Amsterdam Business School
New audit practices and the battle for
legitimacy within a Big 4 firm
Name: Bob Saat
Student number: 11161655
Thesis supervisor: Prof. Dr. Brendan O’Dwyer
Date: 20th of June 2016
Word count: 22566
MSc Accountancy & Control, specialization Accountancy Faculty of Economics and Business, University of Amsterdam
Statement of Originality
This document is written by student Bob Saat who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
Based on the theory of Bourdieu, obtaining legitimacy is a process affected by the field, capital, and habitus. The current pressure on and changing expectations of professional service firms gives rise to the use of data analytics as a new audit method. The focus is on a Dutch Big 4 firm that started implementing data analytics. For the analysis, the way of implementing the new practice is seen as important and it is analysed how field and habitus changes and influences the practice, and how capital is used as means to obtain legitimacy for the new practice in the firm internally. Additionally, theory on form and strategy of legitimation is used in order to gain insights in the process of legitimizing. The analysis shows how the different constructs, field, capital, and habitus, are functioning related to the implementation of data analytics. The participated firm tries to obtain symbolic capital for the new practice internally, but given the status of the implementation and adoption of data analytics, no symbolic capital is identified. The analysis shows that the firm focuses on a combination of pragmatic and moral legitimacy and the strategy used is the selection strategy. This thesis is a respond to the call of previous research of Robson et al. (2007), Andon et al (2014), and O’Dwyer et al. (2014)). The findings gain insights in the legitimation process of new audit practices, which adds to the gap in the literature.
Table of Content 1 INTRODUCTION ... 6 1.1 INTRODUCTION ... 6 1.2 DATA ANALYTICS ... 7 1.3 RESEARCH QUESTION ... 8 1.4 RELEVANCE ... 9 1.5 STRUCTURE ... 10 2 THEORETICAL FRAMEWORK ... 10 2.1 BACKGROUND THEORY ... 10
2.1.1 The audit explosion ... 10
2.1.2 The Authority for the Financial Markets ... 11
2.2 NEW AUDIT PRACTICES ... 12 2.2.1 Data analytics ... 13 2.3 LEGITIMACY ... 14 2.4 BOURDIEU’S LEGITIMACY ... 15 2.4.1 Field ... 15 2.4.2 Habitus ... 17 2.4.3 Capital ... 19 2.5 CAPITAL CONVERSION ... 20 2.6 FORMS OF LEGITIMACY ... 21 2.7 LEGITIMATION STRATEGIES ... 23 2.8 SUMMARY ... 24 3 RESEARCH METHODOLOGY... 24 3.1 RESEARCH SETTING ... 25 3.2 DATA COLLECTION ... 25 3.3 DATA ANALYSIS ... 28 4 DESCRIPTIVE ANALYSIS ... 28
4.1 IMPLEMENTING DATA ANALYTICS ... 29
4.2 ANALYSIS OF BOURDIEU’S CONCEPT OF LEGITIMACY ... 32
4.2.1 Influence of the field ... 32
4.2.2 Habitus of the company internally ... 36
4.2.3 Mobilized capital ... 39
4.3 OBTAINING SYMBOLIC CAPITAL ... 43
4.3.1 Form of legitimacy ... 43
4.3.2 Strategy obtaining legitimacy ... 45
5 DISCUSSION ... 46
5.1 INFLUENCE OF THE FIELD ... 47
5.2 HABITUS OF THE COMPANY INTERNALLY ... 48
5.3 MOBILIZED CAPITAL ... 49
5.4 OBTAINING SYMBOLIC CAPITAL ... 52
6 CONCLUSION ... 53
6.1 CONCLUSIONS ... 53
6.2 LIMITATIONS ... 54
6.3 SUGGESTIONS FOR FUTURE RESEARCH ... 55
7 REFERENCE LIST ... 55
8 APPENDICES ... 58
8.1 APPENDIX A ... 58
1 Introduction
1.1 Introduction
Since several decades, the accounting profession is subject to a lot of new regulatory mandates. This is due to fraud scandals, big embezzlements, and other felonies that can be related to accounting. As a consequence, there was (and is) a call for an enhanced system of control and there are more and more regulatory changes that focus on ensuring the right information is provided in the books. One of the changes is the increased governmental oversight of the professional service firms (Suddaby et al., 2007). An example of the actions taken to limit unwanted behaviour is the COSO report. Also, the Sarbanes-Oxley Act of 2002 can be seen as an action to limit unwanted behaviour. What is seen generally is that there is a call for an enhanced organizational governance (Ramamoorti, 2003).
Another trend is the changing demands of professional service firms. In the field of accounting, there are continuous changes and new emerging markets. There are services that are widespread used by auditors and are common knowledge within the accountancy branch, like financial statement audit and risk assurance. But there also is a need for a way to deal with new services, such as “online certification,
sustainability assurance and many more” (Andon, Free, & O’Dwyer, 2015, p. 44).
Some of these new services will become popular services in the coming years, like the gain in popularity of financial instruments in the last decades. Others will be used less and remain underdogs. However, regardless of the fact that new markets become widespread used or not, there is a need for a way to deal with the emergent services. Andon, Free & O’Dwyer state in their article that “new audit spaces are
largely improvised and adapted rather than derived from an over-arching body of knowledge” (2015, p. 44). Also, Gendron & Barrett (2004, p. 563) find that “attempts to expand the accounting profession’s domain of expertise reflect a trail-and-error process where the outcome achieved may be far from the vision that motivated the institutes into undertaking the project in the first place”. Both these quotes suggest
that the process around new audit practices lead to inefficiencies and problems and therefore require more attention.
The current way of “getting to know” the new services is to improvise and adapt to the new services. A more efficient way, of course, is to explore the new
service first and to find the ins and outs and then account for it. Unfortunately, this is, in most cases, not possible or at least not to the desired extent.
The emergence of new audit practices brings certain possibilities for firms to handle it. Andon et al. demonstrate that “new audit spaces may be primarily driven by
actors outside the mature audit field and that the capacity of professional accounting firms to adapt and colonise new audit spaces is neither unproblematic nor inevitable”
(2015, p. 3). A possibility is to use the information they have about the new practice and use it for own use. The objective then is to become an expert in that topic to obtain a dominant position in that specified market; this is what happens most of the time. Another possibility is to bundle power of all players in the market to come to the best practice to account for the new audit practices.
