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Audit partner competences: Influence of extensive criticism in the

Netherlands

Master thesis- Accountancy and Controlling June 2017 Tim Teunis S2194449 Wielewaalplein 196 9713BR Groningen Mobile: 06-42143023 Email: tim.teunis@hotmail.com Supervisor: dr. S. Girdhar Abstract:

This research aimed to identify the current required competences for audit partners in Dutch Big4 firms and whether these competences are influenced by the extensive criticism from the last decade. This research approached competences from the perspective of competing institutional logics. Evidence for this research was gathered in three Big4 firms by the means of interviews with partners, directors and senior managers. The findings suggest that the commercial and technical competence is important for audit partners and these competences are affected by other general competences. As a result of the publicly expressed criticism from the market regulator, much emphasis was placed on the technical logic. However, this is not perceived as an ideal situation. Therefore, the audit partners in the Netherlands should combine their commercial and technical competence.

Key words: audit partner, competence, market regulator, logics Word count: 9288

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Contents

1. Introduction ... 2 2. Theoretical review ... 5 3. Methods ... 9 4. Results ... 11

4.1 Audit partner competences ... 11

4.2 The criticism on the audit sector ... 15

4.2.1 The events and the impact... 15

4.2.2 Influence on the partner competences ... 18

5. Discussion and conclusion ... 21

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1. Introduction

The audit profession is continuously in motion, there seems to be a constant process of change through history (Jeppesen, 1998). Looking towards the last decades two broad influences are of considerable importance for this research. At first there is a general influence whereby the objectives of the big audit firms are changing towards more and more commercialism (Sweeney & McGarry, 2011). This tendency of more commercialism can be seen as an identity change of the auditor in order to generate more revenue (Guo, 2015). The commercialization is associated with the non-auditing assignments performed by the Big4 audit firms (Citron, 2003;Wyatt, 2004; Guo, 2015). According to the research of Fogarty & Radcliffe (2001) the change towards more commercialism in the audit firms is not unexpected, since the auditor’s historical role as service provider of capitalistic enterprises makes it more likely to adopt commercial practices. This influence of commercialism led to problems and scandals within the audit sector, that eventually brought in new rules and regulation as, for example, SOX in the US and other audit quality enhancing regulations (Wyatt, 2004; Robson, Humphrey, Khalifa, & Jones, 2007). The commercial practices of audit firms were no longer contentious. In the Netherlands the market regulator, Autoriteit financiële markten (AFM), provided during the years most of the criticism, especially with a focus on the quality related issues as a result of the commercialism. These problems were specifically raised in the report of the AFM “Audit quality and quality assurance’’ (2010) and even more critical was the AFM report “Outcomes of the quality research on legal audits at Big 4 audit firms’’ of 2014. A recent report from the monitoring commission accountancy (MCA), “Report in the public interest” (2016) shows that the audit firms did a lot to improve their quality last years. Big 4 audit firms further claimed to have implemented recommendations of the regulator that were related to independence issues. However, the report of 2016 still outlines a problem. The Dutch audit firms have a profit-orientated entrepreneurial culture and in the last decades this has developed in a focus on profits and partner fee. This problem is known and is completely in line with academic literature as, for example, Kornberger (2011) sees senior managers and partners as “entrepreneurially-minded agent’’. The phase of adjustment and improvement within the audit sector can be seen as the second relevant influence, whereby auditor independence and audit quality became really important again. The first influence of commercialism and the second influence of adjustment and improvement in the audit sector could have affected the selection criteria for new employees to enter the firms, but also the required competences for promotion to top positions within the audit firms (Kornberger, 2011; Hanlon, 1994). Arens (2014) describes competences as a set of knowledge and different skills required for a particular task or position and the ability

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3 to apply them in practice. Research has been conducted on the competences of auditors (for example Palmer, 2004), but little research has been conducted to identify the competences for audit partners. Literature suggests that during the period of commercialism not only technical competences are required to get a promotion to a partner position in the audit firm (Hanlon, 1994, pp. 118 – 123), but new partners should also have commercial competence and a business orientated mind (Hanlon 1996, Emby & Etherington, 1996). Research shows that more advanced competences are needed for higher functions in the organization. This is because these higher functions also have other performance expectations (Emby & Etherington, 1996; McNair, 1991; Montagna, 1974). Carter & Spence (2014) approach the partner competences in Canada and the UK from the Bourdieusian perspective, but they believe there can be differences in terms of geographical context. Hayes (2002) and Sweeney & McGarry (2011) also find that commerce is the main aim for partners in the US.

For various reasons, the required competences for audit partners in the Netherlands may differ from other countries and so far known findings in literature. The Netherlands has, for example, a different culture. In comparison with the US, there is less focus on competition in the Netherlands and people in the Netherlands are more focused on the long term (Jansen, Merchant & Van der Stede, 2009). Another reason to conduct research in the Netherlands is described by Calori and de Woot (1994). They argue that the smaller countries of Europe as the Netherlands provide a good way to assess ‘‘European” HRM practices, because these countries are affected early by outside influences. Therefore, findings may differ from previous findings and can be a prelude for other countries. The main reason to study the competences of audit partners in the Netherlands is because of the prominent presence of their market regulator, the AFM. The AFM often chooses the public path of communication and the Dutch financial market is considered highly sensitive to reputational damage (Van Erp, 2011). The earlier mentioned AFM reports are fairly recent and that is the reason why there is a literature gap regarding the impact of these reports on the organizations.

