Clash of corporate governance logics obscuring auditor independence

• DOI: http://doi.org/10.1111/ijau.12164
• Published date: 01 July 2019
• Date: 01 July 2019
• Author: Gunilla Eklöv Alander

ORIGINAL ARTICLE

Clash of corporate governance logics obscuring auditor

independence

Gunilla Eklöv Alander

Stockholm Business School, Stockholm

University, Stockholm, Sweden

Correspondence

Gunilla Eklöv Alander, Stockholm Business

School, Stockholm University, Stockholm,

Sweden.

Email: gea@sbs.su.se

Audit committees are regarded by regulators as beneficial for improving audit

independence and are hence globally enforced. This study aligns with research that

questions whether audit committees function well in nations that differ from the

Anglo‐Saxon model. The aim of the study is to examine if the auditor and audit com-

mittee relationship conforms with a Swedish or Anglo‐Saxon logic, and to analyze the

impact on auditor independence. A critical discourse analysis is undertaken on corpo-

rate governance reports and three dimensions of logics are found: one complying

with Swedish logic (compliance) and two according to Anglo‐Saxon logic (varieties

of subordination). The study indicates that the discourse on audit committees follow-

ing an Anglo‐Saxon logic in this national setting constructs a power relation with the

auditor that hampers the auditor's independence, and hence, that auditor indepen-

dence is context bound. The importance of the composition of the audit committee

and its members independence also from larger owners is discussed. The study con-

tributes to research that marks the importance of a better understanding of national

jurisdictions before international harmonization can be achieved.

KEYWORDS

audit committee, auditor independence, corporate governance, critical discourse analysis,

epistemic independence, harmonization, subordination

1|INTRODUCTION

Auditors must be independent, or else their services will be to no avail.

Although this is widely accepted, independence in auditing has been

difficult to maintain. Consequently, numerous regulatory efforts, like

the US Sarbanes–Oxley Act (SOX) legislation and the recently enforced

EU audit reform (EC, 2014a; EC, 2014b), have been launched to protect

auditor independence. Audit committees are emphasized in these

efforts, because of their conceived ability to restore audit quality,

independence and professional skepticism. Audit committee oversight

over auditors has been found to work relatively well in an Anglo‐Saxon

post‐SOX environment when looking at typical effectiveness criteria

(Beasley, Carcello, Hermanson, & Neal, 2009; Beattie, Fearnley, &

Hines, 2013; Bédard & Gendron, 2010; Carcello, Hermanson, & Ye,

2011). This is why audit committees have been promoted by

regulators as a way to pursue international harmonization in corporate

governance. However, whether such committees also work in

other parts of the world is still an open question. Humphrey and

Moizer (2008, p. 270), for example, called for auditing academics to

treat extraterritorial reaching regulations with “analytical skepticism,”

because differences in national practices and traditions make

international harmonization difficult to achieve. Moreover, transposing

Anglo‐Saxon governance practices to different jurisdictions may cause

challenges to practitioners in these other jurisdictions(cf. Dobija, 2015).

One area in which regulation with international reach may be inef-

fective at the national level is auditor independence. Auditor indepen-

dence, in terms of an unobservable state of mind and autonomy, is

argued to be impossible whenever economic aspects, such as remuner-

ation and appointment issues, are primarily in the charge of manage-

ment (Kosmala & Sucher, 2006; Young, 2006). Auditor independence

is thus to be strengthened by separating auditors from the management

of the client (Blue Ribbon Committee, 1999; Krishnamoorthy, Wright,

Received: 15 May 2017 Revised: 11 February 2019 Accepted: 2 April 2019

DOI: 10.1111/ijau.12164

336 © 2019 John Wiley & Sons Ltd Int J Audit. 2019;23:336–351.wileyonlinelibrary.com/journal/ijau

& Cohen, 2002). Whereas audit committees may be a remedy for

auditor independence in the Anglo‐Saxon context, other jurisdictions

differ in terms of both the design of corporate governance and the

assignment and remuneration of external auditors in ways that may

jeopardize auditor independence.

The argument is thus that there are important differences between

corporate governance in different jurisdictions that need to be taken

into account while proposing regulatory changes within this area. This

paper compares Anglo‐Saxon and Swedish corporate governance.

Anglo‐Saxon corporate governance, with its dispersed ownership

and management control, differs from jurisdictions distinguished by

concentrated ownership and private blockholder control, such as

Sweden (Eilifsen & Willekens, 2008; Henrekson & Jakobsson, 2011).

