Reaching Key Financial Reporting Decisions: How Directors and Auditors Interact


The regulatory framework for financial reporting, auditing and governance has changed radically in recent years, as a result of problems identified from the Enron scandal and more recently from the drive to implement global standards. In a key regulatory change, a company audit committee is now expected to play a significant role in agreeing the contents of the financial statements and overseeing the activities of the auditors. Finance Directors, Audit Committee Chairs and Audit Engagement Partners are required to discuss and negotiate financial reporting and auditing issues, a significant process leading to the agreement of the published numbers and disclosures, and to the issuing of the auditor's report which accompanies them, but which is entirely unobservable by third parties.

Reaching Key Financial Reporting Decisions: How Directors and Auditors Interact is a fascinating, behind-the-scenes examination of this closed process. The authors draw on the results of face to face interviews, and an extensive survey of finance directors, audit committee chairs and audit partners, and present nine company case studies highlighting the process of discussion and negotiation and the methods by which the agreed financial reporting outcome was reached. Detailed analysis of the case studies:

• Allows those involved in the process to benchmark their behaviours against those of others
• Enables a comparison between the previous and current regulatory environments to see what has changed, and sheds light on the sorts of behaviours the current regulatory framework encourages
• Evaluates the effectiveness of the changed regulatory regime, providing evidence relevant to current policy debates concerning the value of audit, IFRS and the relative merit of rules-based versus principles-based accounting standards in relation to professional judgement and compliance

The unprecedented access and unique insights offered by this book make it invaluable for audit firm staff and partners, audit committee chairs and company directors involved in agreeing the published financial statements, as well as those who have an interest in the financial statements, but do not have access to the negotiation process.

Vivien Beattie is Professor of Accounting and Director of Research at the Business School, University of Glasgow. She is a member of the Accounting Standards Board's Academic Panel, a member of the Accounting Standards Committee at The Institute of Chartered Accountants of Scotland and was a panel member for Accounting and Finance in the 2008 Research Assessment Exercise conducted in the UK. She has published over 100 academic journal articles, research reports, books and professional articles. Her co-authored research book Behind Closed Doors: What Company Audit is Really About was awarded the prestigious Deloitte/American Accounting Association Wildman Medal in 2007.

Stella Fearnley BA FCA is Professor in Accounting at the University of Bournemouth Business School. Stella spent 16 years with Price Waterhouse and Grant Thornton before becoming an academic. Her research interests cover audit and financial reporting and she has received over £700,000 funding. She has published over 100 articles in professional and academic journals and national newspapers and is co-author with Vivien Beattie of Behind Closed Doors. Stella was a member of the UK Financial Reporting Council's Professional Oversight Board from 2004 to 2009 and was an elected member of the ICAEW Council from 1992 to 2004.

Tony Hines MSc FCA is Head of the Department of Accounting and Finance at Portsmouth Business School. He trained with Coopers and Lybrand and became an academic shortly after qualifying as a chartered accountant. Tony's main research interests are the Financial Reporting Review Panel and the regulation of financial reporting and audit and he has published widely on these issues.

List of Figures
List of Tables
Foreword by Peter Wyman


1 Introduction and Background
1.1 What This Book is About
1.2 Recent Regulatory Changes
1.3 Contribution of This Book in the 2010/2011 Regulatory Environment
1.4 Research Approach
1.5 Outline of Book
1.6 Key Findings and Conclusions

2 Review of Relevant Literature
2.1 Overview
2.2 Regulation
2.3 IFRS
2.4 Audit Quality
2.5 Enforcement
2.6 Corporate Governance and the Role of the Audit Committee
2.7 Interactions and Negotiation in Non-Audit Settings
2.8 Interactions and Negotiation in Audit Settings