1.2 Data Analytics
One of those new practices is data analytics. It is a big trend within the world of fast changing technology. Cao et al. (2015) refer to [Big] Data analytics as “the process of
inspecting, cleaning, transforming, and modelling Big Data to discover and communicate useful information and patterns, suggest conclusions, and support decision making” (p. 423). It is a recent phenomenon in a fast-changing environment,
which brings along challenges, opportunities and threats. According to Yoon et al. (2015) the use of Big Data “gives auditors unique opportunities to build up
first-mover advantage and achieve economies of scale” (p. 436). However, not adapting to
changes in the environment can impact the business of a firm dramatically and consequently this trend is picked up on by professional service firms. More specifically, with the use of data analytics they try to get a better understanding of the audited firm and at the same time the goal is to improve efficiency and effectiveness of the audit.
That professional service firms, or Big 4 firms1, are involved in data analytics
and are exploring the new opportunities is evident from their individual publications or blogs (e.g. Deloitte, 2015; EY, 2014; PwC, 2015; KPMG, 2016). All of them devote a considerable amount of time on data analytics nowadays. They use data analytics as a method for auditing client’s data on a bigger scale compared to the traditional, embedded, method. This new method also attracts newspapers and others
parties to write on this change. For instance major (financial) newspapers write about the emergence, use and importance of data analytics (e.g. Financieel Dagblad, 2016; Financial Times, 2016) and more and more research is conducted in the field of data analytics (e.g. Cao et al., 2015; Yoon et al., 2015; Earley, 2015; LaValle, 2010; Tysiac & Murphy, 2015).
1.3 Research question
The current view of exploring and mastering emerging changes in terms of audit practices by Big 4 firms is highly adaptive and still a lot can be learned from the way firms acquire legitimacy. Seeking legitimacy is a complicated but important process in order to embed a practice within a firm. O’Dwyer et al. (2014) describe the aim of that legitimation process as “to justify both the work professions undertake (are the
results produced culturally valued?) and how it is undertaken (are the results produced in a culturally approved manner?)” (p. 34). Seeking legitimacy for
something new, in this case data analytics, needs widespread approval by all involving parties before this is obtained. These parties are referred to as key audiences; clients, internal world & external world (O’Dwyer et al., 2014). Those audiences are seen as “central to legitimating expansions in audit/assurance practice” (p. 35).
This thesis particularly focuses on the legitimation process of the so-called internal world, or in other words, within the firm itself. In order to find out how firms deal with new practices, this thesis has the following research question: How does a professional service firm internally deal with new audit practices? The research question specifically deals with the process of exploring and mastering a new audit practice and gaining legitimacy within the audit firm. More specifically, the process of obtaining legitimacy for data analytics within a Big 4 firm is the scope of this thesis. In order to find the answer to this research question, one of the Big 4 service firms participates in this thesis. 11 Interviews are conducted in order to formulate an answer to this question. Therefore, this thesis serves as a case specific thesis that further explores current literature on this particular topic.
1.4 Relevance
In September 2014 the Dutch Authority for the Financial Markets (AFM) issued a report regarding the audit quality of the Big 4 in the Netherlands. In this report, the AFM reports on investigations they did in a period from April 2013 until July 2014. The objective of the investigation was to find out whether or not the Big 4 firms obtained “sufficient and appropriate audit-information to base and support their
judgment on and thereby if they lived up to the professional rules” (AFM, 2014, p. 6).
They concluded that 45% of the audits were insufficient. However, they explicitly state that these “insufficient” audits are not per se marked as incorrect. What is meant is that the audits did not live up to the established rules in a sufficient way (AFM, 2014). As a consequence, it is expected that the Big 4 firms actively address this fact and thus increase their audit quality in order to drastically decrease the number of insufficient audits in the future. This is a motive for Big 4 firms to evaluate and critically assess their audit practices, their audit quality and so on. Therefore, new audit practices are interesting to focus on since they are new and thus subject to uncertainties, vagueness and more that requires attention in order to establish a good practice. Especially with the previous inspection of the AFM, Big 4 firms are even more cautious in establishing their new audit practices in order to deliver the expected quality. Therefore, looking at the process of establishing new audit practices gives insights that are resourceful for the firms themselves and ultimately for the public as a whole.
Besides the motive for more insights in Big 4 audit practices as a consequence of the findings of the AFM report, there is a gap in the literature. There are articles written on the emergence of new audit practices, but not to a large extent (e.g. Robson et al. (2007); Andon et al (2014); O’Dwyer et al. (2014)). Also, in general, there are only limited insights in new audit practices; basically since the practices are very recent and thus not much research has been done yet. For instance Robson et al. (2007, p. 412) say that “to date, there has been relatively little exploration, empirical
or theoretical, of the processes through which audit techniques change” and Andon et
al. (2014, p. 77) emphasize that “little work has focused on the ways auditors seek to
secure legitimacy within newly established audit fields”. In addition to that, O’Dwyer
et al. (2014, p.35) stated in their paper that “this latter aspect [internal audience] of
legitimacy has been largely ignored in prior research examining organizational legitimacy”. This thesis contributes to the current literature by enhancing the
understanding in the evolvement of audit practices (here: data analytics), the responses of employees, and the approach a professional service firm embraces in order to legitimize a new practice internally. In addition, the subject is interesting from an auditing point of view since obtaining insights is useful for firms; to be informed on how to deal with new audit practices within the firm now or in the future.
1.5 Structure
The remainder of this thesis will have a clear structure. First, section 2, is devoted to the theoretical framework and both sets the boundaries for this thesis and at the same time helps understand the current literature. The latter is required in order to enhance understanding of current literature. Then, in section 3, the methodology will be discussed. The chosen method will be explained and the used instruments are elaborated on and outlined. The method section is followed by the case narrative (section 4), where conducted interviews are translated into structured outcomes that help understand the process behind new audit practices. Then a discussion of the findings is presented in section 5 and this thesis will be concluded with the conclusions and limitations in section 6.
2 Theoretical framework
2.1 Background theory
In order to understand the recent changes and developments in the field, it is important to grasp the interaction and struggles that occurred the last years in the environment of auditing in general. And, more specifically, the recent interaction between the regulator AFM and Big 4 firms. Therefore, this section provides a brief overview of developments in auditing and the interaction between the regulator and Big 4 firms more recently.