Through control by blockholding, management is under surveillance

by the board, and this model dominates in “virtually all other

countries”outside of the Anglo‐Saxon jurisdictions (Henrekson &

Jakobsson, 2011, p. 2). Swedish corporate governance practices follow

along the line of German traditions, with a concentrated ownership

structure, constituted by many small shareholders alongside one or a

few dominating owners, and a civil law jurisdiction (Weimer & Pape,

1999). However, the EU has largely moved the eurozone harmoniza-

tion towards the Anglo‐Saxon model of corporate governance (Collier

& Zaman, 2005) and even “towards the approach to regulation

adopted in the US”(Humphrey & Moizer, 2008, p. 262). In line with

this development, two conflicting logics in the Swedish corporate gov-

ernance system have been identified: one influenced by Swedish

values such as capital preservation, traditionally drawn from a German

approach to governance, and the other by an Anglo‐Saxon approach

to governance that focuses on capital distribution to investors (Johed

& Catasús, 2015). These logics may be seen as effects of the ways in

which companies in a jurisdiction answer to regulatory strives for

harmonization. It is thus important to study if these two logics also

have different effects on auditor independence.

In order to bring clarity upon this issue, the aim of the study is to

examine whether the relationship of the auditor and audit committee

in Swedish large listed companies conforms with a Swedish or Anglo‐

Saxon logic, and to analyze the impact on auditor independence when

the relationship is affected by an Anglo‐Saxon logic. This aim links to

the argument that the ability of the auditing profession to govern itself

has decreased rapidly, and the extensive development of audit commit-

tee oversight is one example (Humphrey, Kausar, Loft, & Woods, 2011).

First and foremost, auditors ought to be independent and their opinion

rendered through an inspection based on professional skepticism. But

the basic question in the current regulative environment in many juris-

dictions turns out to be: Independent in relation to whom? The answer

to this question may involve a discussion of auditor independence not

only in relation to management, but also in relation to the audit commit-

tee. In order to pursue this aim, a critical discourse analysis (Chouliaraki

& Fairclough, 1999) has been undertaken on corporate governance

reports (CGRs) for 4 years (2008–2011) in large listed entities on the

Large Cap list of the Nasdaq OMX Stockholm stock market, towards

the backdrop of a comparison of US and UK versus Swedish corporate

governance regulations. This paper presents findings indicating that

audit committees following an Anglo‐Saxon logic in Sweden may ham-

per auditor independence and consequently threaten the auditor's abil-

ity to perform a high‐quality audit. The paper indicates that measures to

change auditors' contact interface from management to audit commit-

tees, as is the case in the enforced EU auditor regulation, may merely

escalate the independence dilemma instead of solving it and that this

dilemma may be jurisdictionally dependent.

This study aligns with the growing literature on an audit commit-

tee's role in corporate governance (Beasley et al., 2009; Beattie,

Fearnley, & Hines, 2012; Bédard & Gendron, 2010; Carcello et al.,

2011; Cohen, Krishnamoorthy, & Wright, 2004; DeZoort, Hermanson,

Archambeault, & Reed, 2002; Gendron & Bédard, 2006; Gendron,

Bédard, & Gosselin, 2004; Turley & Zaman, 2004). The study aligns with

research that questions regulatory efficiency to improve audit quality

and auditor independence (Eilifsen & Willekens, 2008; Humphrey &

Moizer, 2008; Malsch & Gendron, 2011), specifically through the use

of audit committees (Beasley et al., 2009; Young, 2006). It answers to

calls for research on how “the new governance and auditing rules

affects audit”(Eilifsen & Willekens, 2008, p. 12), and on audit commit-

tees from “jurisdictions which do not follow the Anglo‐Saxon model of

corporate governance”(Bédard& Gendron, 2010, p. 175). The changes

to the role of the auditor and audit committee invoked by the EU audit

reform legislation has effects all over Europe, as well as in Sweden.

However, this reform does not jeopardize the findings of this study.

1

The paper is structured in the following way. In Section2, the differ-

ences between US, UK, and Swedish corporate governance, with perti-

nence for the study's purpose, are outlined. This section ends with a

formalization of the properties essential for constituting the auditor's

independence in relation to the audit committee in Sweden. In Section

3, previous research on the role of the audit committee is discussed in

relation to auditor independence. Section 4 describes the method

employed: the critical discourseanalysis, how companies were selected,

and the coding performed to analyze the CGRs. Section 5 presents the

findings from the interpretation of the discourse and how auditor inde-

pendence is constructed. Finally,in Section6, the findingsare discussed

and followed by conclusions and suggestions for further research.

2|SWEDISH AND ANGLO‐SAXON

CORPORATEGOVERNANCEREGULATION

COMPARED

This section provides a comparison of differences in Anglo‐Saxon and

Swedishcorporate governance practices,especially the role of the board

and the audit committeeand their importance with respect to the ability

for the auditor to independently execute the audit. The comparison

of the USA and the UK vis‐à‐vis Sweden is summarize d inTable 1.

2.1 |Responsibility for financial statements, auditor

appointment, and compensation

In the USA, management is responsible for the financial statements,

with oversight by the board and its audit committee (Public Company

EKLÖV ALANDER 337