Therefore, the main research question is: What are the current required competences to become

an audit partner in a Dutch audit firm and are these competences influenced by the criticism from the last decade?

This is an exploratory research on a small scale, especially to address the literature gap for partner competences in the Netherlands. The findings can be used as starting point for research on larger scale in the Netherlands or other similar countries. Knowledge of these competences can be very relevant for employees of audit firms or outsiders who want to become partner in future. Additionally these findings can be a valuable tool for recruiters to recruit people with

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4 the right competences in the early stage of the process. The findings can also be relevant internationally. As mentioned earlier, findings in the Netherlands can be a prelude to audit firms in other countries.

This paper has the following structure. At first the theoretical review, that outlines the relevant literature on this topic and describes competences from an institutional perspective. The second section, the research methods, describes the research design and data collection. This section is followed by the analysis and forthcoming results. The last section, the discussion and conclusion, explains the limitations of this research and offers directions for future research.

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2. Theoretical review

This theoretical review explains why the requirements to become partner in an audit firm change or remain constant over time as a result of the external influences and different logics in the organization from an institutional perspective. This section starts with a short description of the relevant concepts.

The main focus of this research is to identify the required competences for partners in Dutch audit firms. Literature connects some competences to the function of partner in audit firms. Accordingto some literature the commercial competence becomes more important for audit partners than the technical competence (Greenwood & Suddaby, 2006; Hanlon 1996, Emby & Etherington, 1996, Blanthorne, Bhamornsiri, & Guinn, 2005). Technical competence can be explained in terms of general auditor competence. Moreover Emby & Etherington (1996: 101) define technical skills as “auditing and accounting knowledge and ability (familiarity with GAAP and GAAS and firm technical releases) to apply knowledge to specific situations’’. In the article of Siriwardane, Hu & Kin (2013) the ability to critically assess situations and identify potential risks is also included as technical competence. According to Carter & Spence (2014) this technical competence can be seen as a starting point and should be embodied early in the career of the auditor. Commercial competences can be best seen “as the ability to get on with clients, to get fees in on time and to communicate well with clients” (Hanlon, 1996: 349) and in addition, the ability to get to know the environment and the client’s needs. (Hanlon, 1996; Siriwardane et al., 2013). Hayes (2002) and Sweeney & McGarry (2011), explicitly mention that they find strong evidence of the commercial aspect. For Sweeney & McGarry (2011) this was unexpected, because some literature suggests that the discourse has been changed from business value to quality aspects. Discourse is about how people communicate about aspects of the organization (Potter and Wetherell, 1987). According to literature, this change in discourse is a result of scandals and problems related to the audit sector (Gendron, 2002; Khalifa, Sharma, Humphrey, & Robson, 2007). So according to Sweeney & McGarry (2011) the function of audit partner should be more based on quality and technical aspects.

In summary, evidence from studies in the US and Canada suggest that the last decades commercial aspects are an important feature of the audit partners function. Some studies as Gendron (2002) and Khalifa et al. (2007) also take into account that a change in discourse as a result of the problems in the sector is expected to have an influence on the partner function. Given the focus of US literature on the aspect of technical versus commercial competence, this research also follows this direction to identify the required competences in Dutch audit firms.

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6 This research will look at the potential changes of required competences for audit partners in the Netherlands from an institutional perspective. Competences of actors within an organization are linked in the literature to the institutions that are embedded in organizations (Schneider, 1988). It is even assumed that these institutions are influenced by the HRM vision of the organization (Evans, 1987), therefore people are recruited who will fit in the organization. This implies that a change in the institutions can also ensure a change of what is currently regarded as an important competence within firms. Institutional theory is about ‘’non-choice behaviors that can occur or persist through the exercise of habit, convention, convenience, or social obligation’’ (Oliver, 1991: 151). According to Roberts & Greenwood (1997:354) in institutional theory “emphasis is placed either on the taken-for-granted nature of the decisions being made or on the pressures to secure legitimacy for operating in organizations”. A certain view on institutional behavior, institutional logics, is most useful for this research. Thornton (2004, p. 69) defines institutional logics as ‘‘the socially constructed, historical pattern of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to their social reality’’. Moreover logics can best be interpreted as a system of reasoning and acting. Logics explain the appropriateness of organizational practices in given settings and at a particular time (Greenwood, Díaz, Li & Lorente, 2010). The perspective of institutional logics is useful for this research, since the element of conceptualization of organizational fields as comprised of multiple competing logics (Friedland & Alford, 1991). Having multiple competing logics in a field means that diverse actions and claims can arise towards practice, which enables actors to distinguish themselves from others (Marquis & Lounsbury, 2007). Changes in the field, both from external pressure or internal rationalities, can according to institutional logics be interpreted and processed differently across actors (Oliver, 1991).Therefore, the construction or perception of required competences for partners can be affected by a particular logic. Further, institutional logics define how things are done in the organization and are originated from economic and social structural changes (Thornton & Ocasio, 1999).