2.1.1 The audit explosion
Some decades ago there was only one type of audit, the financial audit. As time passed by, the world rapidly changed in so many fields, of which the audit field was one. Since the 1980s and the beginning of the 1990s, mainly in the United Kingdom, major public sector reforms were taking place (Ferlie et al., 2007, p. 326). In that time, many users come across audits for the first time, but at a certain point of time it
is inevitable to avoid audits anymore. Power (1994) refers to this phenomenon as the “audit explosion” and is described as “[…] the growth of audit and related monitoring
practices associated with public management reform processes” (2003, p. 326).
One of the reasons for this explosion is due to the fact that in the 1980s accountancy firms grew considerably. Another indication in the 1990s, as a consequence of the previous reason, lots of young people is trained in the field relating to audit. Under these, and other, circumstances the audit explosion is generated (Power, 1994). What also changed in this period is the role of the auditor towards the role of a business advisor (Spence and Carter, 2013). For instance, they say that an auditor is considered as good whenever the auditor has satisfied clients.
More broadly, according to Suddaby et al. (2007), there is a shift in professionalism. In the old professionalism, local markets were central for doing business where in the new professionalism the global market is of importance. According to Caramanis (2002) institutions of accounting are changing due to globalisation. This general change is said to be one of the factors that influenced the change of the organizational field of professional service firms. Robson et al. (2007) outline that new products are not an outcome of changing market demands, instead they argue that new technologies on the market are consequences of “political and
cultural characteristics of an organizational field” (p. 419).
2.1.2 The Authority for the Financial Markets
This expansion of audit practices calls for a watchdog that supervises the quality of the overall services delivered by professional service firms. As introduced before, the AFM is the authority in the Netherlands that is “supervising the operation of the
financial markets since 1 March 2002” (About AFM, n.d.). The AFM is supervising
the whole financial sector, from savings to investments, so that also entails the Big 4 firms. In their annual report of 2014, the AFM states that they work with
“risk-driven” supervision (p. 34), which means that they prioritize those parts of the field
that have the biggest risk at that moment. Also, they try to anticipate to the new and upcoming risks. The different goals of a specific period can change during the period in order to keep the focus on those aspects that need supervision the most. Both the risk-driven focus and anticipation of the upcoming period is based on market
developments and risks that are analysed by the AFM (2014). In this way, the AFM makes sure that the biggest risks of that moment are supervised.
In the investigation of 2010, the AFM concluded that the audits of the Big 4 firms were insufficient, more than in 2014. From this period onwards Big 4 firms increasingly took measures in order to ensure the quality of the audits. For instance, PricewaterhouseCoopers (PwC) explicitly stated in their annual report of 2013/2014 that “the results of the AFM-investigations contradict our ambition” and as a consequence they took measures and explicitly notice their
“quality-improvement-program” and other quality measures (PricewaterhouseCoopers, 2014, pp. 27-28).
Also Ernst & Young (EY) explicitly remark, as a consequence of the 2010 investigation, that they took measures and “thoroughly evaluate[d] points raised
during the inspection […] where we can improve audit quality” (Ernst & Young,
2013, p. 39). These two examples show that the Big 4 is actively taking measures to improve the audit quality, which is also noticed by the AFM. They say in their 2014 report that they “noticed that the measures by the Big 4 […] is in intention increased,
more comprehensive and more far-reaching compared to the previous investigation”
(p. 8). So, the Big 4 seems to improve the audit quality during the years, and as an overall conclusion of the 2014 investigations, the AFM states that in the period between 2010 and 2014 there has been an increase in quality of audits investigated by the AFM. However, this increase is not as big as expected, which means that the number of insufficient audits is still too high (AFM, 2014, p. 7).
2.2 New audit practices
Like there are changes everywhere, there are changes in the field of professional service firms, or more specifically in auditing. Developments in the market, changes in technologies, and more contributes to changes in the audit market as well. These changes can cause a diversion between the current activities executed by auditors compared to the need or expectations by for instance the clients. Hayes et al. (2014, p. 58) relate to this as the “audit expectation gap”. They describe it as the “results from
the fact that users of audit services have expectations regarding the duties of auditors that exceed the current practice in the profession”. One example of changing needs or
It is a method that receives a lot of attention recently and is seen more and more as important.
2.2.1 Data analytics
Data analytics, as introduced in section 1.2, is seen as a big trend in the current world of auditing. However, since it is something that is substantially different from the traditional way of auditing, still a lot has to be discovered within this field. Many articles are written about the fact that data analytics can improve the audit of financial statements (e.g. Cao, et al, 2015; Earley, 2015; LaValle, 2010; Tysiac & Murphy, 2015). At the same time, there are lots of challenges in the field of data analytics in order master the practice. For instance, Earley (2015) outlines multiple challenges for the implementation of data analytics. First the challenge of training and expertise of auditors. Where big data sets will likely contain lots of data, both financial and non-financial data, which may outlevel the capabilities of auditors to process that data. The approach to overcome this challenge is by for instance outsourcing certain activities, or to hire people who with the suitable expertise (Early, 2015). The second challenge is the availability of data, the relevance of data and the integrity. It may be hard for clients to process all the needed data in their systems or there is a threat towards integrity whenever the duties within the system are not separated clearly. “Auditors encounter hundreds of different accounting systems and, in many cases,
multiple systems within the same company. Data extraction has not historically been a core competency within audit, and companies don’t necessarily have this competency either” (Ernst & Young, 2015, p. 11). That kind of data related challenges
can, for instance, affect the reliability of data analytics. The third outlined challenge for data analytics is related to the regulators in the field and how they see data analytics. Earley (2015) says that due to the fact that 100% of the data is audited, users of financial statements could expect a higher level of assurance and hold auditors liable more easily whenever unexpected events happen. However, with all changes come challenges, and therefore with the use of data analytics in audits as well.
Besides the challenges that are outlined in the previous paragraph, there are many opportunities for the use of data analytics and at the same time, many positive effects are found already. For instance, LaValle et al. (2010, para. 4) argue that
“Top-performing organizations use analytics five times more than lower performers”. They
found that overall the use of data analytics is providing value. The opportunities for data analytics according to Tysiac & Murphy (2015) are due to the use of 100% of the data instead of using samples of the data. At the same time, it helps to provide a better risk assessment of the client since it is possible to find anomalies and trends. Ultimately it will give the auditor a better understanding of the firm as a whole, which is beneficial during the audit in general.
