Auditor Independence within An Auditing Analysis Situs: Topology of Places as factor for enhancing auditor independence, competence, and audit quality, between the global and local
Topological Approach to Audit Dynamics, Focused on Auditor Independence, Competence and Audit Quality through Qualitative quantity methodology and Topological Data Analysis
Philosophy of Science for Social Science PhD course
Lund University, Faculty of Social Science
The substantive concern of the present paper is with the multidimensional concept of auditor independenceAuditor Independence: Refers to the International Standards For The Professional Practice Of Internal Auditing of The Institute of Internal Auditors (IIA): 1100 — Independence and Objectivity (1110: Organizational Independence; 1111: Direct Interaction with the Board; 1120: Individual Objectivity); 1130 — Impairment to Independence or Objectivity; 1200 — Proficiency and Due Professional Care (1210: Proficiency; 1220: Due Professional Care; 1230: Continuing Professional Development). related with auditor competence, ethics and audit quality, within the independent and objective human evaluation process that aim to establish the adherence to certain norms and results in an opinion or judgment, a process defined as auditing.
The objective of the paper is to emphasize on the need of, and importance of, investigation of the spatiality impact (place and places) on financial reporting, auditing and assurance, with a focus on the auditor independence. The role of place and multiplicity of space, the spatial dimensions of economy, business and financial landscape, significantly impact audit quality and auditor independence. Although the impact of legal environment, laws and regulations that vary greatly between jurisdictions and geographical locations is widely recognized, the role of the place as factor for auditor independence is not well researched and there are not findings available and developed in auditing research.
The aim of the present paper is to open a discussion on how audit can be unfold as spatial phenomena and practice, to contribute to an enhance understanding of the concept of auditor independence, and to provide for the straightening of awareness of auditor independence.
This paper implements a topological approach to auditor independence within audit dynamics and auditing research, emphasizing on the impact of space and place on auditor independence, the spatial impact on auditing situated between the transgressing boundaries of economic and business landscape, where audit and auditor is placed or displaced into the context of local-global transitions, national-international.
Through its Latin root (locus) and Greek root (topos), place already etymologically informs locational and topological analysis. Topological turn in social science, topological philosophy (topological thinking and meaning making) and topological approach to social and cultural dynamics (Lury C., Parisi L. and Terranova T., 2012), suggest not only metaphorical uses of topology, but address topology as mathematical discipline (Analysis Situs), and the opportunity to utilize the advance development of field, such as Topological Data Analysis (based on the new topological constructs called “simplicial complex”, “persistent homology”, “barcode”). Topological thinking, topological metaphors and topological (mathematical) models of categories such as quality and quantity, time and space, provide methodological arguments and tools for empirical findings related with the research theme and hypothesis — Topology of space and places are factor for enhancing auditor competence and independence, auditor’s ethics and audit quality.
Topology is a major area of mathematics concerned with properties that are preserved under continuous deformations of objects, such as deformations that involve stretching, but no tearing or gluing. In topology, any continuous change which can be continuously undone is allowed. So a circle is the same as a triangle or a square, because one can just ‘pull on’ parts of the circle to make corners and then straighten the sides, to change a circle into a square. Then one can just ‘smooth it out’ to turn it back into a circle. These two processes are continuous. During each of these two actions, nearby points at the start are still nearby at the end. In topology we can transform a spatial body such as a sheet of rubber in various ways which do not involve cutting or tearing. We can invert it, stretch or compress it, move it, bend it, twist it, or otherwise knead it out of shape. Certain properties of the body, the properties of the “qualitative quantity’ (Dimitrov B., 2012), will in general be invariant under such transformations, which is to say under transformations which are neutral as to shape, size, motion and orientation. The “qualitative quantity transformations’ can be defined as being those which do not affect the possibility of our connecting two points on the surface or in the interior of the body by means of a continuous line.
Our world is undergoing profound change due to the advanced research in topology and significant importance of topological thinking and topological meaning making. Topology itself is the science of the change. Topology is extremely applicable to the complex dynamics systems. The unique and modern treatment of topology today is employing a cross-disciplinary approach.