The effects of institutional logics make it even clearer why this concept is useful for this research. Suddaby & Greenwood (2005) argue that institutional change can be the result of a shift in logics whereby legitimacy is assessed. The way a firm acts is not seen as all internal conceived choices- , but rather a choice defined by possibilities set by group actors of the audit firms organizational field, which are ultimately traceable to the legitimacy of the firm operations (Scott, 1991). For this research, this aspect could have a significant influence. The

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7 audit profession is exposed to criticism, whereby to some extent their commercial practices are under investigation and can lead to legitimacy issues (Picard, Durocher & Gendron, 2014). This is even more important for audit firms in the Netherlands, because the Dutch market regulator often delivers the criticism publicly (van Erp, 2011). Legitimacy processes explain institutionalization and stability, but can also start deinstitutionalization and change in organizations and in organizational fields (Stryker, 2000).However an example from history in the US shows that legitimacy issues do not simply lead to structural change. After the collapse of Arthur Andersen in the beginning of the century the audit sector had a big legitimacy problem. Nevertheless according to Gendron and Spira (2010) the emphasis on self-criticism after the scandals was short-lived and the commercialism continued to be dominant. This situation in the US clearly shows that a dominant logic under the pressure of external influences and legitimacy issues still continues to exist and is, therefore, strongly institutionalized. It is possible that despite the criticism of the AFM in the Netherlands, the commercial logic is after all still dominant. Another effect of institutional logics is found in the paper of Collier (2001). The author finds that having multiple logics can lead to contradictory aims in an organization. The aspect of contradictory aims is possibly of great importance. It stresses the continuous tradeoff between the partner's interests. On the one hand growth and therefore profits for the company is a main concern (Dirsmith, Heian & Covaleski, 1997), on the other hand the technical and quality issues are expected to be a driving force within the organization (Gendron, 2002; Khalifa, Sharma, Humphrey & Robson, 2007).

Competing logics and the introduction of, for example, a new logic in the field leads to conflict and discussion among actors and can lead to multiple possible outcomes (Lander, Koene & Linssen, 2013). At first a shift from the old dominant logic to a new introduced logic (Thornton, 2002; DiMaggio 1983; Hensmans 2003). Second a permanent co-existence of both logics (Lounsbury, 2007) and third, it is also possible that the new logic is a hybrid version of two previous logics (Glynn & Lounsbury, 2005; Thornton, Jones & Kury, 2005). A Hybrid is best described as: “organizations that combine different institutional logics” (Battilana & Dorado, 2010). In hybridizing a combination of intact practices from each logic is embraced (Pache & Santos, 2010). An issue with hybrids is that the institutional logics are not always compatible (Greenwood, Raynard, Kodeih, Micelotta & Lounsbury, 2011). Furthermore when the compatibility of these logics becomes more difficult, than this results in bigger challenges for the organization (Besharov & Smith, 2011). However a hybrid can also benefit an organization, since it might fit with the demands from their environment (Pache & Santos, 2010). Noordegraaf (2007) makes a connection between the hybrid and the professionals. The

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8 author indicates that the competences required in an organization by a professional may sometimes differ from one another and may also be a combination of competences that were previously known and can therefore form a hybrid. In literature, a lot is written about hybrid professions, for example, as described in Burns and Scapens (2000). The paper of Burns and Scapens (2000) describes how someone, which traditionally has one specific role, gets a multilateral role in the organization. Partners in audit firms therefore can also become hybrids, in sense of role enlargement (Caglio, 2003), as a result of changing logics.

In summary, when accessing literature on changes in the last decade, two relevant logics can be identified for the field of auditors; the commercial and the technical logic. Both logics can been seen as contradicting perspectives and differ on many points (Gendron, 2002). Reliant on the literature, it is well possible that one of the two logics can be the current dominant logic. However a hybrid type of both logics or a co-existence of two logics is not ruled out in this study. The view of institutional logics can be used to explain the potential shift in the requirements to become partner in an audit firm. However institutional logics can also explain stability. Literature stresses that the consequences of competing logics can vary across geographical context (Lounsbury, 2007). Therefore, the impact of contradicting and multiple logics on audit partner competences must be investigated in the Netherlands.

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3. Methods

This is a qualitative research, because qualitative research normally uses a flexible research design (Marshall & Rossman, 2011). The qualitative method has the valuable advantage that it is designed to have a close fit between data and people. By directly talking to the participants this research contains firsthand knowledge (Taylor, Bogdan & DeVault, 2015). Furthermore, the qualitative approach fits well to identify the meaning of people’s day-to day work practices (Grey, 1998), in this case the work of the partners in the audit firm. This research follows the inductive approach, with the primary purpose to let research findings emerge from raw data without the restraints imposed by structured methodologies (Thomas, 2006). In association with colleague students this research conducted 22 interviews of 45 minutes in April 2017, with partners, senior managers and directors (non-equity partner) in three Dutch Big 4 audit firms (table1). Senior managers and directors were included, since they are close to the position of partner. Other employees of the audit firms were not approached, because of the assumption that they would not have enough knowledge of the partner position. Using only the Big4 audit firms is sufficient to give a representative picture for the Netherlands, because the Big4 firms own an 80 percent market share in the Netherlands (AFM, 2010). It was intended to have an equal balance between male and female participant to ensure that perspectives from both genders are included. The interviews were conducted on a structured base. The semi-structured interview has an open-ended and flexible nature (Horton, Macve and Struyven, 2004). This means that there are sufficient possibilities to go more in depth on certain aspects of the partner’s competences and the effects of the criticism. The semi-structured interview setting is also very useful when conducting the interview in association with other interviewers and offers some advantages (Bernard, 1988). Conducting the interview with others offered a benefit with regard to the efficiency of data collection and gave the possibility to collect more data in the limited timeframe of this research, which is beneficial for relevance and conclusions of the research (Smith, 2014). Anonymity was guaranteed to the participants at the beginning of the interview to prevent conformity bias, therefore, will be referred to company A, B and C.