2.3 Legitimacy
As explained in the previous paragraph, new audit practices cause a change in the current way of working. According to Greenwood et al. (2002, p. 59), who refer to changes as deviations, these “deviations [...] cause discomfort and trigger attempts to
justify (that is, legitimize) departures from the social norm”. Or as Ashforth and
Gibbs formulate it: “legitimacy justifies the organization’s role in the social system
and helps attract resources and the continued support of constituents” (1990, p. 177).
Therefore, firms that introduce a new practice, which causes a different way of working, need to gain legitimacy before this practice is seen as normal. It is in accordance with the theory of institutionalization by Meyer and Rowan, they say that “organizations that incorporate societally legitimated rationalized elements in their
formal structures maximize their legitimacy and increase their resources and survival capabilities” (1977, p. 352). This implies that in order to function well in a changing
environment, the firm has to gain legitimacy, both internally as externally.
According to Drori and Honig (2013, p. 347) internal legitimacy is defined as “the acceptance or normative validation of an organizational strategy through the
consensus of its participants, which acts as a tool that reinforces organizational practices and mobilizes organizational members around a common ethical, strategic or ideological vision”. In the case of this study, the focus is on internal legitimacy.
However, according to the same study, internal and external legitimacy are interrelated. They say that this holds because problems externally affect the firm in general (so internally), and thus that first needs to be solved before internal legitimacy can be attained. Therefore, in order to find out if internal legitimacy is attained, the external legitimacy, “the acceptance and validation by external stakeholders” Drori and Honig (2013, p. 346), cannot be left behind.
For this study, where the implementation program of a firm is studied, only the process of obtaining legitimacy internally is studied, as explained in section 1.3. However, since external activities affect the internal legitimacy, the external factors have to be taken into account to get a better understanding. A frequently used model to explain the concept of legitimacy is Bourdieu’s legitimacy. This theory is useful in the analysis of changes in a certain environment. The theory helps explaining how a change in the environment (in this case the implementation of data analytics) is processed in interaction with the environment and actors that have an influence on the environment. This thesis uses that concept with its three related aspects field, habitus, and capital in order to explain this concept thoroughly.
2.4 Bourdieu’s legitimacy
In order to find out and understand how legitimacy is gained in a certain environment, Bourdieu’s well-known theory helps explain how social environments can be understood and how power relations are handled with. Legitimacy is seen according to Bourdieu (1984, p. 110) as “an institution, action or usage which is dominant, but
not recognized as such, […] which is tacitly accepted”. Important terms in this theory
are field, capital, and habitus. These three main concepts will be explained in the following sections. This theory will be used as an important construct for the analysis of this thesis. More specifically, it is used as a theoretical lens to explain how the implementation of data analytics can be understood from Bourdieu’s point of view.
2.4.1 Field
Starting with the term “field”, defined by Moi (1991, p. 1021) as “a competitive
system of social relations which functions according to its own specific logic or rules”. Or as Bourdieu (1984, p. 197) defines it: “a space in which a game takes place, a field of objective relations between individuals or institutions who are competing for the same stake”. So a field is seen as an environment in which agents
seek to obtain a dominant position with the use of certain instruments.
A field is a way to label the environment in which a group of agents is acting, competing and so on. More specifically, according to Greenwood et al. (2002, p. 59) it consists of a “set of organizations that directly interact with one another or are
structure. The space in which the agents perform is affected by the agents, but at the same time, the space affects the agents. The field can be seen as the market as a whole where the firms in this field all have a piece of control, which is similar to a firm’s market share (Bourdieu, 2005). If a firm’s (relative) capital increases it will gain a bigger piece of the market. However, the impact of the capital increase depends on various factors, such as relations, within the field as a whole (Bourdieu, 2005). When there is a change in the field, the impact is bigger for those firms that are bigger, compared to the smaller firms. At the same time, the bigger firms can exercise more influence on the field as a whole because it owns more resources (capital) to do so.
All these different agents that interact in the field, combined with their various levels of capital causes struggles within the field. The agents try to obtain more and power by using their resources of power in order to obtain a piece of the market. However, the effectiveness of this depends on the way agents use their resources (capital) in order to affect the structure or to obtain more capital (Bourdieu, 2005). This will be discussed more extensively in section 4.2.1. What is important here is that the field is continuously subject to changes as a consequence of agents affecting the market with the goal to obtain a bigger piece of the market or changing factors of the field as a whole.
Even though there are many types of agents within a field, the type this thesis focuses on is the Big 4. Since the Big 4 is the dominant type in the field of professional service firms, this thesis will only focus on the motives of that kind of firms. According to Bourdieu (2005, p. 201) there are two strategies that the dominant, in this case the Big 4, can choose. Either “it can work to improve the
overall position of the field, […] or it can defend or improve its established positions within the field”. The first strategy, to improve the position of the field, is to increase
the demand of clients. This is relatively beneficial for dominant parties since it is likely that they, the Big 4, absorb more of the additionally created demand. However, at the same time, the firms should attain their current position within the firm. Ways to do so is to continuously improve the processes of the firm; lower the costs, offer lower prices, and so on. Bourdieu (2005) argues that dominant parties in a field work towards at least maintaining their position.
However, maintaining the position in the market is not as easy as it sounds. Maintaining in this sense means that firms have to defend themselves against “innovations” of other firms and “price reductions” (Bourdieu, 2005, p. 202). It is
done by using their obtained capital that is accumulated in the field because of superiority or because of experience in the field. It allows the dominant party/parties to innovate easier compared to smaller firms. As Bourdieu (2005, p. 202) puts it: “they can lower their costs and, at the same time, reduce their prices, while limiting
any reductions in their margins”, which is “making life very difficult for new entrants and eliminating at least well-equipped competitors” (p. 202). Even though dominant
players have an advantage in defending themselves, they still have to be active in their defence in terms of innovations, price reductions, and other strategies that help making life for competitors and new entrants a living hell.