3 The Survey
3.1 Overview
3.2 Methods
3.3 Findings
3.4 Interaction Issues
3.5 Financial Statement Changes
3.6 Summary


4 Case Studies
4.1 Introduction to the Case Studies
4.2 How the Case Companies were Selected and Approached
4.3 Broad Approach to the Grounded Theory Analysis
4.4 Writing Up Each Case (Matched Set of Interviews) -The Stories
4.5 Preliminary Within-Case Analysis: Attaching Labels to the Key Categories
4.6 Within-case Analysis
4.7 Tabular Summary of Cases

5 Case 1-Sandpiper plc
5.1 Background to the Case
5.2 Corporate Governance
5.3 Key Interactions Between Stuart, Duncan and Patrick
5.4 Contextual Factors and Analysis of the Interactions
5.4.6 Financial Reporting Interaction: Pension Liabilities
5.5 Conclusions

6 Case 2-Kestrel plc
6.1 Background to the Case
6.2 Corporate Governance
6.3 Key Interactions Between Philip, Guy and Barry
6.4 Contextual Factors and Analysis of the Interactions
6.5 Conclusions

7 Case 3-Mallard plc
7.1 Background to the Case
7.2 Corporate Governance
7.3 Key Interactions Between Jack, Paul and Gerald
7.4 Contextual Factors and Analysis of the Interactions
7.5 Conclusions

8 Case 4-Finch plc
8.1 Background to the Case
8.2 Corporate Governance
8.3 Key Interactions Between Ben, Robert and Damien
8.4 Contextual Factors and Analysis of the Interactions
8.5 Conclusions

9 Case 5-Cormorant plc
9.1 Background to the Case
9.2 Corporate Governance
9.3 Key Interactions Between William, Dave and Simon
9.4 Contextual Factors and Analysis of the Interactions
9.5 Conclusions

10 Case 6-Pochard plc
10.1 Background to the Case
10.2 Corporate Governance
10.3 Key Interactions Between Peter, Alan and Henry
10.4 Contextual Factors and Analysis of the Interactions
10.5 Conclusions

11 Case 7-Woodpecker plc
11.1 Background to the Case
11.2 Corporate Governance
11.3 Key Interactions Between Richard, Horace and Edward
11.4 Contextual Factors and Analysis of the Interactions
11.5 Conclusions

12 Case 8-Raven plc
12.1 Background to the Case
12.2 Corporate Governance
12.3 Key Interactions Between Trevor, Norman and Ivan
12.4 Contextual Factors and Analysis of the Interactions
12.5 Conclusions

13 Case 9-Ostrich plc
13.1 Background to the Case
13.2 Corporate Governance
13.3 Key Interactions Between Matthew, Victor and Luke
13.4 Contextual Factors and Analysis of the Interactions
13.5 Conclusions


14 Views of Interviewees on the Regulatory Framework
14.1 Introduction
14.2 Financial Reporting Issues
14.3 Auditing Issues
14.4 Corporate Governance
14.5 Summary

15 Attributes and Procedures of the Audit Committee and the Audit Committee Chair: Evidence
15.1 Overview
15.2 The Audit Committee
15.3 The Role of the Audit Committee Chair
15.4 Issues Discussed at Audit Committee Meetings
15.5 Conclusions and Contribution to the Academic Literature

16 Cross-case Analysis and Theory Development
16.1 Introduction
16.2 Summary of Interaction Attributes
16.3 Summary of Cross-case Analysis
16.4 A Revised Grounded Theory of Financial Reporting Interactions -Overview
16.5 General Company/Audit Firm Context
16.6 Specific Context
16.7 International Regulatory Regime
16.8 National Regulatory Regime
16.9 Interactions (Core Category)
16.10 Outcome Determinants
16.11 Comparison with Extant Literature

17 Conclusions
17.1 Overview
17.2 The Regulatory Setting
17.3 Evidential Base and Structure of Findings
17.4 The Nature of Financial Reporting Interactions Between FDs, ACCs and AEPs
17.5 The Interaction Process
17.6 Interaction Outcomes
17.7 The Regulatory Framework
17.8 The ACC and the Audit Committee
17.9 Policy Implications
17.10 Limitations and Implications for Future Research and Regulatory Interest