Table 1 Interviews by firm position

Senior managers Director/

Non-equity partner Partner/ equity partner Total Big4 7 6 9 Total: 22 7 6 9

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10 The aim of the interview was at first to get to know the tasks and responsibilities of partners and which competences could be related. The second goal of the interview was to find evidence for an influence on the competences as a result of the extensive criticism on the audit sector, specifically the AFM reports in the Netherlands. During the interviews emphasis was placed on identifying the current dominant logic in the audit sector. The technical and commercial logic were used as a reference point, but during the interviews was taken into account that totally different logics might be present within organizations and the sector. An interview guide was used to ensure consistency of questions with the aim to minimize bias and variation in the questions presented to the interviewees (Patton, 1990). The interviews were tape-recorded, because according to Cohen & Crabtee (2006) the open questions can result in deviations from the interview guide. The tape recorded interviews benefit the reliability of the study by ensuring that the researcher will not forget and cannot ignore relevant information (LeCompte & Goetz, 1982). After conducting all tape-recorded interviews, these interviews were entirely transcripted to be used for examination. All transcripts were extensively reviewed and re-read to make sure all statements were considered to be in the right context. All transcripts were submitted to the participants for evaluation and the transcripts were revised if necessary.

This research used a form of thematic analysis which seeks to identify recurring themes of meaning within the data (Braun & Clarke, 2006). The analysis started with reading all transcripted interviews to get familiarized with the data. Afterwards, the transcripted data was divided into two relevant parts, which were based on the structure of the interview guide to facilitate the grouping of answers (Patton, 1990). Subsequently, the relevant statements of interviewees were marked and then manually grouped around themes and recurring patterns. This led to the opportunity to determine the major competences for partners. A consistency in answers quickly led to a primary tension regarding the criticism on the audit sector. However, to fully analyze this aspect, all information regarding the criticism was divided into sub-themes. Examples of these sub- themes are, the atmosphere in the firm, perceived differences after reports and important moments of change.

This study tried to find evidence whether criticism from the last years has influenced audit partners competences. Since the relevant criticism originates from 5-8 years ago the participants had to appeal to their memory to answer the questions, which could be a small limitation for this research design. Also their tenure in the sector was assessed-, to make sure they were active during this period. Kirk and Miller (1986) emphasize consideration of the reliability for this type of studies. One of the biggest issues concerns the replicability of the findings. Especially with a design in which different interviewers collect data among different

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11 participants in the audit firms with a semi- structured question guide. This problem is largely solved with good communication among the interviewers. Important aspects were: the interpretation of questions and definitions in the interview guide. It is possible for many reasons that incorrect information was provided by participants (Dean & Whyte, 1958). This was a significant threat for the study, but according to Fuchs (1969) this problem can be partly solved by seeking for corroboration among multiple participants. All mentioned aspects to ensure the reliability for this research were taken into consideration and were carried out as well as possible.

4. Results

This results section describes the current required competences for partners in Dutch audit firms (4.1). The focus of this research is mainly on the importance of the technical versus the commercial competence. However this does not mean that the commercial or technical competences are the only two required competences to become partner in a Dutch audit firm. Therefore, the last paragraph of paragraph 4.1 will illustrate the other more general competences for audit partners. Furthermore, the impact of the profound criticism on the audit sector is emphasized and additionally is described how this criticism influenced the required competences for audit partners (4.2).

4.1 Audit partner competences

Interviewees perceived that the commercial aspect is the essential difference between the senior manager position and the partner position in a Dutch audit firm. The commercial competence was mentioned in different contexts by the interviewees. The commercial competence could therefore be subdivided into gaining new customers and more work for the firm, maintaining customer relationships and thereby maintaining customers for the company. Also achieving a good return on the customer is something that is perceived as a commercial competence by interviewees. The relevance of the commercial competence is already known from other countries (Carter & Spence, 2014; Hayes, 2002; Sweeney & McGarry, 2011), but during the interviews it appeared that this is also seen as a major competence for partners in the Netherlands. The partners are entrepreneurial by nature. In practice, however, this is not always comparable with other entrepreneurs, because they have to make decisions with other partners. Yet many partners feel like an entrepreneur and feel the responsibility to bring in new assignments to facilitate work for the employees.

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12 “The quality of our work has increased”(...) “ However we are a commercial company, this sounds nowadays as an inappropriate word, but we need to keep the business running”- Partner, company A

Employees in a senior manager position do not own a client portfolio and have, therefore, no specific commercial responsibilities. The director or non-equity partner has in some of the audit firms a client portfolio, but this portfolio is much smaller than the portfolio of the equity partner.

“Eventually, the partner is the one who has to sell the brand of this office to the market. You as partner are responsible for the commercial side of the company, so strategic commercial policy of this office, how do we position ourselves in the market, what type of customers do we want to pursue and what type of service do we want to put down. This are really partner specific matters.”- Partner, company A

Also gaining new clients and turnover is not something that is expected from a senior manager or other employees lower in the hierarchy. A senior manager is still close to the team and performs a lot of audit activities himself. Experience can be an explanatory factor for the relevance of the commercial aspect. A statement from a partner logically shows why it is not expected from a senior manager-and-down to generate revenue.