Topology has been transformed from a theoretical field that highlights mathematical theory to a subject that plays a growing role in nearly all fields of scientific investigation.
Within the current audit dynamics and evolutionary economic geography, and transformation of national audit markets under the impact of new regulation, financial crisis fluctuation and leaps of scandals of financial markets, transgression of boundaries between global and local, the major challenge for the auditors, auditee and society is the auditor independence, auditor competence, auditor ethics and audit quality. This challenge could be faced with coherence of spatial and temporal dimensions of audit, the time and place optimization of auditor pathways in auditing universe, scrutinizing of auditing horizon, emphasizing on how the impact of the spaces and places could straighten auditor independence.
I. The rational of the proposed approach: Auditor Competence as a Knowledge precedes Auditor Independence
The rational of the proposed approach is grounded on the understanding that auditor knowledge or in other words auditor competence is the core of auditor independence. Tom Lee and Mary Stone held that auditor competence necessarily precedes auditor independence.
Lee and Stone argued that auditor cannot choose to be independent unless is competent and concluded that auditor competence is a priory condition for auditor independence. The arguments supporting the thesis of Lee and Stone unfold the conclusion that “the greater the probability of auditor competence, the greater the probability of auditor independence” and alternatively “the greater the probability of auditor incompetence, the greater the probability of auditor dependence.” (Lee T, Stone M, 1995, 2006, 1173)
Lee and Stone examined the definition of auditor competence provided by Dreyfus and Dreyfus (1986) to auditing, which definition states that the competence of auditor is “state of expertise sufficient to achieve explicit audit objective’. (Dreyfus H.L., and Dreyfus S.E., 1986) According to Dreyfus and Dreyfus, expertise is a continuum which moves, via a process of learning, from one pole of “knowing that’ to another of “knowing how’ — from knowledge of and dependence on rules to a state of intuition.
Setting “knowledge’ and “competence’ as the core of auditor independence, we must emphasize on the idea of the “local’ knowledge, due to the fact that auditor independence is not an abstract phenomena but spatialized. A term “local knowledge’ is coined by the English philosopher Gordon Ryle, and popularized by the American anthropologist Clifford Geertz (1983).
As Trevor J. Barnes states in his study The place of locational analysis: a selective and interpretative history (Barnes T, 2003), “Local knowledge is the notion that first, all knowledge is geographically and historically bounded in terms of its generation, and, second, that the local conditions of its manufacture affect substantively the nature of the knowledge produced. In this context, local refers to the conditions in which knowledge is produced, and not the geographical domain to which knowledge applies. Einstein’s theory of the universe, for example, is a piece of local knowledge, even though the theory’s explanatory province is infinitely large.” (Barnes T, 2003, 73).
In his discussion Barnes refer to David Livingstone (Putting Science in Its Place: Geographies of Scientific Knowledge, 2003), stating that “first, knowledge is historically constrained, and produced within particular material settings that include, for example, individual geographical sites, particular kinds of human bodies, and even specific building types, machines and equipment (Livingstone, 2002: 7–40). The key word is ‘produced’, which contrasts with the discovery view of knowledge (meaning literally to ‘uncover’). In the discovery approach, knowledge is presumed already to exist, requiring only the correct conditions to be revealed. To say that knowledge is produced, however, suggests something different: that there is an active process of creative construction ‘on site’ according to specific local rules and inputs.” (Barnes T, 2003, 73). In his second argument line, Barnes refer to Donna Haraway’s Simians, cyborgs, and women: the reinvention of nature (1991), stating that “Second, material and historical settings, and corollary social interests, enter into the very lineaments of knowledge itself. Producing knowledge is a social activity. Knowledge does not come from heavenly inspiration, but from engaging in particular kinds of social practices that are historically and geographically variable. Donna Haraway (1991: 95) writes that knowledge does not ‘come from above, from nowhere, from simplicity’ but from ground level, from somewhere and from complexity (a point central to the wider literature of science studies” (Barnes T, 2003, 74).
