also suggests that an 'emphasis of matter' audit report may
be issued where such a report might give the reader 'a better understanding
of the financial statements' (para. 24). If the auditor's doubts remain, then
further tests are to be applied.
5) Much of the accounting literature argues that some different account-
ing principles are applicable to a non-going concern, in accordance with
which assets need to be stated at a liquidation (or some equivalent) value

(for example, see Lewis and Pendrill, 1982). But neither the draft (APC,
1983) nor the guideline (APC, 1985) offers any discussion of the appropri-
ate valuation bases. Instead, it is argued that if an auditor has material
reservations about the going concern basis, then he 'should consider the
recoverability and classification of assets, the classification of liabilities
and the possibility of new liabilities were the company to cease to be a
going concern' (para. 26).
6) If details of all material uncertainties cannot reasonably be estimated
and disclosed, then a qualified opinion is appropriate. Following the USA
practice (AICPA, 1981), the guideline prefers a 'subject to'^ type of quali-
fied audit report (i.e. regarding the matter as material but not fundamen-
tal) for going concern matters. A 'Disclaimer of Opinion' may also be
appropriate where the uncertainties are considered to be "fundamental' to
appreciating the financial statements.
7) Where all uncertainties have been fairly estimated and disclosed, or
all the assets and liabilities have been reclassified, then an auditor may
give an unqualified audit opinion. As mentioned earlier, the auditor may
also give an unqualified opinion where his normal audit work does not
reveal any 'contrary evidence', or where an evaluation of the 'mitigating
factors' suggests that the going concern assumption is approriate.
In order to appreciate the groups and priorities which may have been
privileged, it is appropriate to examine briefly the institution which played
a central role in the formulation of the guideline. Therefore, the next
section sketches some relevant aspects of the Auditing Practices Commit-
tee (APC).
THE AUDITING PRACTICES COMMITTEE

The issuing of auditing pronouncements in the UK is of relatively recent
origins. Though the Scottish Institute obtained its royal charter in the
1850s and the English Institute in 1880, there were no moves formally to
issue any auditing guidance until 1961.' This is despite the fact that audits
for banks and insurance companies have been compulsory since 1879 and
that professional auditors have been required for all limited companies
since 1948. Even in 1961, a specific profession-wide committee to issue
auditing guidance was not set up. In 1969, the profession set up a commit-
tee (the Accounting Standards Committee), initially under the complete
control of individuals engaged in audits, but a similar body to formulate
auditing standards was not formed. However, all this changed in the early
1970s.
In 1973, against a background of increasing visibility of audit failures
(Department of Trade, 1971a, 1971b; Hopkins, 1980), the ICAEW formed
an Auditing Practices Committee (APC) with the aim of formulating
auditing standards. Its members came from Harmood Banner, Coopers &
Lybrand, Kidsons and Peat Marwick. Its chairman, a partner in Harmood
Banner {subsequently Deloitte Haskins and Sells), became personally
identified with the London and County (a secondary bank) collapse and
his firm was severely criticized (Department of Trade, 1976a). This APC
was abandoned without the issuance of a single auditing standard.
The next APC was formed in 1976 by the UK's major accountancy
bodies under the umbrella of the Consultative Committee of Accountancy
Bodies (CCAB). It was formed against a background of a secondary bank-
ing and property market crash which focused a particularly critical gaze
upon auditing practices. The press and numerous reports from the Depart-
ment of Trade and Industry (DTI) inspectors were critical of the standards
of auditing and the auditor's failure to highlight the companies' ability to
continue in business (see Sikka, Willmott and Lowe, 1989, for further
details). The standards of major firms were found to be deficient. For one
experienced commentator, a significant feature of the crisis was the
ease with which eminent firms of auditors turned a blind eye on the wholesale
abuse by client company directors of [legal] provisions. [The directors] operated
these public companies for the principal benefit of themselves and their families;
and most regrettable of all, on the virtual complicity of their auditors, whose
efforts are seen to have amounted to a whitewash at best, and a fatuous charade
at worst.
(Woolf, 1983a: 112)
Such revelations threatened the legitimacy of corporate disclosures, oper-
ations of capital markets, sanctity of property rights, mystiques of pro-
fessionalism, auditor profitability, powers of self-regulation and general
confidence in auditing processes. Due to severe economic crises (see, for
example, Armstrong, Glyn and Harrison, 1984) and under the age-old
ideologies of 'professionals know best', the State was unable, or unwilling,
to set up an independent regulatory site for the promulgation of auditing
standards. Instead, a regulatory site was formed within the profession.
The APC argued that its major aim was that a
codification of good auditing practice into a set of auditing standards will . . .
help to satisfy our critics in political circles and outside.
(APC, 1978: 50)
However, the membership of the APC was not elected or nominated by
the ordinary members of the profession. Though financing its activities,
they were not directly invited to vote on the desirability of its formation
either. The choice of APC membership largely rested on personal contacts
and proximity of the individuals to London (APC headquarters). Reflect-
ing the influence of major auditing firms on the profession, the APC
membership was largely drawn from partners from major firms. The prac-
tice of part-time unpaid membership favoured the larger firms who could
afford to continue to pay their personnel while on APC duties thus buying
influence. Representatives of the State (DTI) were also present but in a
non-voting capacity. As Table 1 shows, the APC was under the influence
of major firms such as Price Waterhouse, Coopers & Lybrand, Peat Mar-
wick, Touche Ross, Arthur Andersen and others. The assumed users of
financial statements and consumers of audit opinions were not present on
the APC.
Table I Major accountancy firms and their domination of the APC
Firms Autumn Winter Spring Winter Spring Sept.

1976 1978 1980 1980 1984 1985
Price
Waterhouse 3 1 1 1 - —
Spicer and
Pegler 1 1 1 1 - _
Arthur
—
l-t
Andersen 1 1 — 1
Coopers &
1-1
Lybrand 1 1 1 1
Thornton
Baker/Grant
Thornton 1 2 2 - — —
Peat Marwick/
Thomson
McLintock 1 1 2 2 2 3
Touche Ross - 1 1 1 1 1
Deloitte
Haskins & Sells - — - 2 2 1
Robson Rhodes - - - 1 1 1
Ernst &
Whinney - - - - 1 1
Arthur Young - - - - 1 1
Binder Hamlyn - - - - 1 1
8 (57%) 8 (57%) 8 (62%) 9 (64%) 11 (69%) 11 (69%)
Others 6 (43%) 6 (43%) 5 (38%) 5 (36%) 5 (31%) 5 (31%)
Total APC
membership 14 14 13 14 16 16
Chairman from Price Spice Spicer Spicer Coopers Arthur
Waterhouse & & & & Young
Pegler Pegler Pegler Lybrand
Source: Sikka, Willmott and Lowe, 1989.
The same major firms also dominated the working parties and subcom-
mittees (APC, 1986). The APC met behind closed doors and at no time
were any of its members required to sever their employment connections
with the firms. Voting power was exclusively in the hands of the auditing
firms. Its internal documents were freely circulated to major firms, but
denied to ordinary members of the profession and other constituencies
(Sikka, Willmott and Lowe, 1989). To gain public legitimacy, the APC
issued 'exposure drafts' inviting others to comment on its preferred alter-
natives, but, armed with privileged information, insider status and a will-
ingness to bear costs, the major firms were in a strong position to shape
the agenda, establish parameters of decisions, non-decisions and dis-
cussions. A major declared aim of the APC was also to
assist the auditing profession in defending itself against unnecessary and inappro-
priate claims.
(APC, 1986: 61)
Against such a background, the APC set about formulating the going
concern auditing guideline.
DEVELOPING THE GOING CONCERN GUIDELINE
The social, economic and political context