“It is a big moment if a manager generates revenue for the company. Only the possibility that this occurs is relatively small considering the fact that we only want customers form specific market segment, namely the bigger customers. This means that a manager in the age of 30 to 35 has to convince people in the age of 50 to 60 to carry out the audit work for their firm. This is just really difficult also because the managers cannot sign the audit report themselves.” –Partner, company A

Therefore, the commercial competence really gets relevant when entering into the position of partner or director with a client portfolio. At the beginning of an auditor's career, little or none recourse has been made to the commercial competence (Emby & Etherington, 1996). For many the importance of the commercial aspect for the function of partner is often seen as matter of course. This research found three clear explanations for the presence of the commercial competence. Firstly, the partners are owners of the firm in contrast to other employees of the audit firm (Pierce & Sweeney, 2005). This means that they carry a financial risk, but also benefit from the generated profits. Secondly, as noted before, the partners are basically the only participants of the firm that are actively engaged in the commercial process to find new clients and achieve a good return. The primary purpose of other employees is performing the audit (Knechel, 2007). This means that the firm strongly depends on the commercial efforts of the

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13 partner. Finally, most of the interviewees’ believe that despite the fact that audit firms fulfill a very important social role, audit firms are commercial companies. Investing in quality and fulfilling the social role is important, but in the end money needs to be earned.

A competence that was mentioned by all interviewees in addition to the commercial competence is the technical or professional competence. Many interviewees usually associate this aspect with the quality of work and the quality of the final audit files. What can be derived from the interviewees' answers is that an excellent technical competence was seen as a taken for granted for partners. New recruits start from day one with learning this technical competence (Emby & Etherington, 1996) and are also promoted based on their progress in this process. The level of manager was experienced as an important measurement point of the technical competence. At this level, technical knowledge is tested and determines if one can continue in this position. The technical competence should therefore be very good at this level. But certain statements by interviewees indicate that the development of this competence does not stop at this level.

“Someone who is promoted to senior manager should have those quality standards. The main difference concerning the technical differences between senior managers and partners is that it is expected from partners that they can work on more complex issues.”- Partner, company A

In some papers as, for example, Carter & Spence (2014), the technical competence is seen as a starting point for an auditor. Therefore, when the question was asked whether or not the highest level of the technical competence is reached at manager level, the following statement illustrates how this competence develops in practice.

“In theory, we all have the same degree. However I am already partner for over 10 years. This means that I have made a lot more hours in this business than a manager. So I believe experience is a valuable aspect. You can compare this with a driver’s license. Everyone has the same basic skills, but during the years you start gaining experience and recognizing situations. In this way people can still develop this competence.” -Partner, company A

An excellent technical competence is therefore seen as very important for audit partners, but this is seen as taken for granted. During the selection of the partners, this competence should not be the reason why someone can or cannot be partner of the firm. This is because if this competence was not sufficiently present, this would have appeared much earlier in the process. These findings match the findings of Carter & Spence (2014). Eventually, the experience on the job and in the partner position will make it possible for this competence to become superior.

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14 This is actually a natural process, which will logically take place. A somewhat more tangible expression of the importance of technical competence can be found in the desired quality hours to be made in top positions of the audit firms. Quality hours can best be described as hours in which a partner or other top position employee invests time in quality enhancing activities, which in practice means reviewing work of others and contributing to the quality of the profession (PwC, 2015-2016). Carrying out these quality enhancing activities naturally requires a well-developed technical competence. The quality hours that have to be made differ, but increase as someone is promoted to a higher position. Based on this aspect, it appears that in the higher positions in these firms the technical competence is often called for.

“To eventually become partner or director, it is a showstopper if you do not have performed on the quality hours. If you have all other necessary competences, but you do not meet the quality hours criteria, then you cannot become partner.”-Senior

manager, company B

This research focusses primarily on the technical and commercial competence. It would be incomplete to present these two competences as the only required competences. To become a partner also more general competences are required. Competences as leadership, communication and networking were also mentioned in every single interview as extremely relevant competences. These more general competences are even by some interviewees perceived as the biggest difference between senior managers and partners. This is because these general competences affect both the commercial and technical aspects of the profession (Hanlon, 1996). A statement of an interviewee illustrates how, for example, communication affects the technical competence.

“Communicatively, you must be skilled, both in the team and in the direction of a customer, otherwise you will not get the information you want to perform the audit.”-

Director, company B

However, communication and even networking also affects the commercial aspects, as a partner, you will ultimately have to persuade the potential customer to become a customer (Hanlon, 1996). Leadership is also mentioned as extremely important for partners. Leading teams is important from even in a low function in the hierarchy. As partner of an audit firm, you are basically leader of the entire office and sometimes a whole region. Good leadership skills of a partner benefits the organization in multiple ways.

“It is important to have good leadership skills, this to motivate people, to lead and educate people. If you work in a team where people like to work for you, learn things and grow in the organization, this will finally benefit the audit”. -Director, Company A

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15 4.2 The criticism on the audit sector

4.2.1 The events and the impact

This research focusses on what the current required competences for Dutch audit partners are, but also whether or not these competences are influenced by the criticism on the audit sector from the last decade. During the interviews this was a subject that did not really needed further introduction. The subject of criticism on the audit sector was usually addressed by the interviewees themselves and was seen as a game changer. In the Netherlands, the market regulator (AFM) is by far the largest source of criticism. The interviewees believe that both the reports of 2010 (Audit quality and quality assurance) and 2014 (Outcomes of the quality research on legal audits at Big 4 audit firms) revealed certain weaknesses in the audits, documentation and cultural issues in the audit sector. The report of 2010 was seen as a first indication that there were problems and weaknesses in the sector, but the report of 2014 was by many seen as the most important moment of change for the auditors.