Does it make a sense to speak of audit as having geography?
Similar to the culture and society, and discipline and phenomena such as economic and law, audit itself has geography, in the same way it has philosophy, sociology, phenomenology, rhetoric, psychology and ethnography. Theories and concepts from philosophy of science and social science have contributed to the methodology of auditing and yet audit methodology is distinctive as implementing specific aims.
Specific are the philosophy of audit and history of audit, culture and sociology of audit. Audit, audit institutions and auditors are not only part of society and culture, but they are society and culture itself, providing character and determinacy, competence, confidence and value.
Within the manifold of cultures and societies, multiplicity highly impacted by the particularities of space and places, the audit dynamic itself is not unaffected by the space where audit is placed. The auditors and auditing authorities face a continual struggle to assert their legitimacy, virtue, and independence within the diverse spatial environment, between global and local, and yet into very particularities of geographical space, or to use David Livingstone’s notions — sites, regions, circulations.
The idea that geographical factors and specifics of space and place have a bearing on the development of the economic, finance, finance control, accounting and auditing, has attracted research and discussion within Economic Geography and Human Geography (Relph E, 1976, Tuan Y, 1976, Soja E.W., 1985, Lefebvre H, 1991, Entrikin J, 1991, Casey E, 1993, Leyshon 1995, Leyshon A, 1997, Sack R.D., 1997, Leyshon A, 1998, Casey E, 2001, Hall S, 2010, Ek R, 2010, French, Leyshon, Wainwright, 2011, (Leyshon A, 2011, French S, Leyshon A, 2012, Ek R, & Mekonnen T, 2013, Corvellec, H, Ed., 2013), Sociology of Accounting and Auditing (Power, M, 1997, Schwndt T, 2007, Justesen and Mouritsen, Jan, 2011), Human Geography of Law (Blacksell, Watkins, Economides, 1986, Braverman I, Blomley N, Delaney D, Kedar A, 2013), yet the questions how particularities of space and place impact auditor independence, auditor ethics and audit quality, is quite novel and less investigated systematically within the areas of Auditing Research, Human Geography and Management Services Research.
The issues of auditor independence, auditor competence, ethics and audit quality, in particular, within the area of auditing research, has been insufficiently attentive to space and place, both in terms of processes and effects.
Audit follows the money flow and topology of financialization. The multidimensionality of the phenomena of auditor independence and the bearer actor or agent, the auditor could be placed within the manifold of “financializing space” (French S, Leyshon A, Wainwright T, 2011, 805) and “spacing financialization” (French S, Leyshon A, Wainwright T, 2011, 809).
The conclusion made by Shaun French, Andrew Leyshon, and Thomas Wainwright in their paper Financializing space, spacing financialization, about how current research in “financialization’ is still unaffected by geographical studies of space and place. (French, Leyshon, Wainwright, 2011), seems as conclusion relevant also to the audit and auditing research.
Discussing “financial ecologies’, French, Leyshon, Wainwright states that “fiancialization is profoundly spatial phenomenon, because it describes the search for a fiancialized spatial-temporal fix (es) for the crisis tendencies of Anglo-American capitalism.” (French, Leyshon, Wainwright, 2011, p.800). Within the area of human geography, French, Leyshon, Wainwright offers deep discussion on “financialization of everyday life’, “fiancializing space’, “spacing finacialization’.
The term and the concept of “financialization’ was coined by social scientists from a diverse range of disciplinary background to envelope the meaning and phenomena of the new social change from the period of 2007—2009 crisis. French, Leyshon, Wainwright, examines the geographies at which fiancialization is concerned to have agency and impact, addressing the space of nation state, the corporation, the households and individuals, as well as other spaces and regions within the geographical registers.