2.4.2 Habitus
Within each field, there are specific rules and habits that hold for a specific field. In terms of Bourdieu, this is formulated as the “habitus”. The habitus in a field is equal to the rules of the game, the do’s and don’ts, etcetera. They are unwritten and not clear for someone to just pick up and see. Consequently, the habitus of a field is socially learned over time (Andon et al., 2014). It takes time, money, and effort for actors in the field to get familiar with the habitus of the field. Bourdieu (1977, p. 78) describes habitus as “the durably installed generative principle of regulated
improvisations, produces practices which tend to reproduce the regularities immanent in the objective conditions of the production of their generative principle, while adjusting to the demands inscribed as objective potentialities in the situation, as defined by the cognitive and motivating structures making up the habitus”.
Since habitus is not something physical and because it, most of the time, happens without being conscious of certain actions (habitus) it is hard to formulate the different habitus in a field (Hilgers, 2009). One of the reasons for it is that habitus of a field is derived from someone’s behaviour, which is indefinite. It is impossible to be completely certain of someone’s behaviour after implementing something new in the field. There can be limited certainty of the responses that one person possibly can give, but since so many people are involved it is impossible to predict the actual outcome. However, for instance for researchers and management, it can provide lots of information if more of a field’s habitus is outlined. Again, Bourdieu (1977) characterizes habitus as durable, which implies that it is lasting and thus it can help explore possible future actions of, in this case, new audit practices. But, since this
concept is complex and thus hard to conceptualize, it is of great importance to outline it clearly in theory.
One of the things that Bourdieu (1977) says about the impact of habitus is that it has a “universalizing mediation” (p. 79) effect that causes the actions of an individual and thus the practices of the actor. What is implied in this mediation effect is that the habitus is not the same as a characteristic of an actor, like charisma. Rather, it can be seen as something that exists in the field and is specific for that field. The field with its habitus influences the actors in that same field whenever they are making decisions, what causes the practices of the actors. Those actions are likely to be different when those actors would have acted in another field.
To go even one step further, according to Hilgers (2009), habitus can be seen as continuously being “in a state of permanent mutation” (p. 731). Because there are so many ways people could behave, it is hard to probe someone’s behaviour. Someone’s behaviour is influenced by various factors. When a decision needs to be made an actor will make a decision based on his or her habitus. So someone’s habit influences certain actions in a field. At the same time, this action can have consequences again for the actor and thus affects the habitus of this actor. Hilgers (2009, p. 731) explains this permanent mutation because it has an “evolutionary
dimension” and therefore “habitus determines practice but is also determined by it”.
What is implied in permanent mutation is that the evolutionary dimension could either weaken or strengthen someone’s habitus, or even a field’s habitus as a whole.
Even now it is known that habitus is a concept that is hard to determine and hard to predict, knowing about a field’s or an actor’s habitus is desirable for different reasons, such as understanding a field and getting insights in a field. The theory of habitus is a means to understand the complexity of the effect of behaviour on the activities in a field and at the same time how behaviour lead to field specific do’s and don’ts. For purposes of this thesis, the theory is used as background for the analysis of habitus in the field, how theoretically habitus finds its way in the field. However, since the field of research is accountancy, it is deemed hard to analyse the habits in the field which is more related to the field of psychology.
2.4.3 Capital
In addition to the dimensions field and habitus, capital is the third and last important dimension that is needed to explain the concept of legitimacy. One of the motives of introducing a new practice is to maintain the position in the market, which requires an active search for improving activities in the field. As discussed in section 2.4.1, capital is needed in order to achieve that. Capital is seen as a resource that can help obtaining a better position in the field. Also, a goal is gaining a legitimate position for this new practice. In order to obtain legitimacy, capital accumulation in the field is needed.
Andon et al. (2014, p. 77) formulate capital as “resources (e.g. attributes,
capacities, skills, knowledge) deemed valuable as they can be mobilised as ‘weapons’ or stakes in struggles over contextual ascendancy and status”. Firms within the field
can have various amounts of capital depending on their status, type of organization, and so on. Big 4 firms have the advantage in a way that they already possess relatively a lot of capital compared to smaller firms. For instance, Big 4 firms have a considerable amount of social capital that they can use in order to change rules in their favour (Bourdieu, 2005). This is one kind of the various types of capital, which will be explained in the upcoming paragraphs. Next to social capital there are other kinds of capital (economic and cultural) that can ultimately lead to the most specific kind of capital: symbolic capital. These various kinds of capital are explained in the following paragraphs.
From the various forms of capital, the monetary or financial one is economic capital. It “refers to the accumulation of money or other financial resources that can
be used to purchase power, positions and people, as well as goods, services and other forms of capital” (Andon et al., 2014, p. 78). An example of economic capital can
simply be money used for buying goods. However, not all kinds of capital are obtained by using money. Economic capital is the only kind of capital (discussed) that has to do with physical or monetary items. The other kinds of capital are per definition non-monetary and require time and effort in order to accumulate.
The second kind of capital, social capital, is the amount of resources in possession of a person based on his or her connections, networks, and alliances (Andon et al., 2014). Social capital can be present due to certain connections of an actor in the field and sociability can help accumulating more social capital. Also, positions in the field can help a person obtaining social capital, due to connections or
whatsoever. Social capital can help a firm obtaining goals. For instance, whenever a person in a firm has lots of social capital, he or she is more easily able to influence decisions within the firm because of his or her position or connections within that firm.
The third kind of capital is cultural capital, which “consists of forms of skill
and expertise that agents consciously acquire or passively absorb, which are valued in their field” (Andon et al., 2014, p. 78). This kind of capital can be present in
multiple ways. It can be present for instance due to an actor’s personal qualities or due to status. Specific knowledge due to a person’s position in a field is an example of cultural capital. Cultural capital is not something that can be gained in a day. Time and effort is needed in order to understand the field and, then, there is the possibility to accumulate cultural capital that is specific in that field.
The fourth and last form of capital is symbolic capital. This form is the hardest one to obtain and most likely the three other types of capital are needed together in order to obtain symbolic capital. Andon et al (2014, p. 78) define symbolic capital as “capital that takes an elevated status because it is deemed to be legitimate”. Within a firm, for instance after introducing a new audit practice, it should be the objective to obtain a legitimate practice. Symbolic capital is a kind that is the hardest one to acquire, but once acquired it is the most durable kind of capital. This kind of capital can be used to legitimize rules, actions, behaviour, but also new audit practices. Having more symbolic capital makes it easier to obtain legitimacy. In the end, when talking about obtaining legitimacy, it is the goal to create/form/obtain symbolic capital in the field.