The going concern guideline was developed against a background of severe
economic crises, often made visible by dramatic declines in the rates
of profitability (Armstrong, Glynn and Harrison, 1984; British Business,
September 1988: 32), corporate liquidity ratios (British Business, 28 Nov-
ember 1986: 35) and the rising number of insolvencies. In 1974 the UK
had 7,927 liquidations but In 1985 the number reached 19,794 (per the
Annual Abstract of Statistics published by the DTI).
In such an environment, the auditing firms were involved in htigation,
frequently arising in the aftermath of a company with an unqualified audit
opinion ceasing to be a going concern. In everyday language, the phrase
'going concern' is used to denote a thriving business (Strachan, 1975). As
what seemed to be thriving businesses collapsed, 'significant others' argued
that the auditors "must have known that the company was going to the
ground' (The Accountant, 6 May 1982: 4). The DTI inspectors (one of
whom is usually an accountant) were increasingly critical of the auditors'
failure to comment on business viability and survival prospects (see, e.g.,
DOT, 1976a, 1978, 1979; DTI, 1980, 1983). In response, the professional
bodies defended the auditing industry by citing the expectations gap and
argued that 'people simply misunderstand the role of the auditor' (The
Accountants' Magazine, April 1985: 2). The sustained questioning of the
auditors' role, usefulness of audits and with it meanings of going concern
came at a time when many auditing firms were facing increased litigation.
Accountancy, the official magazine of the ICAEW, complained of a 'flood
of writs' (April 1985: 7). It was reported that, out of a sample of 3,000
finns, 562 had faced negligence claims. The probability of a lawsuit was
considered to be one out of five (Financial Times, 5 August 1985: 6). The
Economist (29 June 1985) noted that the lawsuits against auditors had
tripled and that 'the crux of the matter in most cases lies in defining
accountant's responsibility' (p. 74). Major firms such as Deloitte Haskins
and Sell (The Times, 8 February 1980: 17), Arthur Andersen (Daily
Telegraph, 28 July 1979: 8; The Times, 1 February 1985: 10), Ernst &
Whinney (The Times, 19 February 1985: 26; Financial Times, 9 June 1984:
1), Touche Ross (The Times, 22 May 1985: 17), Arthur Young (The
Times, 24 July 1985) and others were all involved in litigation which
threatened firm profitability. Faced with increasing negligence claitns in
1984, the Guardian Royal Exchange, a major supplier of professional
indemnity insurance, ceased offering negligence cover (Financial Times,
3 April 1988: 48). To manage a crisis of confidence in auditing and the
threat of ever increasing litigation against auditing firms, the accountancy
bodies sought to (re)negotiate auditor responsibilities. One vehicle for
this was the going concern auditing guideline. A major aim was to clarify
auditor responsibility and to privilege some meanings and to have them
enshrined in auditing guidelines which in recent years have become the
quasi-legal benchmarks in court cases and the DTI investigations.
In the spring of 1982, a working party, under the chairmanship of Ray
Hinton (Arthur Andersen partner) was formed. As one member of the
working party explained.
We were in the throes of a recession and the situation was becoming worse . . .
the question of auditor liability was becoming extremely important . . . a lot of
different perceptions existed out there about our responsibility and somebody
screamed for a paper on going concern . . . and a working party was hastily
assembled.
The consultative process

The auditing standing setting process, like many other policy-making pro-
cesses, is legitimized by a 'consultation process" through which policy
makers mobilize support for some preferred alternatives. The formation
of a working party is an important stage in such a process.
The manner in which individuals are nominated to a working party has
not been explained by the profession. One explanation might be that, in
view of their considerable experience, senior members of the profession
from major firms are invited to provide an input to policy making. Such
an explanation does not adequately explain the dominating presence of
major firms on the standard setting structures, An alternative explanation
is that the
auditing practices committee is dominated by the major firms . . . [such firms]
can afford to provide part-time members [and can thus] effectively dominate
decisions on the running of a profession in which they have a vital economic

interest.
(House of Commons, Official Report, Standing Committee D, Companies
Bill. 13 June 1989: col. 310)
In any policy making process, there are numerous formal and informal
procedures which enable a dominant group to exercise disproportionate
influence. However, in view of the 'closed way in which the [audit policy-
making] is handled in this country' (House of Commons, Official Report,
Standing Committee D, Companies Bill, 13 June 1989: col. 311), many
such arrangements cannot be easily identified. One way in which a major
group might seek to reproduce conditions favourable to its world-view is
by control of information, making it freely available to some and denying
the same to others. In British parliamentary debates, it has been noted
that the APC had a policy of
providing information on its activities and decisions to the large firms that
dominate its proceedings and denying the same information to the rest of the
profession - the small accountancy firms. . . . [The APC] also gives internal
documents to major firms - information that is denied to ordinary accountants.
(House of Commons, Official Report, Standing Committee D, Companies
Bill, 13 June 1989: cols 311-13)
Indeed, later sections of this paper will make explicit references to the
contents of some such documents.
As the aim of this paper is to advance an understanding of auditing
policy making, it was thought that discussions with the members of the
going concern working party would be beneficial. A literature search
revealed that the professional bodies (for example, ICAEW, 1985, 1986)
and the APC have published lists showing membership (see, for example,
APC, 1976, 1986) of some working parties, but a list of the going concern
working party membership for some reason has not been published.
Therefore, a request for the appropriate information was made. The APC
did not provide a list of the working party members, even though one of
its chairmen (Patient, 1983) had specifically called for research into the
implications of 'going concern'. At one stage, the APC Secretary offered
to reveal the composition of the working party by saying:
I will provide you with the names of the working party members on the condition
that you do not contact them.**
However, in view of the purpose of this research, such an undertaking
could not be given; consequently, the APC and the professional bodies
refused to reveal the identity of the members (for further details, see
Sikka, Willmott and Lowe, 1989). While the offiical literature claims that
the working party 'considers background material, develops ideas and
produces draft Auditing Standard/Guideline' (APC, 1986: 12), the APC
explained that:
The working party does not have the responsibility for the auditing guideline.
The responsibility for preparing (emphasized in the original] the document rests
with the APC.
The ICAEW explained that, while
a working party plays an important role in a project as a whole, it neither
produces nor approves the final draft."'
The Chartered Association of Certified Accountants (ACCA), one of the
APC's governing bodies, emphasized the authority of the working party
by stating;
it is the final document which members are appointed to produce; how this is
arrived at, what weight may have been attached to which argument, is a matter
for the members of the committee or working party."
According to the official literature, the working parties 'vote' (APC, 1986:
24), but the going concern working party's voting details could not be
found. When asked, the APC replied that 'the voting pattern of the
working party is irrelevant'.^^
The lack of co-operation from the Secretariat of the professional bodies
and the APC made me feel as though I was intruding into something
which they regarded as "private". Eventually, the identity of the working
party members was learnt through interviews with partners from major
multinational firms who had been given lists of all working party member-
ships (and other information) as a matter of routine. Subsequently, dis-
cussions were held with two members of the going concern working party.
Those interviewed were certain that they were responsible for developing
the guideline and making recommendations to the APC. In addition,
discussions with recent presidents of the professional bodies, members of
the APC and partners from firms provided useful insights into the politics
of audit policy making.
Having noted some aspects of the consultative process, the next section
focuses upon the parties who commented upon the draft auditing guide-
hne.
The respondents
Following its deliberations, the working party formulated an exposure
draft (APC, 1983) and the professional bodies formally issued it for com-
ments in September 1983. The exposure draft attracted twenty-six
responses and the respondents are identified in Table 2.
Some features of Table 2 should be noted. Twenty-one of the twenty-
six respondents had prior connections with the APC, either through full
membership or participation in various working parties (as identified in
APC, 1986). These included four responses from the APC's governing
bodies. In view of the APC's information dissemination policies, this
Table 2 Respondents to the draft auditing guideline
Respondents Criticisms Prior