In April 2007, the Financial Times launched a new advertising campaign, with a marketing strap-line boldly proclaiming that “We live in FINANCIAL TIMES”. The new slogan brought the world business in one place, but “any doubts that we were indeed living in financial times, and that the subject of money and finance was deserving of great attention, were dissipated just a few months later as rising defaults in the US sub-prime mortgage market, as the most significant financial crisis since 1930s broke in the financial heartlands of the global financial system — the United States and the United Kingdom.” (French, Leyshon, Wainwright, 2011).
If “We live in FINANCIAL TIMES”, where about is our actual knowledge, our actual place?
French, Leyshon, Wainwright, proposed Human Geography “as a good case’, within the research need in the area of spacing financialization — “Despite the absolute growth in the numbers of academics that that could be defined as working on the geography of money or finance, they remain a small minority even within the subfield of Economic Geography, which was itself recently defined as a shortage subject in an Economic and Social Research Council graduate training recognition exercise.” (French, Leyshon, Wainwright, 2011, 815)
Based on the above discussions and conclusion, one could see how spatial thinking and particularities of space and place are relevantly impacting such notions as auditor ethics, auditor independence, audit ethics and audit quality. The “role’ of place and the specifics of “site (s)”, “region (s)’ and “circulation’ (Livingston) is shaping not only science (putting it in her place as Livingston states), but also shaping social and cultural dynamics, businesses, financial market and.. auditing. Auditing theory and practice is following the move of the international financial system, which is reproduced through the grounding of financial flow in place-specific institutional space. (Hall S, 2010, 234). These specific places of the international financial centers (London, New York), provincial financial centers, emerging markets and financial centers (Asia: China– Islamic banking — and Eastern Europe), struggling financial centers, trans-local knowledge networks between financial centers.
There are “insides from the recent geographical scholarship on money and finance that can be used to address silences by demonstrating not only how place based assets shape process of financial market making, but also by exploring the possibility for creating ‘alternative’, more progressive, ‘world’ through financial markets.” (Hall S, 2010, 235)
Events as the financial crisis from 2007 — 2008 provides the impetus for the continued growth of geographical research on money and finance (Hall S, 2010, 234). Present in the literature are consideration about geographical homogeneity of the money, finance, and audit, and auditor independence “worlds”.
The phenomenon such as auditor Independence is not the expression of some type of pre-given natural human behaviors, but a relational effect of distributed collective calculative devices (Berndt and Boeckler, 2009:543).
Auditing, in particular auditor Independence, is related with economic, money and finance constituted through social relations, and these social relations are impacting also Auditor Independence. Concepts such as “network’, “embeddedness’ are important in investigation the issue of audit and auditor independence. These networks of interaction between individuals and firms within the audit universe (and within the international financial districts and financial processes) impact auditor independence.
Audit and auditor independence and ethics are absorbed by and part of what is known as societal embeddednes. The term refers to the way in which these processes of innovation are embedded both societally and territorially. Social embeddednes refer to the ways in which cultural, social and political relations, at multiple spatial scales from the local through the transnational, shape economic activities, including audit dynamics.
Auditor Independence relationships are trust based relationships that are influenced by the unique cultural attitudes. As Sarah Hall establishes, “unique cultural attributes of financial centres such as attitude to risk, business norms and bodily performances help facilitate the development of trust-based relationships that are deemed essential for the exchange of knowledge and information within the financial markets”. (Hall S, 2010, 236)
Does audit in general, and auditor independence, auditor competence, auditor ethics and audit quality are notions and actions untouched by the local conditions?
Cordon L. Clark, the author of the book Judges and the Cities: Interpreting Local Autonomy (1985), states that “localities structure personalities” (Clark G, 1985, p.196).
In the contemporary context of auditing research and practice, the place where the audit is conducted seems to be of little or no consequence for auditor independence, but could we exempt audit from the imperatives of spatial significance?
To paraphrase David Livingstone, one shall ask — Does audit is supposed to reflect the character of the soil in which it had grown?
Auditor’s findings and reports sound, and shall sound objective and universal, in accordance with the standards, but are actually situated and profoundly embodied. National systems, regional cultures are conditions for audit placement and spatializing auditor independence.