2.5 Capital Conversion
Now the three essential parts for gaining legitimacy are explained, the conversion from economic, social and cultural capital into symbolic capital can be explained. When this process is finished, a practice can be seen as legitimate, or as taken-for-granted. However, for gaining legitimacy it is not just procedure to just have these three building blocks. Together, habitus, field, and capital can lead to symbolic capital only in relation to each other since the field influences the needed capital, habitus influences capital, and so on. Bourdieu & Wacquant (1992, p. 101) even said that “capital does not exist and function except in relation to a field”, which makes clear
that capital is field-related. Also, as Andon et al. found in their study “legitimacy was
the field-specific value of the composition of resources (capital in Bourdieusian terms)” where they found different ways of legitimizing for a similar audit practice.
However, in order to legitimize a practice, there are different forms and ways to reach legitimacy, which will be explained in section 2.6 and 2.7.
2.6 Forms of legitimacy
In order to find out and understand how new audit practices are developed and to understand the process in which legitimacy is gained, this thesis draws on three forms of legitimacy; pragmatic, morale and cognitive. According to Suchman (1995, p. 577) there is a general assumption for the three types, which is the “assumption that
organizational activities are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions”. The difference between
the various forms of legitimacy is due to “behavioural dynamic” of each form.
The first one, pragmatic legitimacy, is present whenever “the organization
satisfies the interests of its members” (Kumar & Das, 2007, p. 1434). This type of
legitimacy is the easiest one to obtain. It focuses most likely on complying with interests and desires of key audiences in order to obtain legitimacy. However, obtaining legitimacy can also be due to broader and indirect aspects, such as politics or economics. In the end, the organization performs activities that “visibly affects the
audience’s well-being” (Suchman, 1995, p. 578).
Then, the next level of legitimacy is moral legitimacy. This type of legitimacy goes one step further than just complying with the interests of the audience in order to obtain legitimacy. Moral legitimacy “rests not on judgments about whether a given
activity benefits the evaluator, but rather on judgments about whether the activity is “the right thing to do”” (Suchman, 1995, p. 579). The right thing to do depends on
societal beliefs and values. The bottom-line of this type of legitimacy is that it is important to also think about the society as a whole and whether or not the performed activities affect the society in a positive way. So it is not only about complying with the interests of key audiences, but with complying with the society as a whole. Moral legitimacy is harder to obtain than pragmatic legitimacy since the activities have to be in line with the expectations of society as a whole and not just with those of key
audiences. Even though it is harder to reach moral legitimacy, once it is present, it is likely to last longer than pragmatic legitimacy (Suchman, 1995).
The third and last type is cognitive legitimacy. This type is the most complicated to achieve and requires more than serving interests of key audiences or acting according to society’s expectations. According to O’Dwyer et al. (2011, p. 36) “cognitive legitimacy is produced when practices pursue objectives and activities that
constituents take for granted as being appropriate, proper and desirable”. This type
of legitimacy is the most complicated one to obtain, but at the same it is the one that will last the longest. Taken-for-grantedness is something cognitive, and thus not that easy to address and obtain. Therefore, in order to reach this, it is important to not only focus on the key audiences but also on society at large (O’Dwyer et al., 2011). In the end, the legitimate activity is taken for granted and thus is engrained in the system of society, which causes it to last longer than the other two types of legitimacy.
Together, the discussed types of legitimacy are present in a system of society. In order to achieve a cognitive legitimacy, the other types of legitimacy have to be obtained as well. First pragmatic legitimacy is needed, then, also, moral legitimacy and if both types are reached then it is possible to obtain a cognitive legitimacy. This step-based categorization is also applicable for other categorizations. As explained before, in terms of difficulty, pragmatic is the easiest and cognitive is the hardest. Another categorization is that pragmatic legitimacy is the most short-term of the three, and cognitive legitimacy being the most long-term oriented (with moral legitimacy in between those two).
However, even though the three forms of legitimacy are presented as separate forms, O’Dwyer et al. (2011, p. 36) argue that “while analytic distinction can be made
among them, in practice they tend to merge with one another”. Knowing this helps
classifying the objected form or forms. There is something that simplifies the classification of the form of legitimacy even more. Tost (2011) and Drori & Honig (2013) argue that the cognitive form of legitimacy is per definition a form that is only applicable for external legitimacy. Therefore, in section 4 the case study choses from the pragmatic form, the moral form or a combination of both.
2.7 Legitimation strategies
Whenever a company decides to enter a market it knows what it wants to achieve. It has certain ideas, plans, and so on. In order to obtain a type of legitimacy for new audit practices Suchman (1995) formulated three legitimation strategies. These different strategies help identify the strategy used by the firm in order to obtain legitimacy for data analytics in audits.
The first one is the conform strategy. The idea of the conform strategy is to position plans in such a way that it is in line with the expectations and demands of the environment. Important for any of the types of legitimacy is to “show how new
practices meet” (O’Dwyer et al., 2011, p. 37) certain conditions or demands, which
depends on the form of legitimacy. So, for instance for pragmatic legitimacy, it is important to act conform expectations and demands, where for moral legitimacy it is important that the firm acts conform activities that are socially desired (O’Dwyer et al., 2011).
The second strategy is the selection strategy. This strategy selects certain audiences to focus on, audiences that will support the new activities. So, instead of focusing on the demands and needs of the audiences in order to obtain legitimacy, under the selection strategy only a selection of audience groups is chosen of which is known that they support the new activities. Here again, it depends on the type of legitimacy that is wanted to be achieved. According to O’Dwyer et al. (2011, p. 37) for pragmatic legitimacy the selection strategy should focus on the “instrumental
interests” of the selected audience. Then for moral legitimacy, the selection should be
made based on the “moral values” of the audience groups. And for cognitive legitimacy selection should take place based on “already accepted standards”.
The third and last strategy is the manipulation strategy. This strategy is used in order to enrol radical new activities. Where existing audiences are used for the other two strategies, for the manipulation strategy new audience groups are formed and used to enrol the (new) activity. Included in the manipulation strategy is persuading audiences in order to make them believe you. Another tactic to ensure a good manipulative strategy is by lobbying.