“The AFM conducted a research in 2014 over the files of 2012, the conclusion of the reports was that the quality of the Big4 audit firms was not sufficient. Based on this, the NBA, our professional group, has set up a committee with the focus on what should and what can be better in our sector and they came up with 53 measures to enhance the quality in the Big4 audit firms in the Netherlands. This can be seen as a tipping

point.”-Director, company A

However, not everyone believes that the criticism in the form of the 2014 report must be seen as the moment that everything changed. Logically a logic cannot change overnight, the following statement clearly shows that this change should of course be seen as a process (Thornton et al., 2005). However, it remains clear that the report of 2014 significantly increased the pressure on the audit sector to bring about change.

“Yes, I think that it is more an evenly process. When the first report came out in 2014, people really did not say at once, "We are going to do it completely different." That is more of a conversion process. I think it has become increasingly clear over time.” –

Director, company A

These reports ended up in the media and quite soon afterwards in politics. As van Erp (2011) describes, the AFM often chooses the public path of communication. Therefore, it is easy for the media to catch up this story. The media did not neglect to do so, possibly as a result of the auditors’ social role in society to serve the public interest (Guo, 2015). A statement from a

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16 Big4 director indicates that there was a heavy legitimacy and identity discussion during that time.

“We have had a crisis concerning, who are we? What are we supposed to do in our profession?”- Director, company A

Such statements can be compared to those found by Carnegie & Napier (2010), who perceive the same type of identity crisis after scandals in the US. Considering that this criticism in the sector led to a legitimacy problem,this criticism also had its repercussion internally within the Big4 firms. Some interviewees indicated that they did not specifically believe that they did an excellent job during that time, but the extent of the criticism also had an impact on the employees of the Big4 audit firms. The criticism but also the following measures to enhance quality in sector caused much turmoil and stress among all the employees and owners of the firms. The way of working changed for everyone in the firms, but there was also a lot of uncertainty about how the audit should be executed.

“The measures lead to more documentation, and therefore more time spent on the assignment. This resulted in a high workload and pressure, but this also resulted in a culture of fear caused by the strict regime. If you failed to proceed successfully through a review, this could have serious consequences.” -Senior manager, company A

However, the new standards of the market regulator remained unclear. Literature confirms that changes in the audit process can lead to situations where the employees of the organization are under pressure and become insecure about their work (Knechel, 2007). The criticism was justly according to most interviewees, but it was completely unclear what was expected from the Big4 audit firms. The increased workload as well, as the overall uncertainty surrounding the audit, the work and consequences after some kind of mistake during the process were for many a reason to leave the audit sector.

“I had a review where I had all sufficient scores and a year later I suddenly had all insufficient scores. The files were basically the same, but since the fact that the scores were insufficient, I had to write an improvement plan and I had to account myself in front of the executive board. That was not a nice phase, we lost a lot of co-workers during that time and also partners of the firm.” - Partner, company A

The approach of the AFM in the Netherlands is seen as quite unique (van Erp, 2011). In addition to the AFM's choice of communication, the AFM is also seen as very strict. The following statement actually illustrates, as described in Calori and Wood (1994), that the Netherlands is often affected early by outside influences. What is happening now in the

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17 Netherlands can thus be seen as a prelude for other countries. The specific change of a particular logic in the Netherlands is eventually, likely to be expected in other countries.

“The AFM is by far the strictest supervisor. There was an investigation within this organization, internal inspections and external inspections. Internal inspections concern that other offices within the organization assess our files and the external inspections are the AFM. In the internal inspections, the Dutch department of the organization came out as the world best. And at the external inspection, the Netherlands as the worst. Therefore, internationally offices look with great interest to the Netherlands, we are really ahead.” – Partner, company B

The criticism on the sector was severeand there was exerted pressure to bring about change. It can therefore be said that a change in logic was enforced by the AFM. Indeed, as the literature has already suggested in the paper of Suddaby & Greenwood (2005) as a possible reason why an institutional logic can change, a legitimacy problem, seems to be a sufficient motive to let go of the dominant logic. The legitimacy issue was caused by all criticism on the sector. This had an extra impact because this was done publicly by the AFM, and the issue found itself on the political agenda. This finally resulted in new measures which audit firms need to meet. This can be linked to the literature, the way a firm acts is connected to the legitimacy of the organization (Scott, 1991). The new guidelines will therefore be in line with how actors in the organizational field perceive the role of the company. Furthermore, there was also a lot of internal discussion regarding the identity and function of the company. The existing dominant logic did not seem to be appropriate at that particular time in the words of Greenwood et al. (2010).

“In the Netherlands, I noticed that because of the enormous social pressure, as you can read in the AFM reports, that we had the full focus on quality aspects of the profession. Commercialism was an inappropriate word the last couple of years” - Partner, company

A

All together this was enough reason to emphasize quality. What has become clear from the interviews is that there was a change in discourse during that time. The technical logic became really important again. These results closely matches the research of Khalifa, Sharma, Humphrey & Robson (2007), they also believe that there should be a change of discourse in the audit sector as a result of the scandals and related problems. However, this research now also shows that this change has really taken place in a country. The thought of Power (2000; 2003) that the change in discourse would only have to do with the way in which one talks about

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18 these matters and does not actually find its way into practice, does not seem to apply to this situation.