Firm by the DTI APC
ranking or lawsuil connections
1) Emst & Whinney (Ireland) 5 Yes Yes
2) B. R. Addison of Hays Allan* 28 - Yes
3) Deloittes, Haskins & Sells 4 Yes Yes
4) Arthur Young McClelland and
Moores & Co. 6 Yes Yes
5) The Chartered Association of
Certified Accountants** ? Yes
6) Spicer & Pegler 11 - Yes
7) Neville Russell & Co. 17 - Yes
8) Clark Whitehill 14 - Yes
9) Thornton Baker & Co. 8 Yes Yes
10) Coopers & Lybrand 1 Yes Yes
11) Thomson McLintock 10 Yes Yes
12) Pannell, Kerr Forster 13 Yes Yes
13) Ernst Whinney (London) 5 Yes Yes
14) Peat Marwick 2 Yes Yes
15) Dearden Farrow 15 - Yes
16) Price Waterhouse 3 Yes Yes
17) Touche Ross 7 Yes Yes
18) Kingston Smith & Co. - No
19) The Royal Institute of
Chartered Surveyors N/A No
20) Mr Julian Mason*** N/A No
21) The Institute of Chartered
Accountants of Scotland** ? Yes
22) The Institute of Chartered
Accountants in Ireland** ? Yes
23) Buzzacott & Co. 40 - No
24) Wickens Building Group**** N/A No
25) Chalmers Impey 18 Yes Yes
26) Technical Advisory Committee
of ICAEW** Yes
* Writing in private capacity.
** APC's governing bodies.
••* Lecturer.
•*** A letter, dated 1 November 1983 from Mr Alan Orme, financial director of the
company, in response to seven questions posed in APC's bulletin True & Fair, Issue
No. 25. autumn 1983.
N/A = Not applicable.
? = Not known.
Notes
1 Firm classificalion is based on information published in The Accountant (26 June 1986:
14-16), which gave indication of 1984 and 1985 positions.
2 The only non-London firms to respond were Ernst & Whinney (Dublin, Ireland) and
Thomson McLintock (Edinburgh. Scotland).
3 Analysis of responses
Top 15 firms* 14
Outside lop 15 5
APC's governing bodies 4
Finance director 1
Lecturer 1
RICS 1
Total 26
There were two responses from Ernst & Whinney. Missing major firms are Arthur Ander-
sen (9) and Binder Hamlyn (12),
privileged circle would have been able to make informed comments and,
as the later sections will show, they were aware of the main priorities and
the 'underlying agenda'. Only two of the top (at that time) fifteen firms,
Arthur Andersen and Binder Hamlyn, did not make a written submission.
However, Arthur Andersen's partner Ray Hinton was the chairman of the
working party and would have been able to represent his firm's interests.
Whether Binder Hamlyn used any informal lines for making represen-
tations is not known.
Earlier, it was noted that a large number of firms were implicated in
litigation and subject to criticisms in the DTI reports. Such firms had
particular reasons for promoting an environment conducive to their econ-
omic interests (at least short-term interests). Therefore, it is significant
that a large number of written responses came from such firms. For
example, Ernst & Whinney made an out-of-court settlement in the Hed-
derwick affair and were facing fresh litigation from Ruberoid and the
Allied Irish Bank. Deloittes had made an out-of-court settlement over the
collapse of London and County Securities and Power Dynamics. Arthur
Young had faced major lawsuits from Tremletts and were implicated in
the Johnson Matthey Bank affair. Thornton Baker were criticized by the
Gilgate inspectors (DTI, 1981a). Coopers & Lybrand had faced major
litigation over the collapse of Burnholme and Forder. Thomson McLin-
tock were criticized in the Department of Trade report on Roadships Ltd
(DoT, 1976b). Peat Marwick were criticized by the DoT inspectors in
their reports on Lonrho (DoT, 1976c), Court Line (DoT, 1978) and Orbit
Holdings Limited (DTI, 1981b). Price Waterhouse were criticized in the
DTI reports on Norwest Hoist (DTI, 1982) and the firm was criticized for
the inadequacy of its procedures for making going concern evaluations in
connection with Ramor Investments (DTI, 1983). Touche Ross were
facing a lawsuit from Caparo. Chalmers and Impey were criticized in the
Pergamon report (DoT, 1971b, 1973). Arthur Andersen, the firm of the
working party chairman, made an out-of-court settlement over the Media
Electronics affair and were facing a lawsuit over the collapse of PRISM
and the DeLorean Motor Company. In addition, the auditing procedures
of Pannell Kerr Forster were being scrutinized by DTI inspectors
appointed on 6 April 1983 to investigate the affairs of the Greenbank

Trust (DTI, 1988). The crisis of confidence in auditing made visible by
the DTI reports, the collapse of many companies and press criticisms
also affected the public image of the professional bodies. As the APC's
governing bodies, they also made comments on the exposure draft and
shaped the agenda through behind the scenes discussion.
Another feature of Table 2 is the relative scarcity of comments from
the assumed 'users' offinancialstatements. The APC was asked whether in
developing the going concern guideline, it consulted any users of financial
statements? It replied that, 'No special consultation took place'.''
UNDERSTANDING THE CONTENTS OF THE AUDITING

GUIDELINE
This section examines the shaping of the detailed contents of the going
concern guideline. Most of the guideline covers the meaning of foreseeable
future, symptoms of going concern problems, suggestions that auditors
examine corporate plans and budgets and the wording of the audit report.
This section will focus on these aspects with a view to understanding the
underlying agenda or the 'interests" being advanced by the particular
meanings preferred in an auditing context.
Meaning of the foreseeable future

Issues in auditing do not arise singly. Each debate raises a cluster of
problems which raise a cluster of other problems. One of these relates to
the meaning of the term 'foreseeable future' which is frequently associated
with any discussion of going concern. The preferred meaning of the phrase
is not neutral and can have serious consequences for auditor liability,
perceived responsibility and public confidence in corporate reports. In
the event of litigation, an institutionalized meaning can be invoked by
'significant others' to argue that the auditor owed (or did not owe) them
a duty of care for the defined period. Therefore, the meaning of the
phrase is important.
In the auditing literature, a number of competing meanings have been
assigned to the phrase 'foreseeable future'. These include 'twelve months
from the balance sheet date' (Coopers & Lybrand, 1985), 'twelve months
from the audit report date' (Thomson McLintock, 1983) and others. In
common with SSAP 2 (ASC, 1971), the APC could also have chosen not
to define the phrase. But it did, arguing that:
the auditor should normally consider information which relates to a minimum
of six months following the date of the audit report or one year after the balance
sheet date, whichever period ends on the later date.
(APC, 1985: para. 8)
One respondent (number 24 in Table 2) opposed the APC's formulation

by arguing that:
The auditor should look as far ahead as is necessary to give confidence that the
company will trade adequately, and remain solvent, until the following accounts
have been filed at the Companies House.
In sharp contrast, the Thames Valley Technical Advisory Committee
(TAC) welcomed what it regarded as the 'shortening of the period'.
However, neither the APC's preferred definition nor any explanation of
its logic could be found in the prior literature. Indeed, the South Western
Technical Advisory Committee (TAC) sought references to the origins of
the APC formula. Of the twelve TACs commenting on the draft guideline,
three supported the APC position, four felt the period to be too short,
two considered it to be too long and three were uncertain. The range of
meanings advocated by the respondents is shown in Table 3.
Table 3 Advocacy of foreseeable future in submissions to the APC

Option Supported by
The APC position Coopers & Lybrand, Thornton Baker,
Price Waterhouse, Peat Marwick,
Arthur Young, Neville Russell and
Thames Valley, Sheffield and
Manchester TACs
One year from the date of the audit Deloittes, Thomson McLintock, Spicer
report & Pegler and Liverpool, London and
South-Eastern TACs
Minimum of six months from the date ACCA
of the audit report
One year from the date on which the Pannell Kerr Forster
directors sign the financial statements
Up to the date of the audit report or Northern TAC
one year after the balance sheet date,
whichever is the earlier
Next trading year or six months from Ernst & Whinney (London)
the audit report date whichever is the
maximum
Two to three months after the audit Deardon Farrow
report date
No specific period Hays Allan, Touche Ross, Chalmers
Impey, Kingston Smith, Wickens
Building Group; Beds Bucks Herts,
Leicester and West Yorkshire TACs
The APC's definition was supported by major firms, such as Thornton

Baker, Arthur Young, Price Waterhouse and Peat Marwick, all involved
in litigation and/or DTI criticisms in the aftermath of a business ceasing

to be a going concern and all with prior 'insider' connections with the
APC. Arthur Young drew attention to the
obvious danger that any time limit suggested by APC will be seen as a guarantee
period . . . [and agreed to accept the guidance] only if this is accompanied by
a clear statement that it is not the auditor's responsibility to guarantee the
solvency of the enterprise for that period.
Ernst & Whinney (London) objected on the grounds that any definition
would be 'interpreted as placing on auditors a responsibility to attest to
the ability of their clients to continue as going concerns'.
Hays Allan were opposed to the mention of any period on the grounds
that 'these time factors could be used against the auditor'.
Deardon Farrow preferred 'a period of two to three months after the
date of the audit report', but the ACCA suggested six months from the
audit report date on the grounds that this would 'reduce the review of the
foreseeable future period to a minimum'.
Firms such as Deloittes felt uncomfortable with suggestions of too short
a period as this could become a focus of public criticism.
A working party member explained that the issue of 'foreseeable future'
was widely discussed with partners from selected major firms. After such
discussions, the 'twelve months after the audit report' option was rejected
as it required extensive audit work. Some APC members were keen to
specify a period of only three months after the audit report date, but were
concerned that too narrow an approach might become the focus of criti-
cism and litigation. As a member of the working party put it, 'someone
might even be tempted to test it in the courts, if an opportunity arose'.
The APC wanted the Accounting Standards Committee to innovate,
but this was not to be the case. It did not wish to leave the definition
open-ended, as this was thought to be counterproductive. In view of the
professional pronouncements being used as 'benchmarks' in litigation and
DTI investigations, it was felt that the term should be defined, as this
could help auditors. A deep-seated fear was that an empty space would
invite courts or legislation to fill it and that this may not be too helpful
to auditors. Ultimately, the APC was urged to adopt a definition which
various firms felt would protect auditors. Under the circumstances, six
months after the audit report date seemed a reasonable compromise, with
the 'common sense' and traditional interpretation of twelve months from
the balance sheet date. In a document distributed to major firms, the APC
noted the following and the original formulation remained in the guideline.
Points of principle Response

A variety of views were expressed Noted. The guidance as stated by the
regarding the period suggested in exposure draft is considered to
paragraph 5 of the exposure draft as represent adequately the consensus of

the normal minimum for the opinion. No change is therefore
'foreseeable future', and a number of proposed (see new paragraph 8).
alternatives were suggested (for
example, 3 months, 6 months or 1 year
after the date of the audit report).
In summary, this section has shown that the issue of going concern
required attention to a cluster of related issues which includes the notion
of 'foreseeable future'. In defining the term the auditing firms could see
some advantages but were also nervous in case it could be used against
them in a lawsuit, They rejected the definitions which might have required
additional audit work. The eventual definition was the result of discussions
with highly privileged individuals and reflected traces of historical mean-
ings.
The next section examines the auditing guideline's recommendations on
identifying symptoms of going concern problems.
Symptoms of going concern problems