2.8 Summary
Section 2.1 to section 2.7 outlined the theory used in this study. It assists in answering
the research question of the thesis. More specifically it helps to find out how legitimacy is trying to be obtained within a professional service firm. Bourdieu’s legitimacy framework together with Suchman’s different forms of legitimacy and strategies are the theoretical main constructs used in this thesis. Given the fact that data analytics is relatively new in the area of audit – in its current form – it is used as the object sought legitimacy for within the company.
3 Research methodology
This section describes the methodology used to conduct the research, the research setting in which the research took place, the process of collecting data, and the analysis of the obtained data.
Yet, there is not enough data on the use of data analytics by firms, which makes quantitative research, at least database research, not a suitable method for this thesis. However, since the use of data analytics in audits is currently in an orienting and a developing phase, a suitable method of research for this thesis is a qualitative approach. The research question focuses on the process of legitimizing new audit practices and more specifically on the process of legitimizing data analytics within the audit of a Big 4 firm. The approach taken in this thesis, therefore, focuses on one particular Big 4 firm and a case study is performed.
To limit the scope of this thesis, the focus is only on the internal world, as described in section 1.3. An exploration and orientation needs to be initiated in order to build and accumulate knowledge on this matter in the future. Note that this thesis only focuses on one Big 4 firm. Obtained knowledge in this thesis should not be generalized to other kinds of firms. Or at least it is not generalizable yet since knowledge on this matter is too limited in order to generalize it to all firms, or even only to Big 4 firms.
To explain the application of a case study in this specific case this thesis uses the explanation that Yin gives for the need of case studies, which “arises out of the
desire to understand complex social phenomena” (2014, p.4). Since knowledge on
processes of legitimizing a new audit practice within Big 4 firms is limited, a case study can help examine and understand this process more clearly. The goal is to
obtain the needed information mainly based on interviews with employees of a Big 4 firm in the Netherlands.
3.1 Research setting
In this case study, interviews are held with employees of a Big 4 firm in the Netherlands. The focus only on the Netherlands is chosen in order to be able to clearly focus on the process that is going on within one firm. As Francis and Yu state in their article: “The Big 4 firms are organized as national partnerships with national
administrative offices that set firm-wide policies” (2009, p. 1524). So every Big 4 is
composed of different partnerships based on nationality, while implementing the same policies. However, at the same time, there are cross-national differences between countries. According to Bik (2010, p. 6) “many professional, organizational or
environmental aspects that affect the audit process differ across national borders”.
The differences can occur for instance due to differences in legal systems, economic wealth or level of corruption (e.g. Bik 2010 & Nobes 2011). What is evident here is that even the national partnerships of a Big 4 act in accordance with the firm-wide policies, there still are cross-national differences in approaches and activities. Therefore, in order to get a clear view of the process of legitimizing data analytics, interviews are only conducted within a Dutch Big 4.
The interview questions are formulated based on the theoretical framework. For constructing the interview questions, an operationalization-scheme is used in order to formulate questions related to the theoretical framework. The operationalization-scheme is added in Appendix A.
3.2 Data collection
In total 11 interviews are conducted. The focus is only on employees that have experience with data analysis, one step further than only using it in audit(s). The experience in terms of years among the interviewees varies between 5 and 17 years. The interviewees are all participants of the [Implementation Program] relating to the use of data analytics in auditing. The interviewees represent three experience groups. The first group applies data analytics in one or more audit teams as a manager of the team. This is referred to as Engagement Managers (EM). The second experience group is a group that helps implementing data analytics in terms of coaching. Their
task is to assist audit teams that apply data analytics in their audit. This coaching role is referred to as Implementation Coach (IC). And the third group has experience with data analysis since they are concerned with methodology matters of using data analysis. This group of employees is concerned about all matters like acting in line with the standards and guidelines set by oversight bodies. This group is called the Methodology Coaches (MC). The described functions are explained based on the presence within the firm. From most common within the firm to less common within the firm. Together these three groups represent different insights related to the use of data analysis and they have insights in how data analysis is implemented in the firm and how the firm tries to obtain legitimacy for this new audit practice.
The interviews are structured to find out about the process of dealing with new audit practice, and the approach to do so adopted by the firm. As the objective of data analytics in this thesis, a specific implementation program on data analytics is analysed by means of interviews in order to find the answer to the research question. The process of obtaining legitimacy is important for this thesis. New markets are highly unpredictable, so exploration and mastering new practices is difficult and uncertain. The conducted interviews are semi-structured and follow-up questions are asked in order to get a clear picture of the view of the interviewee. In Appendix A the general interview questions are stated, with the specific questions varying, depending on the role of the interviewee within the [Implementation Program].
Before the start of every interview a brief introduction is given about the thesis; the process of the thesis and a brief explanation of the thesis as a whole. Not much information is given prior to the interview in order to ensure that the interviewees remain as neutral as possible. Also, all interviewees are asked if the interview may be recorded. Also, it is explained that the recording is needed in order to transcript the interview. The interviews are transcribed after the interview, with the exception of one interview because of a technical issue. However, a summary of this interview is used, and still seen as useful for the understanding of the process of legitimizing. Table 1 provides details of the interviewees. Also, already before the interview, the interviewees is told that their responses are confidentially dealt with. Therefore, the names of the interviewees are replaced by a code in the second column of the table. Also, the positions of the interviewees are coded since they are company specific. Within the company there are 6 different positions. In the table, the positions are ranked from the lowest position to the highest position from 1 to 6.
# Interviewee Position Function(s) Conducted Duration
1. IA 4 EM May 9th 30 minutes
2. IB 4 IC May 12th 46 minutes
3. IC 4 MC May 18th 53 minutes
4. ID 5 EM, IC May 25th 42 minutes
5. IE 4 EM, IC May 26th 56 minutes
6. IF 4 EM May 30th 45 minutes
7. IG 3 EM June 1st 49 minutes
8. IH 4 MC June 2nd 49 minutes
9. II 2 IC June 2nd 41 minutes
10. IJ 4 MC June 7th 57 minutes
11. IK 4 EM, IC, MC June 8th 50 minutes
Table 1: Summary details interviewees
The interviews all had the same structure with one part of the interview depending on the function(s) of the employees, which therefore makes the content of the questions different among the interviewees. First, each interview started with questions about data analytics in general (in relation with the interviewees) to get an idea of what the role of data analysis is within the particular Big 4 firm. Then, questions are asked about the implementation of data analysis and how the interviewees interpreted it and what their experiences are. Here the questions are different among interviewees depending on the different roles they can have. Lastly, there are some additional questions to conclude the interview and to find out what they think changed during the course of implementation and how they think things will change.