4.2.2 Influence on the partner competences

Thus the criticism had a major impact on the audit sector in the Netherlands and the institutional logics are influenced by this. As noted before competences are connected to institutions (Schneider, 1988). Therefore, the required competences for audit partners are also affected. The commercial logic was placed in the background and under pressure from society and the market regulator quality became the main priority. Partners are less busy with new acquisitions and are also selecting a lot more stringent on customers they would like to have in their portfolio.

“What you've also seen is that we have said goodbye to certain customers. It also begins with a customer who cooperates and has the plot in order. At the moment that is not the case, you can hardly make a good file.”(…) “We have therefore been very critical towards customers. After two AFM reviews had taken place, it was clear to us that if we just accepted things from the customer, we will be settled accordingly.”- Senior

manager, company A

Big4 firms have therefore said goodbye to many customers who could potentially affect quality, this all to protect their own safety. The diminished importance of commerce can also be derived from an example given by a Big4 director:

“As director it is now sufficient to have a client portfolio of 1 million euros, because the organization believes that with a portfolio of this size the quality of the file is sufficient. If the portfolio was 2 or 2,5 million euros, you would not be able to spend the right amount of time on each customer. Three or four years ago there were enough partners and directors with a portfolio over 3 million euros.” - Director, company A As mentioned earlier, quality was by many interviewees connected to the technical competence.Considering the fact that quality became so important after the criticism, this had in addition to the impact on the content of work, also an effect on the important competences of employees and partners in the audit firms. According to the interviewees, the rules and promotion requirements were tightened at each level in the organization to ensure that quality remains guaranteed. Employees were therefore judged on their technical competence to make a promotion. At the top level of the organization, quality was also more and more included in the nomination process of partners and directors.

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19 “What happened in particular is that quality aspects became an important part of the nomination process. In the past you could be promoted to partner when you just managed to get in big customers and had a proper client portfolio. This is still needed, but nowadays the quality of your work needs to be excellent. They added this element to the selection criteria.”- Director, company A

Without an excellent technical competence, it is no longer possible to become partner. For current partners, this aspect has become much more important too since the criticism. In practice, it is now the case that the commercial aspect is still important to become partner, but relative to the technical aspect, this is now much less required than before. Where at first the commercial logic seemed to be dominant in the Netherlands,which had indicated consistency with so far known findings from the literature (e.g. Guo, 2015; Carter & Spence, 2014), it is now replaced with a new dominant logic. In some way,this can be seen as a type of change in logics as described in Thornton (2002), namely the shift from the old dominant logic to a new introduced logic. This is partly the change that took place since the sector experienced the extensive criticism. However, the technical logic has always been important for the sector and can therefore not be considered as a totally new introduced logic. But there was a change in priority and a new logic became dominant. As a result of the extreme emphasis on the technical and quality aspects in the organization, the commercial logic is partly replaced by the previously known logic.

The current audit partners are aware that a dominant logic is not necessarily in their best interest and also not in the best interest of the firm. Every interviewee is aware of the fact that quality is of vital importance for the continuity of the audit firms and is their “license to operate”. The criticism on the profession had positive effects. Except that the current logics are totally out of balance at this point and this can also result in potential problems.

“We are a commercial company, let that be clear. We can be outstanding on quality, but we should also keep our position in the market. If we quit on the commercial practices, then all customers walk away. Yes then we have the best people and the best quality, but we do not earn money.” - Partner, company B

“There has been a discussion about the difference between directors and partners. If we find this technical aspect so important and we are only judged by this subject, what will be the difference between director and partner?”- Partner, company A

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20 “In four or five years, when a new important rotation round of big customers comes around, we must ensure that we have people trained to operate effectively in the market. Then it is really insufficient if you are just a good auditor.”- Partner, company A Many partners believe that when the standards of the market regulator and society are met, commercial aspects can be more important again. However, this should not be conceived with the negative subtlety resulting from Gendron and Spira’s research of 2010, who indicate that the emphasis on self-criticism after the scandals was short-lived. The commercial logic was according to interviewees underexposed for the last years. Partners believe that one dominant logic is not desired. If there is too much emphasis on the technical competence, there is a risk that in a couple of years there will not be any people with a strong commercial competence in charge to get in new work for the firm. A balance or combination of both logics would therefore be optimal for the audit firms to also perform well in the future. Not all participants, however, have expressed the thought about this intended change to a balance between both logics in this way yet. A single person indicated that the commercial aspects do not necessarily belong within the audit department, but may belong to the consultants, where the emphasis is much more on commercialism.Therefore, the dissatisfaction with the current distribution of priorities and the desire to find a balance between logics cannot yet be derived from each interview.