Another cluster of issues relates to how auditors are to construct whether
company is a going concern or not. The guideline assumes that normal
auditing procedures would alert auditors to symptoms of going concern
problems. Such symptoms are listed in paragraphs 10 and 11 of the guide-
line. Broadly, auditors are expected to take note of any adverse accounting
ratios, financial difficulties and unfavourable market and political con-
ditions which their normal work unearths. How did the APC come across
such indicators?
Most of the respondents had little to say on such matters and their
suggestions in the main related to presentational aspects. Thornton Baker
and Buzzacott wondered how the APC's recommendations could be
applied to small enterprises, but such aspects did not receive adequate
attention in the eventual guideline. Clark Whitehill wanted to see empha-
sis on 'management responsibility' for identification of going concern prob-
lems. To clarify the nature of the auditing guideline and the circumstances
listed as 'symptoms of going concern problems', the working party mem-
bers explained that:
All we are saying is that the auditor should be aware, we do not ask him to go
and perform specific tasks.
However, there is an endless list of factors (both positive and negative)
which one could focus on. Factors such as low liquidity ratios, over-
gearing, excessive stocks, etc., need not necessarily be signs of weakness.
In addition to requiring assumptions about normal or optimal corporate
operations, in many circumstances they may actually be thought of as
signs of strength and prudent financial management. Perhaps the APC
could have been more specific in identifying the factors which cause a
company to cease to be a going concern. A study of failed companies
might have been helpful in identifying the danger signals. A working party
member explained that the APC
did not carry out any analytical review of companies that had gone into liqui-
dation to see whether some of the factors we identified were present. History
may be of interest to you academics, but we do not have the time - I am not
sure whether history is of any great use. We have to deal with the here and
now problems.'•*
One APC member recalled that the appropriate paragraphs (10 and
11 of the guideline) were sent for comment to some liquidator(s), who
considered them to be suitable. Overall, the final list was developed as a
result of comments and personal experiences of a few selected partners
rather than any systematic study of company histories. Given the extensive
experience of partners from accountancy firms, the APC could possibly
have ranked the 'going concern symptoms' in order of their ability to
predict problems. Such a ranking might have enabled some auditors to
direct their work to key audit areas. A working party member explained
that the APC did not want to be too specific as 'in the event of a corporate
failure, a smart lawyer may use the guideline for litigation'.
Most of the accountancy firms represented on the APC are multinational
and have considerable business interests in the USA (a major market for
accountancy services). In order to minimize their training and other costs,
it would be helpful if identical professional ideologies, vocabularies, tech-
niques, standards and procedures could be established in various coun-
tries. The UK auditing standards already use a considerable amount of
American terminology (see, for example, APC, 1980). In this context, it
is interesting to note that in listing indicators of going concern problems,
the APC appears to have borrowed liberally from the extant American
standard 34 (AICPA, 1981). Table 4 shows a considerable similarity
between the two documents (also see later discussion).
The APC was very much under the influence of major firms. Did it pay
sufficient attention to the problems of small companies (usually audited
by small firms)? In the traditional accounting literature, going concern is
also frequently associated with discussions of valuation bases of financial
statements. Did these aspects affect the policy makers? The next section
examines these matters by focusing upon the additional auditing proce-
dures advocated in the guideline.
Additional auditing procedures

Having been alerted to the problem factors and noted the mitigating
factors, the guideline asks the auditors to perform some additional tasks.
Table 4 Going concern problem indicators: a comparison of the American and

British pronouncements
AICPA (SAS 34) APC

A) Information that may indicate solvency problems (para. 10)
1) Recurring operating losses. 1) Recurring operating losses.
2) Working capital deficiencies. 2) Working capital deficiencies.
2a) Financing to a considerable
extent out of overdue suppliers
and other creditors.
2b) Heavy dependence on short-term
finance for long-term needs.
2c) Excessive or obsolete stock.
2d) Long overdue debtors.
3) Negative cash flows from
operations.
4) Adverse key financial ratios. 4) Low liquidity ratios.
4a) Over-gearing in the form of high
or increasing debt to equity
ratios.
4b) Under capitalization.
5) Default on loan or similar 5) Default on loan or similar
agreements. agreements.
5a) Borrowing in excess of limits
imposed by debenture trust
deeds.
6) Arrearages in dividends. 6) Dividends in arrears.
7) Denial of usual trade credit from 7) Restrictions placed on usual
suppliers. trade terms.
8) Non-compliance with statutory- 8) Non-compliance with statutory
capital requirements. capital requirements.
9) Necessity of seeking new sources 9) Necessity of seeking new sources
or methods of finance. or methods of obtaining finance.
9a) Significantly increasing stock
levels.
9b) Deterioration of relationship
with bankers.
9c) Continuing use of old fixed assets
because there are no funds
available to replace them.
AICPA (SAS 34) APC

B) Information that may raise a question about continued existence without
necessarily indicating potential solvency problems (para. 11)
10) Loss of key management or 10) Loss of key management or staff.
operations personnel.
11) Work stoppages or other labor 11) Work stoppages or other labour
difficulties. difficulties.
12) Substantial dependence on the 12) Substantial dependence on the
success of a particular project. success of a particular project or
on a particular asset.
13) Uneconomic long-term 13) Excessive reliance on the success
commitments. of a new product and
uneconomic long-term
commitments.
13a) Size and content of the order
book and potential losses on
long-term contracts.
14) Legal proceedings, legislation or 14) Legal proceedings or similar
similar matters that jeopardize an matters that may jeopardize a
entity's ability to operate. company's ability to continue in
business.
14a) Frequent financial failures of
enterprises in the same industry.
15) Loss of a key franchise, license or 15) Loss of a key franchise or patent.
patent.
16) Loss of a principal customer or 16) Loss of principal supplier or
supplier. customer.
17) Uninsured catastrophes such as 17) Undue infiuence of a market
drought, earthquake or fiood. dominant customer.
17a) Political risks.
17b) Technical developments which
render a key product obsolete.
These include examination of company plans, budgets and forecasts. Even

small companies are expected to develop plans and forecasts. These
aspects are listed in paragraphs 12 and 13 of the guideline. The APC did
not wish to rank any of the factors identified in paragraphs 12-13, as this,
according to a working party member, could give the appearance of the
factors being 'definitive' and prove to be counterproductive in a lawsuit.
The members of the working party and the APC felt that the auditor's
examination of forecasts and budgets for small companies could be prob-
lematic as they may not have such documents. But such issues were
marginalized in the ensuing guideline development debate. It was appreci-
ated that, in many cases, the auditors would be preparing and then examin-
ing the same forecasts. Such attestation might suggest that the forecasts
have been effectively authenticated by the auditors and pose threats to

auditor liabihty.
Since the mid-1970s property market and secondary banking crash,
auditors have been urged to examine forecasts for making going concern
evaluations (for example, Strachan, 1975; Accountants International
Study Group, 1976; Blackwood, 1976), but some APC members wanted
to ignore them as these were regarded as highly subjective and prone to
errors. The feeling was that any association with such data could become
a source of litigation. However, the members were also aware that much
of the press and the DoT criticisms related to situations where the auditors
had ignored profit and cash-flow forecasts. This meant that the importance
of forecasts, budgets and plans in making going concern evaluations had
to be acknowledged. It did not necessarily follow from such a public
acknowledgement that the profession expected auditors to use such data.
Indeed, auditor working papers are neither accessible to the assumed
users of audit opinions nor any independent regulatory agency. As an
APC member put it, 'Whether auditors will use such information is up to
them, it is a matter of judgement.'
Hinton (1985) stated that the auditing procedures mentioned in the
guideline would not normally involve detailed considerations of budgets,
plans, etc. It involves no more than an awareness for the future, he argues.
However, firms such as Kingston Smith drew attention to the very limited
value of forecasts in resolving going concern uncertainties, as 'financial
forecasts and budgets will in the vast majority of cases be prepared on a
going concern basis'.
The guideline seems to suggest that the going concern problems are
primarily related to finance and that the auditors could protect their
litigation position by seeking 'comfort letters' from bankers and members
of groups of companies. The theme of minimizing the audit work and
protection from litigation continues throughout the guideline. Auditor
responsibility remains somewhat ambiguous.
According to the guideline, if the auditor has serious going concern
doubts then recoverability and classification of assets and liabilities need
to be considered. Such logic suggests that a different kind of accounting
is appropriate for 'going' and 'non-going' concerns. How will the auditor
cope with the various valuation bases? A working party member explained
that it is up to the directors to make accounting choices and for auditors
to form an opinion thereon. But does this not mean that the auditor still
needs to be familiar with the various bases of valuation? The reply was
that 'the auditor only forms an opinion. We are not concerned with the
valuation'.
Earlier it was noted that the auditing guideline bore a considerable
similarity to the equivalent extant American pronouncement. Such simi-
larities were thought to be beneficial to larger firms as it enabled them to
make savings on training and exchange of personnel. Following such

