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Regulation and the Promotion of Audit Ethics: Analysis of the Content of the EU’s Policy

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Abstract

Accounting literature has commonly judged the impact of regulation on auditors’ ethical commitment by studying daily audit practice. We argue that the content of the regulations themselves is an important determinant of such an impact. This paper evaluates the capacity of the content of regulation to promote audit ethics by reference to the European Union’s (EU) audit policy. Anchored in the extant conceptual perspectives on ethics, our analysis of relevant policy documents shows that the EU’s approach to audit ethics relates most strongly to the deontological perspectives on ethics and leaves largely unexplored other means of promoting auditors’ ethical stance, such as by stimulating virtue ethics. We find that it is the EU regulators’ restricted view of the conceptual foundations of audit ethics that limits the capacity of their policy to effectively stimulate auditors’ ethical commitment. The paper also discusses the potential implications of our analysis for the design of future audit policy.

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Notes

  1. One example is the multi-billion negligence claim by the British insurer Equitable Life against Ernst and Young in 2008.

  2. The collapse of the US energy giant Enron and the subsequent bankruptcy in 2002 of Arthur Andersen, the company’s auditor accused of a major breach of professional ethics, led to arguably the greatest turmoil in the history of the audit profession. Such was the impact of the Enron scandal on the profession’s reputation that already the following year the European Commission announced its plans (European Commission 2003) to introduce measures to tackle the problem of low perceived standard of audit quality and ethics, which eventually led to the issuance of the significantly revised Eighth Company Law Directive.

  3. Some latest revisions, for example, concern changes addressing conflicts of interest faced by professional accounts as well as a breach of the Code’s requirements. See the 2013 Handbook of the Code of Ethics (IFAC 2013).

  4. See http://www.icaew.com/en/technical/ethics/icaew-code-of-ethics/ifac-issues-revised-code-of-ethics.

  5. Professional negligence can be defined as an ‘act or omission which occurs because the person concerned [auditor] has failed to exercise the degree of professional care and skill, appropriate to the circumstances of the case’ (ACCA 2009, p. 1).

  6. The system means that an auditor can be required to pay the entire amount of damages irrespective of whether the damages were caused by the unprofessional audits or by the wrong-doing of other parties, such as the company’s management.

  7. Proportionate liability means an auditor can be asked to compensate for the damages caused which is in proportion to the degree of his/her culpability.

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Authors and Affiliations

  1. Manchester Accounting and Finance Division, The University of Manchester, Crawford House, Oxford Road, Manchester, M13 9PL, UK

    Anna Samsonova-Taddei & Javed Siddiqui

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  1. Anna Samsonova-Taddei
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  2. Javed Siddiqui
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Correspondence to Anna Samsonova-Taddei.

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Samsonova-Taddei, A., Siddiqui, J. Regulation and the Promotion of Audit Ethics: Analysis of the Content of the EU’s Policy. J Bus Ethics 139, 183–195 (2016). https://doi.org/10.1007/s10551-015-2629-x

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