“Quality in the selection of partners has become important during the years and the commercial thought is less present. If you have a commercial profile, you should ask the question, if this profile does not fit better within the consultancy business”. –

Partner, company A

Finally, it is still necessary to determine what type of change has taken place. Lander, Koene & Linssen (2013) describe multiple possible outcomes after a conflict in logics. The first possibility presented in the paper of, for example, Thornton (2002) is as discussed partly the change that took place.The other two options that are presented, namely, the co-existence of both logics as described in Lounsbury's paper (2007) and the new logic can be a hybrid version of two previous logics (Glynn & Lounsbury, 2005; Thornton et al, 2005) are also taken into consideration. The co-existence of logics as described in Lounsbury (2007) cannot easily be compared with the situation in the Dutch audit sector. Lounsbury (2007) describes the co-existence of logics as two standalone specialisms in one firm. That is not the case for audit partners in the firms, because it is not like a partner is specialized on one certain aspect of the job and knows little to nothing from other aspects. Currently, it seems that the firm strives to let partners become a hybrid in the very short future. The technical competence have become very important for partners and, in fact, for everyone in the Big4 audit firms since the sector

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21 has been criticized. The commercial logic has therefore been less present in recent years, but nevertheless it has not completely disappeared. Evidence suggests that a hybrid version is more a desirable image for partners. The firm wants to deliver a sublime quality on the basis of good technical basis in the organization, but in the near future partners in the Netherlands also need to have the right competences to earn money.

5. Discussion and conclusion

The purpose of this research was to identify the current required competences for partner in Dutch audit firms and if the extensive criticism on the audit sector from the market regulator (AFM) and society has influenced the required competences for partners. Semi-structured interviews were conducted in Big4 audit firms, which have an 80% market share in the Netherlands. The interviewees were all of senior level in the organizations, partners (equity), director (non-equity) and senior managers. This research approached the competences of audit partners from the perspective of institutional logics. The results show that commercial, technical and other general competences, as networking, leadership and communication are perceived as the required competences to enter the position of partner in a Big4 audit firm in the Netherlands. Furthermore, the results show that the technical logic became dominant again as a result of the criticism on the audit sector. Thus, there is a shift in institutional logics observed in the Netherlands as a result of a legitimacy problem for the audit firms. So the focus on quality and technical competence became the primary priority of the firms. The criticism had a major impact on the firms and had a great influence on the job and influenced the working atmosphere for everyone in the organization. Throughout the organizations, the requirements for promotion were sharpened with regard to the quality related aspects. It is no longer possible for seniors to become partners with only a large portfolio of customers and commercial competence. Nevertheless, the commercial competence remains important for partners. Currently interviewees’ believe the logics are out of balance and they perceive one dominant logic as undesirable, because both aspects are ultimately important for the Big4 firms. With a look at the near future, in addition to being technical highly competent, it is also important to master the commercial aspects of the profession for partners. The function of partners changed to a more hybrid function. Therefore, this research contributes to the literature on hybridization of professions and organizations. The way in which organizations can combine competing logics has been shown little in literature (Pache & Santos, 2010.) This research outlines a situation where it is necessary for an organization to change a specific function, into a hybrid function. This to serve both interest of the organization. Due the focus on the technical logic

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22 of recent years, there is a risk that the commercial aspects of potential partners may not be well developed. For audit firms, it could be that the desired image of partners as a type of hybrid is not as easy to realize. Furthermore, the results are in contradiction to what is known so far from the international literature. The mentioned required competences were already known and recognized as relevant. However, almost all available literature on this subject indicates that the commercial logic should be currently dominant in the audit firms (e.g. Hanlon 1996, Carter & Spence, 2014; Sweeney & McGarry, 2011; Guo, 2015). This research concludes different. The difference is most likely to be explained by the criticism of the AFM. The criticism is given publicly (van Erp, 2011) and according to the interviewees, the AFM in the Netherlands is much stricter compared to market regulators in other countries. Therefore, the difference with international literature can be seen as an important contribution of this research. Another point worth mentioning is the change to a previous known logic. Among others, Thornton (2002) described the introduction of a new logic in the organization which will become dominant. This research shows that an old previously known logic can once again become dominant as a result of legitimacy issues. Furthermore, this research identifies other competences which in addition to the already known competences, technical and commercial, were also perceived as critical to enter the position of partner in an audit firm. Leadership, communication and networking competences, which are also found by Carter & Spence (2014) and are mentioned by almost all the interviewees.These general competences were considered important because they relate to both technical and commercial aspects (Hanlon, 1996).

This research has four limitations. Firstly, the interviewees are connected to a firm and may therefore be reticent to express their opinions as they might have done in private conversations and their responses were also recorded. However, anonymity was guaranteed to the person and firm and the interviewer searched for corroboration among interviewees. Secondly, the commerce in audit firms is not only caused by the audit department, but also largely due the influence of consultants (Citron, 2003) who are also employed within the company. The audit firms therefore consist of several departments besides the audit department. The conclusions in this paper therefore only apply to the audit department of the Big4 firms. The possible differences among departments within the organizations can be a possible objective for future research. From this perspective, it is possible that different logics exist among standalone departments in an organization. Thirdly, interviews were conducted with only 3 out of 4 Big4 firms and there is no equal number of interviews conducted at the three firms. It is possible that the conclusions were still influenced by this fourth missing firm or could differ when the same number of interviews were conducted at each firm. However,

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23 due to the high consistency of answers given by interviewees, I do not consider this possibility to be very large. Finally, the Netherlands is a unique research ground, so results are not generalizable for other countries. However, according to some interviewees, the results may be a prelude for other countries. Therefore, audit firms from abroad should reflex on the situation in Netherlands and consider whether the situation and developments can also be relevant to them as well. For future research, it is important to keep an eye on the audit sectors in other countries for possible changes that are related to the legitimacy issues facing the sector. It is also possible that in other countries the logic has changed as well, but no research has been done there yet.

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