thinking, a further comparison has been taken in relation to the mitigating
circumstances mentioned in paragraphs 12 and 13 of the guideline. The
results are shown in Table 5.
A considerable similarity between the two pronouncements should be
noted. Commenting on the similarities between the American and the
British guidelines, an APC member suggested that the
Americans lead in auditing standards and we follow . . . in the long run it is
cheaper . . . there is no point in reinventing the wheel, is there? Besides, we
have to operate on a very short-time horizon and there is no time to start afresh.
To sum up, the guideline advocated additional auditing procedures

mainly by focusing upon the interests of large firms. The possible problems
faeed by small practitioners auditing small companies were marginalized.
The APC also borrowed from the American Standard. The guideline had
little to say about questions of valuation. Such issues were not considered
to be major by the policy makers.
The next section examines the advice given on audit reports.
Audit reports
According to the guideline, if the mitigating factors and the additional
audit evidence suggest that the auditor has no material doubts about the
ability of an enterprise to remain in existence, then an unqualified audit
opinion should be given. If he is uncertain then assets/liabilities may need
to be reclassified. The guideline suggested (paragraph 24) the use of an
'emphasis of matter' type of audit report, which is meant to highlight
some situations, but, according to the auditing standards (APC, 1980a),
it is not meant to be a qualification. In their written submission, Coopers
& Lybrand were concerned that 'emphasis of matter' may be misinter-
preted by readers as a qualification. Touche Ross strongly opposed the
need for an 'emphasis of matter' type of audit report for the same reason.
During interviews some partners were apt to see the 'emphasis of
matter' report as a 'soft option' and indeed viewed it as a kind of qualifi-
cation. The working party members acknowledged that small practitioners
may use it as a 'cop out', but felt that such a report had to be included
as it gives the auditor opportunities to protect himself. Some additional
points should also be noted. The British auditing standards introduced in
April 1980 treated 'going concern' as a 'material but not fundamental'
uncertainty and suggested a 'subject to' type of audit opinion, though a
'disclaimer of opinion' was not ruled out in exceptional circumstances.
The 'subject to' type of audit opinion is of American origin (Carmichael,
1972), but its communicative value has been questioned by the Cohen
Commission (AICPA, 1978). The Canadian position (CICA, 1980) is that
Table 5 Mitigating factors: comparision of the American and British

pronouncements
AICPA (SAS 34) APC

1) Disposability of assets not 1) Ability to dispose of assets or to
operationally interdependent. postpone the replacement of
assets without adversely affecting
operations.
2) Capability of delaying the 2) To lease assets rather than
replacement of assets consumed in purchase them outright.
operation or of leasing rather than
purchasing.
3) Possibility of using assets for
factoring, sale leaseback or similar
arrangements.
4) Ability to replace assets which
have been destroyed.
5) Availability of unused lines of 5) To obtain new sources of finance.
credit or similar borrowing
capacity.
6) Capability of renewing or 6) To renew or extend loans.
extending the due dates of existing
loans.
7) Possibility of entering into debt 7) To restructure debts.
restructuring agremeents.
8) Separability of operations
producing negative cash flows.
9) Capability of postponing
expenditures for such matters as
maintenance or research and
development.
10) Possibility of reducing overhead
and administrative expenditures.
11) Variablity of dividend
requirement.
12) Capability of obtaining additional 12) To raise additional share capital.
equity capital.
13) Possibility of increasing cash 13) To obtain financial support from
distributions from affiliates or other group companies.
other companies.
14) Availability of qualifed persons to 14) Availability of suitable persons to
fill a vacated key position. fill key positions.
15) The likelihood of suitably 15) The likelihood of finding
substituting for a lost principal alternative sales markets when a
customer or supplier. principal customer is lost.
AICPA (SAS 34) APC

16) The possibility of adequately 16) The ability to replace assets which
replacing assets seized or have been destroyed,
destroyed.
17) Capability of operating at reduced 17) The possibility of continuing the
levels or of redeploying resources. business by making limited
reductions in the level of
operations or by making use of
alternative resources.
the uncertainties should be disclosed in the notes to the accounts. If the

notes are satisfactory then there is no need for the auditor to issue a
qualified report as a qualification may prove to be misleading and con-
fusing.
Among the respondents, Touche Ross favoured the Canadian position.
The working party members explained that the Canadian alternative was
discussed and rejected because the major firms felt that the auditor should
have the opportunity to issue a qualified audit opinion to protect himself.
A senior partner from a multinational firm doubted whether British com-
panies would be willing to disclose the necessary uncertainties and added:
'We cannot push the management into disclosures they don't want to
make.'
The original going concern specimen audit report (APC, 1980), drafted
at a time of a liquidity crisis, related to lack of finance, but the guideline
version (APC, 1985), prepared in an environment of declining profit-
ability, related to losses and finance. Why the shift? A working party
member explained that the new report emphasized earnings because
obtaining finance was not usually a problem for many companies. What was
difficult was the ability to generate sufficient earnings to pay the loans.
However, Spicer & Pegler felt that going concern is frequently related to
financial support and for this reason preferred the original going concern
quaUfication report - a view echoed by Coopers & Lybrand. Nine TACs
opposed the proposed audit report and were concerned that it was either
too vague or invited a bank manager to cancel financial facilities. Deardon
Farrow and Price Waterhouse also wanted the new specimen audit report
to be withdrawn. Some, such as the Leicester TAC, referred to the audit
report as 'torturous' and 'incomprehensible'. Deloittes referred to the
proposed audit report as 'long winded'. Deardon Farrow also thought that
the proposed report could be damaging to a client. Hays Allan wanted to
retain the old report.
The respondents were concerned with the impact of the audit report on
auditor liability and responsibilities. With this in mind, Peat Marwick and
the South Western TAC wondered whether a 'disclaimer of opinion" was
more appropriate than the 'subject to' opinion. Coopers & Lybrand and
Audil policy making in (he UK 377
Pannell Kerr Forster considered the 'disclaimer of opinion' to be inappro-

priate as this could lead to serious consequences for the client company's
finance and survival. The working party members explained that the guide-
hne does not rule out the use of a 'disclaimer'. From the written sub-
missions it is clear that the firms were concerned with the self-fulfilling
nature of a going concern qualification. Touche Ross felt that going con-
cern quahfications do cause financial difficulties for the companies. It
wrote:
it is the duty of those who assume responsibility for setting auditing standards
to avoid imposing on auditors an unnecessary obligation to issue reports which
have such potentially damaging results.
The first suggested that the guideline should state that;
the reader of financial statements is not entitled to rely on either the fact that
the financial statements are prepared under the presumption of going concern,
or that the auditor's report is unqualified, as evidence that the enterprise will
in fact be able to carry on business as a going concern.
Spicer & Pegler were concerned that a qualification, if inappropriate,
eould still land the auditor with a lawsuit. In order to protect auditors,
Thornton Baker felt that the banks ought to be persuaded to issue guaran-
tees to the effect that 'bank facilities will not be withdrawn under current
circumstances provided the company continues to fulfil its obligations*.
A working party member was asked whether the readers would under-
stand the audit report. The reply was that 'one hopes they do'. The APC
did not undertake any detailed study research to ascertain the users' views.
To sum up, the audit reports were devised without any systematic
research and in the main were based upon the personal perceptions of the
working party and APC members. Within the constraints of traditional
practices, the formulation is concerned with protecting the interests of the
clients (shareholders, stakeholders or directors?) and auditors' liability
position. The Canadian position was seen as contrary to the deeply rooted
British practice of qualifying accounts and was rejected. The 'subject to'
opinion originally imported from the USA in the 1980 auditing standards
was retained, but auditors were left with an option to choose an 'emphasis
of matter' report, something which the APC was aware may be used by
some firms as a 'soft option' to protect themselves.
THE UNDERLYING AGENDA: PROTECTION FROM LAWSUITS

AND SAFEGUARDING THE ECONOMIC INTERESTS OF
AUDITORS
Concerns with liability and litigation