The interviews are conducted in the native language of the interviewees, which is Dutch. Therefore, also the transcripts are in Dutch. The transcript of all interviews is not completely translated into English since this process is too time consuming and not possible due to time constraints. Also, if translated, the quality of the transcript decreases considerably since it is likely, while translating such an extensive document (nearly 100 pages), that things will get lost in translation. Instead, quotes needed for the descriptive analysis, are carefully translated into English. This way more focus can be on translating quotes and therefore quality of the translated parts is better warranted. Also, the quotes used in the descriptive analysis are anonymous. Specific names and activities are replaced by general terms, placed in italic brackets. For instance, the participating company is referred to as [Company
3.3 Data analysis
After conducting and transcribing the interviews, the obtained qualitative data is analysed in a structural manner. First, the transcripts are carefully read again to get a general idea of the interviewees’ responses. Then, in accordance with Namey et al. (2008), different categories of responses are identified and coded to find similarities, contradictions, and so on. The reason to do so is because of the exploratory approach this thesis adopts. And thus identifying different categories “gives an idea of the
prevalence of thematic responses across participants” (Namey et al., p. 141). After
that, a coding process helped structure the identified categories (and subcategories) by labelling them. The structural coding method, as outlined by (Saldaña, 2009), is used to do so. This method applicable for this thesis since it “is appropriate for virtually all
qualitative studies, but particularly for those employing multiple participants, [...] semi-structured data-gathering protocols, [...] or exploratory investigations to gather topics lists or indexes of major categories or themes” (p. 67). Subsequently, tables per
category are made in order to be able to analyse and compare the responses of the interviewees’ more easily. These tables are presented in the Appendix2.
4 Descriptive Analysis
The descriptive analysis of this thesis is divided into three parts. First, a general explanation of the case is given. It explains the initiated change in relation with data analytics, what the approach is concerning the implementation, and outlines the operational process of data analytics. Basically, a general description of the implementation is given in order to understand the more specific analysis later on. Then, a theory-related analysis of the case is presented in section 4.2. It outlines the identified aspects that are either related to Bourdieu’s legitimacy concept (Field, Habitus, Capital), or vital for the implementation process. And to finish the overall analysis, in section 4.3 the approach taken by the firm in order to obtain legitimacy within the firm is analysed. According to theory the overall objective is to obtain
2For the purpose of analysing the interviews, interview quotes are categorized in various codes relating to certain
subjects relevant for the analysis. In tables 4 up until 10the codes are presented for various themes. The rows
represent the interviewees and the columns represent the different codes. If for an interviewee a quote is deemed valuable, the corresponding page of the interview is put in the table. The last row represents is the total amount of interviewees that noted something on the same subject.
symbolic capital for the practice as a combination of the different capitals in relation with the field and habitus within that field. Therefore, analysing the case related to Bourdieu’s concept of legitimacy enables finding out how symbolic capital is tried to be reached by the company. Also, an analysis of the form and strategy of legitimation adopted by the company will be outlined.
4.1 Implementing data analytics
About two years ago the participating company initiated a program to implement data analytics within audits. There are multiple factors that contribute to the need for change; changing expectations of the accountant, clients using enhanced systems and process more and more data digitally, and the possibility of executing data analytics within the audit. They all are contributing factors that ask for a new audit approach. An elaborate process of changing, implementing, and learning started there in order to change the traditional audit to an audit that incorporates data analytics. To start with the explanation of data analytics for the analysed company, it is necessary to define how data analytics is seen. And since the focus is only on the legitimation process internally it is important to know what employees see as data analytics. There is a range of views of what data analytics is. Some argue that data analytics is something that exists for a long time already, and that it just gained more and more popularity over the years. While others see data analytics as something new and different than working with Excel files.
Yeah, we can act like data analytics is something completely new, but that is not the case. […] In the past we worked with frequently with sophisticated Excel queries and such. Now we use a different tool and we suddenly call it data analytics. (Interviewee ID)
Well, the hard thing of data analytics is that it mostly works as a sorting function, so in Excel data analytics can be executed just fine. It depends on what you want to obtain. In my opinion there are different kinds of data analytics, a light form and a heavier form. (Interviewee IF)
As can be seen from the quotes, people have different views relating to data analytics when asked for in the first place. However, all of the participants have something in common: they are all (or were) involved with the implementation program related to
data analytics. Consequently, the scope of data analytics within this thesis is limited to that multiple-year implementation program within the participated company.
The program is implemented in multiple stages. Audit teams can be chosen to be part of the implementation program. When chosen, it means that the audit team will use data analytics in the audit of a client as a pilot. These selected teams had assigned coaches who were assisting the teams where necessary. One of the coaches is the implementation coach, who helps the teams whenever the team has questions or run into problems and. At the same time, that coach ensures that the teams keep the right focus. Also, methodology coaches are part of the program. They are assigned to guard the limits and the possibilities of working with data analytics.
There are implementation coaches, methodology coaches, and data assurance coaches. One is focused on the methodology; how do you apply this in an audit and which activities do you cover if you do it in this new way. The implementation coach has to direct the process, teams, and take care that the process works. And the data assurance coach is concerned with the data; the extraction and the translation [of data] for the colleagues [of the team] so they can use it in a certain format so they understand it. (Interviewee IC)
As a coach you are more on the sidelines; helping the team where needed, provide guidance, but in the end the team has to do it. (Interviewee IC)
The teams are chosen from a list of applied teams. Based on that the applications by teams, a selection was made deliberately.
We chose the clients in a good distribution of industries. So we took care of the fact that they all, all industries, were evenly allocated. […] In [Implementation Program, year 1] it was in particular like “what do we want to do”. In [Implementation Program, year 2] there were more applications, but also a more strict selection. (Interviewee IK)
Evident from this quote is that a specific selection is made in order to make sure that all different industries are participating. Then, after choosing the teams and assigning the coaches, working with data analytics can be initiated.
During the audit, the chosen teams use data analytics in their audit. The focus is on piloting and getting familiar with working with data analytics, not on using as much as data analytics as possible.