In the late 1970s and early 1980s, auditing firms were facing a considerable
increase in lawsuits. These frequently arose in the aftermath of a client
company with a clean audit report ceasing to be a going concern. For a

considerable time, the profession argued that an auditor does not comment
on business solvency and viability (Lee, 1982)., but the pressures from the
State (e.g. DTI reports) and press comments were persuading the pro-
fession to be sympathetic to competing meanings of audits and 'going
concern'. The profession sought to reconstruct its identity by suggesting
that now 'it was reasonable to expect the auditor to consider the future
viability of his client' (APC, 1986: 32). The acceptance of such a meaning,
however, is not a zero sum game. It has implications for auditor liability,
responsibility, effort, profitability and pubhc confidence in auditing.
The interviews and written submissions to the APC show that auditing
firms were keen to articulate an audit approach, an interpretation of going
concern which would minimize their liability, protect them in lawsuits and
dampen public expectations from an audit, without much additional audit
work. The written submissions show that the draft auditing guideline was
opposed by Touche Ross, Chalmers Impey and six of the sixteen ICAEW
TACs. Touche Ross felt that the exposure draft
imposes responsibilities that go far beyond those that are desirable in the
interests of the auditing profession or their clients . . . it will encourage
unreasonable public expectations.
Many firms were also nervous about a document which sought to discuss
the auditor responsibility in any detail. Peat Marwick argued that:
regarding the content of the proposed guideline and bearing in mind the poten-
tial legal effects . . . whether such a complex subject is suitable for a guideline
at all. . . . It is not an issue which can be addressed in abstract and generalised
terms, as the nature of an auditing guideline generally requires.
Price Waterhouse expressed reservations on the draft because it seemed
to suggest that 'the auditor has a responsibility to undergo an active search
for indications of possible going concern problems'.
Pannell, Kerr and Forster objected on the grounds that the draft 'lays
too much emphasis on the auditor's responsibility to identify the prob-
lems'.
Kingston Smith objected on the grounds that the guideline 'seeks to
extend the responsibility of the auditor to an unacceptable extent'.
Firms such as Deloittes and Thornton Baker first wanted the directors'
responsibilities clarified and preferred the matter to be dealt with via an
accounting standard. Ernst & Whinney (Ireland) argued that the
guideline needs to be carefully balanced and worded so as not to impose on the
auditor unnecessarily heavy requirements, with particular reference to avoid
the need to refer to going concern concept.
Arthur Young objected on the grounds that the guideline
appears to add strength to the view of some users that, when an unqualified
audit report is signed, the auditor is issuing a guarantee that the entity will
continue in business for a certain period.
Coopers & Lybrand were concerned with the
danger that accounts users will misunderstand the auditors' role and be encour-
aged to seek redress against the auditors where a company ceases to be a going
concern.
Ernst & Whinney (England) criticized the draft by concluding that it 'does
not strike the correct balance and eould leave the auditor unreasonably
exposed'. Chalmers Impey objected on the grounds that the guideline was
impractical.
Overall, the firms were concerned with litigation and protecting their
economic interests. A major issue was whether the meanings of the going
concern should be used to support an 'active' approach or a 'passive'
approach to audits. The eventual official interpretation can have real
consequences for auditor liability, as professional pronouncements can
provide benchmarks in deciding questions of auditor negligence. In
addition, the approaches have consequences for other social groups and
legitimacy of corporate disclosures.
Under the 'active' approach, auditors would be required specifically to
search for symptoms or signs which might suggest that a business may
cease in the near future. In contrast, the 'passive" approach does not
require the auditors specifically to search for any particular audit evidence.
An auditor is required to carry out additional auditing procedures if, and
only if, the normal audit work reveals some contrary evidence.
The next section shows that the APC responded by legitimizing the
'passive approach' to auditing going concern issues.
PASSIVE APPROACH TO GOING CONCERN AND MINIMUM

AUDIT EFFORT
From the extant literature, it is not always clear whether the APC was
recommending an 'active' or a 'passive* approach. For example, Hinton
(1983, 1985) appears to be advocating an 'active' approach, but Charles-
worth (1985) argued that the APC had recommended a 'passive' approach.
Referring to the 'passive' approach of the American auditing standard
(AICPA, 1981), Jones (1985) argued that the 'APC has been more positive
in its approach' (p. 238). Woolf (1983b) felt that the guideline supported
a 'passive approach', but Boritz and Kralitz (1987) thought that it advo-
cated an 'active" approach. Even the respondents to the exposure draft
were confused. For example, the Liverpool Technical Advisory Commit-
tee (TAC) felt that the exposure draft recommended an 'active approach'.
Thornton Baker thought that the earher parts of the guideline suggested
an "active approach', but the later parts emphasized a 'passive approach'.
Overall, the ICAEW TACs felt that the 'passive' versus 'active' dilemma
was not resolved and that the draft appeared to be confusing and unclear
in its general approach. Alan Orme (respondent 24), one of the few non-
auditors to write to the APC, argued that:
the auditor most certainly should have a duty actively to look for going concern
problem indicators, It is as much a dereliction of duty for him to wait for them
[problem indicators] to be presented to them as for him not to investigate
historical facts as part of the normal audit.
Amid such concerns, what did the working party set out to achieve? A
working party member explained that the issue of 'passive' versus 'active'
approach was almost the very first item on their agenda for the very first
meeting. The working party was aware of the 'passive' advocacy of SAS
34 (AICPA, 1981). The recurring question was how to import it to Britain
within the possible constraints of Statement of Standard Accounting Prac-
tice 2 (ASC, 1971) and the Companies Act 1981. An interviewee recalled
that, throughout the development period, the major topic of discussion
was:
How do we do it in such a way that we do not put an onus on the auditor to
go searching; in other words to make a whole range of inquiries that he would
not have made otherwise.
In addition, there was also pressure from major firms who felt that:
anything which in this particular area articulates the auditors' responsibility . . .
is desirably not said rather than said.
Despite some reservations, on balance there was a feeling in the APC
that the guideline would help to protect the auditor rather than exposing
his position. According to a working party member, the solution adopted
is that:
we don't actually have him [auditor] go out and carry out specific steps to see
whether the going concern basis is appropriate. What we ask him to do is - as
a normal part of his audit work, which he must be doing in any case - to be
actually conscious of the factors identified in the guideline to see whether any
of these are present and if they are, then to respond to them.
Did the guideline recommend a 'passive approach'? The answer was a
clear 'yes' from members of the working party and the APC. What exactly
is the message of the 'passive approach"? According to a member of the
APC, it was saying:
go about your audit and by the way, if something comes and hits you over the
head which suggests that the going concern assumption is not appropriate, then
you really ought to respond to it, but you don't actually have to make overt
inquiries and you don't actually have to think in an overt way about the going
concern concept.
But why recommend the 'passive approach'? Faced with a crisis, the
profession could have articulated and legitimized the 'active approach'.

But it chose not to. The working party members and recent APC members
explained that the 'active' approach extends auditor responsibilities and
is uneconomical. The profession has to think of auditing firm profitability
and cannot extend auditor responsibilities unless the firms can profit from
such an extension. One reason {according to a working party member)
for the 'passive approach' was that:
when we have 300,000 to 400,000 active companies in the country and if you
add about an h o u r of audit time to each then you can imagine what that does
to audit fees. 400,000 hours . . . is a lot of additional fees, or should I say write-
offs, especially as you will do the work and then cannot bill it. W e have tried
to write [the guideline] particularly in light of such views . . . we must be very
very careful in these areas and not to extend the responsibilities too overtly or
to extend them too graphically.
According to a working party member, the most important message

(strongly emphasized) of the guideline is that:
for the vast majority of audits - 90% plus - the guideline will not be germane.
In fact, it will not require more than another half an hour of audit time to
respond. . . . This is very important because we had to pursue that position.
We can't go on economically extending standards and we also want to be very
careful that we don't over-extend the auditors' responsibilities.
Another reason for the 'passive" approach related to the possible refer-
ences to auditing standards and guidelines in court cases as benchmarks.
A working party member explained that:
As a practical matter, the APC cannot let such things [issues of auditor responsi-
bilty] go by for long without these things to be referred in auditing standards
. . . few people fully recognize that the APC is in a more difficult situation than
the ASC. It is rare for a legal suit to take place on accounting standards. Such
standards are unlikely to find their way to the courts and be contested. The sort
of things the APC has to deal with are very much to do with the credibility of
the profession. There is no political way for us to stand still.
During discussions, a senior civil servant representing the DTI on the
APC (non-voting) initially denied and was then reluctant to acknowledge
that the APC had intended to promote a 'passive' approach.'^ In this
respect, it would be helpful to refer to a document circulated by the APC
to major firms. It shows that in order to protect the 'economic interests'
of auditing firms, the APC intended advocating a 'passive approach' all
along. It noted the following (see page 154).
Whether any member of the APC opposed the 'passive' approach is not
known. According to the APC's Constitution, the approval of two-thirds
of the membership is required for the release of a guideline. The 'need
to vote' appeals to dominant ideologies of democracy and helps to legitim-
ize the policy-making structures, The APC's practice of voting is acknow-
ledged by the Secretary of State for Trade and Industry.'*' But when voting
Points of principle Response

The auditor should not normally be This was the original intention,
required to search actively for going Paragraphs 6, 14 and 15 (as now
concern problems, or to carry out any renumbered) emphasize that although
additional work when considering the the auditor must be satisfied that the
appropriateness of the going concern going concern basis is appropriate, and
basis. must consider any evidence to the
contrary, no specific additional
procedures will normally be necessary.
Indications of possible going concern
problems will normally be identified
by the auditor's other procedures.
itiformation was requested frotn the Chartered Association of Certified

Accountants, it replied that the
APC does not vote. . . . It will only issue a guideline if there is general agree-
ment to do so. If there were strong and reasoned opposition to doing so, even
from a small minority of members, 1 think the APC would endeavour in redraft-
ing to meet the reasoned opposition.
However, Appendix 1 shows that the APC balloted its members on 23
April 1985 prior to issuing the guideline. Details of voting, if any, could
not be secured from the APC or its governing bodies.
With an eye on the international developments, a document circulated
by the APC to major firms also noted that "the draft guideline does not
differ in any material respect from that proposed by the IAPC Exposure
Draft 23 on the same subject'. This later on went on to become Inter-
national Auditing Guideline 23 (International Auditing Practices Commit-
tee, 1986).
The APC did not have powers to issue auditing standards and guidelines
in its own name. Only its governing bodies (ICAEW, CACA, ICAS,
ICAI and CIPFA) could do so, after approval from their respective coun-
cils. This was done and the guideline was formally issued in August 1985.
SUMMARY AND DISCUSSION

This paper has examined audit policy making in the UK by focusing upon
the formulation of the going concern auditing guideline. The guideline is
about the contested meaning of going concern. Its 'common-sense' mean-
ings are frequently associated with discussions of valuation bases and
notions of a 'foreseeable future' and these were reflected in the auditing
arena. Overall, the concept is used to indicate a business which is healthy
and thriving. Such 'common sense' meanings are found in earlier texts by
De Paula, Dicksee, Pixley and others. Indeed, the accountancy bodies
have used it to signify a business which 'will continue in operational
existence for the foreseeable future' (ASC, 1971). In the context of the
mid/late 1970s industrial restructuring, falling rates of profitability and

rising liquidations, such institutionalized meanings looked very unstable,
especially as many companies collapsed soon after receiving an unqualified
audit report. 'Significant others' argued that the auditor should have
warned them, but auditors resisted such meanings of going concern. The
social and economic developments resulted in increased litigation against
auditors and helped to push 'the auditor's considerations in respect of
going concern' to the professional agenda. Though traditionally reluctant
to acknowledge some responsibility for assessing the survival of a business,
under public scrutiny the profession acknowledged some obligation, in
order to reconstruct its identity. However, it supported a 'passive' rather
than an 'active' approach to going concern. Such an approach may also
indicate director-auditor power relations. A 'passive approach' makes it
easier for auditors to issue an unqualified audit report, something which
may be desired by company directors, especially in times of economic
decline. It may also enable directors to minimize audit fees and maximize
their salaries, perks, etc., as these are frequently linked to published
profits. But the outcomes of such choices are contradictory. For example,
while retaining director support, the guideline can lead to public criticisms
of auditors, higher incidence of lawsuits and a loss of legitimacy.
The official literature argues that 'the auditor is rarely carrying out his
work with the thought of subsequent litigation at the front of his mind'
(APC, 1986; 36), but this paper has shown that such issues were at the
forefront of audit policy making. In the case of 'going concern', the
accountancy profession sought to legitimize meanings which would minim-
ize audit effort and maximize protection from lawsuits. While arguing that
the 'APC does not limply accept overseas solutions' (APC, 1986: 49), it
borrowed significantly from the American pronouncement (without ever
acknowledging it), presumably on the grounds that it best served the
economic interests of major firms.
Historically, the UK profession has enjoyed considerable autonomy in
making audit policy and its definitions, terms and discourses, etc., have
been privileged in policy making. But in order to manage conflict, it is
also obliged to negotiate meanings of concepts. The extent of such nego-
tiations is always context dependent and need not lead to consistent
approaches. For example, in relation to auditor reliance on audit evidence
generated by specialists, the official literature clearly states that the 'audi-
tor should not passively accept such evidence but should critically examine
it' (APC, 1986: 32). In contrast, the going concern guideline advocates a
'passive' approach. It has not been possible to find any auditing literature
which advocates a 'passive approach' to the three other accounting con-
cepts also defined as 'fundamental' in accounting standards. It should be
noted that four accounting concepts (prudence, consistency, accrual and
going concern) are described as 'fundamental" in the UK accounting stan-
dards and company law, but only one of these, the going concern concept,
has ever been singled out for an auditing guideline. This suggests perhaps
that the selection of topics for auditing pronouncements is influenced by
the issues considered to be threatening to major firms rather than part of
what Ferrier (1985) describes as a 'conceptual framework for auditing'.
The paper also points towards a fruitful avenue of research relating to
audit failures. In recent months, the UK has experienced major corporate
collapses such as Maxwell, Bank of Credit and Commerce International
(BCCI), Polly Peck, Coloroll, Sock Shop, Levitt, Parkfields, British and
Commonwealth and many others. In each case, the audits were carried
out in accordance with the auditing standards sanctioned by the profession
yet the audit reports contained no warning of any going concern problems.
This then raises an issue: whether auditing deficiencies are already insti-
tutionalized into the profession's recommendations. In the case examined
here, it is noted that the profession does not urge auditors to look specifi-
cally for going concern problems or to develop specific techniques for
making going concern evaluations. Instead, the auditor's normal routine
work is expected to highlight going concern problems. In the corporate
collapses cited above, clearly the normal audit work, all done in accord-
ance with auditing standards, seemed to be less than adequate., at least to
the public. Therefore, it would be interesting to examine the ways in
which current auditing standards create bhnd-spots and deficiencies for
auditors.
Contrary to the views of a number of accounting writers (for example.
Brown, 1981; Hussein and Ketz, 1980, 1991; Hope and Briggs, 1982;
Newman, 1981; Sutton, 1984), this paper shows that policy making by the
profession is not pluralistic. Just because the standard setters receive
submissions from various parties, this does not necessarily make them
pluralistic. Brown (1981) assumes that such submissions are neutral. But
this cannot be the case since no respondent resides outside the nexus of
social divisions and relations of power. The firms and their partners are
engaged in a struggle over what 'going concern' signifies; a 'passive' or an
'active' audit approach and the way this privileged meaning and a chain
of connotations is to be articulated,
In the case examined here, voting details are not publicly available. But
the mere focus on voting details (Rockness and Nickolai, 1977) neglects
the socialization of policy makers through educational, professional and
business discourses. In the case cited here, the standard setters privileged
the interests of the major firms. While the policy makers would claim to
be operating in the general interest, the point remains that what constitutes
the general interest is inevitably coloured by their business and pro-
fessional interests.
The studies claiming that the policy making by the profession is plural-
istic do not adequately recognize that some world-views may be insti-
tutionalized or taken for granted (Westergaard and Resler, 1975). In the

case reported here, the policy-making arena privileged the terms of the
debate favoured by the auditing industry. As has been noted, the guideline
paid considerable attention to the interests of the major firms. There are
structural reasons for this. Historically, the accountancy profession has
been central to audit policy making and due to its centrality enjoys a
considerable amount of autonomy in advancing some discourses. The APC
was controlled by the major firms who were willing to finance its operations
by seconding unpaid personnel to it. Such social arragnements enabled
them to advance their preferred meanings. Such policies are also
developed in a tradition which assumes that 'the professionals know best'.
No doubt, there may have been differences among the policy makers, but
given their world-views these are likely to be minor and, in any case, they
did not result in any concessions on the major issues relating to the need
for a guideline and the privileging of 'going concern* meanings.
The studies claiming that policy making is pluralistic also pose methodol-
ogical problems. The notion of 'dominance' is essential to any empirical
test of pluralism, but accounting researchers seem reluctant to acknow-
ledge this. By abandoning the notion of power blocs or Elites, there is a
danger that the very idea of 'dominance" in social formations and dis-
courses may be downgraded to a very weak pluralistic concept of power
and control. Rather than simply conceiving it as the imposition of a
framework, whether by force or otherwise, on a subordinate group, there
is an alternative. This 'dominance' can be both through the level of the
conscious and the unconscious. It can be seen as a property of the system
or social relations involved which favour particular world-views, rather
than an intentional bias. Due to systematically asymmetrical social
relations of power, the decisions of auditing standard setting agencies may
secure or advance the privileges of a particular group or class.
The evidence presented here suggests that the accountancy profession
should not be seen as a homogeneous entity. It should be noted that
industrial/commercial accountants had little direct say in audit policy
making. Small practitioners and their concerns were marginalized.
Assumed users were not explicitly consulted. The guideline., developed
under the influence of major firms, sought to develop a world-view for all
auditing firms and 'others', but there is no guarantee that the values
disseminated by the standard setters are necessarily absorbed by others.
In a subsequent survey of 300 auditing firms (Sikka, 1991), it was found
that support for the 'passive' approach was mainly confined to the top
twenty firms. Given such weak support for the 'passive' approach, it is
quite likely that during a major crisis, the profession will have considerable
difficulty in sustaining its preferred meaning.
Finally, it is suggested that the term 'professiqn' is not too helpful in
policy-making studies. It is more appropriate to consider the accountancy
bodies as trade associations who seek to advance the economic and social
interests of their members through a variety of contested means. The
phrase 'profession' brings with it all kinds of ideological baggage relating
to a body of knowledge, altruistic motives and pursuit of public interest
by the professional bodies. Such images obscure the political and contested
nature of auditing and the partisan nature of the trade associations. They
also obstruct seeing the auditing firms as significant businesses which, in an
environment of conflict, have to secure favourable conditions for making
profits, avoid lawsuits and retain their legitimacy. The pursuit of economic
surpluses brings them into conflict with 'significant others', as frequently
evidenced by lawsuits and critical DTI reports. Of course, there are diffi-
culties in constructing, pursuing and promoting sectional interests. In such
a context, the auditing guidelines are best regarded as gambits in the
exercise of power which seek to privilege some meanings of auditing
practices and prioritize the concerns of major firms.
NOTES
Earlier versions of this paper were also presented at the EIASM Audit Workshop,
Copenbagen, September 1991, a seminar at Copenhagen Business Scbool, Febru-
ary 1992, and the 1992 UK Audit Conference, Bristol Business Scbool, April 1992.
I gratefully acknowledge the perceptive and belpful comments made by colleagues
and participants. I am particularly grateful to Richard Laugblin, Anne Loft, Tony
Lowe, Hugb Willmott and an anonymous referee for their constructive comments
and suggestions.
1 In the case of Lloyd Cheyham & Co. v Littlejohn & Co. (1985), the auditors
cited Statement of Standard Accounting Practice 2 and the accrual concept
to defend their audit approach successfully (as reported in Accountancy,
February 1986; Accountancy Age, 16 January 1986).
2 From April 1991, the APC has been replaced by the Auditing Practices
Board (APB). One of its very first acts was to ratify all extant auditing
pronouncements.
3 The concept of a discourse owes its origins to French social scientist, Michel
Foucault. A discourse does not consist of one statement but of several state-
ments to form what Foucault calls 'discursive formations'. It is a way of
thinking, discussing or representing a particular topic. A discourse can be
produced by many individuals/institutions in different settings. Discourses are
not closed systems and tend to draw on elements from other discourses,
binding them into its own network of meanings, Helpful discussion of Fou-
cault's ideas will be found in Cousins and Hussain (1984).
There is considerable dispute about whether a discourse is similar to 'ideol-
ogy', Foucault rejects the term 'ideology' on the grounds that it makes distinc-
tion between true and false statements. He argues that statements about tbe
world are rarely ever 'true' and/or 'false'. However, discourses do and can
combine to shape world-views and seem to function as 'ideologies'. These
aspects are discussed in Hall, Held and McGrew (1992).
4 A letter from the APC, dated 10 December 1986.
5 The APC was a division of a private limited company, CCAB Limited (same
arrangements apply to its successor body, the APB). Through CCAB Ltd,
the UK accountancy bodies act on matters of common interest. Its shares are
held as follows:
The Institute of Chartered Accountants in England & Wales

(ICAEW) 51.7%
The Chartered Associaton of Certified Accountants (ACCA) 17.2%
The Chartered Institute of Management Accountants (CIMA) 14.7%
The Institute of Chartered Accountants of Scotland (ICAS) 7.3%
The Chartered Institute of Public Finance and Accountancy
(CIPFA) 6.0%
The Institute of Chartered Accountants in Ireland (ICAI) 3.1%
6 The 'subject to' type of audit reports are of American origin. Their use has
been criticized by the Cohen Commission, describing them as difficult to
understand, ambiguous and confusing (AICPA, 1978: 25),
7 Often known as 'U' statements, after the section in which they appeared in
the ICAEW handbook.
8 Letter dated 26 September 1986.
9 Letter dated 6 October 1986.
10 Letter dated 21 November 1986.
11 Letter dated 17 December 1986.
14 In this respect, the view expressed by the Chartered Association of Certified
Accountants (ACCA), one of the APC's governing bodies, may be of interest
(letter dated 27 November 1987). Its secretary wrote:
we are concerned primarily with the progress and effectiveness of that Committee's
work, and less with the intellectual routes travelled by the Chairman and members
in arriving at their conclusions.
15 In December 1991, the Auditing Practices Board (APB) announced its inten-
tion to revise the going concern auditing guideline. The socio-political con-
ditions leading to this are not the subject of this paper. Ray Hinton, the
chairman of the original working party, is reported as having said, that he
strongly supports a move away from the present 'passive' stance. Further he
is quoted as having said:
When we drafted the present guidance it was only if a concern actually hit you
between the eyes that you had to do something.
{New Accountant, 13 January 1992: 2)
Referring to the possible new guideline, the new chairman of the working
party is quoted as having said:
In practice many auditors already undertake these [going concern evaluation} proce-
dures. I don't expect there to be a substantial amount of extra work.
{Accouniancy Age, 6 February 1992: 3)
16 As per a letter from the Secretary of State for Trade and Industry, dated 19
October 1989.
APPENDIX: A LETTER SHOWING THAT THE APC BALLOTED ITS

MEMBERS
AUDITING PRACTICES COMMITTEE
P.O. Box 433,
Moorgate Place,
London EC2P 2BJ
Tel: 01-628-7060
Our Ref: AR/RC/PJW APC 12-39P
To: All members of the

Auditing Practices Committee 23 April 1985
DRAFT AUDITING GUIDELINE:

THE AUDITOR'S CONSIDERATIONS IN RESPECT OF GOING
CONCERN
I enclose a copy of the above draft audititig guideline which was approved
by APC at the meeting on 25 March 1985. Amendments which have been
made since that date are identified by barlines.
The principal amendment is to the example of a qualified audit report
(paragraph 28). This has now been expanded so that all the material
matters giving rise to the qualification are referred to in the report. In
particular, the basic facts concerning the negotiation of vital financing
arrangements are now stated.
I enclose also a ballot paper for approval for pubhcation of the guideline.
Please will you complete this and return it to me by 7 May 1985.
Alun Richards
Secretary
Enc.
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Audit policy making in the UK

Article in European Accounting Review · December 1992

Corporate governance View project

Theory Innovation for Corporate Governance View project

The user has requested enhancement of the downloaded file.

Audit policy making in the UK

Address for correspondence

promoting the interests of [their] members' (Certified Accountant,

Despite being described as 'fundamental', the implications of the concept

Developmg Contents Underlying

The social Defining Protecting Legitimizing

Figure 1 Structure of the paper

Context of the Auditing Practices Committee

processes which seek to tnobilize support for some preferred alternatives.

UNDERSTANDING AUDIT POLICY MAKING

Ideologies are not exclusively a consciously held set of beliefs, but

THE GOING CONCERN AUDITING GUIDELINE: A SUMMARY

Consider the miligaiing

Issue an unqualifed audit

Figure 2 Flowchart summary of the auditing guideline The

which assets need to be stated at a liquidation (or some equivalent) value

THE AUDITING PRACTICES COMMITTEE

Table I Major accountancy firms and their domination of the APC

Firms Autumn Winter Spring Winter Spring Sept.

DEVELOPING THE GOING CONCERN GUIDELINE

The social, economic and political context

The consultative process

decisions on the running of a profession in which they have a vital economic

Table 2 Respondents to the draft auditing guideline

Respondents Criticisms Prior

appointed on 6 April 1983 to investigate the affairs of the Greenbank

UNDERSTANDING THE CONTENTS OF THE AUDITING

Meaning of the foreseeable future

One respondent (number 24 in Table 2) opposed the APC's formulation

Table 3 Advocacy of foreseeable future in submissions to the APC

The APC's definition was supported by major firms, such as Thornton

in litigation and/or DTI criticisms in the aftermath of a business ceasing

Points of principle Response

paragraph 5 of the exposure draft as represent adequately the consensus of

Symptoms of going concern problems

Additional auditing procedures

Table 4 Going concern problem indicators: a comparison of the American and

AICPA (SAS 34) APC

AICPA (SAS 34) APC

These include examination of company plans, budgets and forecasts. Even

have been effectively authenticated by the auditors and pose threats to

make savings on training and exchange of personnel. Following such

To sum up, the guideline advocated additional auditing procedures

Table 5 Mitigating factors: comparision of the American and British

AICPA (SAS 34) APC

AICPA (SAS 34) APC

the uncertainties should be disclosed in the notes to the accounts. If the

Pannell Kerr Forster considered the 'disclaimer of opinion' to be inappro-

THE UNDERLYING AGENDA: PROTECTION FROM LAWSUITS

Concerns with liability and litigation

company with a clean audit report ceasing to be a going concern. For a

PASSIVE APPROACH TO GOING CONCERN AND MINIMUM

profession could have articulated and legitimized the 'active approach'.

According to a working party member, the most important message

Points of principle Response

itiformation was requested frotn the Chartered Association of Certified